Dustin v Stark
[2020] NZHC 1975
•7 August 2020
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE
CIV-2020-412-000026
[2020] NZHC 1975
IN THE MATTER of section 149 of the Companies Act 1993 BETWEEN
IAN LUKE DUSTIN
Plaintiff
AND
ALASTAIR DAVID STARK
First Defendant
AND
ALAN BEVIN MCKAY
Second Defendant
AND
RICHARD DRUMMOND FRASER
Third Defendant
AND
MEAD AND STARK, Chartered Accountants
Fourth Defendant
Hearing: 30 July 2020 Appearances:
P J Dale QC for Plaintiff
D G Hurd for Second and Third Defendants M E Parker for Fourth Defendant
Judgment:
7 August 2020
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 7 August 2020 at 11.00 am pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
DUSTIN v STARK [2020] NZHC 1975 [7 August 2020]
The application
[1] Ian Luke Dustin was a bankrupt. He owned shares in two companies that vested in the Official Assignee. The Official Assignee sold the shares and then later assigned rights of action arising from the share sale transaction to Graham Kenneth Gaskin and Elizabeth Joan Dustin as trustees of the Dustin Family Trust (the Trustees). In reliance upon the assignment this proceeding was commenced but, in error, by Mr Dustin, not the Trustees. Mr Dustin now applies to join the Trustees as an additional plaintiff under r 4.56, High Court Rules 2016.
[2] The application is opposed by the second to fourth defendants primarily on the basis the assignment is invalid as the Court’s approval to it was not obtained under s 221 of the Insolvency Act 2006. They also argue that no order for joinder should be made without removing Mr Dustin as a plaintiff and on terms that do not prejudice a limitation defence. As an additional matter, it is said there is no such entity as the fourth defendant.
Background
[3] Mr Dustin was bankrupted on 7 March 2016. The creditors in his bankruptcy were Ian Rodney Renner and the Trustees.
[4] Mr Dustin was a shareholder in Pisa Moorings Ltd (PML) and Pisa Moorings Vineyard Ltd (PMVL). Upon his bankruptcy, the shares vested in the Official Assignee who, by a deed of settlement, sold them to the remaining shareholders of PML and PMVL. The deed of settlement is not before me.1
[5] The Official Assignee considers material misrepresentations were made to it affecting the value of the shares and it suffered a loss. By a deed entered into on or around 31 March 2020 (the Deed), the Official Assignee purported to assign its rights of action arising out of the share sale transaction to the Trustees.
1 There is a statement of the terms of the deed of settlement at [44] of the amended statement of claim.
[6] The parties to the Deed are the Official Assignee, the Trustees, Mr Renner and Mr Dustin. The recitals record that the Trustees wish to take an assignment of the:
… Official Assignee’s rights and interest to all and any causes of action relating to or arising from the share sale under the deed of settlement dated 19 May 2016 (Rights of Action).
[7] The term “Rights of Action” is further defined in cl 1.1 as “the Official Assignee’s rights against third parties listed in the Schedule”. The third parties listed are the first to fourth defendants.
[8] Under cl 2.1, the Official Assignee assigns absolutely all his or her rights and interests in the Rights of Action to the Trustees on terms set out in the Deed. Clauses 2.2, 2.3 and 2.4 broadly provide that the Trustees withdraw their claim in Mr Dustin’s bankruptcy and will pursue the Rights of Action at their cost but share a portion of the proceeds of recovery (after payment of costs and expenses) with Mr Renner.
[9] Under cl 2.4, the Official Assignee agrees to provide reasonable assistance to the Trustees which may be necessary under the rules of Court to assist with pursuing the Rights of Action.
[10] Under cl 2.5, the Official Assignee is released from the further conduct and administration of Mr Dustin’s bankruptcy.
[11] Under cls 3.1 and 3.2, the Trustees provide indemnities and security for the costs and expenses incurred by the Official Assignee to carry out its obligations under the Deed and for liabilities arising in connection with the Rights of Action and their assignment.
