Flow Control Limited v Il Forno Limited

[2021] NZHC 946

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-002409

[2021] NZHC 946

UNDER

Section 290 of the Companies Act 1993

BETWEEN

FLOW CONTROL LIMITED

Applicant

AND

IL FORNO LIMITED

Respondent

Hearing:	22 April 2021
Appearances:	James Kleine for the Applicant Michael Lenihan for the Respondent
Judgment:	29 April 2021

JUDGMENT OF MOORE J

[On application to represent a company]

This judgment was delivered by me on 29 April 2021 at 4:00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar / Deputy Registrar Date:

FLOW CONTROL LIMITED v IL FORNO LIMITED [2021] NZHC 946 [29 April 2021]

Introduction

[1]    Douglas James Kleine (“Jim”) is the sole director and shareholder of Flow Control Ltd (“Flow Control”). Flow Control has been served with a statutory demand by Il Forno Ltd (“Il Forno”). The sole director and shareholder of Il Forno is Andrew Michael Kleine (“Andrew”). Andrew and Jim are brothers.1

[2]    Il Forno’s statutory demand is based on judgment debts arising out of judgments of Jagose J, being the substantive judgment following trial2 and the consequent costs decision.3

[3]    Il Forno has also commenced bankruptcy proceedings against Jim relating to the same judgment debt. Jim has applied to set aside the bankruptcy notice. Both applications to set aside are to be heard together.4

[4]    Jim applies for leave to appear for Flow Control at that hearing which is scheduled to be heard on 5 May 2021.

[5]This judgment deals with Jim’s application.

Background

[6]    The background which led to the litigation is set out by Jagose J at the beginning of his 31 July 2020 judgment:5

“[1]     [Il Forno] operates a bakery and café of some repute and longevity in Auckland’s Ponsonby, run respectively by [Andrew] and Helane Paula Mead.

[2] On 26 October 2006, with financial assistance from Andrew’s respectively older and younger brothers…[Jim] and Barry John Kleine (“Barry”), Andrew acquired a former shareholder’s half-interest in the business. Jim also provided the business with professional accounting and other services. On 11 November 2015, Andrew terminated Jim’s involvement with  the  business,  alleging  Jim’s   professional  accounting  services  were

1      This judgment refers to each of the brothers by their first names. This practice is consistent with the way each of the brothers has referred to themselves in the course of the various stages of this litigation. It is also consistent with the practice adopted in the substantive proceedings in this Court and also before the Disputes Tribunal.

2      Il Forno Limited v Kleine & Ors [2020] NZHC 1889.

3      Il Forno Limited v Kleine & Ors [2020] NZHC 2730.

4      As per the Minute of Associate Judge P J Andrew, dated 4 February 2021.

5      Il Forno Limited v Kleine & Ors [2020] NZHC 1889 at [1] and [2].

inadequate and negligent, such as caused Il Forno to be liable for fines for failing to file tax returns…”

[7]    On the question of costs6 Jagose J observed that although Il Forno had “…achieved a measure of success, no party can claim comprehensively to be successful in the proceeding, and the family context of the proceeding also justifies avoiding continued grounds for dispute…”. In that context, he indicated that his preliminary thinking was that costs should lie where they fell.

[8]    Given the actual result, the Judge’s description of Il Forno’s success as “limited” seems a little understated with respect.

[9]    The proceedings were complex. Some sense of their complexity can be obtained from Jagose J’s summary of the claim and counterclaim as set out below:7

“[3] In this proceeding, among other relief, Il Forno seeks to recover all money paid to [Flow Control] for Jim’s services and on the fines liability. They, in turn, dispute any inadequacy or negligence, and assert their financial assistance to Andrew was to acquire Andrew’s half-share in Il Forno for Flow Control. Flow Control also counterclaims for payment of some additional

$650,000 as compensation for the balance of Jim’s services to Il Forno, and an unquantified sum as damages for Andrew’s alleged breach as Il Forno’s director of fiduciary duties owed to Flow Control, as holder of half its shares. Il Forno and Andrew respectively deny the foundation for any such liability. Various technical defences, including under the Limitations Acts 1950 and 2010, are also raised by both sides.

