Fog v Frimley Estate Ltd
[2015] NZHC 3301
•18 December 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-001990 [2015] NZHC 3301
BETWEEN MARIANNE FOG
Plaintiff
AND
FRIMLEY ESTATE LIMITED First Defendant
STEPHEN DUFF (AKA NICK DUFF) Second Defendant
Hearing: 20 November 2015 Counsel:
RB Hucker and J Schwarcz for Plaintiff
PM Fee and AR Durrant for First and Second DefendantsJudgment:
18 December 2015
JUDGMENT OF PALMER J
This judgment was delivered by me on 18 December 2015 at 12 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Hucker & Associates, Auckland.
Fee Langstone, Auckland.
FOG v FRIMLEY ESTATE LIMITED [2015] NZHC 3301 [18 December 2015]
Summary
[1] Mr Stephen Duff, the second defendant, is a director of property development company Frimley Estate Ltd (Frimley), the first defendant. Mr Duff was also the financial adviser to Ms Marianne Fog, the plaintiff. Mr Duff offered shares in Frimley to Ms Fog without a registered prospectus. Ms Fog seeks repayment of her three subscriptions totalling $149,400 by Frimley and Mr Duff under s 37 of the Securities Act 1978 (the Act). She seeks summary judgment and says there is no arguable defence to her claim. I am not satisfied that the defendants have no limitation defence in relation to the original subscription. I therefore decline the application for summary judgment for that subscription but grant it for the other two subscriptions. My reasons follow.
Summary Judgment Principles
[2] Where a defendant has no defence to a claim the plaintiff can apply for summary judgment. Rule 12.2 of the High Court Rules provides, relevantly, that “the court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim”.
[3] There is no dispute about the relevant principles, which the Court of Appeal has summarised in this way:1
The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341(PC). In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ
84 (CA).
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].
Facts
[4] The background facts are relatively clear. They were outlined by Asher J in his judgment in these proceedings of 13 May 2015 which declined an application by Frimley for relief for the consequences of issuing a security without a registered prospectus (the relief judgment).2 I summarise the relevant aspects.
[5] Frimley was incorporated on 16 December 2004 with the business of subdividing a 7.86 hectare block of land near Hastings in Hawke’s Bay. Mr Stephen Duff was a director and shareholder in Frimley.
[6] On 17 December 2004 Mr Duff wrote to Ms Fog, as a client of his financial advisory company, outlining the key features of the proposal. There was no registered prospectus. Ms Fog subscribed to shares for $99,000. There was some disclosure at the time Ms Fog’s subscription was sought but, as found by Asher J,
that was inadequate in relation to:3
(a) the risks of the investment; (b) the interest costs;
(c) the share capital of original investors, including Mr Duff, not being paid up;
(d) the management fees or guarantee fees; and
(e) the lack of audited accounts.
[7] Ms Fog made further subscriptions in response to capital calls in 2009 and
2010 of $18,000 and $32,400 respectively, totalling $50,400 together. The total amount of all her subscriptions is $149,400. The development has not been
completed and has not been a success. Ms Fog wants her money back. Mr Duff,
2 Frimley Estate Ltd v Fog [2015] NZHC 1010, [2015] NZAR 1019 (the relief judgment).
3 At [45]-[51].
Frimley, and the majority of its shareholders have wanted to proceed with the development.
[8] In 2014 the Financial Markets Authority determined that some of the shareholders were members of the public and that, under the then applicable Securities Act 1978, Frimley should have issued a registered prospectus before seeking subscription from them. If that is so, the consequence, under ss 37(4), (5) and (6) of the Act, is that the allotments of shares would be invalid and of no effect and Frimley would be obliged to repay the members of the public with statutory interest at 10% per annum. If that did not occur within two months of receipt of the subscriptions, Frimley and its directors would be jointly and severally liable for the repayments with statutory interest. The liability is strict, though there are defences available in the Act.
