EBR Holdings Ltd (in liq) v van Duyn
[2016] NZHC 1169
•25 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2009-404-1560 [2016] NZHC 1169
BETWEEN EBR HOLDINGS LTD (IN
LIQUIDATION) First Plaintiff
VIVIEN JUDITH MADSEN-RIES and
HENRY DAVID LEVIN Second Plaintiff
AND
JOHANNES VAN DUYN (SENIOR) AND GERARDA JACOBA MARIA VAN DUYN & ORS
Defendants
McLAREN GUISE ASSOICATES LTD Third Party
Hearing: 16, 18, 19, 20, 23 May 2016 Counsel:
P C Murray and K H Morrison for Plaintiffs
I M Hutcheson and K F Quinn for Defendants
S-J Telford and L G Cox for Third PartyJudgment:
25 May 2016
Reasons:
1 June 2016
REASONS FOR JUDGMENT OF HEATH J
Solicitors:
Meredith Connell, Auckland Forest Harrison, Auckland Morgan Coakle, Auckland
Counsel:
I Hutcheson, Auckland
EBR HOLDINGS LTD (IN LIQUIDATION) v VAN DUYN & ORS [2016] NZHC 1169 [25 May 2016]
CONTENTS
Introduction [1] Background [3] The present proceeding [6] Developments during the hearing [16] The application for leave to amend
(a) The defendants’ position [27]
(b) The plaintiff ’s position [35] (c) The third party’s position [41] Analysis
(a) Legal principles [47]
(b) Should leave be granted?
(i) Context [60] (ii) Statement of defence [62] (iii) The third party claim [73] (iv) The orders [80]
Introduction
[1] On 25 May 2016, after I had made a decision to abort the trial of this proceeding, I granted an application by the defendants for leave to file and serve both an amended statement of defence and third party claim. The hearing, which had begun on 16 May 2016 and was scheduled for 12 days, was adjourned.1
[2] My orders granting leave and consequential adjournment to 7 February 2017 were subject to stringent conditions.2 These are my reasons for making those orders.
Background
[3] EBR Holdings Ltd (EBR) was incorporated as a limited liability company on
3 January 2002. It was put into liquidation by order of this Court on 30 January
2009. The present liquidators are Ms Madsen-Ries and Mr Levin (the liquidators).
[4] The total amount of proved creditors in the liquidation is $262,414.37. Of that, $126,663.38 is comprised of preferential claims, with the balance being unsecured. There is an issue over the status of an unsecured claim by ANZ National Bank Ltd for $63,481.91. It is said that guarantors3 have satisfied the debt and
should be subrogated to that claim.4
1 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1112.
2 Ibid, at paras [8]–[12] (inclusive), set out at paras [80] and [81] below.
3 The guarantors are Messrs van Duyn jnr and Rene van Duyn, who were directors of EBR: see
[5] The liquidators undertook inquiries to ascertain what assets were available for distribution to creditors. A number of physical assets were located. They have been sold for $31,988. The remaining “assets”, comprise claims that the liquidators assert either EBR or they have against the defendants in this proceeding.
The present proceeding
[6] EBR and the liquidators sue the directors and shareholders of that company, as well as some associated persons. They claim both in respect of alleged current account debts and for breaches of duties owed under the Companies Act 1993. The defendants are:
(a) Mr Johannes van Duyn snr and his wife Mrs Gerarda van Duyn, each of whom hold a 50 percent shareholding in EBR. They are the first defendants. They are sued on an alleged current account debt.
(b)Their sons, Mr Rene van Duyn and Mr Johannes van Duyn jnr, as directors of EBR. Mr Rene van Duyn is the second defendant. Mr van Duyn jnr is the third defendant. They are sued both on alleged current account debts, and for various breaches of their duties as
directors of EBR.5
(c) Mr van Duyn snr, Mrs van Duyn, Mr Rene van Duyn and Mr van Duyn jnr, in their capacities as trustees of the Awaroa Family Trust, which was settled on 23 June 2000. They are the fourth defendants. The trustees are sued in respect of both a loan said to be due to EBR, and in respect of alleged insolvent transactions.6 As to the latter, the liquidators seek disgorgement of the sums paid.
(d) South Head Trustees Ltd (South Head) as the trustee of the South
Head Trust, which was settled on 29 September 2003. It is the fifth
para [6](c) below.
4 See also, paras [30] and [37] below.
5 These claims are brought under ss 131, 135, 137 and 300 of the Companies Act 1993. Relief is sought under ss 301 and 300(3) of that Act.
6 Companies Act 1993, ss 294 and 295.
defendant. Although previously removed from the Register of Companies, South Head has now been restored. South Head is sued on the same basis as the trustees of the Awaroa Trust.
[7] The claimed current account debts arise out of payments made by EBR to Fidelity Life Assurance Ltd (Fidelity Life) that the plaintiffs assert were made for personal purposes. In the statement of defence on which the trial was due to begin, all five defendants accepted that the financial statements of EBR recorded the debts on which EBR is suing. The most recent manifestation appears in the financial statements for the year ended 31 March 2008 which were signed by the directors (Mr Rene van Duyn and Mr van Duyn jnr) on 4 December 2008. That was just over one month before EBR was placed in liquidation. The debts were disputed. The defendants contended that all payments ought to have been treated as company expenses, and that EBR’s accountants had not classified the payments correctly, for
accounting purposes.7
[8] In the most recent iteration of its statement of claim,8 EBR alleged that, as at
31 March 2008:
(a) Mr van Duyn snr and his wife owed $55,502 to EBR. (b) Mr Rene van Duyn owed $129,258 to EBR.
