ETG Holdings Ltd v First Eastern Holdings Limited

[2012] NZHC 3026

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-000228 [2012] NZHC 3026

BETWEEN  ETG HOLDINGS LTD First Plaintiff

ANDETG BROKERAGE LIMITED Second Plaintiff

ANDFIRST EASTERN HOLDINGS LIMITED First Defendant

ANDFE INVESTMENTS LIMITED Second Defendant

ANDTHATT KIONG SHIM Third Defendant

Hearing:         9 November 2012

Appearances: B D Gustafson for Plaintiffs/Respondents

M Heard and K Phelan for Defendants/Applicants

Judgment:      14 November 2012

JUDGMENT OF VENNING J Security for Costs

This judgment was delivered by me on 14 November 2012 at 4.30 pm, pursuant to Rule 11.5 of the

High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Harrison Stone, PO Box 1297, Shortland Street, Auckland 1140

Lee Salmon Long, PO Box 2026, Shortland Street, Auckland 1140

Copy to:            B Gustafson, PO Box 1297, Shortland Street, Auckland 1140.

ETG HOLDINGS LTD V FIRST EASTERN HOLDINGS LIMITED HC AK CIV-2012-404-000228 [14

November 2012]

Introduction

[1]      The plaintiffs allege they were induced to purchase shares in the second defendant  at  an  over  value.     They  seek  a  variation  of  the  agreement  and compensation under the Fair Trading Act 1986.  The defendants apply for security for costs.

Background

[2]      ETG Holdings Ltd (ETH) is a holding company.  ETG Brokers Ltd (ETB) is a broking company.  Both companies were established by Mr Sun for the purposes of implementing an agreement between the plaintiffs and the defendants.  First Eastern Holdings Ltd (FEH) is a holding company.  FE Investments Ltd (FEI) operates as a finance company throughout New Zealand.   The third defendant, Mr Shim, is a director of both FEH and FEI.

[3]      Mr Sun operates a foreign exchange company, E-Trans.  ETH and ETB allege that, in response to an approach from Mr Shim, Mr Sun agreed to take an investment in FEI and to introduce clients to the possibility of investing funds in FEI.  ETH and ETB were established for that purpose.  ETH paid $300,000 for 750,592 fully paid up ordinary shares in FEI.  The agreement was concluded on 11 May 2010 (the May agreement).

[4]      The plaintiffs allege they were induced to enter the May agreement on the basis of the following misrepresentations:

(a)      a representation  as  to  the bad  debts  and  doubtful  debts  provision shown in the December 2009 FEI management accounts (the debt misrepresentation);

(b)an omission, namely that at no stage were Mr Sun or the plaintiffs advised that in the latter part of 2010 FEI would possibly be withdrawing from the Crown guarantee deposit scheme (the Crown guarantee deposit scheme representation);

(c)      a  representation  in  May  2010  that  the  March  2009   financial statements and the December 2009 management accounts correctly recorded the bad debts at that time (the confirmation misrepresentation).

[5]      The plaintiffs seek various orders including:

a prospective indemnity for any losses suffered by ETB as a result of any

claim by its clients relating to their investment in FEI;

variation of the agreement setting the purchase price for the shares to reflect

the actual value;

compensation pursuant to s 43(2)(d) of the Fair Trading Act.

[6]      The defendants deny the misrepresentations alleged and raise two affirmative defences.  First, that the prospective indemnity sought is not available;  and second, that the plaintiffs have failed to mitigate their loss by refusing to accept an offer from FEH to repurchase the shares at $300,000 with settlement in two years’ time (with interest accruing in the meantime).

[7]      The defendants also raise a counterclaim against the plaintiffs and Mr Sun alleging that, prior to entry into the May agreement the parties had negotiated and agreed the terms of a discussion paper entitled “Project Double Happiness” (the Double Happiness agreement).  Under the Double Happiness agreement ETB agreed to market and raise deposits for FEI.  The Double Happiness agreement recorded an expectation that ETH would raise $3 million of deposits for FEI by July 2010.  The defendants also allege Mr Sun represented that ETH would act in good faith and use its best endeavours to raise $100 million in deposits for FEI through ETB over the long term.

[8]      The defendants say the plaintiffs and Mr Sun have breached the express and implied terms of the Double Happiness agreement and seek:

losses in a sum to be quantified;

a declaration the plaintiffs and counterclaim defendant have repudiated the

Double Happiness agreement;

an order under s 9 of the Contractual Remedies Act  1979 re-vesting the

shares in FEI in FEH;  and

orders under s 43 of the Fair Trading Act.