[9] In applying, under s 37AH of the Act, for relief from any repayment obligation Frimley argued that Ms Fog was not a member of the public. Asher J held that she was.4 In the relief judgment he concluded that “there was a serious contravention of s 37 in respect of Ms Fog which materially prejudiced her interests”.5 He declined the application for relief. The decision is under appeal to the Court of Appeal. The defendants sought a stay of the judgment which Asher J declined in a judgment of 6 November 2015 (the stay of relief judgment).6 Because the relief judgment was a decision to decline an application he held there was nothing to stay.7
[10] Ms Fog also applied to liquidate Frimley. Frimley applied for a stay of that application which was declined by Associate Judge Sargisson in a judgment of
2 October 2015 (the stay of liquidation judgment).8 The application for liquidation
was heard on 30 November 2015, after the hearing of the current application for summary judgment. Frimley neither opposed nor consented to the application for
liquidation. In her judgment of 7 December 2015 (the liquidation judgment)
4 At [34].
5 At [73].
6 Frimley Estate Ltd v Fog [2015] NZHC 2757 (the stay of relief judgment).
7 At [11].
8 Fog v Frimley Estate Ltd [2015] NZHC 2247 (the stay of liquidation judgment).
Associate Judge Sargisson held that Frimley was insolvent and unable to meet its debts as they came due and put Frimley into liquidation.9
[11] In the hearing of this application for summary judgment Ms Fog sought leave to discontinue the proceedings against another former director of Frimley, Mr Alan Duff, as third defendant. There was no objection by the other defendants and leave was granted.
Application of Law to the Facts
[12] Mrs Fee, for the defendants, says that they have a number of arguments against liability under s 37 of the Act which should be allowed to go to trial. Ms Fog needs to demonstrate that there is no defence in order to succeed in her application for summary judgment. Four defences were the subject of argument by the parties. I consider the disputes of fact identified by Mrs Fee in relation to the relevant defences.
1 A Stay under s 37AL(5)
[13] Section 37 of the Act provided, relevantly:
(4) Any allotment made in contravention of the provisions of this section shall be invalid and of no effect.
(5) Where subscriptions for securities are received by or on behalf of an issuer, but, by virtue of this section, the securities may not be allotted, or for any reason the securities are not allotted, the issuer shall ensure that—
..
(b) the subscriptions, together with such interest (if any) as has been earned thereon, are repaid to the subscribers as soon as reasonably practicable.
(6) If any subscriptions to which this section applies are not so repaid within 2 months after the date on which the subscriptions were received by or on behalf of the issuer (or, in any case to which subsection (2) applies, within 5 months after the date of the registered prospectus), the issuer and all the directors thereof shall be jointly and severally liable to repay the subscriptions, together with interest at a rate prescribed from
9 Fog v Frimley Estate Ltd [2015] NZHC 3081 (the liquidation judgment) at [13].
time to time by regulations made under this Act from the date on which the subscriptions were received by or on behalf of the issuer:
provided that a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his or her part.
[14] Section 37AL provided, relevantly:
(4) Subsection (5) applies if—
(a) proceedings have been commenced to require the repayment of subscriptions or interest under section 37(5) or (6) in relation to the allotment of a security; and
(b) an application has been made for a relief order in relation to the security under 1 or more of the following provisions:
(i) section 37AC: (ii) section 37AH: (iii) section 37AI.
(5) The court must, on the application of the issuer, order that the proceedings to require the repayment of subscriptions or interest under section 37(5) or (6) be stayed until after the determination of the application, or applications, for a relief order unless the application, or applications, for a relief order—
(a) is, or are, frivolous or vexatious; or
(b) is, or are, an abuse of the process of the court.
[15] Section 37AL(5) requires the Court to stay proceedings requiring repayment of subscriptions or interest under s 37 “until after the determination of the application . . for a relief order” unless the application is frivolous or vexatious or an abuse of the process of the Court. Mrs Fee, on behalf of the defendants, submitted that their appeal of the relief judgment means there had not been a “determination” of the application, and so the question of whether relief will be granted remains live. Mrs Fee notes that the appeal is as of right and is by way of rehearing.