[4]        To be precise, Il Forno seeks declarations Andrew is the sole and legal beneficiary of Il Forno, and Jim’s or Flow Control’s involvement with it has been cancelled (in terms of ss 37 and 41 of the Contract and Commercial Law Act 2017) and Il Forno has no further obligations to Jim or Flow Control; and claims compensation under the 2017 Act, or as contractual and tortious (negligence) damages, in the amount of $43,277.61 (being the GST-exclusive fees paid to Flow Control within the limitation period), plus $13,600 in fines and costs, and legal fees incurred, arising out of the Commissioner of Inland Revenue’s prosecution of Il Forno.

[5]        So far as the statutory and contractual money claims are concerned, Jim and Flow Control assert Il Forno failed to mitigate its losses by abandoning or  discontinuing its appeal  against  the fines  liability finding;  Il Forno waived or is estopped from asserting any requirement for Flow Control’s fees to be invoiced; and, if Jim is not Il Forno’s half-shareholder, Flow Control has an equitable set-off for the $10,000 in financial assistance plus quarterly compounding interest since the date of its payment. On the

6      Il Forno v Kleine & Ors [2020] NZHC 1889 at [89].

7      At [4]-[7].

negligence  claim,   Flow Control and Jim say Il Forno’s and Andrew’s contributory negligence caused Il Forno’s losses.

[6]        Il Forno also seeks to recover the sum of the money claims as money had and received by Flow Control and/or Jim on their services’ failure to provide consideration for its receipt. Flow Control and Jim again assert affirmative defences of waiver and estoppel and limitations. And Il Forno seeks to recover its electronic data in Flow Control’s or Jim’s possession in trespass or conversion.

[7]        By its counterclaim, Flow Control seeks a declaration Andrew holds 5,000 shares in Il Forno on trust for Flow Control, and an order transferring those shares to it. It also claims $650,000 (plus GST) quantum meruit for some 25 services said to have been provided to Il Forno over the nine or so years of Flow Control’s involvement through Jim with Il Forno’s  business.  Il Forno asserts the first four years of that involvement now is time-barred. And then there is Flow Control’s breach of trust claim against Andrew, as mentioned.”

(footnotes omitted)

[10]   In a detailed 90 paragraph judgment, Jagose J determined that Andrew  was  Il Forno’s sole legal and beneficial owner and made a declaration to that effect in respect of the first cause of action. As for Il Forno’s second and third causes of action, the Judge found these had failed because he was not satisfied there was an agreement for the provision of accounting services by Jim as pleaded by Il Forno. He did, however, find that Jim failed to take reasonable care preparing and filing Il Forno’s tax returns and that he failed to take reasonable care to maintain Il Forno’s financial records. As a consequence, he held Jim to be negligent in the performance of that duty to Il Forno and awarded $14,185 as damages in negligence. He also directed Jim to deliver up to Il Forno its files and information held by him. He dismissed all other causes of action both in the substantive claim and counterclaim.

[11]   Flow Control has not appealed either the substantive judgment or the costs judgment. However, Jim has appealed both albeit the substantive judgment out of time and, accordingly for that appeal, requires the leave of the Court of Appeal. The costs appeal was filed within the required time limits.

[12]   However, there has been further related and subsequent litigation. As earlier noted in the Judge’s introduction at [2], Jim and another brother provided financial assistance for Andrew to acquire a former shareholder’s half interest in the Il Forno business. In Jim’s case, it was a $10,000 advance which Jagose J determined was a

loan.8 In their submissions on costs, Jim and Flow Control claimed that any costs award should be reduced due to the effective success of their counterclaim in the Judge’s finding relative to the $10,000 loan. Jagose J dealt with this submission in his costs judgment in this way:9

“[7]  I expressly did not find Andrew had any liability to Jim in respect of the loan. Neither is there any declaration in the defendants’ favour…There is no basis for their assertion ‘the quantum meruit claim has essentially succeeded on issue’; to the contrary, I held the defendants had not discharged their onus of proof at all.”

[13]   Notwithstanding this finding, Flow Control commenced proceedings in the Disputes Tribunal (“the Tribunal”) against Andrew and his partner, Ms Mead to recover the $10,000 loan and interest. Through Jim, Flow Control sought payment of the $10,000 loan plus interest which he claimed exceeded $20,000 forgiving the recovery of any amount beyond the Tribunal’s jurisdictional limit of $30,000.

[14]   The Tribunal, in a detailed judgment, determined that Flow Control’s claim was barred by reason of the application of the res judicata principle. That decision, I am advised, has since been appealed to the District Court.

Application to set aside statutory demand

[15]   Il Forno served Flow Control with a statutory demand dated 6 November 2020 relying on the judgment debt determined by Jagose J, being the damages ordered and costs. It is scheduled to be heard on 5 May 2021.

