Fe Investments Ltd v Klisser HC Auckland CIV-2007-404-008056
[2009] NZHC 1995
•21 October 2009
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2007-404-008056
BETWEEN FE INVESTMENTS LIMITED Plaintiff
ANDEDWARD ELKAN KLISSER First Defendant
AND BANK OF NEW ZEALAND Second Defendant
Hearing: 8 October 2009
Counsel: M Heard and J Wach for the plaintiff
N R Hall and M J R Simes for the first defendant
S Willetts for the second defendant (given leave to withdraw) C Jones for the Official Assignee
Judgment: 21 October 2009
JUDGMENT OF STEVENS J
This judgment was delivered by me on Wednesday, 21 October 2009 at 11am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
M Heard, LeeSalmonLong, PO Box 2026, Shortland Street, Auckland 1140
N R Hall, Simpson Grierson, Private Bag 92518, Wellesley Street, Auckland 1141
S Willetts, Buddle Findlay, PO Box 1433, Shortland Street, Auckland 1140C Jones, Private Bag 92513, Wellesley Street, Auckland 1141
FE INVESTMENTS LIMITED V EDWARD ELKAN KLISSER AND ANOR HC AK CIV-2007-404-008056
21 October 2009
Introduction
[1] This is an application by FE Investments Limited (the plaintiff) for leave to continue proceedings (filed in December 2007) against Mr Edward Klisser (the first defendant). Because the first defendant has now been declared bankrupt, the application is brought under s 76(2) of the Insolvency Act 2006 (the Act). The plaintiff was a financier to two companies controlled by the first defendant. He personally guaranteed the debts of both companies to the plaintiff. On two contractual causes of action under the personal guarantees, the plaintiff obtained summary judgment in respect of liability. Quantum is yet to be determined. A third cause of action alleges a claim for dishonest assistance against the first defendant. There is also a claim against the second defendant on the basis of knowing receipt. Liability on each of these claims is yet to be determined.
[2] The first defendant opposed the application. Counsel for the second defendant advised that the second defendant will abide the decision of the Court. Counsel was given leave to withdraw. The Official Assignee has confirmed, by way of a helpful memorandum, that there is no objection to the proceeding continuing. The Official Assignee considers that no prejudice will result to other creditors if leave is granted.
[3] The plaintiff submitted that leave should be granted as the claim is more suited to being dealt with by the Court than on the proof of debt procedure. The plaintiff submitted that there is a prospect of financial benefit from so proceeding and the claim is not clearly unsustainable. Therefore, the plaintiff submitted that the Court should allow the proceeding to continue.
[4] For the reasons set out in this judgment, I propose to grant leave. This is an appropriate case in which to impose a condition that the plaintiff not enforce any judgment against the first defendant without the leave of the Court.
Factual background
[5] The two businesses financed by the plaintiff were Progym Limited and Leisureworld Limited. The first defendant controlled both of these companies and had personally guaranteed the debts of both companies to the plaintiff. Both Progym and Leisureworld breached the financing agreements and the first defendant did not honour his personal guarantees.
[6] The first defendant was a director of Leisureworld and at all material times controlled it. It was at the request of the first defendant that the plaintiff purchased goods from Leisureworld’s suppliers for shipment to Leisureworld’s customers. The goods were owned by the plaintiff. The first defendant allegedly told the plaintiff that the goods would be purchased from the plaintiff by Leisureworld before they cleared customs in the country of destination. At the direction of the first defendant, Leisureworld is said not to have paid the plaintiff for the goods before they cleared customs. Rather, at the direction of the first defendant, Leisureworld is alleged to have received funds from the sale of the plaintiff’s goods.
[7] The funds representing the purchase price of those goods are alleged to have been received and held by Leisureworld subject to a trust in favour of the plaintiff. At the direction of the first defendant, Leisureworld applied those funds for its own purposes, including to reduce debt owed by it to the second defendant. It was contended that such conduct of the first defendant was not honest by the standards of reasonable people and he himself realised it was not honest when he engaged in the conduct concerned.
