Downes v Jain

[2019] NZHC 1145

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-001598

[2019] NZHC 1145

UNDER

Sections 274 and 284(1) of the Companies Act 1993 and Parts 12 and 18 of the High Court Rules

IN THE MATTER OF

Pharma Scientific Research Group Limited (in liquidation)

BETWEEN

TIMOTHY WILSON DOWNES and STEPHANIE BETH JEFFREYS as

liquidators of PHARMA SCIENTIFIC RESEARCH GROUP LIMITED (IN LIQUIDATION

Plaintiffs

AND

AKHIL JAIN

First Defendant

KORU LIFESCIENCE LIMITED (FORMERLY KNOWN AS PHARMA SCIENCE AND RESEARCH LIMITED)

Second Defendant

Hearing:

22 May 2019

Appearances:

D L Bennington for Plaintiffs

R B Hucker and R F Selby for Defendants

Judgment:

24 May 2019

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

DOWNES & OR v JAIN & OR [2019] NZHC 1145 [24 May 2019]

Introduction

[1]        In my decision of 22 February 2019, I granted summary judgment against the defendants, requiring them to deliver up to the plaintiff liquidators, laboratory equipment and other assets.1 Those assets are defined in a schedule to the judgment and referred to throughout as the Pharma assets.

[2]        I concluded that by refusing to deliver up the Pharma assets, the defendants had committed the tort of conversion and that Mr Jain, the first defendant, was acting in breach of s 274 of the Companies Act 1993.

[3]        The defendants now seek to recall my judgment or alternatively, seek an order staying my judgment pending a determination of their appeal to the Court of Appeal.

[4]        In relation to the recall application it is contended that counsel failed to direct my attention to a plainly relevant decision, namely Working Capital Solutions Holdings Ltd v Pezaro.2 In relation to the stay application, it is claimed that allowing enforcement of the orders for possession will irreparably damage the ongoing business of the defendants, causing loss of employment and delays in the provision of product to third party customers.

[5]The critical issues I must determine are as follows:

(a)Whether counsel’s failure to refer me to Working Capital Solutions (which is relevant to the interpretation of ss 162–167 of the Personal Property Securities Act 1999 (the PPSA)) was a material omission; and

(b)Whether I should grant a stay of execution and, if so, whether on the terms proposed by the defendants (which include payment of a bond of

$149,622 and undertakings guaranteeing access and inspection of the assets) or on modified terms.

1      Downes v Jain [2019] NZHC 199.

2      Working Capital Solutions Holdings Ltd v Pezaro [2014] NZHC 1020, [2014] 3 NZLR 379.

Recalling a judgment

[6]Rule 11.9 of the High Court Rules 2016 reads:

11.9     Recalling judgment

A Judge may recall a judgment given orally or in writing at any time before a formal record of it is drawn up and sealed.

[7]        The leading statement in New Zealand remains that of Wild CJ in Horowhenua County v Nash (No 2):3

Generally speaking, a judgment once delivered must stand for better or worse subject, of course, to appeal. Were it otherwise there would be great inconvenience and uncertainty. There are, I think, three categories of cases in which a judgment not perfected may be recalled – first, where since the hearing there has been an amendment to a relevant statute or regulation or a new judicial decision of relevance and high authority; secondly, where counsel have failed to direct the Court’s attention to a legislative provision or authoritative decision of plain relevance; and thirdly, where for some other very special reason justice requires the judgment be recalled.

Stay of proceedings

[8]Rule 12(3) of the Court of Appeal (Civil) Rules 2005 reads:

12       Stay of proceedings and execution

…

(3)Pending the determination of an application for leave to appeal or an appeal, the court appealed from or the Court may, [on an interlocutory application,] –

(a)order a stay of the proceeding in which the decision was given or a stay of the execution of the decision; or

(b)grant any interim relief.

[9]        The Court of Appeal in Keung v GBR Investment Ltd re-confirmed the various factors that should be taken into account when undertaking the balance exercise as to whether a stay application should be granted:4

Factors to be taken into account in this balancing exercise include:

(a)Whether the appeal may be rendered nugatory by the lack of a stay;

3      Horowhenua County v Nash (No 2) [1968] NZLR 632 (SC) at 633.

4      Keung v GBR Investment Ltd [2010] NZCA 396 at [11] (footnotes omitted).

(b)The bona fides of the applicant as to the prosecution of the appeal;

(c)Whether the successful party will be injuriously affected by the stay;

(d)The effect on third parties;

(e)The novelty and importance of questions involved;

(f)The public interest in the proceeding; and

(g)The overall balance of convenience.