[16] Mr Hucker, on behalf of Ms Fog, submitted that there has been a “determination” of the application for the relief order – by Asher J in the relief judgment. He submitted that s 37AL(5) is not intended to entitle defendants to further delay a plaintiff’s statutory entitlement. As an indication that Parliament
could have been clearer, if it had intended the meaning favoured by the defendants, he pointed to s 37AL(6) which says that “[n]othing in this section applies to an appeal against a final judgment given or made before this section comes into force”. He further submitted that Asher J determined this point in the relief judgment when, in obiter comments, Asher J observed that a judgment declining relief had
“determined” an application.10
[17] As the Supreme Court has noted, the legislative history of s 37AL reveals that it was intended to provide avenues for relief for technical contravention of s 37 of the Act when there were concerns as to whether relief under the Illegal Contracts Act
1970 was available, particularly to overseas issuers.11 The select committee report,
and second reading speeches, make clear that relief was intended to be available retrospectively to “proceedings not concluded” prior to the commencement of the amendments.12
[18] As Mr Hucker, submitted, it is clear from the wording of ss 37AL(1) and (6) (which is also mirrored in s 37G) that Parliament was aware of the distinction between a first instance decision and an appeal of that decision:
(a) Section 37AL(1)(b) states that the section applies to all proceedings “that have not been finally disposed of by the Court of first instance” before the section came into force. That implies that final disposition of proceedings was envisaged to be something different from, and prior to, any further consideration by an appellate court.
(b) The wording of 37AL(6) also implies that there may be an appeal
against a “final judgment”.
[19] It is true that neither of those provisions uses the word “determined” but there are three other indicia in the words of the Act that support Ms Fog’s interpretation:
10 The relief judgment at [30].
11 Hickman v Turner and Waverley Ltd [2012] NZSC 72, [2013] 1 NZLR 741 at [121] and fn 60.
12 Business Law Reform Bill (56-2) (select committee report) at 7. And see the second reading speeches of Hon Rick Barker and Brian Connell (23 March 2004) 616 NZPD 11898.
(a) The qualifiers “finally” and “final” were used in relation to “disposed of” and “judgment” in subs (1) and (6). That must mean that requiring a stay until “determination of the application” in subs (5), without such a qualifier, is highly unlikely to have been intended to require a stay until after final determination including appeals.
(b)The effect of subs (1) and (6) together is that s 37AL applies to proceedings that were still live before a Court of first instance when the section came into force but does not apply to appeals of those decisions before the section came into force. That is inconsistent with the defendants’ interpretation which would not distinguish between first instance and appellate decisions.
(c) The effect of subs (5) is that a court must order a stay unless the application for a relief order that is frivolous or vexatious or an abuse of process. According to the defendants’ interpretation an appeal would require the High Court, having already decided that the application for relief should or should not be granted, then to decide whether the application was frivolous or vexatious or an abuse of process.
(d)If the defendants had been successful in obtaining relief from the High Court and Ms Fog had appealed, the defendants’ interpretation would mean the application was still not “determined” and the defendants would still have to apply for a stay of the repayment requirement.
[20] I conclude that “determination of the application” in s 37AL(5) means a determination by a Court of first instance. Determination occurs when the final decision is made by that court to grant or deny the application.
2 Member of the Public
[21] Mrs Fee also makes a more generic version of the submission about a stay on behalf of the defendants. The defendants are appealing Asher J’s finding in the relief judgment that Ms Fog was a member of the public and, if upheld on appeal, that is
an argument which would defeat the proceeding. Mrs Fee therefore submits that is a reason for this Court to have real doubt or uncertainty about whether there is a defence to the claim here.