[8] Leisureworld had three shareholders. One of those was the first defendant, who owned one share. The second was his wife, Mrs Penelope Klisser, who owned two shares. The third shareholder was Equipe Consultants Ltd (Equipe) who owned
639,997 shares. Equipe had two shareholders, namely, the first defendant and
Mrs Klisser, who held 50 shares each. It seems that these 100 shares in Equipe were
held on trust for the Klisser Business Trust (the trust). The beneficiaries of the trust include any person or group of persons or trust or body whom the first defendant and his wife appoint. No appointment has been made and the first defendant and his wife have not delegated their power to appoint.
[9] The first defendant was declared bankrupt on his own application on 15 April
2008. The effect of the bankruptcy is that the proceeding has been stayed by operation of s 76(1) of the Act. The plaintiff now wishes to continue the proceeding against both defendants. No leave is required to continue against the second defendant and a hearing has been scheduled for February 2010.
Pleadings
[10] Because of its importance to an issue surrounding the possible financial benefit to the plaintiff from allowing the proceeding to continue, the pleading of the third cause of action against the first defendant which is entitled “dishonest assistance” is set out as follows:
Payments received by Leisureworld for FEI stock
34. When Leisureworld received payment for stock purchased by FEI it held that such part of the payments as represented the purchase price of the goods as a trustee only, and for the benefit of FEI (Proceeds).
35. By virtue of its position as a trustee of the Proceeds, Leisureworld owed
FEI fiduciary duties, including to fully account for the Proceeds.
36. At the direction of the First Defendant, and in breach of its obligations as a trustee of the Proceeds, Leisureworld applied them for its own purposes, including by paying down debt owed to third parties.
Particulars
Between 13 September 2006 and 14 June 2007 Leisureworld arranged for Proceeds totalling at least $2,830,744.55 to be paid in reduction of debt owed by Leisureworld to the Bank of New Zealand.
37. The First Defendant acted dishonestly in directing Leisureworld to apply the Proceeds for its own purposes. The First Defendant’s conduct was not honest by the standards of reasonable and honest people and he himself realised that by those standards that his conduct was dishonest. The First Defendant’s knowledge is apparent or in the alternative is to be inferred from the following facts:
(a) The First Defendant procured the Leisureworld Loan on behalf of Leisureworld, knew the material details of the agreements between Leisureworld and FEI, and knew that Leisureworld held the Proceeds on trust for FEI;
(b) The First Defendant procured that the Proceeds be applied for
Leisureworld’s own purposes and not to FEI;
(c) When asked by Mr Shim when payment for stock financed by FEI would be made to FEI, the First Defendant did not reveal that payment for sock purchased by FEI had been received by Leisureworld.
[11] In terms of relief, the plaintiff seeks an inquiry into the amount of the proceeds and an order that the first defendant pay that sum to the plaintiff.
Statutory provisions
[12] This application is to be determined under s 76(2) of the Act, which provides:
76 Effect of adjudication on Court proceedings
(1) On adjudication, all proceedings to recover any debt provable in the bankruptcy are halted.
(2) However, on the application by any creditor or other person interested in the bankruptcy, the Court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the Court thinks appropriate.
[13] Provable debt is defined in s 231 of the Act as follows:
231 Meaning of provable debt
(1) A provable debt is a debt or liability that a creditor of the bankrupt may prove in the bankruptcy.
(2) A creditor's claim form is the document that a creditor submits to the
Assignee for the purpose of proving the debt.
(3) A debt is proved when it is admitted by the Assignee.
[14] Section 232 states what debts are provable debts:
232 What debts are provable debts
(1) A provable debt is a debt or liability that the bankrupt owes— (a) at the time of adjudication; or
(b)after adjudication but before discharge, by reason of an obligation incurred by the bankrupt before adjudication.
(2) A fine, penalty, sentence of reparation, or other order for the payment of money that has been made following any conviction or order made under section 106 of the Sentencing Act 2002—
(a) is not a provable debt; and
(b)is not discharged when the bankrupt is discharged from bankruptcy.