(c) Mr van Duyn jnr owed $125,209 to EBR. The total indebtedness alleged was $309,969.
[9] The defendants joined the accountants who prepared the financial statements9
for the year ended 31 March 2008, McLaren Guise Associates Ltd (McLaren Guise), alleging negligence on their part. The defendants assert that errors were made in the accounting treatment of the moneys paid by EBR in the financial statements for the
years ended 31 March 2005, 2006, 2007 and 2008. The accountants deny any
7 See para [9] below.
8 Fourth Amended Statement of Claim filed on 23 November 2015.
9 See para [11] below.
wrongdoing, and support the liquidators’ view that the amounts as recorded in the
2008 accounts are owed.
[10] The proceeding began life as a summary judgment application in the District Court at Waitakere, in which EBR sought recovery of the amounts owing on the current accounts. That application was filed as long ago as 31 August 2009, about seven months after the liquidation order was made. The summary judgment application was heard in the District Court on 3 May 2010. It was dismissed by
Judge Recordon, in a judgment delivered on 7 September 2010.10 It is clear that the
Judge, while mindful of the need for a plaintiff to exclude the existence of an arguable defence, had concerns about the quality of the evidence offered by the defendants to resist the claim.11 Among other things, the Judge relied on evidence from Mr Harrison, a director of McLaren Guise, who provided a foundation for the possibility that the amounts paid had been erroneously treated as part of the current account debts, and were properly payable by EBR.12
[11] On 23 November 2011, the District Court gave leave to the defendants to join McLaren Guise as a third party. At some point thereafter it appears that a non-party discovery order was made against each of Fidelity Life to obtain relevant documents held by it.
[12] The proceeding was the subject of a number of further judicial conferences in the District Court, before an issue arose about whether the claims were within its civil jurisdiction. The question was whether the $200,000 limit13 related to the total amount claimed or any one individual cause of action. While the total claim was for
$309,969, each of the claims against the first, second and third defendants were for amounts well below $200,000.
[13] The van Duyn interests applied to strike out the proceeding. In case their position was found to be wrong, the plaintiffs applied to transfer the proceeding to
10 EBR Holdings Ltd v van Duyn DC Waitakere CIV-2009-090-1560, 7 September 2010 (Judge
Recordon).
11 Ibid, at paras [38]–[46].
12 Ibid, at paras [38], [40] and [45]. Subsequently, a separate issue has arisen about the accuracy of that evidence. That is the subject of a separate proceeding: for background, see EBR Holdings Ltd v McLaren Guise Associates Ltd [2015] NZHC 1996.
13 District Courts Act 1947, s 29.
this Court. On 12 June 2014, Judge Wilson QC upheld the jurisdictional objection. However, he decided to transfer the proceeding rather than order that it be struck out.14
[14] The first case management conference in this Court was scheduled before Associate Judge Doogue on 21 August 2014. By this time, the liquidators had been joined as second plaintiffs. The separate claims they make under the Companies Act
1993 were ones in respect of which the District Court had no jurisdiction.15
[15] At that conference, a number of timetabling orders were made by consent. At a substantive case management conference held on 23 June 2015, the Associate Judge was advised that the proceeding was ready for trial. Trial directions were made. A hearing for 12 days commencing on 16 May 2016 was allocated. The fourth amended statement of claim, on which the claim has proceeded to trial, was filed on 23 November 2015. On 13 May 2016, after I was assigned as trial Judge, I convened a case management telephone conference. At that time, both EBR and its liquidators were ready to proceed on the extant pleadings. So too was McLaren Guise, as third party. Mr Hutcheson, for the defendants, did not suggest that there was any difficulty in doing so.
Developments during the hearing
[16] On the first day of the hearing, 16 May 2016, Mr Hutcheson advised me that he wished to take instructions on the possibility of narrowing the defence and third party claim. If his instructions were to be confirmed, he expected some amendments to be made to briefs of evidence exchanged by those parties, but indicated that the hearing time could be reduced by up to 80 percent. To allow those instructions to be obtained, the hearing was adjourned until 4.30pm that day.
[17] When the proceeding was called at 4.30pm, Mr Hutcheson advised me that he had received the anticipated instructions. He informed me that the issues were to
be limited to the accounting treatment to be given to moneys paid as a result of loans
14 EBR Holdings Ltd v van Duyn DC Waitakere CIV-2009-090-1560, 12 June 2014 (Judge
Wilson QC).
15 See para [6](b) and (c) above.
made by Fidelity Life, together with instructions given to McLaren Guise in relation to preparation of the financial statements. I understood the narrowing of the issues to relate to the particular accounting treatment for those loans. They had always formed the basis of EBR’s current account claims.
[18] Mr Hutcheson said that he would refine the briefs of evidence and provide them to counsel for other parties on 17 May 2016. By consent, I adjourned the proceeding for mention before me at a telephone conference to be held at 9.30am on Wednesday 18 May 2016.
[19] At that telephone conference, I was informed that amended briefs had been prepared. Some of them had been served as late as 11.30pm the previous night. One additional brief remained to be provided. That was served at about 2.00pm on 18
May 2016. I have not been provided with copies of the amended briefs.
[20] I stood down the hearing until 4.30pm. At that time, Mr Hutcheson advised that he was still seeking further instructions as to the precise basis on which the defence would be put and on the way in which the third party claim was to be advanced. Mr Hutcheson indicated that he was concerned about the possibility of a conflict of interest arising out of his new instructions. The proceeding was adjourned until 9.30am on 19 May 2016.