[22] Mr Hucker submits that this is a collateral attack on Asher J’s judgment and that the doctrine of issue estoppel prevents the defendants from raising it here. Mr Hucker cited the Court of Appeal judgment in Chean v De Alwis which upheld issue estoppel in relation to a case under s 37 of the Act.13 He also referred to Associate Judge Matthews’ adoption14 of the statement by Lord Diplock in the
House of Lords that a final judgment is one that “cannot be varied, reopened or set aside by the court that delivered it or any other court of co-ordinate jurisdiction although it may be subject to appeal to a court of higher jurisdiction”.15
[23] I do not agree that issue estoppel applies here. None of the courses of action identified by Lord Diplock are pursued here. And one of the essential elements of issue estoppel, as identified by the Court of Appeal in Chean v De Alwis,16 and
recently in Muir v Commissioner of Inland Revenue,17 does not exist here: the
judgment asserted to create the estoppel is not final. As Jacob LJ stated in Unilin
Beheer v Berry Floor “[i]t was under appeal – the very negation of it being final.”18
Or, as His Lordship said in Reed Executive v Reed Business Information, albeit in a
different context, “this appeal trumps the estoppel.”19
[24] Here it is Ms Fog who has applied for summary judgment and who has the burden of showing that there is no defence to her claim. That is what I need to consider.
[25] The relief judgment is not stayed, since the stay of relief judgment concluded there was nothing to stay. So the finding that Ms Fog is a member of the public
stands unless and until it is overturned on appeal. Rule 20.10 of the High Court
13 Chean v De Alwis [2010] NZCA 30.
14 Zwarst v Saxton [2013] NZHC 386 at [15].
15 DSV Silo-Und Verwaltungsgesellschaft mbH v Sennar (Owners); The Sennar [1985] 2 All ER
104 at 106 (HL).
16 At [21].
17 Muir v Commissioner of Inland Revenue [2015] NZCA 591 at [19].
18 Unilin Beheer BV v Berry Floor NV [2008] 1 All ER 156 (CA) at [80].
19 Reed Executive v Reed Business Information Ltd [2004] EWCA Civ 159, [2004] RPC 40 at [88].
Rules provide that an appeal itself does not operate as a stay of proceedings or “of enforcement of any judgment or order appealed against”.20 I do note also that, in the stay of relief judgment, Asher J considered it relevant that “the motivation for the appeal was at least in part tactical to gain time to sell assets, and that Frimley has resisted a quick hearing of the appeal”.21
[26] Of course the ultimate resolution of the appeal of the relief judgment, including whether Ms Fog is a member of the public, is for the Court of Appeal and, possibly, the Supreme Court. But, for the purposes of the summary judgment application, I am obliged to consider whether there is a “defence to a cause of action in the statement of claim”.
[27] The defendants have indicated that, in their appeal, they will submit to the Court of Appeal that there Ms Fog was not a member of the public at the time of her subscriptions in 2004, 2009 and 2010. Mrs Fee says the defendants will argue that:
(a) Ms Fog was a close business associate of the issuer or director of the issuer for the purposes of s 3(2)(a)(i) of the Act;
(b)Ms Fog was a person “who, in the course of and for the purposes of their business, habitually invest money” for the purposes of s 3(2)(a)(ii) of the Act; or
(c) The circumstances of the offer were such that Ms Fog was selected to invest in Frimley otherwise than as a member of the public for the purposes of s 3(2)(a)(iii) of the Act.
[28] These arguments will be based on evidence that:
(a) Mr Duff did not believe Ms Fog was a member of the public;
(b)Mr Duff personally knew Ms Fog as a client of his financial advisory firm and believed she was aware of and comfortable with the risks of property development and Mr Duff ’s involvement with the company;
(c) Mr Duff provided Ms Fog with accounts, updates and reports containing full disclosures for each capital raising;
(d)Mr Duff usually met with Ms Fog one or more times a year, had numerous telephone conversations with her, kept her well informed about the company and capital raising and that she was involved in discussions about whether further securities should be offered and attended shareholder meetings that approved the capital raisings.