[15] If the plaintiff’s dishonest assistance claim is successful, the plaintiff contends that a debt will arise that will survive discharge from bankruptcy under s 304 of the Act:
304 Debts from which bankrupt is released on discharge
(1) On discharge, the bankrupt is released from all debts provable in the bankruptcy except those listed in subsection (2).
(2) The bankrupt is not released from the following debts:
(a)any debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party:
(b)any debt or liability for which the bankrupt has obtained forbearance through fraud to which the bankrupt was a party:
(c)any judgment debt or amount payable under any order for which the bankrupt is liable under section 147 or section 298:
(d) any amount payable under a maintenance order under the Family
Proceedings Act 1980:
(e) any amount payable under the Child Support Act 1991.
Applicable principles
[16] In Saimei v McKay & Ors (1998) 6 NZBLC 102,611 Paterson J set out the principles applicable to applications for leave to continue proceedings under s 32 of the Insolvency Act 1967 (predecessor to s 76 of the Act). Section 32 of the 1967 Act was in broadly similar terms.
[17] The Saimei principles set out at 614-615 are as follows:
a) The Court has a discretion to do what is right and fair according to the circumstances of the case;
b) When a person is adjudicated bankrupt, his assets are to be administered in an orderly fashion for the benefit of all his creditors and a particular creditor should not be able to obtain an advantage by bringing proceedings against him. There should thus be no prejudice to other creditors or to the ordinary administration of the bankruptcy if the action were to proceed;
c) The claim should not be clearly unsustainable but the Court will not investigate the merits of the claim;
d) The claim should normally be of a type which is more suitably determined by action rather than by lodging a proof of debt in the
bankruptcy. If the claim could just as easily be dealt with in the bankruptcy, leave is not likely to be granted;
e) Leave is more likely to be granted where there is an insurance company standing behind the defendant to pay any judgment debts the plaintiff might obtain, because if it is successful, such an action is unlikely to prejudice the creditors of the defendant;
f) It may be desirable to impose a condition that the plaintiff will not enforce any judgment against the defendant without the leave of the Court to ensure that the Official Assignee retains ultimate control;
g) Mere delay itself in applying for leave will not prevent leave being granted. Leave is not to be withheld simply and solely as punishment; and
h) Leave may be granted after the expiry of the relevant period of limitation to continue an action commenced within the limitation period without the leave of the Court.
[18] Paterson J also stated at 615:
There is no direct reference in the principles extracted from the authorities which suggests that leave should not be granted if there is no prospect of the applicant benefiting financially if leave were to be granted. However, in my view, this is also a relevant matter when considering what is right and fair according to the circumstances of the case.
[19] On the facts, Paterson J refused to grant leave, as there was no financial benefit to be gained from proceeding against the bankrupt and if leave were granted it would cause delay and additional cost to the other parties.
[20] The principles enunciated by Paterson J in Saimei have been applied in various subsequent decisions such as Gasior v Barton (2002) 7 NZBLC 103,746; and De Alwis v Luvit Foods International Limited (2007) 10 NZCLC 264, 304. In Navix Line (NZ) Limited v Milo HC AK CP 281-SD99 5 December 2002, the plaintiff sought leave to continue four proceedings against a bankrupt. Morris J applied the principles in Saimei and granted leave. He considered that the proceedings were not pointless. He also stated that the most convincing factor was the public interest in having the allegations of fraud resolved. The Judge noted that any other creditors would not be adversely affected by the granting of leave. On the fraud question, Morris J stated at [22]:
It is, therefore, a matter of some public interest that the allegations of fraud be resolved by the Court.
[21] He added at [25]:
There is nothing unfair about giving a person who allegedly committed fraud an opportunity to defend himself.