[16]   On 7 December 2020, Jim, purporting to act for Flow Control, filed a notice of application to set the statutory demand aside.

[17]   For the purposes of the present application, it is instructive to set out the grounds relied on by Flow Control in full:

“1. Flow Control has counterclaims and/or set-offs against the debt  described in the demand in respect of debts owing either to itself or its sole director, [Jim], by the respondent and/or its sole director, [Andrew]. In particular:

8      Il Forno v Kleine & Or [2020] NZHC 1889 at [28]

9      Il Forno v Kleine & Ors [2020] NZHC 2730 at [7].

a.Flow Control filed a claim  in  the  Disputes  Tribunal  on  21 October 2020 in the amount of $30,000 against [Andrew and Ms Mead] pursuant to Jagose J’s finding that the payment of $10,000 made by Flow Control on 11 October 2006 comprised a loan to [Andrew]; and

b.Flow Control  and/or  [Jim]  have  a  further  claim  against  Il Forno in respect of unpaid wages and/or delivery charges under a separate agreement described in [Andrew’s] brief of evidence dated 12 June 2020. The value of the agreement described by [Andrew] on an employer/employee basis exceeds $36,000. However, Il Forno has since to sort resile from [Andrew’s] evidence by claiming that he was not describing an employer/employee relationship. In the absence of such a relationship, Flow Control is entitled to claim against Il Forno on the basis that it was de facto a temporary labour agency, and to recover at a higher rate to cover its own consequent liability for employee benefits and its administration costs. These are elements that will need to be quantified at trial to arrive at a specific sum;

2.The judgment debt is the subject of an appeal. An element of the appeal is that the costs order is manifestly excessive, since it:

a.Denies Flow Control costs relating to Il Forno’s filing of amended pleadings, to which it was entitled irrespective of the outcome of the proceeding ($2,772); and

b.Allows the judgment creditor expert witness expenses for time engaged in matters for which it has already had its costs and/or which related to a failed mediation ($12,000); and

c.His Honour had no discretion in respect of those sums.

3.The residual sums remains secured by a payment into Court of

$85,000, pending the outcome of the appeal;

4.Flow Control has previously agreed to the transfer of the sum paid into Court to Hornabrook Macdonald’s trust account, subject only to an undertaking that those funds will not be disbursed to Il Forno pending the outcome of the appeal. No undertaking has been received;

5.Il Forno is reasonably believed to be insolvent and the undertaking has been requested to prevent Il Forno from immediately dispersing the security sum to its own creditors and rending it unrecoverable in the event that the appeal should succeed;

6.It appear from the affidavit of [Jim] annexed to this application.”

Legal principles

[18]   While there is no bar in the District Court to a company being represented by its director in proceedings, that latitude does not extend to proceedings in the High Court. As various authorities have commented, the legal principles for applications of this sort are well settled. As did Associate Judge Lester in Keemati Ltd v MR Civil Ltd,10 I adopt in full the analysis contained in Dreamtech Designs & Productions Pty v Clown Fish Entertainment Ltd11 as set out below:

“[8]  The  legal  principles governing this application are well established. We gratefully adopt the following summary in the judgment of Stevens J in this Court in Kai Iwi Tavern Ltd v The New Zealand Guardian Trust Company Ltd:

[6]        In Re GJ Mannix Ltd this Court held that it is “well settled” that “a company has no right to be represented in the conduct of a case in Court except by a barrister; or by a solicitor in Courts or proceedings where solicitors have the right of audience…”. Cooke J continued:

“There was cognate rule that, apart from statutory exceptions, a corporation has no right to bring or carry on proceedings in a Court except by a solicitor. This refers to the filing of documents – writs, statements of defence, notices of appeal, etc.”

[7]        This principle has recently been affirmed by this Court in New Zealand Cards Limited v Ramsay and Commissioner of Inland Revenue v Chesterfields Preschools Ltd. The policy reasons behind this principle are set out at [34] of Chesterfields. Briefly stated, the rule ensures that proper consideration is given to the validity of proceedings, decreases the likelihood that appellants will require indulgences in the rules of procedure, and ensures that those who appear before the Court are cognisance of the duties and responsibilities that are owed to the Court.