[12] On 4 May 2020, this proceeding was commenced with Mr Dustin named as plaintiff. Mr Dale acknowledges this was an error and the Trustees should have been the plaintiffs. The error came about because the claim was prepared before the Deed was completed. Six causes of action were pleaded alleging misrepresentation against all the defendants, negligent misstatement, breach of s 9 Fair Trading Act 1986 and deceit against the first and fourth defendants and breach of fiduciary duty and s 149 of the Companies Act 1993 against the first to third defendants.
[13] Upon discovery of the error, an amended statement of claim was filed on 9 July 2020, naming both Mr Dustin and the Trustees as plaintiffs. The same six causes of action are relied on in the amended statement of claim. They are brought on behalf of both Mr Dustin and the Trustees, but no order has been made joining the Trustees as plaintiffs under r 4.56.2 No statements of defence have yet been filed.
[14] On 13 July 2020, this application to join the Trustees as second plaintiffs was filed.
[15] The first defendant suffers from mental incapacity and has taken no steps in the proceeding. An application to appoint a litigation guardian to represent his interests will be made.
[16] The second to fourth defendants oppose the application for joinder. The grounds advanced are:
(a)the assignment is unlawful and of no effect due to non-compliance with s 221 Insolvency Act 2006;
(b)no order for joinder should be made until Mr Dustin is removed as a plaintiff;
(c)an order for joinder should take effect only from the date of the order and not, as is sought, from the date of filing of the amended statement of claim; and
(d)for the fourth defendant only, there is no such entity as Mead and Stark.
[17] In addition, there is an issue concerning when statements of defence should be filed if joinder is ordered.
2 The filing of the amended statement of claim was not effective to join the Trustees to the proceeding. McLachlan v MEL Network Ltd HC Auckland CIV-1998-404-510, 9 December 2004 and Winton v Winton [2018] NZHC 1323 at [19].
Rule 4.56
Rule 4.56 High Court Rules provides:
4.56 Striking out and adding parties
(1)A Judge may, at any stage of a proceeding, order that –
(a)the name of a party be struck out as a plaintiff or defendant because the party was improperly or mistakenly joined; or
(b)the name of a person be added as a plaintiff or defendant because –
(i) the person ought to have been joined; or
(ii) the person’s presence before the court may be necessary to adjudicate on and settle all questions involved in the proceeding.
(2)An order does not require an application and may be made on terms the court considers just.
(3)Despite subclause (1)(b), no person may be added as a plaintiff without that person’s consent.
[19]The Trustees consent to being joined as plaintiffs.
[20] In Newhaven Waldorf Management Ltd v Allen, the Court of Appeal noted the approach to applications for joinder under r 4.56 is liberal and that r 4.56 imposes a fairly low threshold.3 When referring to the first limb of r 4.56(1)(b) – that “the person ought to have been joined” – the Court said this concerns persons whose presence is necessary for the Court to adjudicate the exact issues arising on the pleadings.
[21] The first limb of r 4.56(1)(b) is plainly engaged. This claim is founded on the assignment of the Rights of Action.4 The Rights of Action were assigned to the Trustees who are primarily interested to sue in respect of them. The Trustees ought at the outset to have been plaintiffs in this proceeding.
[22] The jurisdictional threshold for joinder is therefore satisfied and I did not understand it to be argued otherwise. The arguments advanced against joinder engage the discretionary question whether joinder should be ordered.5
3 Newhaven Waldorf Management Ltd v Allen [2015] NZCA 204, [2015] NZAR 1173 at [46].
4 At [6] of the amended statement of claim.
5 Newhaven Waldorf Management Ltd v Allen, above n 3, at [53].
Section 221 Insolvency Act
The statutory provisions
[23]Section 221 provides:
221 Assignee may assign right to sue under this Act
(1)The Assignee may, if the Court has first approved it, assign any right to sue that is conferred on the Assignee by this Act.
(2)The application for approval may be—
(a)made by the Assignee or the person to whom it is proposed to assign the right to sue; and
(b)opposed by a person who is a defendant to the Assignee’s action, if already begun, or a proposed defendant.