[9]      In their reply to the counterclaim the plaintiffs accept there was a discussion paper  called  Project  Double  Happiness  but  say  it  was  never  agreed  to  have contractual effect.  In the alternative if there was any binding agreement they say it was terminable on reasonable notice by either party.   Next, they say that if the statements attributed by the defendants to the plaintiffs were made, they were honestly  and  reasonably  held  when  made.    They  repeat  they  were  induced  to purchase the shares in FEH by misrepresentations.

The law

[10]     Rule 5.45 of the High Court Rules provides for orders for security for costs. [11]     The starting point, often referred to as the threshold consideration, is whether

there is reason to believe the plaintiffs would be unable to pay the costs of the defendants if the defendants were successful in their defence:  Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2).[1]    If the threshold is established then the Court has an overriding discretion as to whether an order should be made and, if it should be, the quantum of the order:  A S McLachlan Ltd v MEL Network Ltd.[2]   The discretion is not to be fettered by constructing principles from the facts of previous

cases.

The threshold issue

[1] Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516.

[2] A S McLachlan Ltd v MEL Network Ltd (2000) 16 PRNZ 747 (CA).

[12]     The defendants  estimate  costs  on  a 2B basis  for a five day trial  on  the plaintiffs’ claim (excluding the costs on this particular application) to be $44,377. With an allowance of $40,000 plus GST for expert accounting/audit evidence and disbursements the costs award could be in the region of $91,000.

[13]     The plaintiffs were established for the purposes of performing the agreement with the defendants.  ETB has no assets.  It could not pay costs.  ETH’s sole asset is its shareholding in FEI.

[14]     Despite  the  limited  assets  and  resources  of  the  plaintiffs,  Mr  Gustafson submitted the defendants could not pass the threshold test to establish grounds for an order for security.   He noted Mr Sun had confirmed that ETH owns the $300,000 shareholding in FEI unencumbered.  He submitted that, in the event the plaintiffs’ claim failed, then the shares in FEI to the value of $300,000 would be available to meet any costs award.

[15]     However, the plaintiffs’ case is that the shares in FEI are worth substantially less than $300,000.  In the answer to a request for particulars counsel has said the shares are worth approximately $105,000.

[16]     Next, given the limited resources of the plaintiffs and the need for them to pay their own solicitors’ fees, even if the shares were worth close to $300,000 there is unlikely to be enough left for the plaintiffs to pay the defendants costs in the event they were unsuccessful in their claim.  The position is even more clear if the shares are, as the plaintiffs allege, now only worth $105,000.  Mr Gustafson suggested the Court could perhaps make an order for the plaintiffs’ claim to be funded otherwise than by resort to the $300,000.  I am not prepared to make such an order.  It would be difficult, if not impossible, to enforce.

[17]     Nor am I able to accept Mr Gustafson’s submission that, in the event the plaintiffs fail in their claim, the shares would be worth $300,000 as opposed to the

$105,000 the plaintiffs say they are worth currently.   Even if the plaintiffs fail in

establishing the misrepresentations alleged it does not necessarily follow the shares would, by the time of trial, be worth $300,000.  The issue between the plaintiffs and defendants is the value of the shares at May 2010, but whatever that value is, it does not mean the shares will have retained that value by the time of trial.

[18]     I consider that, in the event the plaintiffs are unsuccessful, they will not be in a position to meet an order to pay the defendants costs.  The threshold requirement is satisfied.

Discretion as to the order

[19]     Mr Gustafson referred to the commentary by McGechan on the High Court Rules[3]  to support his submission that the Court will not generally order security when the defendants have an independent counterclaim arising from the same factual matrix as the plaintiffs’ claim.  He also noted that Associate Judge Faire had raised the issue at a conference in May this year.

[3] McGechan on Procedure (online looseleaf ed, Brookers) at [HR5.45.13].

[20]     The existence of affirmative defences and/or a counterclaim is a relevant consideration where security is sought against the plaintiff:  Ansell v State Insurance Ltd;[4]     Kimber Timber Products (1996) Ltd v Kimber Timber Products Ltd,[5] particularly where the plaintiffs’ claim will not result in the defendants incurring greater expense than they would otherwise incur in prosecuting their counterclaim.

[4] Ansell v State Insurance Ltd (1996) 10 PRNZ 133 (HC).

