Eversons International Limited (in liquidation) v Stewart

[2022] NZHC 906

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2020-409-000192

[2022] NZHC 906

UNDER

the Companies Act 1993

BETWEEN

EVERSONS INTERNATIONAL LIMITED

(In Liquidation) First Plaintiff

AND

LUKE NORMAN and ELIZABETH HELEN KEENE

Second Plaintiffs

AND

EVAN KERRY STEWART

Defendant

Hearing:

29 April 2022

Appearances:

M J Tingey for Plaintiffs

K W Clay and R A Hearn for Defendant

Judgment:

17 May 2022

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 17 May 2022 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

EVERSONS INTERNATIONAL LTD (In Liq) v STEWART [2022] NZHC 906 [17 May 2022]

[1]        The plaintiffs are the liquidators of Eversons International Ltd (in liq) (Eversons).1 The  defendant  is  the  sole  shareholder  and  director  of  Eversons  (Mr Stewart).

[2]        This judgment concerns an application by Mr Stewart, pursuant to r 8.19 of the High Court Rules 2016, for particular discovery of four documents or categories of documents. The documents are identified as follows:

(a)A letter from the Inland Revenue Department (IRD) to Mr R Whiteley dated 16 January 2014.

(b)An email, prior or subsequent to the email from Ms Elizabeth Keene to Mr Paul Sparrow dated 3 December 2019 at 11.29 am.

(c)Email(s) between the IRD/Mr Paul Sparrow and the second plaintiffs (“the liquidators”) with regard to Eversons International Ltd and/or the defendant.

(d)Email(s) between the liquidators and Ms Lee Hukui between 9 April 2018 and 4 February 2020 relating to the defendant.

[3]The application is opposed by the liquidators on the bases that:

(a)all relevant documents in their possession or control have been disclosed;

(b)the documents sought are irrelevant to any matter in issue; and

(c)Mr Stewart is seeking disclosure for an improper purpose, namely, to use the documents in other proceedings he is contemplating filing against the liquidators.

1      Andrew Oorschot was appointed liquidator of Eversons on 9 April 2018. Vivian Judith Fatupaito and Elizabeth  Helen  Keene  succeeded  Mr  Oorschot  as  liquidators  on  30 January  2020.  Ms Fatupaito resigned as liquidator on 11 March 2022, and Luke Norman was appointed as her successor at that time  under  s  283  Companies Act  1993.  An order was  made  substituting  Mr Norman as a second plaintiff in place of Ms Fatupaito on 2 May 2022.

Background and the application

[4]        Eversons was in the business of selling synthetic legal high products. It was effectively put out of business from 8 May 2014 when the sale of its products was made illegal.2

[5]        Eversons was placed into liquidation by Mr Stewart on 9 April 2018. At the date of liquidation, Eversons owed the IRD $3,766,118 in unpaid taxes and penalties.3 The liquidators say Eversons has no available assets to meet the IRD’s claim. This is despite its financial statements showing overseas investments of more than $6,500,000 and net assets of more than $3,000,000.

[6]        This proceeding was commenced on 13 May 2020 and was accompanied by an application for summary judgment. The summary judgment application was limited to a cause of action seeking to recover the amount said to be overdrawn in Mr Stewart’s current account. The summary judgment application was dismissed on 3 December 2020.4

[7]        Since then, the liquidators have filed an amended statement of claim.5 There are now eight causes of action relied upon. By the first cause of action, the liquidators seek to recover what they say is Mr Stewart’s overdrawn shareholder’s current account. There are alternative causes of action alleging several breaches of directors’ duties owed by Mr Stewart to Eversons under the Companies Act 1993.6 There is also a claim that substantial payments made from Eversons’ bank accounts were distributions to Mr Stewart, in breach of s 52 Companies Act, which he is obliged to repay.

2      Psychoactive Substances Amendment Act 2014.

3      Paragraph [24] of the Amended Statement of Claim and paragraph [31] of the Amended Statement of Defence.

4      Eversons International Ltd (in liq) v Stewart [2020] NZHC 3188.

5      The present pleadings are the plaintiffs’ amended statement of claim dated 1 October 2021,     Mr Stewart’s amended statement of defence of 29 October 2021, and the plaintiffs’ reply dated  1 February 2022.

6      Sections 52, 56, 131, 133, 135, 136, 137, 194, 300 and 301 of the Companies Act 1993 are all relied upon.

[8]        A close analysis of the pleadings demonstrates that fundamental issues at trial will be when Eversons became insolvent, whether the company had any overseas investments as shown in its financial statements, and the extent to which large amounts paid from its bank account between April 2012 and February 2015 were payments to Mr Stewart as shareholder.