[8]        The Court has a discretion to allow non-lawyers to appear on behalf of companies where appropriate. As Cooke J stated:

“In general, and without attempting to work out hard-and-fast rules, discretionary audience should be regarded, in my opinion, as a reserve or occasional expedient, for use primarily in emergency situations when counsel is not available or in straightforward matters where the assistance of counsel is not needed by the Court or where it would be unduly technical or burdensome to insist on counsel. Especially in minor matters, costs-saving could also be a

10     Keemati Ltd v MR Civil Ltd [2021] NZHC 538 at [5].

11     Dreamtech Designs & Productions Pty v Clown Fish Entertainment Ltd [2015] NZCA 491, (2015) 23 PRNZ 141 at [8].

relevant factor. A ‘one-man’ company might be allowed to represented by its owner if the Judge saw fit in a particular case. But it could not be right, for instance, to issue some sort of tacit continuing or general licence to an unqualified agent to appear in winding up or any other class of proceedings.”

(footnotes omitted)

[19]   I also adopt Associate Judge Lester’s helpful list of relevant considerations which the Court may take into account in exercising its discretion to permit non- lawyers to appear on a company’s behalf. These include:12

(a)the nature of the litigation;

(b)the complexities of the case;

(c)the extent of the dispute;

(d)the point at which audience is sought;

(e)the importance of an understanding of the law and a dispassionate consideration of the circumstances;

(f)that the preliminary interlocutory stages are important to the determination of litigation, and the filing of a compliance statement of claims assist this process; and

(g)the need for professional objectivity, including whether the person proposed to represent the company is closely associated with the applicant company and is also a witness.

[20]   I would also add to that list of considerations whether or not the application is made in an emergency situation.13

12     Keemati Limited v MR Civil Limited [2021] NZHC 538 at [6].

13     Re GJ Mannix [1984] 1 NZLR 309 (CA) at 314.

[21]   It is apparent that a grant of leave will be the exception. This particularly reflects the principle that practising lawyers carry with them a range of obligations when representing parties in Court. The rationale behind the Court’s caution before granting leave to a non-lawyer to appear is founded in the Court’s need to ensure proceedings are appropriately pleaded and managed by counsel whose primary duties and obligations are to the Court rather than a party.

Applicant’s submissions

[22]   Jim points out that Flow Control was represented by counsel in the substantive proceedings before Jagose J with “devastating results”. He is  also highly critical of Il Forno which he describes as “an unpredictable litigant”. His adoption of that descriptor is based on his claim that Il Forno regularly failed to make proper discovery, that some documents discovered were “improperly altered” and Il Forno, presumably through Andrew, has made “improper and unfounded allegations against [Jim’s] professional reputation”. Jim submits that because Flow Control is a “one-man” company, all litigation costs will ultimately be borne by him personally. At the present time, Flow Control is engaged in litigation in three Courts in  circumstances where  Il Forno and/or Andrew has failed to pay any of the sums advanced at trial in answer to the counterclaim.14

[23]   Jim says that Il Formo’s bankruptcy notice has effectively denied him the ability to practice as an accountant. This position has been complicated by COVID- 19.

[24]Jim also says that:

“The cross-claims themselves are becoming increasingly lengthy, solely due to [Andrew] denying evidence that he gave before Jagose J. His credibility will be placed at issue in the appeals.”

[25]   Jim says that Andrew’s conduct is designed to exhaust Flow Control’s resources before the appeals are heard. Jim observes that Il Forno enjoyed so little success at trial that any success which Flow Control enjoys on the appeal will likely

14     Insolvency and liquidation proceedings in this Court, appeals to the Court of Appeal and an appeal to the District Court from the Tribunal’s decision.

reverse the costs order,  render the statutory demand a  nullity and potentially place  Il Forno into liquidation.

[26]   Jim says that “pragmatically” if the present application is unsuccessful he intends to withdraw Flow Control’s application to set aside the statutory demand which will likely result in the company being placed into liquidation. Any success on appeal would require those circumstances to be “unwound”.

[27]   Jim submits that the “issue/cause of action estoppel” and the rule in Henderson case effectively require Il Forno to resile from evidence it offered before Jagose J. He points out that because the bankruptcy and liquidation proceedings are to be heard together, he will be appearing in person. He describes himself as an experienced litigant in person. He advised me in the course of oral argument that in qualifying for his Bachelor of Commerce, he was required to pass a paper in commercial/company law.

[28]   Jim also expressed very considerable confidence in the likely outcome in the Court of Appeal describing success in that forum as “almost assured”.

