Fistonich v Halse
[2024] NZHC 2168
•5 August 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-2187
[2024] NZHC 2168
BETWEEN IAN GEORGE FISTONICH
First Plaintiff
IAN GEORGE FISTONICH and ZLATO
TRUST HOLDINGS LIMITED, together as trustees of the ALATO TRUST
Second PlaintiffsAND
GRAEME WILLIAM HALSE
First Defendant
PREMIER LEGAL FINANCE LIMITED PARTNERSHIP
Second Defendant
PREMIER LEGAL FINANCIAL GP LIMITED
Third Defendant
Hearing: 31 July 2024 Appearances:
S O McAnally for Plaintiffs/Respondents D W Grove for Defendants/Applicants
Judgment:
5 August 2024
JUDGMENT OF ASSOCIATE JUDGE SKELTON
Introduction
[1] The defendants/applicants apply for orders requiring the plaintiffs/respondents to provide further discovery, in respect of all documentation and correspondence between the first plaintiff (Mr Fistonich) and the Registrar of Companies that led to
FISTONICH v HALSE [2024] NZHC 2168 [5 August 2024]
the notice prohibiting Mr Fistonich from manging companies dated 10 January 2023, and the notice granting a partial exemption dated 16 January 2023.
[2] The defendants also apply for leave for the second defendant to commence a counterclaim against Mr Fistonich personally, pursuant to s 335 of the Insolvency Act 2006.
[3] The plaintiff opposes both applications. The discovery application is opposed on the grounds of lack of relevance to the issues in the proceeding. The leave is opposed on the basis that the time to bring a counterclaim expired over three years ago and there is no good reason to extend the timeframe; and leave is not appropriate in the context of this discrete proceeding in respect of three transactions/guarantees only –– the proposed counterclaim raises matters properly dealt with in relation to separate Insolvency Act proceedings.
Background
The parties
[4] Mr Fistonich, is a property developer. He is a shareholder and director of a group of companies (Accent On Group). The first defendant, Mr Halse, was the solicitor for Mr Fistonich, his trusts and various companies. The second defendant, Premier Legal Finance Limited Partnership (PLFLP) is a limited partnership that provides lending, of which the third defendant is its sole general partner. PLFLP and the third defendant are controlled by Mr Halse.
What happened?
[5] Between 2008 and 8 November 2018 Mr Fistonich and Mr Halse were the trustees of the Zlato Trust, which was settled on 27 July 2006. On or about 11 May 2007, the Zlato Trust acquired the residential property at 35 Holdens Road, Henderson (Holdens Road property) with funding from Mr Fistonich and a mortgage to ASB Bank Limited.
[6] During 2017, PLFLP made three advances to the Accent On Group which were secured, amongst other things, by second, third and fourth registered mortgages,
respectively, over the Holdens Road property and by personal guarantees of Mr Fistonich. These transactions occurred on 5 May 2017, 18 July 2017 and
5 September 2017. In each case:
(a)Funds were advanced to a group company, Paramount Group Holdings Limited;
(b)The borrowing was guaranteed by Messrs Fistonich and Halse as trustees of the Zlato Trust;
(c)That guarantee was secured by a mortgage over the property at Holdens Road; and
(d)Mr Fistonich also gave his personal guarantee.
[7] In June 2017, Mr Fistonich became aware of a “multi-million dollar hole” in the finances of the Accent On Group. Mr Fistonich says that Mr Halse was alerted of the $3m cash flow deficit on or about, 11 July 2017. Mr Halse says that he was not told the Accent On Group were insolvent until September 2018 and had he known earlier, he would not have made advances to them.
[8] On or around 2 November 2018, receivers were appointed in respect of the property of the Accent On Companies. On or around 9 November 2018, the Accent Group Companies were placed into liquidation.
[9] On 6 November 2020, the plaintiffs commenced this proceeding against the defendant’s alleging breaches of trust and breaches of fiduciary duty.
[10] The plaintiffs seek orders rescinding the mortgages in favour of PLFLP over the Holdens Road property and rescinding the personal guarantees given by Mr Fistonich, and indemnities in favour of the second plaintiffs.