[9]        On 3 September 2021, case management directions were made which included that the parties were to provide standard discovery and file and serve affidavits of documents complying with r 8.15 of the High Court Rules 2016 by 26 November 2021.7

[10]      The liquidators’ affidavit of documents was dated 1 December 2021 and was filed that same day.

[11]      During December 2021 and January 2022, there was correspondence between the parties’ solicitors concerning the adequacy of the discovery. In response to requests by Mr Stewart’s solicitors for further discovery, the liquidators’ solicitors provided further documents to them on 24 December 2021. These were, in the main, communications between the liquidators and the IRD. These documents were disclosed on the basis the liquidators considered they were neither relevant nor discoverable but were provided to avoid the cost and delay of an application for further discovery. The further disclosure did not satisfy Mr Stewart, who filed this application on 23 February 2022.

Memoranda following the hearing

[12]      Following the hearing of this application, Mr Tingey filed a memorandum in relation to two matters.

[13]      First, as a result of an exchange between counsel and me at the hearing, an enquiry was made of the IRD as to whether the liquidators could consent to an unredacted version of the letter from the IRD to Mr Whiteley dated 16 January 2014

7      Eversons International Ltd (in liq) v Stewart HC Christchurch CIV-2020-409-192, 3 September 2021 (Minute).

(the first category of document being  sought  by  Mr Stewart)  being  provided to Mr Stewart. The IRD advised that the redacted portion of the letter relates to a different taxpayer, so in the circumstances, the liquidators’ consent would not assist in enabling Mr Stewart to obtain that letter.

[14]      Second, Mr Tingey attached a letter written by the liquidator, Ms Keene, to the IRD on 4 February 2020. It appears to be a standard letter advising of, inter alia, the appointment of Ms Keene and Ms Fatupaito as liquidators and asking for information. Mr Tingey advises the letter had come to light in the course of the liquidators’ further enquiries, and while it was not considered relevant to the issues in this proceeding, it was provided so that I was aware of it before issuing my judgment.

[15]      Mr Clay filed a memorandum in response.   He submits the IRD’s  letter of    4 February 2020 is highly relevant to the issues in the proceeding and further supports submissions he makes that there is good reason to believe that further documents in the categories set out in the application exist and have not been discovered. He also asks for an extension of the close of pleadings date because discovery is still not complete.

Legal principles

[16]      As noted, here, standard discovery was ordered. Rule 8.7 of the High Court Rules provides:

Standard discovery requires each party to disclose the documents that are or have been in that party’s control and that are-

(a)documents on which the party relies; or

(b)documents that adversely affect that party’s own case; or

(c)documents that adversely affect another party’s case; or

(d)documents that support another party’s case.

[17]      Standard discovery only requires disclosure of documents of actual and direct relevance.8 As the learned authors of Sim’s Court Practice state:9

8      Pyne Gould Corporation Ltd v Bath Street Capital Ltd [2020] NZHC 1247 at [13].

9      Matthew Casey (ed) Sim’s Court Practice (online ed, LexisNexis) at [HCR8.7.1].

In a contested application for standard discovery, the court must decide whether amongst other criteria the document adversely affects a party’s case (or, conversely, positively affects the other party’s case).

[18]      Relevance is assessed having regard to the pleadings. As such, the pleadings set the outer limits of what must be disclosed. In determining relevance, it is the case of the party seeking discovery that is to be assumed to be true.10 Documents that do not relate to an issue arising on the pleadings, that are no more than background, or that relate to a non-substantive aspect of the case, are not relevant and therefore not discoverable.11

[19]The application is made under r 8.19 of the High Court Rules which provides:

8.19Order for particular discovery against party after proceeding commenced

If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party

(a)to file an affidavit stating

(i)      whether the documents are or have been in the party’s control; and

(ii)     if they have been but are no longer in the party’s control, the party’s best knowledge and belief as to when the documents ceased to be in the party’s control and who now has control of them; and

(b)to serve the affidavit on the other party or parties; and

(c)if the documents are in the person’s control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.

[20]      The key issue in applications under r 8.19 is whether there are grounds for believing a party has not discovered documents that should have been discovered. Counsel agree that, on applications under r 8.19, the Court generally adopts the four-

10     Kawarau Village Holdings Ltd v Yuen [2015] NZHC 1379 at [38].

11     RHH Ltd v Anderson [2018] NZHC 2032 at [12]; Bei v Wang [2019] NZHC 2860 at [9].

stage approach as outlined in Assa Abloy New Zealand Ltd v Allegion (New Zealand)

Ltd:12

(a)Are the documents sought relevant, and if so how important will they be?