[21] At the start of the hearing on 19 May 2016, Mr Hutcheson tendered to the Court and served an admission of a cause of action brought by EBR against the first defendants, Mr van Duyn snr and his wife, in the sum of $55,502, together with interest and costs to be fixed by the Court. The admission was signed by both of those defendants. Mr Hutcheson indicated, as a result of that admission, any conflict of interest had been resolved.
[22] At my request, Mr Hutcheson had prepared an amended Statement of Defence and an amended claim against the third party. Leave was required for those pleadings to be filed and served. I indicated that they should be provided to counsel for the plaintiffs and the third party so that they could decide whether they were prepared to consent to a leave application.
[23] The proceeding was recalled at about midday on 19 May 2016. At that stage, I was told that, in fact, $128,462.00 was owed by Mr van Duyn snr and Mrs van Duyn, and an amount of about $24,097 was accepted as owing by Mr van Duyn jnr. Mr Rene van Duyn contended that he was owed about $30,000, as a result of relevant adjustments to the current accounts. I was told that the admission of claim signed by Mr van Duyn snr and his wife related solely to the amount actually claimed in the fourth amended statement of claim.
[24] The proceeding was again stood down so that counsel for the plaintiffs and the third party could assess their positions on the leave application, which both had provisionally indicated would be opposed. I next saw counsel at 2.15pm on 19 May
2016. By that time, both Mr Murray and Ms Telford had had the opportunity to consider the proposed amended pleadings.
[25] I adjourned the proceeding to 10am on 20 May 2016 to hear further from counsel but made it clear that if an adjournment of the proceeding became inevitable (whether or not leave to amend was granted), I would likely make a significant order for costs against the defendants to reflect wasted costs incurred by the plaintiffs and the third party.
[26] I heard from Mr Hutcheson at 10am on 20 May 2016. I reserved to both Mr Murray and Ms Telford the ability to take further time to consider Mr Hutcheson’s submissions before responding. They each made submissions at 10am on 23 May 2016.
The application for leave to amend
(a) The defendants’ position
[27] Mr Hutcheson contended that the proposed amendments were based on evidence contained in briefs exchanged by the plaintiffs. In particular, he relied on aspects of the briefs of evidence from Ms Madsen-Ries and Mr Eadie. Mr Eadie is the Chief Financial Officer of Fidelity Life, and was to be called by the plaintiffs to give evidence about the loans and investment policies in issue.
[28] On the basis of that evidence, Mr Hutcheson submitted that a reallocation of liability was required in respect of the alleged current account debt. This involved increasing the amount owed by Mr van Duyn snr and his wife, increasing the amount owed by Mr van Duyn jnr, and extinguishing the claim against Mr Rene van Duyn. On the argument advanced by Mr Hutcheson there was only one substantive change in the defence from the position that had been taken by the defendants since the time they filed documents in opposition to the application for summary judgment, in late
2009. The difference is that it is now accepted that some of the amounts that were previously asserted to be proper business expenses of the company are to be treated as part of the current account indebtedness of Mr van Duyn snr and his wife, and Mr van Duyn jnr. A consequence of the proposed adjustments is the identification of a “debt” ($30,406.00) payable by EBR to Mr Rene van Duyn, in respect of which he has never filed a notice of claim in the liquidation.16
[29] The upshot of the proposed amendments is that Mr van Duyn snr and Mrs van Duyn now accept that they owe the sum of $128,462 to EBR, together with interest and costs that may be awarded by the Court. Mr van Duyn jnr accepts that he owes $24,097, on the same basis. Allowing for the set-off arguments arising out
of the subrogation claim, the core amount in issue is now a sum of $157,410.17 The
area of dispute will be narrowed further by the fact that the trustees of the Awaroa Trust and South Head each acknowledge that they owe something. But, even after I heard further from Mr Murray and Ms Telford on 23 May 2016, Mr Hutcheson was unable to quantify those amounts. So, even after any amendment, the exact amount that the van Duyn interests continue to assert was a proper company expense remains unknown.
[30] Acknowledging that he requires an indulgence from the Court to make the amendments, Mr Hutcheson produced two admissions of liability, one from Mr van Duyn snr and Mrs van Duyn and the other from Mr van Duyn jnr. They
acknowledge the amounts that they accept they owe to EBR.18 Given that those
16 The appearance of this “debt” is of significance in relation to a set-off defence raised as a result of payment of the ANZ debt by the guarantors, Mr van Duyn jnr and Mr Rene van Duyn: see paras [31] and [38] below. The amount of proved claims is set out in para [4] above.
17 See para [63] below.
18 See para [29] above.
sums differ from those claimed in the current statement of claim, it will be for the plaintiffs to decide whether to seek leave to amend their present statement of claim in order to reflect the admissions that have been made.
[31] There is one additional issue involving a claim based on subrogation. As previously indicated, ANZ proved in the liquidation of EBR in the sum of
$63,481.91. That amount has been paid by the guarantors, Mr van Duyn jnr and Mr Rene van Duyn. The issue is whether any set-off can be made against amounts due by either or both of them to EBR. That turns on whether, through subrogation, they are entitled to set-off amounts owed by them, or would be limited to amounts owing to ANZ. That is a legal issue on which little evidence would be required, and no cross-examination. Of itself, it would not have been a sufficient reason to adjourn the trial.
[32] Mr Hutcheson contended that if the claim were to proceed in its amended form, it would require no more than five days to hear, and could have been completed within the available time allocated for the trial. As at the date on which Mr Hutcheson made his submissions, 20 May 2016, there were a maximum of seven sitting days available for that purpose.