[11] The defendants have pleaded a second affirmative defence alleging that it was Mr Fistonich’s choice to enter into the finance agreements when he, and he alone,
knew of the dire financial position of the Accent On Group and putting causation in issue as follows:
[97] Further, all losses arose from the first plaintiff’s conduct in mismanagement of his business and not disclosing that to the defendants.
[12]Paragraph 97 is denied by the plaintiffs/respondents.
The application for further discovery
[13] The defendants seek all documentation and correspondence between the first plaintiff and the Registrar of Companies (including their representatives) that led to:
(a)The notice prohibiting the first plaintiff from managing companies dated 10 January 2023; and
(b)The notice granting a partial exemption from prohibition from managing companies dated 16 January 2023.
Legal principles
[14]Rule 8.19 of the High Court Rules 2016 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.
[15] Rule 8.19 provides an avenue to a party to circumvent the presumption that the affidavits of documents already filed are conclusive. The onus is on the applicant, here Mr Halse, to establish grounds for belief that the plaintiffs are, or have been, in control of the documents sought. The four-pronged test, following Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, is:1
(a)Are the documents sought relevant, and if so how important will they be (materiality)?2
(b)Are there grounds for belief that the documents sought exist?3
(c)Is discovery proportionate (balancing the time and cost of discovery against the potential value of discovery)?4
(d)Weighing and balancing these matters, in the Court’s discretion applying r 8.19, is an order appropriate?
Assessment
[16] The key issue here is relevance. This is to be assessed according to the pleadings. The court will not try the case during a discovery application to determine the ultimate relevance alleged by the party seeking discovery.5 Until a claim or defence is struck out as untenable, a party is entitled to pursue discovery documents relevant to their claim or defence within the framework of discovery as defined by the pleadings.6
1 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760 at [14] [Assa Abloy].
2 Robert Jones Holdings Ltd v McCullagh [2016] NZHC 2529 at [35].
3 This will often be a matter of inference based on the strength of the evidence. Assa Abloy, above n 1, at [12]: “The threshold embodied in ‘grounds for belief’ is not that high.”
4 Southland Building Society v Barlow Justice Ltd [2013] NZHC 1125 at [17].
5 Rapid Metal Developments NZ Ltd v Access One Scaffolding Ltd [2017] NZHC 204 at [5] and [14].
6 Xu v Meng [2023] NZHC 2915 at [15].
[17] The applicants submit that the further discovery is relevant to the second affirmative defence and to the issue of causation relating to Mr Fistonich’s alleged mismanagement of his companies. Mr Grove, for the applicants, submits that the documents sought (including Mr Fistonich’s response to the allegations made) which led to Mr Fistonich being banned as a director are likely to be relevant to this issue.
[18] Mr McAnally, for the respondents, contends that the documents sought are not relevant because whether the companies were mismanaged is not in issue and the plaintiffs/respondents acknowledge they knew the companies were insolvent from July 2017. Further, he submits that the correspondence with the Registrar of Companies was in January 2023, well after the events in 2017-2018. He submits that the application is merely a fishing expedition.
[19] However, even though the plaintiffs/respondents acknowledge they knew the companies were insolvent from July 2017, there is still an issue on the pleadings as to mismanagement of the companies and whether this was due to the conduct of Mr Fistonich. And even though the correspondence with the Registrar was in January 2023, it was presumably in relation to past management of companies by Mr Fistonich. In my view, the requirement of relevance is satisfied for the purpose of further discovery.
[20] There are grounds for belief that the documents exist. It is clear that orders were made by the Registrar of Companies in relation to Mr Fistonich in January 2023. Mr Halse states in his affidavit that he is familiar with the procedure adopted by the Registrar of Companies and the documents sought are likely to comprise:
(a)A letter sent from the Registrar of Companies to Mr Fistonich with relevant documentation setting out the background and grounds alleged for a prohibition order.
(b)Potential minutes and further documents and/or explanations, including from Mr Fistonich in response to the allegations.
(c)A detailed explanation as to the grounds for the Registrar’s decision.
(d)A specific application or correspondence from Mr Fistonich in relation to seeking an exemption for Zlato Trust Holdings Limited.