[29] None of the evidence is new:
(a) It was before Asher J when he rejected, in the relief judgment, the submission that Ms Fog was not a member of the public. He concluded that “the investor/advisor relationship between Ms Fog and Mr Duff did not amount to a close business relationship” and that the relationship “did not overcome the inequality that existed between Mr Duff as the promoter of a complex risky development project, and
Ms Fog as a passive investor”.22
(b)It was before Associate Judge Sargisson, when she refused to stay the liquidation, saying:23
These arguments assume the likelihood of a successful challenge to key findings of fact in Asher J’s judgment, but nothing that has been put before me that suggests that these findings are other than well-founded or that that they are susceptible to being overturned. As a consequence it appears unlikely that, absent new evidence the Court of Appeal will interfere with them, and I can only conclude that the appeal has weak prospects of success.
(c) It was also before Associate Judge Sargisson, when she subsequently granted Ms Fog’s application for liquidation of Frimley in the absence of opposition from the defendants, saying:24
Further, I noted that though Frimley has filed an appeal, it raised nothing of substance to suggest that Asher J’s finding was possibly susceptible to being wholly overturned on appeal. Such outcome depends upon a successful challenge to Ms Fog’s status as a member of the public, and the related contention that there can therefore be no breach of the requirement for a prospectus (and by dint of that, no obligation to refund any of her investments, under s 37).4 The material that Frimley put before me lacked anything of substance to demonstrate any apparently tenable basis for contradicting Asher J’s finding that Ms Fog is a member of the public – and thus her claimed status as a creditor. There has therefore been no serious attempt to show the existence of any real basis for challenging her claimed status as a creditor, and as Frimley has now chosen, in the context of the present application, to abandon its case in opposition, there is no call to revisit my finding that she is a creditor.
[30] I do not consider that the evidence referred to by Ms Fee provides a foundation for the proposition that Ms Fog was not a member of the public. Mr Duff ’s subjective beliefs about Ms Fog do not affect her status. Neither does his provision of documentation to her. His characterisation of his relationship with her is completely consistent with that found to exist by Asher J. And the factor that Mr Duff will rely on “most importantly”, her involvement in discussions and attendance at meetings, does not qualify her as a “close business associate” for the purposes of the definition of in s 3(2)(a)(i) of the Act. It does not provide the “degree of intimacy of “business friendship” which that term requires, as interpreted
by the Court of Appeal in Securities Commission v Kiwi Co-op Dairies Ltd.25
[31] Neither do I consider that there is an evidential foundation for arguing on appeal, as Ms Fee says the defandants propose to do, that Ms Fog was not a member of the public because she was “a person whose principal business is the investment of money or who, in the course of and for the purposes of their business, habitually invest money” according to s 3(2)(a)(ii) of the Act. None of the evidence before me supports that proposition. Ms Fog deposed, in her affidavit of 24 March 2015, that she contacted Mr Duff in 2002 because she needed to find a financial adviser
because she inherited some money and had some capital resource. In her affidavit of
25 August 2015 she deposed that she was not aware of what a prospectus was until she met with her solicitors following a meeting with Mr Duff on 19 November 2012.
[32] And finally, on this topic, neither do I consider that there is an evidential foundation for arguing on appeal that Ms Fog was not a member of the public because she was “a person who is all the circumstances can properly be regarded as having been selected otherwise than as a member of the public” according to s 3(2)(a)(iii) of the Act.
[33] It follows from my conclusions above that I do not consider that the point that will be argued on appeal, about whether Ms Fog is a member of the public, is an arguable defence to Ms Fog’s claim for repayment under s 37 of the Securities Act. This is consistent with Associate Judge Sargisson’s conclusion that the same point did not stand in the way of Frimley being placed into liquidation – an application Frimley did not oppose nor consent to. If the Court of Appeal comes to a different conclusion, no doubt that would be a ground for appeal of this judgment.
3 Limitation Defence
[34] The third defence to Ms Fog’s claim is that the claim to the original subscription is time barred under s 4(1)(d) of the Limitation Act 1950 which sets a deadline of six years from the date of accrual of a cause of action to recover a sum by virtue of an enactment.