[33] I questioned Mr Hutcheson about the effect of his proposed reallocation of debt on the third party claim. No loss has yet been suffered by any of the defendants, in respect of the amounts they admit are owing. It would be difficult to argue that those defendants who now accept liability for some of the amounts could seek contribution from McLaren Guise. Nevertheless, I acknowledge that there may remain some claims, in particular in relation to some aspects of the directors’ duties claim; notably that part that deals with an alleged failure on the part of the directors to keep proper accounting records.
[34] I asked Mr Hutcheson to take instructions on the time it would take for admitted debts to be paid in the event that I were to grant an adjournment on terms required that to be done. He advised that the defendants were in the process of obtaining funds and had seen their bank manager for that purpose. Mr Hutcheson
was unable to give any specific time by which the acknowledged amounts could be paid.
(b) The plaintiffs’ position
[35] Mr Murray opposed the application for leave to amend. Having had the weekend to reflect on Mr Hutcheson’s submissions, Mr Murray indicated that whether leave to amend was or was not granted it would not be possible for the proceeding to be contemplated during the remaining time allocated.
[36] Mr Murray’s opposition was two-fold:
(a) The Courts have drawn a distinction between allowing amendments to clarify issues in dispute, and those that permit a new defence to be raised for the first time.19 He submits that this case falls into the latter category and that the defendants ought not to be allowed to amend.
(b)The late changes require investigation by the liquidators and are not capable of being undertaken within a short space of time. It is likely that new evidence would need to be briefed on aspects of the proceeding which were not previously in dispute.
[37] The main concern is that, since the proceeding began, the substantive issue has been whether all payments made by the company in respect of the Fidelity Life policy and investments were business expenses properly payable by EBR. Now, the focus has changed. The issue is whether the accounts were wrong in stating debts to be owed by particular parties. The defendants now seek a reallocation of the debts, accepting that a significant proportion is owed by persons other than the company. To date, the liquidators have not focussed on that reallocation issue. On the
pleadings, they did not need to do so.
19 Relying on the principles set out in Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383 (CA) at 385, notwithstanding that case dealt with a late application for leave to amend a statement of claim: see paras [49] and [50] below.
[38] A third issue arises out of a specific defence based on the right to guarantors to be subrogated to the position of ANZ, having met the bank’s debt in full. The legal question is whether a subrogated creditor is entitled to use the set-off procedure20 in respect of debts due and payable by the guarantor, as opposed to the creditor itself.
[39] A further difficulty is that, given the way in which some of the debts have now been admitted, it may be necessary for the plaintiffs to amend their statement of claim. Mr Murray is concerned that they may be met with a limitation defence, because of the need to go back to the first set of accounts when considering reallocation as among the defendants.
[40] Whether or not the amendment is permitted, Mr Murray submitted that a wasted costs order (on an “unless” basis) should be made against the defendants, on a joint and several basis. Further, subject to protections in relation to the claimed incidence of debt, if an amendment were granted a term requiring payment of amounts acknowledged to be owing was sought.
(c) The third party’s position
[41] Ms Telford submitted that leave to amend the defendants’ claim against the third party should be declined, on grounds that are not dissimilar to those advanced by Mr Murray. The third party’s position is a little different in the sense that one of its witnesses, Mr Harrison, gave affidavit evidence to oppose EBR’s application for summary judgment in the District Court, and there is some doubt as to the correctness of evidence on which Judge Recordon relied to dismiss that application.
[42] McLaren Guise does not need to concern itself with any limitation issue. If a fresh cause of action has been pleaded by the defendants out of time, it may respond by invoking the Limitation Act as a shield. Ms Telford’s real concern involves a change in the nature of the claim in respect of which prejudice suffered by McLaren
Guise cannot be met by an adjournment, with or without an order for costs.
20 Companies Act 1993, s 310. See also, para [31] above.
[43] The problem is that the person who undertook the apportionment exercise when the financial statements were first prepared was Ms Zaragoza. She is believed to be somewhere in the United States, but presently cannot be located. As the apportionments were carried out initially as long ago as 2004, not only is there prejudice in McLaren Guise’s current inability to locate Ms Zaragoza but also in the likelihood that she will have no recollection of this particular accounting exercise, given the 12 years or so that have passed.
[44] Ms Telford pointed to differences between the duties of care alleged to be owed by the third party in the original claim by the defendants and the present formulation of them. She also points to differences in the pleaded manner in which those duties are alleged to have been breached.
[45] Ms Telford submitted that the third party was able to proceed in the available time on the original pleadings. However, given the stance taken by Mr Murray and the understandable reluctance of Ms Telford to make available Mr Harrison as a witness for the plaintiffs,21 it was impracticable to proceed on the third party claim.
[46] Ms Telford submitted that any grant of leave to amend and consequential adjournment should be on terms as to costs. A wasted costs order was sought, on an “unless” basis.
Analysis
(a) Legal principles
[47] Should the dual applications for leave to amend be granted? The two are inextricably linked. In the circumstances of this particular case, the application for leave to amend must be considered in light of the need for a lengthy adjournment of
the hearing.
21 As a result of the problems identified in EBR Holdings Ltd v McLaren Guise Associates Ltd
[2015] NZHC 1996.
[48] Rule 7.7 of the High Court Rules applies equally to amendments to a statement of defence and any statement of claim, including one on a third party notice. It states:
7.7 Steps after close of pleadings date restricted
(1) No statement of defence or amended pleading or affidavit may be filed, and no interlocutory application may be made or step taken, after the close of pleadings date without the leave of a Judge.
(2) Subclause (1) does not apply to—
(a) an application for leave under that subclause; or
(b) a pleading or an affidavit that merely brings up to date the information before the court; or
(c) an application for amendment of a defect or an error under rule 1.9.