[24]Relevant also are s 217 and cl (b) of Schedule 1 of the Act which provide:
217 Assignee’s general powers
(1)The Assignee has the powers—
(a)necessary to carry out the functions and duties of the Assignee under this Act; and
(b)conferred on the Assignee by this Act.
(2)In particular, the Assignee has the powers set out in Schedule 1.
Schedule 1
The Assignee has the power to—
…
(b) begin, continue, discontinue, and defend legal proceedings relating to the property of the bankrupt…
The defendants’ position
[25] The defendants argue s 221 applies and the Court’s approval to assign the Rights of Action to the Trustees has not been obtained and there is no basis for joinder. The proceeding should be stayed, they say, until the Court’s approval to the purported assignment is obtained.
Discussion
[26] While I accept the force in the argument the Court should not allow joinder to pursue a claim which is clearly unjustified this is not such a case.6 I consider the defendants’ reliance upon s 221 is incorrect.
[27] There is a long line of authorities extending latitude to trustees in bankruptcy (and liquidators of companies) to assign a personal cause of action not otherwise allowed by the general law on public policy grounds.7 This is generally understood to be based on the statutory right to sell the property of the bankrupt. The exercise of a power to sell property that vests by statute is thought not to involve the doing of an unlawful act or to be contrary to public policy.8 This latitude is limited to a personal cause of action that is the property of the bankrupt (or insolvent company) as relevantly defined in legislation and it must be assignable.9 It does not extend to a statutory cause of action conferred on a liquidator as an incident of his or her office which would not have been available to the company.10
[28] In a New Zealand context, Stone v Angus involved an application under s 86 of the Insolvency Act 1967 to set aside a decision of the Official Assignee to assign to a bankrupt rights he held under a deed of subrogation which existed prior to his bankruptcy and did not revert to him upon his discharge from bankruptcy.11 One of the grounds relied upon was that the assignment was champertous. In relation to this, Henry J said:12
There is strong English authority that a transaction permitted by the bankruptcy laws [is] not tainted by the law against champerty and maintenance. In Ramsey v Hartley [1977] 2 All ER 673 a right to sue passed to the trustee in bankruptcy and was later assigned back to the bankrupt, under a deed pursuant to which the trustee was to receive [a] portion of the proceeds of the suit if successful. The Court of Appeal reviewed the relevant law and held the transaction could not be impeached as being champertous. The assignment in the present case was clearly within the statutory powers of the
6 NZI Insurance Ltd v Hinton Hill & Coles Ltd (1996) 9 PRNZ 615.
7 Greg Tolhurst The Assignment of Contractual Rights (2nd ed, Hart Publishing, Oxford, 2016) at 213; Re Oasis Merchandising Services Ltd [1998] Ch 170 and Stone v Angus [1994] 2 NZLR 202.
8 Grovewood Holdings Plc v James Capel & Co Ltd [1995] Ch 80 at 86.
9 Greg Tolhurst The Assignment of Contractual Rights, above n 7 at 214.
10 At 214 and Re Ayala Holdings Ltd (No 2) [1996] 1 BCLC 467.
11 Stone v Angus, above n 7, at 204.
12 At 204.
Assignee (s 72). Ramsey v Hartley is indistinguishable in terms of principle from the present case although there the proceeding had been instituted prior to bankruptcy. I can see nothing which offends public policy in this transaction, which concerns a right initially vested in the plaintiff, which by operation of law vested in the Assignee who subsequently transferred it back to the plaintiff for valuable consideration.
[29] The Insolvency Act 1967 contained no comparable provision to s 221. It represented a change in the law but was not intended to limit the Official Assignee’s power under the general law to assign bare rights of action as an incident of the bankrupt’s property. This is clear from the clause by clause analysis of the Insolvency Law Reform Bill 2006 which said in respect of clause 219 (what is now s 221):13
Clause 219 allows the Assignee to assign a right to sue “conferred by this Act”. This is distinct from the Assignee’s right to sue as an incident of the bankrupt’s property vested in the Assignee – that has always been assignable and clause 219 is not intended to regulate assignment by the Assignee in such cases.