Submissions for the Official Assignee
[22] The Official Assignee has no objection to the continuation of proceedings against the bankrupt. Moreover, the Official Assignee does not intend to defend the proceedings on behalf of the first defendant. The Official Assignee submitted that the plaintiff’s claims appear to meet the requirements of s 76(2) of the Act. The Official Assignee observed that, if the plaintiff is not granted leave to continue, then it will have to file a proof of debt, together with supporting evidence for the contractual and dishonest assistance claims. While the Official Assignee expected to be able to deal with any quantum issues in respect of the guarantee claims (even if certain complexity arises), there is likely to be real difficulty in determining the bankrupt’s liability and quantum on the dishonest assistance claim. That leaves open the possibility that the Official Assignee would then have to either apply to the Court for assistance under s 225 of the Act or, if the bankrupt admits or rejects the claim, the bankrupt or the plaintiff might appeal the decision under ss 238 or 239 of the Act. If this results, the Court would ultimately need to determine the issues that it is being asked to determine by way of the continuation of proceedings.
[23] The Official Assignee submitted that there will be no prejudice to other creditors if leave is granted. Counsel submitted that the continuation of proceedings will not impede the orderly administration of the estate.
[24] Finally, the Official Assignee submitted that in response to submissions on behalf of the first defendant that it should not be a prerequisite for the application of s 304(2)(a) of the Act that the bankrupt has benefited from any fraud. In terms of policy, the section would also facilitate the recovery or restitution by creditors where the debt or liability of the bankrupt was incurred by fraud.
Submissions for the plaintiff
[25] The plaintiff submitted that the criteria in Saimei are satisfied. In elaboration, counsel for the plaintiff, Mr Heard, submitted that it is neither right nor fair to force the plaintiff through the proof of debt procedure for a complex claim that was on foot at the time of the first defendant’s application for adjudication and such claim is plainly unsuited to the process. Mr Heard submitted that the most appropriate forum for this dispute is the High Court. Mr Heard emphasised that the public interest in having a fraud claim determined favours leave being granted, submitting that this is preferable to the plaintiff discontinuing the dishonest assistance claim and recommencing it upon the discharge of the first defendant from bankruptcy in April
2010.
[26] The plaintiff submitted that there will be no prejudice to other creditors from granting leave. This is because the plaintiff’s claim will rank pari passu for the duration of the first defendant’s bankruptcy and any debt or liability incurred by fraud will survive discharge. This view was supported by the Official Assignee.
[27] The plaintiff submitted that its claim is not “clearly unsustainable” and has merit. As this is an application for leave, a detailed inquiry into the merits is not warranted. However, the Court is better placed to deal with the claims against the first defendant than the Insolvency and Trustee Services. The plaintiff submitted that the claims, particularly for dishonest assistance, are relatively complex and will require findings of credibility that the Official Assignee is not in a position to make.
[28] The plaintiff referred to the assessment made in June 2008 that the first defendant was to make contributions to the bankruptcy estate of $300 per week. This has since been reviewed, the first defendant’s contributions are now assessed at
25% of his income after statutory obligations. Thus, if its claims are proven and admitted in the bankruptcy, then the plaintiff will benefit in any distribution by the Official Assignee. The plaintiff also noted that additional support may be available from the first defendant’s family and family trusts.
[29] The plaintiff submitted that the prospect of it benefiting financially is clear. This is particularly so if the dishonest assistance claim is successful. Mr Heard argued that the dishonest assistance claim falls within the words of s 304(2)(a) of the Act, namely, a debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party and survives the discharge of bankruptcy. Mr Heard referred to the fact that the word “fraud” was not limited to any particular type of fraud. Further, the word “party” was not restricted to liability as a principal or as secondary party. He emphasised that the pleading in paragraph 37 of the amended statement of claim (referred to at [10] above) pleaded actual dishonesty.
Submissions for the first defendant
[30] Ms Hall for the first defendant submitted that there is no prospect of the plaintiff benefiting financially if leave is granted because the first defendant has few personal assets and limited means. Ms Hall relied on the Official Assignee’s statement of the first defendant’s financial affairs that he does not own any real estate, lives in a house owned by his parents, has debts in excess of $6.3 million and has personal assets of only $10,000. The first defendant has now been granted leave of the Official Assignee to carry on business on his own account as a real estate agent provided that the first defendant makes a contribution to creditors of 25% of his commission earnings.