[49] The high watermark for a successful application for leave to amend a statement of claim is Elders Pastoral Ltd v Marr.22 In that case, an application was made to amend a statement of claim on the sixty-third day of a civil trial, during the course of closing addresses. Tompkins J granted the application. His decision to do so was upheld on appeal. The appeal was dismissed on the grounds that the first instance Judge was in “a far better position after nearly seventy days to assess any risks” under the head of prejudice.23
[50] Delivering the judgment of the Court of Appeal in Marr, Cooke P explained the approach that should be taken to an application for a late amendment to a statement of claim. In eschewing a “disciplinary approach” to such applications, Cooke P said:24
[Counsel for the defendants] argued for what may be called a disciplinary approach to belated applications for amendments: to penalise dilatoriness and to discourage opportunism. In our opinion, If an applicant can surmount the three formidable hurdles of showing that the amendment is in the interests of justice and will not significantly prejudice defendants or cause significant delay, very little if any weight should be given to the suggested desirability of something akin to the denunciation which is an established factor in criminal sentencing. We find it difficult to envisage a case in which
22 Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383 (CA).
23 Ibid, at 385–386.
24 Ibid, at 385.
the relevant considerations are not all comprehended in the three just mentioned.
[51] While Marr focussed on the private interests of the particular litigants before the Court, more recently there has been a discernible trend to consider also public interest factors. For example, the High Court of Australia, in Aon Risk Services Australia Ltd v Australian National University,25 emphasised the need to take into account the effect that waste of the valuable resource of Court time has on other litigants who wait in the queue, who could have used that time profitably. In
addition to the obvious private interests of the opposing party or parties, there is a public interest in ensuring a trial is ready to proceed at the allocated time.
[52] Aon involved an application for an adjournment and for leave to amend a statement of claim to add a new claim against the defendant. The applications were made on the third day of a trial scheduled to take four weeks. The proceeding had been on foot for two years. The public interest in ensuring the efficient workings of the justice system was captured in the judgment given by French CJ:26
5. In the proper exercise of the primary judge’s discretion, the applications for adjournment and amendment were not to be considered solely by reference to whether any prejudice to Aon could be compensated by costs. Both the primary judge and the Court of Appeal should have taken into account that, whatever costs are ordered, there is an irreparable element of unfair prejudice in unnecessarily delaying proceedings. Moreover, the time of the court is a publicly funded resource. Inefficiencies in the use of that resource, arising from the vacation or adjournment of trials, are to be taken into account. So too is the need to maintain public confidence in the judicial system. Given its nature, the circumstances in which it was sought, and the lack of a satisfactory explanation for seeking it, the amendment to ANU’s statement of claim should not have been allowed. The discretion of the primary judge miscarried.
[53] Referring to an earlier decision of the High Court of Australia, in Queensland v JL Holdings Pty Ltd,27 the Chief Justice said that “the proper principles of case management might be employed” in determining a leave to amend application, but
could not “except perhaps in extreme circumstances, … shut a party out from
25 Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 (HCA).
26 Ibid, at 182, para 5.
27 Queensland v JL Holdings Pty Ltd (1997) 189 CLR 146 (HCA).
litigating a case that was fairly arguable”.28 French CJ adopted a passage from JL Holdings, in which Dawson, Gaudron and McHugh JJ had said:29
Justice is the paramount consideration in determining an application such as the one in question. Save in so far as costs may be awarded against the party seeking the amendment, such an application is not the occasion for the punishment of a party for its mistake or for its delay in making the application. Case management, involving as it does the efficiency of the procedures of the court, was in this case a relevant consideration. But it should not have been allowed to prevail over the injustice of shutting the applicants out from raising an arguable defence, thus precluding the determination of an issue between the parties.
[54] So, while the need to do justice in an individual case should be regarded as the “paramount consideration” in the exercise of the discretion whether to permit an amendment, the “waste of public resources and undue delay, with the concomitant strain and uncertainty imposed on litigants” should be taken into account as part of the balancing process. Also relevant is the potential for loss of public confidence in the legal system which arises when a Court is seen to accede to applications made without adequate explanation or justification, when they give rise to vacation of
fixed trial dates.30 These sentiments were reflected in the plurality judgment of
Gummow, Hayne, Crennan, Kiefel and Bell JJ in Aon, in which their Honours referred to a report from the Australian Law Reform Commission to support the view that access to justice considerations required a broader approach to be taken “to tackle the problems of delay and cost in the litigation process”.31
[55] On occasion, when granting leave to amend or a lengthy adjournment, a Court will need to consider whether wasted costs should be compensated and, in some cases, an “unless” order should be made. Those types of issues were discussed
by the Court of Appeal, in SM v LFDB.32
28 Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 (HCA), at 191, para 28.
29 Ibid, at 191–192, para 29. The quotation is taken from Queensland v JL Holdings Pty Ltd (1997)
189 CLR 146 (HCA) at 101.
30 Ibid, at 192, para 30.
31 Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 (HCA), at 211, para 92. See also, paras 93 and 98. While giving a separate judgment, Heydon J did not
disagree with the principles expressed by other members of the Court.
32 SM v LFDB [2014] 3 NZLR 494 (CA). The Supreme Court gave leave to appeal: LFDB v SM [2014] NZSC 131. However, leave was subsequently revoked because the applicant had made a further default in relation to payment of a costs award: LFDB v SM (2014) 22 PRNZ 262 (SC). Accordingly, the Supreme Court did not pronounce on the approach that commended itself to the Court of Appeal.