[35] In his judgment on relief Asher J did not determine whether the claim regarding the original subscription was time-barred, leaving that for resolution in future proceedings.26 One of the grounds of appeal of Asher J’s judgment is that it was just and equitable to grant relief because the time-barred nature of Ms Fog’s claim was a relevant factor which should have been taken into account. This is likely to lead the Court of Appeal to consider whether there is a time-bar under the
Limitation Act, though strictly speaking perhaps it does not have to determine that
question. I do not determine here whether there is a time-bar but I do consider
26 The relief judgment, above n 2 at [72].
Ms Fog’s submission that there is no defence to her claim because there is no time- bar.
[36] First, Mr Hucker submits, on behalf of Ms Fog, no limitation period applies because the action is for recovery of the funds held in trust and s 21(1)(b) of the Limitation Act 1950 provides no limitation period for such an action. The problem with this is that the statement of claim filed here is clearly founded on breach of s 37(5) and an obligation to repay under s 37(6) of the Act. There is no allegation of breach of trust or relief sought by way of a remedial constructive trust. Summary judgment in the proceeding initiated by that statement of claim, which remains unamended and which is the foundation of the evidence adduced to date, cannot be granted on that basis.
[37] Second, and alternatively, Mr Hucker submits that there has been an acknowledgement of the claim under s 25(4) of the Limitation Act 1950 and time runs from the date of that acknowledgement. I agree with Mr Hucker that an acknowledgment for the purposes of s 25(4) does not have to be prepared solely for
that purpose27 and no particular form of acknowledgement is required.28 But I do not
agree that Clifford J’s conclusion in Henderson Global Funds v Securities Commission about the effect of an application for relief on limitation, where the argument was given limited attention at that hearing,29 assists me here.
[38] I am not satisfied that the terms of the application, or of the other documents Mr Hucker points to, necessarily constitute such an acknowledgement for the purposes of summary judgment. The application for relief of 22 December 2014 does not explicitly concede the claim. Both paragraph 4 of the application, the letter from Mr Duff of 19 September 2014 and the Minutes of the Frimley Special General Meeting of 16 October 2014 report the consequences of the view of the Financial Markets Authority, not the view of the defendants. The other terms of the letter of
19 September and the Disclosure Statement of 6 October 2014 are couched in
qualified terms as to whether liability exists. Although relief must be available only
27 Crawford v Heaven (2000) 14 PRNZ 255 (HC) at [61].
28 Colin King (1975) Ltd v Julian CP 44/89, 20 October 1989 at 10.
29 Henderson Global Funds v Securities Commission [2009] NZCCLR 18, (2009) 10 NZCLC
264,477 (HC) at [97].
if the claim is valid the defendants cannot be taken to have intended to have given up their right to defend the substantive claim, which they still exercise.
[39] Third, and alternatively, Mr Hucker submits that limitation runs from the point of reasonable discoverability which was not until after determination of the relief application (presumably by the High Court). However the Supreme Court found in Murray v Morel & Co Ltd that the principle of reasonable discoverability does not apply in general or to a Securities Act context.30 I agree with Mrs Fee that that disposes of the submission.
[40] Because I have found against Ms Fog’s arguments against the limitation defence it follows that I do not agree there is no defence to her claim in relation to the original subscription of $99,000. Accordingly I do not grant summary judgment in relation to this amount and do not consider whether the gross dividend of $9,000
Ms Fog received in March 2008 should be set off against that amount.
[41] I note that my conclusion does not prevent Ms Fog making the same arguments in the substantive proceeding which must meet a different threshold than that in an application for summary judgment.
4 Whether Misconduct or Negligence
[42] The fourth and final argument which Ms Fog must show is no defence to her claim is the defendant’s submission that the proviso to s 37(6) applies to protect Mr Duff from liability. The proviso states that “a director shall not be so liable if he or she proves that the default in the repayment of the subscriptions was not due to any misconduct or negligence on his or her part”. Ms Fog accepts that, in this summary judgment context, she retains the overall onus of showing that this is no defence while the defendant has the evidential onus of demonstrating that there is an
arguable basis to maintain the proviso applies.
30 Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721 at [69] (Tipping J), [2] (Blanchard J), [102] (McGrath J), [143] (Henry J).