[30] Section 221 (and s 260A of the Companies Act 1993 which is materially the same)14 is recognition that the inability to obtain funding is often a barrier to the commencement of meritorious actions in insolvency situations. It allows the Official Assignee to obtain funding for actions which would not otherwise be conducted, speed the administration of estates, recoup funds for creditors and spread the risk of loss that might accrue if the Official Assignee alone brought proceedings.
[31] There is limited authority on s 221. The decision most directly relevant is Official Assignee v Henshaw.15 In Henshaw, a bankrupt had a potential claim against the estate of her father. The claim arose prior to her adjudication and vested in the Official Assignee. After adjudication, the bankrupt applied for Court approval under s 221 to assign the claim to her on the basis of the equal sharing of the proceeds with the Official Assignee.
13 Insolvency Law Reform Bill 2005 (14-1) (explanatory note) at 6. See also Paul Heath and Michael Whale (ed) Heath and Whale on Insolvency (online ed, Lexis Nexis) at [6.9] and Stephen Revell and John Walsh (ed) Insolvency Law and Practice (online ed, Thomson Reuters) at [IN 221.01]. Official Assignee v Henshaw [2015] NZHC 1856 at [26].
14 See Companies and Securities Law (loose-leaf ed, Brookers) at [CA 260A.01] and Official Assignee v Henshaw, above n 13, at [26].
15 Official Assignee v Henshaw, above n 13.
[32] Associate Judge Smith identified the principal issue as being whether the words “conferred on the Assignee by this Act” in s 221 excluded from the ambit of the section a right of action owned by the bankrupt that vested in the Official Assignee.16 If so, the Court had no jurisdiction to approve the proposed assignment under s 221.
[33] It was held the requirement for Court approval in s 221 applies only to the assignment of rights that are “created by the Act for the Assignee”.17 Such rights never inhere in the bankrupt and do not vest in the Official Assignee under ss 101 or 102 of the Act.18 The Associate Judge found support for his view from secondary sources, in the clause by clause analysis of the Insolvency Law Reform Bill 2006 and in the absence of any exception to the automatic vesting rule in s 102 of the Act. On the facts of the case before him, as the bankrupt’s right of action against her father’s estate was not created by the Act for the Assignee it did not fall within the ambit of s 221.
[34] Goodwin v Copland was a similar case where a bankrupt applied for the assignment of causes of action that passed to the Official Assignee on his adjudication in bankruptcy.19 Associate Judge Matthews applied Henshaw holding that:20
The right to sue referred to in s 221(1) must be a right to sue that is conferred on the Assignee by the Insolvency Act. These are not rights which were formerly rights of the bankrupt, which vest in the Official Assignee under ss 101 or 102. It is within the power of the Official Assignee to assign rights which vest in the Assignee under these sections for consideration without the leave of the Court. It follows that the rights to sue referred to in s 221 are not rights to sue which have already vested in the Official Assignee, as court approval for the former is required under s 221.
[35] Mr Hurd claims support for the defendants’ position from Henshaw. He argues the decision in Henshaw is founded on a distinction between rights to sue that arise before and after adjudication. Mr Hurd submits it is unrealistic to consider rights to sue that are owned by a bankrupt prior to adjudication as having been conferred on the Assignee by the Act. He contends s 221 applies to rights to sue that arise after adjudication which, he says, are conferred upon the Official Assignee by s 217 and Schedule 1(b) of the Act. They are new rights which allow the Official Assignee to
16 At [18].
17 At [23].
18 At [23].
19 Goodwin v Copland [2015] NZHC 2124, (2015) 22 PRNZ 709.
20 At [40].
do what the bankrupt could not do. Applied to this case, Mr Hurd submits the Rights of Action arose after adjudication from actions taken by the Official Assignee to exercise powers conferred upon him by the Act over Mr Dustin’s property. It follows that the rights to sue are also conferred on the Official Assignee by the Act for the purposes of s 221.