[56] The Court of Appeal’s starting point was r 1.2 of the High Court Rules. Somewhat optimistically (although everything is relative), r 1.2 states that the objective of those Rules is “to secure the just, speedy and inexpensive determination of any proceeding or interlocutory application”. The Court of Appeal held that the “case management regime now included (since 2008) in Part 7 of the Rules is designed to achieve that objective by isolating the issues and trying them fairly,
swiftly and efficiently, with regard to what is at stake”.33 Stevens J, delivering the
judgment of the Court, continued:
[27] Case management plainly matters to the immediate parties in any given case. It matters to litigants in other cases too, because it affects the time their cases will take to come to trial and influences their expectations of the Court; expectations matter because they influence the settlements in which the majority of civil proceedings end. And it matters to potential litigants – the public at large – because they should feel confident that the Court can try cases fairly, quickly and efficiently. From the perspective of a judge dealing with any given case, all these interests are relevant; all form part of the interests of justice.
[28] Obedience is the foundation upon which the Rules operate. From time to time the Court encounters a party who chooses not to obey, seeking perhaps to avoid accountability to the other party or to secure an unfair settlement. In such a case the interests of justice require that the Court do whatever is necessary to enforce obedience to its orders.
[29] Enforcement powers are found in r 7.48, which empowers a judge to respond to breach of a procedural order by making any order the judge thinks just. Rule 7.48(2) sets out examples of orders the judge may make. Although an “unless” order is not listed, it is now well-established that r 7.48 permits a judge to make one. As the name suggests, an unless order is peremptory; it decrees that unless the specified action is taken by the specified time, the stated sanction will result. An unless order takes effect automatically if it is not complied with. In other words, a party need not apply to enforce the order. Any confusion (and there appears still to be some) as to the automatic effect of an unless order should now be resolved, in light of Marcan Shipping. …
(footnotes omitted)
[57] The Court of Appeal identified principles that should guide a Judge in deciding whether, and if so in what form, to make an “unless” order:
[31] The principles are these:
(a) As an unless order is an order of last resort, it is properly made only where there is a history of failure to comply with earlier orders.
(b) An unless order should be clear as to its terms. That is, it should specify clearly what is to be done, by when and what is the sanction for non-compliance. That sanction should be proportionate to the default.
(c) The sanction will apply without further order if the party in default does not comply with the order by the time specified. However, the party in default may seek relief by application to the Court.
(d) Justice may require that the party in default be relieved of the consequences of the unless order where the Court is satisfied that the breach resulted from something for which that party should not beheld responsible. The party should not assume that belated compliance will suffice.
(e) Where the unless order has been deliberately breached – that is, flouted – it is difficult to conceive of any situation where the interests of justice would require granting the flouter relief from the sanction imposed, notwithstanding belated compliance with the order.
(f) In deciding whether or not to excuse breach of an unless order the question for the Judge is: what does justice demand in the circumstances of this case? Considerations in answering that question include:
(i) The public interest in ensuring that justice is administered without unnecessary delays and costs.
(ii) The interests of the injured party, in particular in terms of delay and wasted cost.
(iii) Any injustice to the defaulting party, although that consideration is likely to carry much less weight in the circumstances than considerations (i) and (ii).
[58] The Court of Appeal was identifying “principles”, not laying down immutable rules as to when an “unless” order would be justified. I make that point because, read as a whole, I do not understand the judgment in SM v LFDB to limit the circumstances in which an “unless” order can be made to those where “there is a
history of failure to comply with earlier orders”.34 While in the vast majority of
cases that will be so, it seems to me that such an order is justifiable if there has been egregious conduct on the part of a party which has caused significant expense to another, with a lengthy adjournment being required in consequence.
[59] In the circumstances of this particular case, the following considerations are relevant to the exercise of my discretion whether the amendments should be permitted:
(a) The starting point is r 1.2 of the High Court Rules, and its emphasis
on the “just, speedy and inexpensive” determination of proceedings.35
(b)Rule 7.7 of the High Court Rules36 creates an expectation that parties will proceed to a hearing based upon pleadings in the form in which they stand “after the close of pleadings date”. By then, the nature of the issues, the parties to be joined and the scope of any likely interlocutory applications should have been determined. These issues are generally addressed at the first case management conference held
under r 7.1.37
(c) Rule 7.7(1) reposes a discretion in a Judge to permit a late amendment to a pleading. Fundamentally, access to justice principles will be regarded as the primary consideration. As the Court of Appeal held in Elders Pastoral Ltd v Marr38 an approach focussing on the “interests of justice”, taking into account the need to obviate significant prejudice to defendants is to be preferred to one involving disciplinary considerations.39
(d)However, in determining where the “interests of justice” lie, the Court is entitled to take account of public interest factors, as well as those pertaining to the particular litigants. All things being equal, parties to
litigation should have legitimate expectations that they:
35 See para [55] above.
36 Set out at para [48] above.
37 In particular, see r 7.1(3). In this case, the final form of the pleadings and the issues to be addressed were finalised at the case management conference held before Associate Judge
Doogue on 23 June 2015. The proceeding had been commenced in 209 and, by the time of that
conference, had been in the High Court since June 2014.38 Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383 (CA) at 385. See also, Aon Risk Services Australia Ltd v Australian National University [2009] 239 CLR 175 (HCA), discussed at paras [52]–[54] above.
39 Ibid, at 385. See paras [49] and [50] above.
(i)will be able to present an arguable case to a judicial tribunal for determination; and
(ii)will not be put to additional cost through undue delay in the hearing of the case, or in responding to new (and late) points raised against it.