[43] On Mr Duff’s behalf Mrs Fee submits that the following explanations as to why any default by Frimley was not due to the negligence or misconduct of Mr Duff are arguable and should be considered at trial:
(a) the small size of Frimley informs what could reasonably have been expected of a director;
(b)it was reasonable for Mr Duff to take the view that Ms Fog was not a member of the public due to his prior relationship with her, the disclosures made and her participation in shareholder meetings;
(c) Mr Duff ran the issue past his solicitor who said it “sounds okay on the face of things” and that he took advice on the more recent capital raisings which should be considered at trial;
(d)Mr Duff did not proceed unilaterally but shareholder meetings discussed and considered the capital raisings;
(e) Mr Duff kept Ms Fog informed; and
(f) the worsening financial position of Frimley was not caused by misconduct or negligence on the part of Mr Duff.
[44] The first, fourth and fifth of these factors are background context rather than exculpatory explanations in their own right.
[45] The second of these explanations overlaps with the question considered above of whether Ms Fog was a member of the public. If she was not then the proceeding fails anyway. If she was then Mr Duff would have to demonstrate that his subjective belief was reasonable, in the face of being wrong at law. The evidence I have seen does not provide a foundation for that argument.
[46] Regarding the third explanation, I consider that there is no evidence that Mr Duff took advice sufficient to ground an arguable defence that proves the absence of his negligence or misconduct. The oral advice, in which Mr Duff has waived
privilege under cross-examination, was given by a solicitor who Mr Duff acknowledged “didn’t commit himself” and who noted the Act was “a very tricky area”. The other matters on which Mrs Fee says there is “evidence that Mr Duff took advice” relate to further capital raising; they do not materially affect responsibility for the default in the repayment of subscriptions. As with a similar argument in Chean v De Alwis¸ there is no evidential foundation for the assertion that it is
arguable that the proviso could provide absolution from liability.31
[47] Regarding the sixth explanation Mrs Fee submits that other factors from 2008 onwards “including” council delays, the collapse of two building companies, the global financial crisis and tightening lending conditions were to blame. Mr Duff provides a little more detail than that in paragraphs 9 to 12 of his affidavit of
29 September 2012.
[48] Mr Hucker notes that, even accepting Mr Duff’s argument about events after
2008, he would need to come up with an explanation for his failure to ensure repayment in the four years from the initial subscription in 2004. Mr Hucker also submits that other factors, entirely within the control of Mr Duff, led to Frimley’s inability to pay Ms Fog, including: the non-payment by the initial investors for their initial shareholdings in cash; large management and loan guarantee fees charged by Mr Duff; and significant drawings on the current account by Mr Duff. In his 13 May
2015 judgment Asher J found that “Mr Duff knew that the share capital was not paid up, knew that there would have to be financing, should have known that guarantee and management fees were at least a possibility, and should have known that there were significant risks of cost overruns and delay.”32
[49] The sixth explanation is, for the purpose of summary judgment, the closest Mr Duff gets to bringing himself within the proviso. However, he does not provide an explanation for the failure to repay the original subscription until 2008 or for why that was reasonable and he does not explain the factors within his control to which
Mr Hucker points.
31 Chean v De Alwis above n 13, at [52].
32 Relief judgment above n 2, at [60]. These findings are not under appeal. The refusal to exercise discretion to grant relief is under appeal, but not on grounds related to these factors.
[50] On the basis of the argument, and the evidence before me, I do not consider, for summary judgment purposes, that it is arguable that Mr Duff can prove that his negligence and misconduct did not cause Frimley’s default in the repayment of subscriptions.
Result
[51] I grant the application for summary judgment in relation to Ms Fog’s 2009
and 2010 subscriptions for shares totalling $50,400 plus statutory interest.
[52] If the parties cannot agree on costs I reserve leave to the applicant to file a memorandum by 5 February 2016 and any memorandum in reply from the respondents to be filed within 10 working days of the applicant’s memorandum.
……………………………..
Palmer J
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