[21] Mr McAnally submits that the starting point is a presumption that the affidavit of documents already filed is conclusive and there is no basis for saying that the existing affidavit of documents filed by the plaintiffs/respondents is incomplete and that relevant documents provided to the Registrar of Companies have not already been discovered. However, it is not apparent that any correspondence between the Registrar of Companies and Mr Fistonich has been discovered, otherwise the defendants/applicants would not have needed to make the application. In my view, this raises an issue as to whether the existing affidavit of documents is incomplete.
[22] I do not consider that there is any issue around the further discovery sought being proportionate. Mr Grove submitted that the further discovery is likely to involve disclosure of only 4-5 documents and email correspondence.
[23] Weighting and balancing these matters, I consider that it is appropriate for an order for particular discovery to be made in the terms sought.
Application for leave to commence proceedings
[24] The defendants/applicants seek leave to commence proceedings against Mr Fistonich pursuant to s 335 of the Insolvency Act 2006. The defendants have provided a draft counterclaim claiming breach by the plaintiffs/respondents of various loan agreements.
[25] Under s 335 of the Insolvency Act, a creditor whose debt is provable under subpart 2, and in respect of which the Court has approved a proposal to creditors for the payment or satisfaction of the insolvent person’s debts, may only commence proceedings in respect of a debt with the Court’s permission.7 The proposal, once approved by the Court, is binding on all the creditors whose debts are provable, irrespective of whether or not they agreed to the proposal.8 The defendants/ applicants
7 Insolvency Act 2006, s 335(3).
8 Section 334; Dental Council of New Zealand v Gibson HC Auckland CIV 2010-404-230 12 November 2010 at [3].
in this case were held not to be able to vote on the relevant proposal.9 In large part, the proposal was approved because the voting creditors reached the view that there is possible upside if Mr Fistonich’s claims in this proceeding are successful.10
[26] Under r 5.55 of the High Court Rules, a counterclaim must be filed within the time stated in the notice of proceeding for filing a statement of defence or, if no such time is stated, within a time fixed by the Court. Under r 1.19, the Court may in its discretion extend or shorten the time for taking any step in a proceeding under the rules.
Assessment
[27] There are two issues to consider. Whether time for filing the counterclaim should be extended under r 1.19 of the High Court Rules, and whether permission should be granted under s 335(3) of the Insolvency Act.
[28] Mr McAnally notes that the proceeding was commenced on 6 November 2020, and the statement of defence was filed on 21 December 2020. He submits that the defendants/applicants did not raise a counterclaim until some three years later, when a draft counterclaim was put forward with this application. Further, although the Court has a discretion, there must be some material on which the Court can rely to exercise its discretion, and the defendants/applicants have not put forward any material.
[29] Mr McAnally submits that the draft counterclaim raises issues beyond the scope of the current proceeding, being further personal guarantees given by Mr Fistonich in relation to loan agreements on 1 June 2017, 25 May 2018 and 5 September 2018. Mr McAnally submits that the introduction of these fresh allegations could impact on the pre-trial directions and the hearing scheduled to commence on 25 November 2024.
[30] There has been a lengthy delay here since the commencement of proceedings. Mr Grove submits that this is related to the fact that until the proposal was accepted in 2023, the defendants/applicants considered that Mr Fistonich would be bankrupted.
9 Calypso No.1 Ltd v Fistonich [2023] NZHC 78 at [10].
10 At [51].
[31] However, nor is there any evidence put forward by the plaintiffs/respondents of any prejudice if time is extended. The issue of prejudice is not expressly raised in the notice of opposition.11 The matter is scheduled for a substantive hearing commencing on 25 November 2024.
[32] Mr McAnnally has raised in submissions the fact that the scope of the counterclaim is wider than the issues raised in the statement of claim and this may raise issues with pleadings and pre-trial directions and with the fixture set down for 25 November 2024. I note that this application was filed in November 2023, over a year before the scheduled hearing. I understand that the application has not been heard until now because of scheduling issues. I do not consider that the proximity of the hearing of this application to the substantive hearing should tell against the defendants/applicants. Nevertheless, it must be considered.