(e) If leave to amend and an adjournment were granted, the Court should seek to compensate parties who are affected adversely; usually through a wasted costs order. The purpose of such an order is to ensure that wasted costs and disbursements involved in preparing for
an aborted trial are recovered by the innocent party.40
(f) Where the conduct that has given rise to the need for a late amendment and a consequential lengthy adjournment, is particularly egregious, it is appropriate for the Court to fashion further conditions to ensure that any required steps are taken promptly. That will limit (but not extinguish) prejudice suffered by the adversely affected litigant. In my view, the use of an “unless” order is permissible, in an appropriate case, to achieve that purpose.
(b) Should leave be granted? (i) Context
[60] For the purposes of r 7.7(1),41 the “close of pleadings date” was fixed by
Associate Judge Doogue, on 23 June 2015, as “105 working days before trial”. That was 23 November 2015. No application for leave to amend the statement of defence or the third party claim was signalled to the Court until the first day of the trial, 16
May 2016.
40 For example, see SM v LFDB [2014] 3 NZLR 494 (CA) at para [31](f)(ii), set out at para [57]
above.
41 Set out at para [48] above.
[61] Indeed, no mention of the possibility of an amendment was made during either a case management conference before Courtney J on 4 April 2016, or before me on the Friday before the hearing was due to begin, 13 May 2016. My inquiries with the Registrar, following argument on the amendment and adjournment issues, revealed that a new hearing date could not be accommodated until the week commencing 7 February 2017.
(ii) Statement of defence
[62] I accept Mr Murray’s submission that the plaintiffs have wasted time and resources in bringing a claim based on amounts shown as owing in financial statements signed by the directors of EBR, Mr van Duyn jnr and Mr Rene van Duyn. No longer is the issue simply whether the accounts wrongly recorded company expenditure as personal debts owed by particular defendants. The defendants now accept that a significant portion of the amount claimed represents a personal liability of one or more of them. Those admissions were made for the first time during the week of 16 May 2016, over seven years after EBR was put into liquidation on 30
January 2009.
[63] In its fourth amended statement of claim, EBR seeks to recover debts totalling $309,969.42 At the end of submissions on the leave applications, an amount totalling $152,599 was admitted.43 That leaves a sum of $157,410 in issue. Of that sum:
(a) An (as yet un-quantified) amount is owing by either (or both) the trustees of the Awaroa Family Trust and South Head and
(b)$29,537 is admitted as being owed by Mr van Duyn jnr, though purportedly set-off in relation to the subrogated ANZ debt. If that were left to one side, his admitted liability becomes $53,634, as
opposed to $24,097.
42 See para [7] above.
43 See para [29] above.
[64] On the basis of an admitted amount totalling $152,559, 49.2 percent of the claimed debts are not in dispute. If the whole of the amount admitted by Mr van Duyn jnr were brought to account, the percentage of admitted debts to the amount claimed rises to 58.7 percent.
[65] On any view, the nature of the defence to the current account claims has changed. The trial for which EBR and the liquidators must now prepare is significantly different. They now need to marshal evidence in an endeavour to prove that judgment should be entered against the particular defendants whom they allege owe the sums. Understandably, there is a degree of cynicism about whether personal debts are being artificially adjusted, as among the defendants, in order to cause difficulties in enforcing any admitted sums. A particular concern arises in relation to the way in which moneys alleged to be owing by Mr van Duyn jnr and Mr Rene van Duyn have been treated, and the suggestion that they will now permit a set-off arising out of payment of the ANZ debt.
[66] I accept Mr Murray’s submission that the plaintiffs need to examine closely the fresh briefs of evidence provided by the defendants and to investigate whether the defences put forward stands scrutiny. That will result in considerable additional cost. On the other hand, the change in stance taken by the defendants means that much of the costs incurred by the plaintiffs to date have been wasted. Their attempts to counter the defence that existed from the time that the summary judgment application was first filed in 2009 until the first day of the trial on 16 May 2016 has deflected resources from what has been belatedly identified as the true inquiry.
[67] I bear in mind that the van Duyn interests have possession of the knowledge required to identify who owes the debts. As for the liquidators, they are the proverbial blind people looking in a dark room for a black cat that is not there. They come to their task without the benefit of the prior knowledge held by the defendants.
[68] I was not prepared, particularly in light of admitted claims, to refuse the amendment. As an adjournment was required in any event, there will be ample time for the new defence to be investigated. The defendants should not be shut out of their ability to defend on the new basis, in case it may have some merit. The
possibility of the plaintiffs facing limitation defences if they sought to amend their claims to conform to proof can be addressed differently.44
[69] I decided that prejudice caused to the plaintiffs could be remedied by payment of admitted sums and wasted costs. Given the egregious nature of the defendants’ attempts to amend the statement of defence so late in the piece, to the extent that the possibility was not even flagged at a telephone conference held on 13
May 2016 (the Friday before the trial was due to begin on 16 May 2016), “unless” orders were justified as terms of the grant of leave to amend, and to allow for the substantial delay in hearing and determining the claims.
[70] Counsel for the plaintiffs provided to me an estimate of the amounts that would be claimed on a 2B basis, in the event that full costs were ordered as a term of the adjournment and the grant of leave to amend. The amount totals about $88,000, excluding disbursements. I have no doubt that significant disbursements have been incurred, particularly in obtaining expert evidence. I decided that the sum of
$65,000 should be awarded as a global amount to reflect costs and disbursements thrown away by the late amendment.
[71] I also considered that the plaintiffs should be paid the amounts admitted as being owing, without prejudice to any further investigation they may make into whether the admissions have been made by the correct defendants. No injustice will be caused to the van Duyn interests by requiring the debts finally admitted (over seven years after a liquidation order was made) to be paid promptly.