That list does not include the apparent strength of the appeal but that has been treated as an additional factor.

The application to recall the judgment

[10]      The critical issue for determination is whether the judgment should be recalled on the ground that counsel failed to direct my attention to the decision of Working Capital Solutions (and the authorities referred to in that judgment) in relation to the issue of whether a security interest is able to be extinguished.5

[11]      The defendants contend that Working Capital Solutions is relevant to the question of how s 162 of the PPSA is to be interpreted. I referred to s 162 in my judgment of 22 February 2019 as follows:6

Financing statement has perfected security interests

[54] Against the background of the concerns I have just outlined above, the defendants’ contention that the proper course to follow, given the interest in the collateral of the SAI Family Trust, is for a change demand to be issued under s 162 of the PPSA, is equally flawed.

[12]      The defendants contend that this is the only reference that I made to s 162 and it is said, in substance, to be a cursory reference.

[13]      Mr Hucker, for the defendants, submitted that my failure to deal with the process or jurisdiction under ss 162–167 of the PPSA (which is analysed in Working Capital Solutions) was a material omission. The process set out in the statutory scheme ensures that the rights of third parties (here, the SAI Family Trust) are

5      The defendants do not pursue the recall application as set out at [2](a) and (b) of their application dated 27 February 2019; the recall application is confined to the ground set out in [2](c).

6      Downes v Jain [2019] NZHC 199.

protected to invoke the procedure that determines whether there is an interest that remains in the property.

[14]      In Working Capital Solutions, the issue before the Court was the relevant test that should be applied when determining whether an application pursuance to s 167 of the PPSA (that a financing statement should be maintained) should be granted. The issue was what the Court needed in order for it to be “satisfied” that none of the grounds in s 162 of the PPSA applied. Gendall J held that in order for him to be “satisfied”, he needed to evaluate the submissions on the evidence before him. He found that the applicant had failed to provide the evidence that supported its case, and as such an order was made discharging the financing statement.

[15]      I do not accept Mr Hucker’s submissions on this point. As the plaintiffs contend, Working Capital Solutions is of limited relevance and would not in my view have affected my decision to grant summary judgment even if it had been put to me during the hearing. The defendants never provided any evidence that the financing statement registered against the second defendant, Koru Lifescience Ltd, by the SAI Family Trust, relates to the Pharma assets. Indeed, the findings I made at [47]–[53] of my judgment point in the other direction. I held there was no evidence that the Pharma assets had been repossessed by Accutest, the vendor of the Pharma assets, and then transferred from Accutest to NLL Trustee 1803 Ltd, then sold by NLL Trustee 1803 Ltd to the SAI Family Trust, and then licensed, as claimed by the SAI Family Trust to Koro Lifescience Ltd.

[16]      I also accept the further submission of Ms Bennington, for the plaintiffs, that counsel had ample opportunity to put the Working Capital Solutions case before me, both during the hearing and prior to my judgment being issued. Working Capital Solutions was issued by this Court on 15 May 2014, and a search of the two main legal databases (Lexis Nexis Advance and Westlaw) using “s 167 of the PPSA” gives some relative prominence to the Working Capital Solutions case.

[17]      For all these reasons, I find there is no merit to the application to recall my judgment. I accordingly refuse that application.

Application for stay

[18]      In Keung v GBR Investment Ltd, the Court of Appeal held that in determining whether or not to grant a stay, the Court must weigh the factors “in the balance” between the successful litigant’s rights to the fruits of a judgment and “the need to preserve the position in case the appeal is successful”.7

[19]In Polini v Gray, Cotton LJ held:8

… when there is an appeal about to be prosecuted the litigation is to be considered as not at an end, and that being so, if there is a reasonable ground of appeal, and if not making the order to stay the execution of the decree or the distribution of the fund would make the appeal nugatory, that is to say, would deprive the Appellant, if successful, of the results of the appeal, then it is the duty of the Court to interfere and suspend the right of a party who, so far as the litigation has gone, has established his rights.