(b)Are there grounds for belief that the documents sought exist? This will often be a matter of inference. How strong is that evidence?

(c)Is discovery proportionate, assessing proportionality in accordance with Part 1 of the Discovery Checklist in the High Court Rules?

(d)Weighing and balancing these matters, in the Court’s discretion applying r 8.19, is an order appropriate?

[21]      It is the first two of these considerations that are foremost in issue on this application.

Relevance and Ms Keene’s evidence

[22]      Before turning to consider the application in relation to each of the categories of documents sought, there are further preliminary matters that I need to address, namely the submissions made on Mr Stewart’s behalf concerning:

(a)the relevance of the documents; and

(b)Ms Keene’s evidence.

Relevance

[23]      As I have set out in [17] and [18] above, in standard discovery parties must discover documents that are of actual and direct relevance to matters put in issue by the pleadings. As the learned authors of McGechan on Procedure state:13

12     Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760, [2018] NZAR 600 at [14].

13     Robert Osborne (ed) McGechan on Procedure (online loose-leaf ed, Thomson Reuters) at [HR8.7.01].

Before any discovery application can be determined it is necessary for the issues arising on the pleadings to be identified, and for the categories of documents or particular documents to be assessed as to their relevance to those issues. … Pleadings set the outer limits of what needs to be disclosed as discovery.

[24]      The submissions advanced for Mr Stewart did not show how any of the categories of documents sought were relevant by reference to the pleadings. Rather, relevance was asserted on very general bases, such as the documents were correspondence between the IRD and the plaintiffs or concerned the liquidation of Eversons. As the authorities show, disclosure is not required of documents that are no more than background or relate to some non-substantive aspect of the proceeding.

[25]      Mr Clay went even further and submitted that I am not bound to consider relevance in terms of the pleadings at all. Examples of this are in his submission at the hearing that I should have regard to issues that may arise if the pleadings were amended. Similarly, in his latest memorandum, he submits the Court is not bound by the pleadings but may have regard to “broader circumstances” including “issues which the defendant has been investigating”. I do not accept this approach to relevance.

[26]      Consistent with the liquidators’ submission, Mr Stewart’s application has been made for an ancillary purpose, namely, to assist Mr Stewart to pursue other applications or proceedings he is considering against the liquidators. Mr Clay submitted the documents sought will be relevant to these matters in so far as they relate to the reasons for the liquidators’ appointment, whether they are acting independently and impartially, and whether there has been a breach of Mr Stewart’s privacy or s 18 of the Tax Administration Act 1994.

[27]      Mr Tingey submits not only are these matters not raised in this proceeding, they cannot possibly be raised, and that use by Mr Stewart of documents obtained through discovery in other proceedings would be improper.14 There is considerable force in these submissions. For present purposes, however, it is enough that I am not concerned with other proceedings Mr Stewart might bring, or whether he might at some stage seek to amend his pleadings in this proceeding to raise new matters.

14     High Court Rules 2016, r 8.30.

Ms Keene’s evidence

[28]      In opposition to this application, Ms Keene deposes that the liquidators’ discovery is complete and that, apart from documents that have already been discovered, they do not have any documents in the categories that are the subject of the application.

[29]      For Mr Stewart, it is submitted I should not accept Ms Keene’s evidence because, it is said, Ms Keene has made statements in her affidavits that have been proven to be incorrect. Mr Clay sets out the occasions relied upon in his written submissions for the hearing and in his memorandum of 6 May 2022.

[30]      The first matter concerns Ms Keene’s affidavit in support of the plaintiffs’ summary judgment application. She mistook credits and debits in Eversons’ financial statements. This was a technical error and I do not see it has any relevance to whether the liquidators have provided full disclosure.

[31]      Next, Mr Clay submits that while the liquidators gave discovery on the basis that all emails between them and the IRD had been disclosed, they have subsequently produced further documents. There are four occasions relied upon.

[32]      First, the liquidators provided further documents to Mr Stewart’s solicitors on 24 December 2021. However, this was on the basis the documents were (and are) not considered relevant and were disclosed to avoid the cost and delay of a dispute over discovery. It is, of course, the case that the discovery process starts with a self- assessment by litigants and their counsel as to the relevance of documents in their possession and control (and in relation to whether privilege applies) and disclosure is only required of relevant documents.