[31] Ms Hall submitted that the financial resources of the first defendant’s parents are irrelevant. There is no evidence before the Court that the first defendant’s parents or their trusts have agreed to contribute to any judgment against the first defendant.
[32] Ms Hall further submitted that the first defendant’s alleged conduct does not amount to fraud or a fraudulent breach of trust to which the bankrupt was a party in terms of s 304(2)(a) of the Act. She submitted that the claim brought against the first defendant was for dishonest assistance as an accessory. Thus, the claim was one involving equitable fraud, not amounting to actual fraud falling within the exception in the Act. Ms Hall submitted that there is no previous authority for extending the exception in s 304(2)(a) of the Act to cases of equitable fraud. Helpfully, counsel
referred to the observations of a commentator in Heath and Whales (eds) Heath and Whale on Insolvency (2008) at 9.17 who suggested that there is no reason why “fraud” as used in the Act should not be interpreted to include equitable fraud, but counsel nevertheless took issue with this suggestion.
[33] Ms Hall sought to distinguish this case from Navix on the basis that the pleading there involved actual fraud in respect of which the bankrupt had been convicted. But she accepted that the quantification of the dishonest assistance claim if proved would not be straightforward. However, she submitted that the plaintiff will not be entitled to recover from the first defendant in respect of the personal guarantee causes of action and the dishonest assistance claim. The first defendant also contended that there is no public interest in having the dishonest assistance claim determined.
[34] Finally, counsel for the first defendant accepted that there is no prejudice to other creditors from granting leave.
Discussion
[35] The key issue is whether it is right and fair that leave be granted to continue the proceedings. There is no dispute that the Court is not required to investigate the merits of the claim, but rather must determine on the available material that the claim is not clearly unsustainable. This aspect was not strenuously disputed by the first defendant. I am satisfied that the claim is not clearly unsustainable. Further, all parties agree that there is no possible prejudice to the administration of the estate or other creditors if leave is granted to continue proceedings.
[36] The plaintiff submitted that the dishonest assistance claim is relatively complex and more suited to judgment than the proof of debt procedure. Counsel for the first defendant accepted that if proved this claim will not be straightforward. The Official Assignee also emphasised the difficulties inherent in determining the first defendant’s liability on the dishonest assistance claim. The Official Assignee noted the likelihood that the claim would ultimately need to be determined by the Court under either s 225 of the Act or on appeal if the proof of debt procedure is adopted. I
agree that the findings of credibility that the Official Assignee will be required to make are better determined by the High Court. I am satisfied that the claim is sufficiently complex to be more suited to judgment.
[37] A further aspect which supports the grant of leave is the public interest in having allegations of fraud resolved by the Court. The fact that there has been no previous finding of liability for fraud against the first defendant (for example in criminal proceedings) is not a proper basis for distinguishing the approach of Morris J in Navix discussed at [20] and [21] above. The public interest is also applicable in the circumstances of this case.
[38] Another important factor is whether there is any prospect of the plaintiff benefiting financially if leave were granted. First, I accept the submission of the first defendant that the financial position of the parents is irrelevant. There is no evidence before the Court that the first defendant’s parents or their trusts are willing or able to contribute to the financial position of the first defendant.
[39] Second, at this stage, the first defendant is able to make a contribution of
25% of his income after statutory obligations have been paid. This has produced a contribution to the bankrupt’s estate over an 11 month period of some $7,567. Although this contribution is not large, the plaintiff submitted that it is not insignificant. I consider that there is some prospect of the plaintiff benefiting financially if leave is granted. This is a similar position to Navix and De Alwis, where there was some prospect of financial benefit.