[20]      The defendants contend that there are no “fruits of the judgment”, save for a claim to interim possession, as ownership of the Pharma assets has yet to be determined. It is claimed that the effect of my judgment, if enforced, would be to provide possession of the Pharma assets (the subject of the proceedings) pending the liquidators making a decision as to the ownership of the asset. The defendants argue that the judgment does not determine the rights of ownership, and there has been no cross-appeal lodged by the plaintiff liquidators from this finding.

[21]      I do not accept the defendant’s submissions that my judgment did not determine the ownership of the assets and that my orders were confined to the issue of interim possession. My conclusions that the plaintiff liquidators had a right and duty to take possession of the Pharma assets (under s 248 of the Companies Act 1993), and Mr Jain’s breach of s 274, were predicated on the Pharma assets being the assets of the company, Pharma Scientific Research Group Ltd (in liquidation). The liquidators had a right of possession because they have a right to possess the assets that are owned by the company that is in liquidation. In seeking orders to deliver up the Pharma assets, the liquidators took a responsible approach by including within those orders

7      Keung v GBR Investment Ltd [2010] NZCA 396 at [11].

8      Polini v Gray (1879) 12 Ch D 438 (CA) at 446 as cited in New Zealand Insulators Ltd v ABB Ltd (2006) 18 PRNZ 459 (CA) at [19] and Accident Compensation Corporation v Stafford [2018] NZHC 488 at [8].

what effectively amounts to a “safety provision”, which allows — as in any liquidation

— for a competing interest in respect of the company’s assets to be presented to the liquidator, with supporting documentary evidence of that claim, for the liquidator to determine.

[22]      I thus reject Mr Hucker’s “fruits of the judgment” argument. However, I do accept that in balancing the various factors in determining whether to grant a stay, in contrast to the defendants (who intend to continue to make use of the Pharma assets and to employ people to do so), the plaintiff liquidators propose to take possession and then retain the assets in storage pending a determination of the appeal.

[23]      While the evidence provided by Mr Jain is somewhat tenuous, I find that I must regard the claim that, without a stay, the appeal would be rendered nugatory, as a serious one. There is evidence before the Court that the defendant, Koru Lifescience Ltd, has over the last 12 months been successful in acquiring major contracts with companies from China and other countries. The current value of the signed contract is said to exceed $3,200,000. Furthermore, the Pharma assets are essential to the running of the Koru business. Mr Jain says that delivery up of the Pharma assets now would result in Koru being unable to continue its operations and to default on its contracts and would cause Koru’s employees to lose their jobs.

[24]      I also find that, in addressing the other factors relevant to the balancing exercise, the arguments favour the granting of a stay. These factors are:

(a)The bona fides of the defendants (the appellants) in prosecuting the appeal to the Court of Appeal. It is not disputed that the defendants have acted diligently and paid the necessary security for costs. They have also taken steps to obtain an early hearing date and it is anticipated that there will be a hearing in the Court of Appeal in either July or August 2019. It seems unlikely there will be any lengthy delay.

(b)The plaintiff liquidators’ concerns about further depreciation of the assets (they are subject to further wear and tear) and the resulting diminution in their value. However, the delay involved is not great.

The evidence also suggests that some of the assets are large pieces of precision equipment that may be damaged if moved or improperly stored.

(c)The impact on third parties (which I have already addressed above).

(d)Novelty and public interest: the defendants responsibly accept that the questions of law involved are not particularly novel nor are there any issues of real public interest arising.

(e)I accept that there are bona fide grounds of appeal and that real caution is required before determining that a proposed appeal is without merit.9

(f)As to the overall balance of convenience, I find this favours the defendants. The proceedings involve substantive property rights and, as I have emphasised, the delay will be relatively insignificant.

[25]      I acknowledge that in opposing the stay, the plaintiff liquidators have raised some legitimate concerns. These include:

(a)The fact that Mr Jain arguably took a commercial gamble10 when he made a decision to convert the Pharma assets;

(b)That it is against the public interest for Mr Jain and the defendants to benefit from a breach of s 274 of the Companies Act 1993 and the conversion of the assets; and

(c)There are doubts about Mr Jain’s financial situation.