[33]      Next, documents were provided by the liquidators’ solicitors on 20 January 2022. This does not suggest the liquidators have failed to provide full discovery as these were not documents the liquidators had failed to discover. They were documents included in the liquidators’ affidavit of documents. The liquidators’ solicitors advised:

These communications appeared in the plaintiffs’ list of documents as 61, 84, 85, 115 and 116 respectively. There were no email communications between the liquidators and Lee Hukui between 9 April 2018 and 4 February 2020 relating to the company.

[34]      The next matter concerns an email of 20 March 2020, that Ms Keene has deposed recently came to light as a consequence of an enquiry the liquidators made seeking confirmation from the IRD that it had no record of any emails between it and the liquidators which had not been disclosed. Ms Keene has set out fully the circumstances under which the 20 March 2020 email was identified in an affidavit filed in a related proceeding.15 She also says, following extensive further searches, there is no record of that email having been received by the liquidators. The email simply attaches bank statements that the IRD held for Eversons. The liquidators could not disclose a document they did not have in their control. I agree with Mr Tingey that the fact the email came to light as a result of further enquiries made in response to this application gives confidence the liquidators’ disclosure is complete.

[35]      Finally, there is the letter Mr Tingey has produced with  his memorandum. Mr Clay submits the letter is relevant because it concerns an issue of when the liquidators obtained Eversons’ bank statements. That is not an issue arising on the pleadings. I do not see how this letter is relevant.

[36]      None of the matters that have been raised give me cause to doubt Ms Keene’s evidence in its material respects that the liquidators have made extensive searches for all relevant documents in their possession and control and have given complete discovery.

The documents sought

[37]      Against that background I will deal with each category of documents sought seriatim. I will do this by setting out briefly the parties’ submissions, my analysis, and the result of the application.

15 Fatupaito v Stewart HC Christchurch CIV-2021-409-131. The affidavit is dated 7 April 2022, and there was no objection to my reading it for the purposes of this application. Ms Keene also deals with this in her affidavit of 9 March 2022, filed in response to this application.

Category 1- the letter from the IRD to R Whiteley

[38]      Mr  Whiteley  provided  taxation  advice  and  services  to  Eversons.   On   16 January 2014, the IRD wrote to Mr Whiteley advising of its intention to conduct an audit of Eversons’ tax affairs. On 28 September 2021, Ms Keene requested a copy of the letter from the IRD, and it was provided to her by Ms Hukui as an attachment to an email that same day. However, two lines from the letter were redacted.

[39]      This letter was one of the documents the liquidators considered irrelevant to any issue in the proceeding but nonetheless disclosed it to Mr Stewart’s solicitors on 24 December 2021. The liquidators do not hold an unredacted version of the letter.

[40]      Mr Clay submits the letter is relevant because it was produced during discovery, relates to the investigation by the IRD of Eversons’ compliance with its tax obligations, and because it refers to Mr Stewart’s shareholder’s current account. He seeks an order the liquidators are to request the IRD to provide an unredacted copy of the letter.

[41]      Mr Tingey has set out in his memorandum the steps taken following the hearing to obtain a copy of the unredacted letter for Mr Stewart. Mr Tingey argues the unredacted letter is not in the liquidators’ possession or control and is not relevant to any matter in issue.  He notes also that the letter was sent to Eversons’ tax agent,   Mr Whiteley, and if the letter was of any significance, Mr Stewart could have been expected to have provided an explanation of its relevance.

[42]      The liquidators have taken reasonable steps to obtain a copy of the unredacted letter, and it is not in their control. Further, the redacted letter was disclosed by the liquidators following formal discovery on the basis they did not consider it relevant to any matter in issue. I agree with that assessment. I do not consider the letter relates  to any issue raised in the pleadings. That the letter is concerned with Eversons’ tax obligations, or makes a passing reference that a focus of the audit would be shareholder’s current accounts, does not make it relevant for discovery purposes, as there is no dispute as to the amount of Eversons’ indebtedness to the IRD and the fact of the audit and any findings/assessments made as a consequence of it are not put in

issue either. I can see no basis upon which the letter could possibly adversely affect the liquidators’ case or positively affect Mr Stewart’s case.

[43]The application in respect of this document is dismissed.

Category 2- any email, prior or subsequent to an email from Ms Keene, to Paul Sparrow of the IRD, dated 3 December 2019

[44]      Among the documents the liquidators provided on 24 December 2021, was an email dated 3 December 2019 from Ms Keene to Paul Sparrow of the IRD. By that email, Ms Keene forwarded (as  an  attachment)  the  consent  of  Ms  Keene  and  Ms Fatupaito to act as liquidators. The document, in the format it was provided to  Mr Stewart’s solicitors, has a large blank space above it which caused Mr Stewart to believe it was part of an email chain, and a further email/s had been redacted. He seeks copies of the redacted email/s.