[36] Mr Hurd also argues Mr Dale is incorrect to submit that because the Rights of Action concern or relate to Mr Dustin’s property that takes the case outside the ambit of s 221. He submits that in a real sense every right exercised by the Official Assignee relates to the property of the bankrupt so to exclude from the operation of s 221 rights to sue that relate to a bankrupt’s property would leave s 221 without any work to do.
[37] I do not accept Mr Hurd’s analysis of Henshaw. The case was not decided upon a distinction between rights to sue arising before and after adjudication. I do not see how such a distinction could be considered material. In Henshaw, how can it matter that the bankrupt’s father’s death occurred before and not after her adjudication?
[38] In so far as the Associate Judge was drawing a distinction it was between rights to sue created by the Act for the Assignee and other rights to sue that are an incident of the bankrupt’s property. Only the former rights fall within the ambit of s 221. This is reflected in the judgment where the Associate Judge said:21
In my view, the requirement for the approval under s 221 applies only to assignments of rights that are created by the Act for the Assignee, such as the ability to set aside certain transactions. Those are rights that never inhered in the bankrupt prior to adjudication and could not have vested in the assignee under ss 101 or 102. Instead they are “conferred”. Parliament has required the Court’s approval to sue if rights of that kind are to be assigned to any third party.
[39] The Official Assignee enjoys exclusive rights to pursue causes of action that never inhered in the bankrupt. 22 Such rights can properly be said to have been “conferred” on the Official Assignee by the Act. For the purposes of s 221, rights to
21 Official Assignee v Henshaw, above n 13, at [23].
22 Insolvency Act 2006, Part 3 Subpart 7.
sue “conferred upon the Assignee by the Act” are those causes of action created by the Act exercisable only by the Official Assignee by reason of his office.
[40] The requirement in s 221 that leave of the Court be obtained to assign such rights to sue is readily explained. The Official Assignee is an officer of the Court23 and in pursuing statutory causes of action he is conducting litigation with a public or penal element. The potential loss of control of such litigation by the Official Assignee is a matter with which the Court can be rightfully concerned. It was clearly thought necessary the Court should have oversight as to the circumstances and terms upon which it is to occur.
[41] The conclusion I have reached is supported by the approach that has been taken to s 260A of the Companies Act 1993 which, as noted above, is materially in the same terms as s 221 of the Act. In ALF No 9 Pty v Ellis the Court of Appeal distinguished between company claims and claims conferred on a liquidator by statute.
It is only the latter to which s 260A applies.24
[42] Here, the Official Assignee did not purport to assign to the Trustees rights to sue conferred upon the Assignee by the Act. None of the pleaded causes of action in the amended statement of claim are created by the Act. Whilst some of the causes of action are based upon statutory provisions they are of general application. It follows that s 221 does not apply to them.
[43] I should be clear that given the nature of the application before me this finding does not finally decide the matter of the application of s 221. I have not had to consider whether, quite apart from s 221, the Deed can be challenged on public policy grounds. The defendants are entitled to raise these matters in defence if they consider there is merit in doing so.
23 In re Thomas Horton [1925] NZLR 739 at 741.
24 ALF No 9 Pty Ltd v Ellis [2010] NZCA 529 at [49] and [55].
Should Mr Dustin be removed as a plaintiff?
[44] The defendants argue Mr Dustin is not the assignee of the Rights of Action and there is no arguable basis for him to remain as a plaintiff. The position Mr Dale adopted prior to the hearing was that Mr Dustin’s status as a party should be dealt with following the disposal of the joinder application. At the hearing Mr Dale accepted Mr Dustin should be removed as a plaintiff. I will order accordingly.
When should an order for joinder take effect?
[45] Mr Dale accepts the usual rule is that joinder takes effect from the date the order is made. Despite this he argues in this case an order should take effect from the date of the commencement of the proceeding or the date of hearing of this application.