[40] I appreciate that the amount of financial benefit, absent a successful claim for fraud, is likely to be modest. It seems that the total debts of the bankrupt are around
$6.145 million. The plaintiff’s claim under the first and second causes of action are in the vicinity of $769,000. The quantum of the dishonest assistance claim is complex and cannot accurately be assessed at this time.
[41] But a more significant prospect of the plaintiff benefiting financially would arise if the dishonest assistance claim were successful and any resulting debt or
liability was to survive the discharge of the bankrupt by virtue of the application of s
304(2)(a) of the Act.
[42] The starting point for analysis on this aspect must be the pleading itself. It is clear that the plaintiff has alleged against the first defendant conduct (directing payment of funds the subject of a trust in favour of the plaintiff) in respect of which the first defendant is said to have acted dishonestly. There is a specific plea that the conduct was “not honest by the standards of reasonable and honest people and he himself realised that by those standards…his conduct was dishonest”. On its face, this is a clear allegation of actual fraud. In my view, it does not take the matter outside the potential ambit of s 304(2)(a) of the Act merely because the pleading of the third cause of action so described was under a heading “dishonest assistance”. Further, the pleading is open to the interpretation that Leisureworld, although not joined as a party and of which the first defendant was a director, committed a fraudulent breach of trust to which the first defendant was a party. The requirements of s 304(2)(a) would also be satisfied on this basis.
[43] On the basis of the claim as pleaded, I am satisfied that the plaintiff, if successful in terms of both liability and quantum, may well achieve a financial benefit from the grant of leave. The assessment of the pleading is sufficient for present purposes to resolve this aspect of the argument. However, out of deference to the argument raised by counsel for the first defendant, I will go on to consider the matter in more detail.
[44] The first submission was that s 304(2)(a) of the Act only applies to a debt or liability incurred by fraud where such was by action perpetrated by a principal party. The submission was that liability as a secondary party fell outside the scope of the section. I disagree. The section is not limited in the way suggested on behalf of the first defendant. The reference to party is not limited to a principal rather than a secondary party.
[45] I am satisfied that there is no policy reason for interpreting s 304(2) of the Act restrictively so as to only include the principal party. The section is designed to protect the interests of creditors and assist in recovery or restitution of debts or
liabilities incurred by fraud. The fact that the action alleged against the plaintiff may not have caused loss to the bankrupt estate, as opposed in this case to the company which the first defendant controlled, does not alter the position.
[46] The next submission was that the claim should be characterised as one of equitable fraud. In this regard, Ms Hall cited a passage from Cooke and others (eds) Laws of New Zealand – Equity (1993) at para 134, which suggests that it is not necessary to prove an actual intent to cheat in order to establish fraud in equity. But this point is met by reference to what is actually pleaded. In this case, the plaintiff has pleaded actual fraud both in terms of conduct and intention. It is not without importance that the allegation is against a director of a company who was the person that controlled the company. The breach of trust was alleged to have been carried out by the company, but through the dishonest direction of the first defendant as controller of it.
[47] The topic of dishonest assistance required of a trustee to commit a breach of trust was discussed by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. Consideration was there given to what dishonesty meant in that context. The speech of Lord Nicholls of Birkenhead distinguished the position in criminal or other contexts and stated at 389:
…in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard.
…Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty.
Thus for the most part dishonesty is to be equated with conscious
impropriety.
[48] Ms Hall argued that the term fraud in s 304(2)(a) of the Act was not apt to include equitable fraud or dishonest assistance. I disagree. I prefer the view of the learned commentator in Heath and Whale on Insolvency at 9.17 who noted as follows:
The Court has interpreted “fraud” as used in other legislation to include equitable fraud which encompasses breach of fiduciary duty. [See: Collier v Creighton [1993] 2 NZLR 534 (CA) in the context of s 28 of the Limitation Act 1950. See also Matai Industries Ltd v Jensen [1989] 1 NZLR 525, at
534-5 (per Tipping J)] It is submitted that there is no reason why “fraud” as used in the Insolvency Act 2006 should be interpreted any differently.