Discussion

[29]   The starting point is that generally applications to represent a company by anyone who is not a properly qualified lawyer are rarely granted. Granting such an application is the exception.

[30]   However, that principle must be considered in terms of the particular circumstances of the hearing or hearings for which leave is sought. I am satisfied that leave in this case should not be granted. My reasons follow.

[31]   First, the application to set aside the statutory demand is by no means straightforward. Amongst others, it relies on persuading the Court that the appeal against the Tribunal’s decision will likely succeed. It also requires Jim to persuade this Court that not only did Andrew in his evidence admit unpaid wages and/or delivery charges, but that these exceed $36,000. Jim also points to details relating to Jagose J’s costs orders which he says contain material legal and factual errors

including an expert witness’ account for some $12,000 which included items which could not and should not have been claimed.

[32]   As I understood Jim, the effect of these claims, if accepted by the High Court, would more than offset the amounts due under the judgments. This, Jim claims, is independent of the outcome of the appeals to the Court of Appeal.

[33]   None of this is straightforward. It will require Jim to take the Court through the evidence in painstaking detail and link it to the judgments of both the Tribunal and this Court. Furthermore, Jim’s challenge to the Tribunal’s determination involves issues of res judicata, estoppel and the rule in Henderson’s case. Even for lawyers of some experience, these are difficult and complex legal principles. For a proper consideration, it may require the Court to consider the extent to which Jagose J’s judgments are determinative on the question of the $10,000 loan and whether, in fact, that issue can be relitigated.

[34]   Secondly, the application to set aside the statutory demand is simply the most recent hearing in a sequence of bitterly fought litigation now involving the District Court, this Court and the Court of Appeal. Before Jagose J, Flow Control and Jim were represented by counsel experienced in civil litigation. Jim is excoriating in his criticism of counsel and as is not uncommon in the case of self-represented litigants, is convinced he can do a better job. It is apparent from both his written and oral submissions that at least part of his reasoning for that conclusion is that he has a much better knowledge and understanding of the underlying facts than any lawyer could. However, that is not, in itself, a sound reason for being permitted to represent a company in litigation. Indeed, the very opposite may be said as is developed more fully below.

[35]   Thirdly, this is, by no means, the sort of emergency situation contemplated by Cooke J in GJ Mannix. It is not “a reserve or occasional expedient…where the assistance of counsel is not needed by the Court or where it will be unduly technical or burdensome to insist on counsel”. Indeed, the very opposite is the case when all the circumstances are considered.

[36]   Fourth, and in my view most important, is the need for the investment of professional objectivity in this litigation. This is intensive, intra-familial litigation which has gone on for some years. In the hearing before me, Jim attempted to downplay the level of animosity between the brothers, but it is plain that Jim views this is something of a personal vendetta. Despite Jagose J making reasoned findings against Jim on the question of credibility, it is he who says that Andrew deliberately misled Jagose J in the course of that evidence. He expressly states this in his application.15 This illustrates the particular need for the Court in this case to be assisted by a professional and objective practitioner who is subject not only to a regulatory conduct code, but also to the fundamental principle that counsel’s first duty is to the Court.

[37]   There is also the question of balance and proportion which counsel bring to litigation. For example, in his submissions, Jim makes an allegation that documents were improperly altered by Il Forno and/or his brother before the substantive hearing. These documents are at pages 58 and 59 of Jim’s bundle. To place this in perspective, this is a single transaction left out of one bank statement in a bundle of over 7,500 pages. As Mr Lenihan, for Il Forno submits, Jim has had the opportunity to give evidence and put the original statement into evidence. He has not done so. In any event, it would appear that the missing entry was largely irrelevant to the matters in issue. There was no application to recall any of Il Forno’s witnesses for cross- examination on the discrepancy. No prejudice was caused to Jim or Flow Control. Nor, it seems, was any claimed. Jim now asserts that evidence was intentionally altered, presumably with the intention to mislead the trier of fact. That claim is without any substance and emphasises not only Jim’s obsessive approach to the litigation, but also the wanting of his broader judgement.

[38]   For these reasons, I am satisfied Jim should not be permitted to represent Flow Control at the hearing to set aside the statutory demand.

15 Application for leave to represent the applicant, dated 25 February 2021 at [14].

Result

[39]   The application for leave for Jim to act for Flow Control at the hearing of the application to set aside the statutory demand is declined.

Moore J

Solicitors:

Mr Lenihan, Auckland

Copy to:

Mr Kleine, Auckland