[5] Kimber Timber Products (1996) Ltd v Kimber Timber Products Ltd  HC Rotorua CP25/96, 26 June 1997.

[21]     The  strength  of  the  link  between  the  two  claims  will  be  a  particularly important  consideration.    Mr  Heard  characterised  the  plaintiffs’  claim  as  being related to pre-contractual negotiations and the defendants’ counterclaim as being related to post-contractual obligations.  Mr Gustafson submitted that the plaintiffs’ claim and the defendants’ counterclaim deal with the same pre-contractual negotiations and subsequent contractual rights.

[22]     On my assessment of the claims, there are relevant differences between the claim and counterclaim in this case.  While the Double Happiness agreement relied

on by the counterclaim defendants and the May agreement relied on by the plaintiffs were negotiated by the same parties in the context of their dealings they potentially give rise to separate obligations.   The plaintiffs seek to have the May agreement varied and/or to be awarded compensation under the Fair Trading Act on the grounds of misrepresentation.   The principal misrepresentations are in relation to the provisioning for bad loan investments in FEI’s loan book.   That may require examination of the 30 plus loans in FEI’s loan book to determine whether whatever representations were made were accurate or not.

[23]     Importantly, even if the defendants successfully defeat the plaintiffs’ claims (by establishing that there were no misrepresentations), it does not necessarily follow the defendants will succeed with their counterclaim.

[24]     The defendants’ claim under the Double Happiness agreement relies on a number of  express  and  implied  terms.    A difficult  issue will  be  whether  those implied  terms  can  properly  be  implied  and  secondly,  if  they  can,  whether  the plaintiffs breached them.  If the defendants succeed with their claim, there will then need to be an assessment of damages, assuming any binding commitment by the plaintiffs to provide services to the defendants would have been terminable on reasonable notice.

[25]     So while the claims and counterclaim arise out of negotiations between the same parties the cases are separate and distinct.

[26]     Given the different nature of the claims and counterclaim it is appropriate to consider them separately.  While the claims are related they are not so closely related that in this case the counterclaim should prevent the defendants from having an order for security for costs that otherwise would be justified.   Mr Heard suggested the plaintiffs’ claim against the defendants might take five days with the defendants’ counterclaim occupying two days.  At this stage of the proceedings it is difficult to make an accurate assessment.   However, on the basis of the information currently before the Court I accept it is likely that the plaintiffs’ claim would take four, possibly five days with the defendants’ counterclaim two to three at most.

[27]     The next factor is consideration of the merits of the case, to the extent a preliminary assessment is possible.  The plaintiffs’ case alleging misrepresentation (by omission) arising out of the defendants’ failure to advise them about Crown Government guarantee deposit scheme appears difficult given the publicity concerning the structure and life of that scheme.   In the absence of forensic accounting evidence and an examination of FEI’s loan book it is difficult to assess the merits of the claims of the debt and confirmation misrepresentations alleged by the plaintiffs.  It is relevant, however, that although Mr Gustafson clarified the basis for the claim there is not necessarily any particular relationship between the management accounts and the later audited accounts.  The plaintiffs’ claims will not be straightforward.  They are likely to be time consuming and to involve significant forensic accounting evidence.

[28]     There are then the affirmative defences.  As discussed, the plaintiffs’ claim for a prospective indemnity faces substantial difficulties.  However, I do not place much weight on the suggestion that the plaintiffs’ refusal to accept offers made by the defendants to repurchase the shares was a failure to mitigate, given the terms of the repurchase.  The plaintiffs would have had to wait two years before being paid out and would have been unsecured creditors for that sum.

[29]     The final matter is that there has been no suggestion that an order for security will prevent the plaintiffs from pursuing their claim.

[30]     I conclude that there should be an order for security.

Quantum

[31]     That leaves the issue of quantum.  As noted I consider the time required for the plaintiffs’ case against the defendants is at least four to five days.  I accept the calculation that scale costs on a 2B basis together with disbursements and expert accounting evidence to be approximately $90,000 for the defence of that claim.

[32]     I consider a sum calculated at three quarters of that to be appropriate for security in this case.

Result

[33]     There will be an order requiring the plaintiffs to provide security in the sum of $67,500  to  the satisfaction  of the Registrar.  Security to  be provided  by 20

December  2011.    In  the  event  security is  not  provided  I  reserve  leave  for  the defendants to apply to stay and/or dismiss the plaintiffs’ claim against them.

Costs on this application

[34]     The defendants are entitled to costs on this application which I fix on a 2B

basis together with disbursements.

Venning J