[33] In the circumstances, I consider that any issues of prejudice or delay to plaintiffs/respondents or impact on the substantive hearing which might arise from the wider scope of the counterclaim can be dealt with by a direction that the time for filing the counterclaim is extended, but the defendants/applicants can only pursue the first to third causes of action in the draft counterclaim which relate to the transactions already in issue in the second amended statement of claim.
[34] I note that the counterclaim (limited to the first to third causes of action) is essentially the “flip-side” of the plaintiffs’/respondents’ claims for recission of the guarantees. If the plaintiffs’/respondents’ claims for recission are unsuccessful, then the defendants/applicants would have to issue separate proceedings in order to pursue judgment on the guarantees. In my view, it makes sense that the parties’ respective claims in relation to these guarantees are heard together in one substantive hearing.
[35] With regard to permission under s 335(3), Mr McAnnally submits that the principle of equality between creditors applies as much to a proposal as to a bankruptcy.12 Mr McAnally submits that the proper place for this application is the
11 The Minister of Education v James Hardie Ltd [2018] NZHC 1481 at [125]–[128], where there was a four-year delay in filing a counterclaim but the main consideration was whether there was prejudice to the plaintiff.
12 Re Paterson, Ex p Kingston [1997] 1 NZLR 371 at 383.
separate proceedings under the Insolvency Act whereby the Court can revisit the reasons why it upheld the decision to exclude the defendants/applicants from voting in light of any changed circumstances, and hear from all interested parties including creditors that wish to be heard.
[36] However, I do not consider that it is necessary for the defendants/applicants to bring their application for permission to file the counterclaim in the separate insolvency proceedings. I do not consider that there is unfairness to other interested parties and creditors if permission is given for the defendants/applicants to file their counterclaim in this proceeding (limited to the first to third causes of action as discussed above). If the counterclaim fails, the proposal continues. If it succeeds and judgment is entered for the defendants/applicants, then it is apparent that the defendants/applicants would then apply to cancel or vary the proposal in the insolvency proceedings. At that stage, the trustees and all interested parties and creditors would properly be served and have the opportunity to be heard.13
Result
[37] The plaintiffs/respondents must, within 10 working days of the date of this judgment, file an affidavit stating:
(a)whether any of the documents referred to in Schedule A to the defendants’ interlocutory application for further and better discovery dated 6 November 2023 have been in their control;
(b)if they have been but are no longer in their control, their best knowledge and belief as to when the documents ceased to be in their control and who now has control of them;
(c)serve that affidavit on the defendants/applicants; and
13 See Re Paterson, Ex p Kingston, above n 12. In that case, leave for a creditor to continue proceedings was granted, but the application to cancel or vary the proposal was adjourned to allow for service of the trustee and other creditors so they would have the opportunity to be heard.
(d)if the documents are within their control, make those documents available to the defendants/applicants for inspection in accordance with r 8.27 of the High Court Rules 2016.
[38] The time for filing the counterclaim is extended under r 1.19 of the High Court Rules 2016 and permission is given to file the counterclaim under s 335(3) of the Insolvency Act 2006. However, the defendants/applicants shall only include the first to third causes of action in the counterclaim.
[39] The defendants/applicants are to file and serve the counterclaim within five working days of the date of this judgment. Any statement of defence to counterclaim is to be filed and served by the plaintiffs/respondents within a further 10 working days. Any reply to any statement of defence to counterclaim is to be filed and served within a further five working days.
[40]The close of pleadings date is extended to 2 September 2024.
[41] My preliminary view is that the defendants/applicants are entitled to costs on a 2B basis and reasonable disbursements. The parties should endeavour to agree on costs. However, if agreement cannot be reached, then memoranda may be filed (not exceeding three pages – excluding costs schedules) and costs will be determined on the papers.
Associate Judge Skelton
Solicitors:
Pidgeon Judd, Auckland (for Plaintiffs)
Vodanovich Law Limited, Auckland (for Defendants)
Copy to counsel:
S McAnally, Barrister, Auckland (for Plaintiffs) D Grove, Barrister, Auckland (for Defendants)
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