[49] With reference to the legislative history, a provision with similar wording has been part of New Zealand legislation since 1867. Section 120 of the Bankruptcy Act
1867 was the first Act to adopt a similar provision from the UK Bills that led to the enactment of the Bankruptcy Act 1869 (UK). Section 120 of the 1867 Act provided:
120. Whether the order of discharge is opposed or not the court may if it thinks fit in and by the order suspend the order from taking effect as follows namely for any time not exceeding three years from the date of the order if it appears to the satisfaction of the court
...
(6) That any debt or liability of the bankrupt subsisting at the time of adjudication, or paid or discharged within three months next before adjudication, was contracted or incurred by him without any reasonable expectation of his being able to pay or discharge it; or by or through any fraud, or false pretence, or breach of trust, committed by him; or that forbearance of any such debt or liability had been obtained by the bankrupt by fraud or false pretence; or that any such debt or liability had been contracted or incurred by him by reason of any prosecution or proceeding wherein he was found guilty of any offence, or of a breach of the revenue laws, or by reason of any action of proceeding for libel, slander, assault, battery, adultery, seduction, breach of promise of marriage, malicious arrest, malicious prosecution, malicious trespass, malicious injury, or the malicious filing or prosecution of a petition for adjudication of bankruptcy.
...
[50] Since then, the statutory provision has been modified and the law has developed in relation to causes of action involving fraudulent conduct, i.e. equitable fraud. But it is important to note that the term “fraud” has remained throughout all amendments to the original provision.
[51] It is noteworthy that, when the legislature originally determined the extent of the exception, it was based upon the general concept of fraud. The legislation did not choose to refer to the technical forms of action. Had that been the case, reference
would undoubtedly have been made to deceit, which was a common way of pleading fraud.
[52] In summary, I am satisfied that the exclusion should not be read down in the manner contended for by the first defendant. The result is that, if the plaintiff can prove the allegations in the third cause of action relating to dishonest assistance then, by application of the exemption in s 304(2)(a) of the Act, there is a real prospect of financial benefit to the plaintiff. In so concluding, I am not commenting on the actual prospects of success in the claim. That is for another time, namely, when the claim is heard.
[53] Incidentally, counsel for the plaintiff may wish to give thought as to whether the pleading in the amended statement of claim needs to be further amended to bring a claim for a declaration that the conduct alleged falls within the provision of s 304(2)(a) of the Act. This would enable the Court hearing the proceeding to rule not only on liability and quantum in respect of the third cause of action, but also to give a specific ruling as to whether the conduct alleged factually met the requirements of the subsection.
[54] In conclusion, I consider that this is an appropriate case to exercise the discretion to grant leave to the plaintiff to continue the proceedings. I make it clear that I exercise the discretion not merely on the basis that there will be a prospect of financial success if the claim for dishonest assistance is made out, but because the plaintiff has satisfied me that this is a proceeding that ought to be heard and determined by the Court. In this regard, I so conclude that it is right and fair to grant leave on the basis of all of the factors referred to in Saimei and discussed at [35] – [40] above.
Result
[55] I grant the plaintiff leave to continue the proceedings against the first defendant under s 76(2) of the Act. In such a case, it is open to the Court to allow proceedings to continue “on the terms and conditions that the Court thinks appropriate”.
[56] The Court can have no knowledge at this stage whether the proceedings will be successful and upon what basis. In particular, the outcome of the claim for dishonest assistance will turn on the facts as proved at the hearing. Given the range of possible outcomes of the hearing, I consider that it is appropriate to add a condition that the plaintiff is not to enforce any judgment obtained against the first defendant without prior leave of the Court. This will enable the position to be reviewed at the conclusion of the hearing and in the light of all other aspects of the first defendant’s bankruptcy at that time.
Costs
[57] In the normal course, the plaintiff would be entitled to costs. It is to be hoped that counsel might be able to agree on this aspect. In the event that agreement cannot be reached, memoranda of no more than four pages each may be filed by the
parties.
Stevens J
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