[46] The defendants have a possible limitation defence under s 43A of the Fair Trading Act 1986. Generally the Court will not add a party where that would defeat a limitation defence.25 The defendants contend that where, as is the case here, the potential limitation issue affects only one of several causes of action it ought not to prevent joinder if otherwise appropriate, but the limitation defence should generally be preserved by an order for joinder taking effect from the date that it is made.
[47] There is no reason to backdate the order permitting the Trustees to be joined as plaintiffs. I do not regard the error that led to the commencement of the proceeding by Mr Dustin to be of a technical nature. When served with the proceeding the defendants had no way of knowing Mr Dustin was the incorrect plaintiff. The naming of Mr Dustin as plaintiff was not a mere misnomer. Furthermore, the plaintiff could have discontinued this proceeding immediately the error was discovered. A fresh action could have been commenced with no delay. To the extent that a decision was made otherwise the Trustees should bear the consequences.
25 Body Corporate 381372 v Heron Point Projects Ltd [2017] NZHC 597 at [14].
Mead and Stark
[48] Mr Parker submits the claim against the fourth defendant is fatally flawed because no entity called Mead and Stark exists. He advises there is a company called Mead Stark Ltd that was incorporated in 2009 but any right the Official Assignee has to sue Mead Stark Ltd has not been validly assigned to the Trustees. The position cannot be regularised, Mr Parker submits, because the naming of Mead and Stark was a misidentification not a misnomer.26
[49] Mr Dale notes the High Court Rules allow persons carrying on business as a firm to be sued in the name of the firm.27 His primary response to Mr Parker’s submissions is that there is no evidence before the Court in relation to the matters that are raised for the fourth defendant and it is not appropriate to address this issue for that reason.
[50] I agree with Mr Dale’s submission. In the absence of any affidavit evidence I cannot decide whether an entity known as Mead and Stark exists or not. This issue is quintessentially one of fact that I cannot resolve on this application.
Timetable orders
[51] Agreement was reached between counsel at an earlier stage that the first to third defendants would have until the later of the prescribed period or until the appointment of a litigation guardian for the first defendant to file their statements of defence. With the passage of time, Mr Dale submits the first defendant’s disability should not prevent the other defendants from filing their statements of defence.
[52] The Trustees will need to file a further amended statement of claim. Once that is served the defendants (other than the first defendant) should file their statements of defence. The defendants are well aware of the substance of the case they must answer
26 Registered Securities Ltd (In liq) v Jensen Davies & Co Ltd [1999] 2 NZLR 686 and Coastal Tankers Ltd v Southport New Zealand Ltd (1999) 13 PRNZ 638.
27 High Court Rules 2016, r 4.25.
and have had a good deal of time to consider their defences. I consider it is appropriate that their statements of defence be filed 15 working days from service of the Trustees’ amended statement of claim.
Result
[53]There shall be orders:
(a)Under r 4.56(1)(a) High Court Rules 2016 that Ian Luke Dustin is removed as a plaintiff in this proceeding;
(b)Under r 4.56(1)(b)(i) High Court Rules 2016 that Graham Kenneth Gaskin and Elizabeth Joan Dustin as trustees of the Dustin Family Trust are added as plaintiffs in this proceeding;
(c)The order under (b) above is to take effect from the date of this judgment;
(d)The Trustees are to file an amended statement of claim within 28 days;
(e)The defendants (other than the first defendant) shall file any statement of defence within 15 working days of service of the Trustees’ statement of claim;
(f)A statement of defence on behalf of the first defendant shall be filed within 15 working days of appointment of a litigation guardian as his representative; and
(g)I reserve leave to apply for such further directions as may be required.
[54] My preliminary view is that costs should lie where they fall. If despite that indication any party wishes to seek costs they may file a memorandum within 14 days. Any reply memorandum shall be filed 7 days thereafter. Memoranda are not to exceed 5 pages.
O G Paulsen Associate Judge
Solicitors:
Sandi Anderson & Partners, Auckland Checketts Mckay Law, Alexandra
Parker Cowan, Queenstown
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