[72] I was concerned about the point raised by Mr Murray in relation to limitation issues. I did not think it was appropriate for the plaintiffs to be at risk of a defence of limitation being raised if a late amendment to the statement of defence were granted.45 In order to meet that problem, I directed that the defendants must file and
serve an undertaking that they will not take any limitation points if the plaintiffs seek
44 See para [72] below.
45 See para [39] above.
and are granted leave to amend their statement of claim in any respect that is consequential on the amendments permitted by my order.46
(iii) The third party claim
[73] The defendants seek judgment against McLaren Guise in respect of any moneys ordered to be paid by any of them in favour of the plaintiffs. In the amended third party claim, they make an allowance for the sum of $55,502 that Mr van Duyn snr and his wife now acknowledge to be owing by them. No allowance is made for the additional sum (now admitted) of $72,960, being the difference between $55,502 and $128,462. Nor is any allowance made for the sum of either $29,537 or $53,634 that is owed by Mr van Duyn jnr, depending upon the effect of the alleged subrogation claim.
[74] McLaren Guise was joined in December 2011. They too were required to meet a case based on the proposition that all moneys shown to be owing in the financial statements were company expenses. The position is that they are now faced with a claim involving reallocation of moneys as among the defendants, with some allowance for business expenses.
[75] Importantly, the claim against McLaren Guise is based on negligent preparation of financial statements. They could only have obtained instructions to prepare them from the directors, or possibly other members of the van Duyn family. The defendants might find it difficult to establish negligence on the part of McLaren Guise when they have now changed their stance with regard to liability for some of the amounts claimed.
[76] The new particulars of the alleged duty of care include allegations that a competent accountant would make due inquiry of its client to ensure that financial transactions received appropriate accounting treatment, and would bring to the attention of the directors any issues involving overdrawn director and shareholder
current accounts. Those allegations might be difficult to establish in light of the
46 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1112 at para [11].
change of position by the persons from whom those instructions would have been given.
[77] I do not consider it necessary to go through the changes to the third party claim. It is sufficient to say that having regard to prior inconsistent statements it may be more difficult for the claim to be made out than was previously the case. Nevertheless, in light of the permitted amendments to the statement of defence, and the considerable delay before trial during which time further investigations could be undertaken, I did not consider it would be appropriate to prevent this claim from being run.
[78] I am mindful of the difficulty caused to the third party in relation to the potential unavailability of Ms Zaragoza.47 Depending upon the way in which preparation for the new hearing proceeds, it will be open for the third party to apply to strike out if an important witness were unavailable and neither costs nor adjournment could remedy prejudice caused to them.
[79] I considered that the third party should receive an allowance to represent wasted costs. In light of the egregious conduct of the defendants I decided that “unless” orders were justified. Following my inquiry, Ms Telford indicated a best estimate of costs on a 2B basis to date to be about $62,500. That excludes disbursements. On a similar basis to that assessed on a global evaluation in respect
of the plaintiffs, I ordered that the defendants pay to them the sum of $30,000.48
(iv) The orders
[80] For those reasons, on 25 May 2016, I made the following orders.49
[7] The applications for leave to amend the statement of defence and the third party claim are granted, so as to permit new pleadings to be filed in a form that strictly follows the draft amended statement of defence and draft third party claim submitted to the Court on 19 May 2016. Each application is granted on conditions. The conditions have been crafted to meet both the indulgence granted in permitting the defendants to amend and the prejudice
47 See para [43] above.
48 EBR Holdings Ltd (in liq) v van Duyn [2016] NZHC 1112, at para [10].
49 Ibid, paras [7]–[11].
caused to both the plaintiffs and the third party as a result of an inevitable and lengthy adjournment.
[8] The trial of this proceeding is adjourned to 10am on 7 February
2017. Nine days have been allocated. I will be the trial Judge.
[9] Unless the defendants pay the following amounts to the plaintiffs, by midday on 30 June 2016, they shall be debarred from defending the plaintiffs’ claim:
(a) The sum of $152,559, together with interest calculated on that sum at the rates prescribed from time to time by the Judicature Act 1908 from 31 August 2009 (being the date on which this proceeding was first filed in the District Court at Waitakere) to the date of payment.
(b) The sum of $65,000, representing a global assessment of wasted costs and disbursements occasioned by the adjournment of the proceeding
[10] Unless the defendants pay the sum of $30,000 to the third party (representing a global assessment of wasted costs and disbursements occasioned by the adjournment of the proceeding) by midday on 30 June
2016, the claim brought by the defendants against the third party shall be struck out.
[11] Unless the defendants file and serve an undertaking to the Court, on or before 30 June 2016, that they will not take any limitation points if the plaintiffs seek and are granted leave to amend their statement of claim in any respect that is consequential on the amendments permitted by this order, the order granting leave to amend will be revoked and the plaintiffs’ claim and the third party claim will proceed on the existing pleadings.
(footnotes omitted)
[81] In order to ensure compliance with the conditions I directed:50
[12] The Registrar shall convene a case management conference before me, in Court for chambers, at 9am on the first available date after 8 July
2016:
(a) If compliance has not been made in full with the conditions on which leave to amend has been granted, the proceeding will be set down for formal proof on a date to be fixed.
(b) If compliance were made with all conditions imposed, further timetabling directions will be made at that stage to ensure any further interlocutory issues can be addressed well before the resumed trial date.
50 Ibid, at para [12].
(c) If there were non-compliance with only the “undertaking” condition,
timetabling directions will be made on the basis of the existing pleadings.
P R Heath J
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