[26]      However, I find that these concerns can be addressed by making any order for stay  subject  to  some  relatively strict conditions.  It also seems unlikely that the

9      See Almond v Read [2017] NZSC 80, [2017] 1 NZLR 801 (SC) at [39].

10     See Philip Morris (New Zealand) Ltd v Liggett & Myers Tobacco Co (New Zealand) Ltd [1977] 2 NZLR 41 (CA).

liquidators will be without any remedy, in the event that the appeal is dismissed, and the defendants have profited from ongoing wrongful retention of the assets.

[27]I now turn to address the issue of conditions that should be imposed.

What conditions should be attached to a stay of execution

[28]      At the hearing, the defendants tabled a draft order containing various conditions to which they are prepared to agree. The defendants agree to paying into court the sum of $149,622 (said to represent the Greenough valuation), to undertake not to dissipate the assets, and to pay the costs of an independent accredited insolvency practitioner to inspect the premises and make an inventory of the assets.

[29]      Hucker & Associates, solicitors, are currently holding the sum of $149,622 in their trust account and I accept that the defendants, in proposing various conditions for any order staying the proceedings, have taken some responsible steps to try and alleviate the liquidators’ concerns.

[30]      I do not, however, accept that the Court should impose the terms set out at [1](c) and (d) of the draft order. It is not for me, at this stage, to determine the outcome of the proceedings in the event that the appeal is unsuccessful or abandoned.

[31]      I conclude, therefore, that a stay should be granted, but subject to the conditions set out below. In addition to what the defendants have proposed, the stay will also be subject to a condition that the defendants pay the sum of $7,500 into Hucker & Associates’ trust account to be held as a bond for the payment of the fees of the accredited insolvency practitioner and any valuer (who is to inspect and take an inventory and valuation of the assets).

[32]      The question of who should be appointed as the independent accredited insolvency practitioner was briefly addressed at the hearing. Mr Hucker proposed three names; in response, the plaintiffs filed a memorandum addressing that issue (dated 22 May 2019). I accept the submission of the liquidators that Mr Andrew Bethal at BDO should be appointed and should be authorised, as he sees fit, to instruct an agent for the purposes of valuing the Pharma assets.

Result

[33]The defendant’s application to recall my judgment is dismissed.

[34]      I grant the defendants’ application for a stay of execution of my judgment of 22 February 2019, pending determination of the appeal to the Court of Appeal, pursuant to r 12(3) of the Court of Appeal (Civil) Rules 2005, subject to the following conditions:

(a)The second defendant is to pay into court the sum of $149,622 to be held undisbursed and receipted in the name of the second defendant, pending determination of the judgment of the Court of Appeal. The sum of $149,622 is to be held on interest bearing deposit.

(b)In the event that the Court of Appeal allows the appeal, the sum of

$149,622 is to be transferred at the direction of the defendants but subject to any further order of the Court.

(c)Nothing in this order shall prevent the funds being disbursed in the manner agreed to by both parties, but the funds shall not be disbursed unless there is written instruction signed by both parties authorising such disbursement.

(d)The defendants are to continue to prosecute their appeal with all due diligence, including the obtaining of a hearing date in the Court of Appeal as soon as reasonably practicable.

(e)The defendants are to provide a written undertaking that, pending the determination of the appeal by the Court of Appeal, they will not dissipate, damage or take any steps which diminishes the value of the Pharma assets. That undertaking is to be filed and served within seven days.

(f)I appoint Mr Andrew Bethal of BDO to take steps to catalogue and value the Pharma assets as described in my judgment of 22 February

2019. Mr Bethal is authorised to appoint an agent to assist him in any valuation exercise. Mr Bethal’s report cataloguing and valuing the Pharma assets is to be filed and served by 5 July 2019.

(g)The defendants are to provide access to Mr Bethal and any agent appointed by him to the premises at Copsey Place, Avondale, where the Pharma assets are located.

(h)The defendants are to pay a bond of $7,500 into the trust account of Hucker & Associates, solicitors, to be held as security for payment by the defendants of the costs of Mr Andrew Bethal and/or his agent. That bond is to be paid within seven days of my orders and the plaintiffs advised of such payment.

(i)Leave is granted to the parties to apply for any variation of these orders including, any application for variation following receipt of the report from Mr Andrew Bethal and/or his agent.

[35]      As to the question of costs, I am of a preliminary view that both parties have had some success and there should be no order for costs. If the parties cannot agree, memoranda are to be filed within 14 days.

Associate Judge P J Andrew