[45]      When this issue was raised by Mr Stewart’s solicitors in a letter of 19 January 2022, the liquidators’ solicitors responded that the appointment of the liquidators was not in issue in the proceeding, and no further documents existed. Further, Ms Keene has confirmed there were no other emails which form part of an email thread with Mr Sparrow, and it is her belief that the format of the document which gave rise to Mr Stewart’s concern was a result of its conversion from email to PDF format for discovery purposes. To demonstrate the point, she produced a copy of the email in the original email format.

[46]      Mr Clay submits that any further emails between Mr Sparrow and the liquidators are relevant as relating to the liquidation of Eversons and to “the commencement of the liquidation”, and there will almost certainly be other emails between Mr Sparrow and the liquidators. Mr Clay also submits that Ms Keene’s explanation concerning the conversion of the document to PDF format for discovery purposes is not accepted.

[47]      Mr Tingey submits that Ms Keene has confirmed there are no other emails which are part of an email chain, and there is no reason not to accept her evidence.

[48]      For reasons I have set out above, I do not accept Mr Clay’s submission that any emails concerning the liquidation of Eversons and the commencement of the liquidation are necessarily relevant and must be disclosed. Further, the email does not concern the commencement of  the  liquidation.  It  concerns  the  appointment  of Ms Keene and Ms Fatupaito as liquidators to replace the original liquidator. There is no pleading that puts their appointment in issue.

[49]      Mr Stewart has also failed to show grounds for belief that the further email/s sought exist. I am satisfied the email of 3 December 2019 is not part of a chain or thread of emails between Ms Keene and Mr Sparrow. Despite arguing there will almost certainly be other emails between Mr Sparrow and the liquidators, Mr Clay did not refer me to anything which supports that submission. There is, in fact, nothing to suggest   Mr  Sparrow  had  further  relevant   dealings  with  the   liquidators  after   3 December 2019.

[50]The application in respect of this document is dismissed.

Category 3 - any emails between the IRD/Paul Sparrow and the second plaintiffs with regard to Eversons and/or Mr Stewart

[51]      For the reasons given above, Mr Stewart has not shown there are grounds for a belief such emails exist.

[52]      For completeness, I should also deal with a further matter relevant to this aspect of the application. In his written submissions, Mr Clay appears to suggest that email correspondence between Mr Sparrow and the liquidators might concern the existence of the overseas investments. There is nothing before me to suggest this is the case.

[53]The application in respect of this category of documents is dismissed.

Category 4 - any emails between the liquidators and Lee Hukui of the IRD, between 9 April 2018 and 4 February 2020, relating to Mr Stewart.

[54]      Mr Stewart contends there is email correspondence between Ms Hukui and the liquidators that has not been disclosed to him. The basis for his belief is that the IRD

declined a request he made under the Official Information Act for emails between Ms Hukui and Ms Keene, from 9 April 2018 to 6 August 2021, in respect of Eversons. The request was refused on the basis such information was sensitive and confidential. Mr Stewart says this would indicate such documents do exist. Mr Clay went further and suggested such documents “clearly exist” for the same reason.

[55]      The liquidators have disclosed emails between Ms Keene and Ms Hukui dating from March 2020, which is within the date range of Mr Stewart’s Official Information Act request. While the IRD’s ground for declining Mr Stewart’s request might suggest there was correspondence between Ms Hukui and Ms Keene (as there was), it does not justify inferences that the correspondence pre-dates March 2020 or included material that the liquidators have not disclosed.

[56]The application in respect of this category of documents is dismissed.

Result

[57]Mr Stewart’s application for particular discovery is dismissed in its entirety.

[58]      Mr Tingey sought costs on behalf of the liquidators. They have been entirely successful in their defence of this application, and I cannot see any basis upon which they would not be entitled to costs on a 2B basis plus disbursements as fixed by the Registrar. However, as Mr Clay did not address me specifically on the issue, I will reserve costs on the basis that if counsel do not agree on costs they may file memoranda within 14 days (no more than five pages).

[59]      For completeness, as I have dismissed this application, there is presently no basis to extend the close of pleadings date as Mr Clay has requested on Mr Stewart’s behalf.

O G Paulsen Associate Judge

Solicitors:

Marttelli McKegg, Auckland

Layburn Hodgins Limited (T K Quirk), Christchurch