Fullarton v Arowana International Limited
[2022] NZHC 202
•17 February 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-551
[2022] NZHC 202
UNDER the Securities Act 1978
the Fair Trading Act 1986
the Securities Markets Act 1988
the Financial Markets Conduct Act 2013BETWEEN
FRANCES JANE FULLARTON
First Plaintiff
NEWTON PONTES
Second PlaintiffAND
AROWANA INTERNATIONAL LIMITED
First defendant
……………………………/continued
Hearing: 11 February 2022 Appearances:
Z G Kennedy and R A Havelock for Plaintiffs
S R Hiebendaal and B J Dominikovich for First and Ninth Defendants
D J Cooper and K T van der Plas for Second, Third, Fourth, Fifth and Sixth Defendants
No appearance by or for Seventh and Eighth Defendants N M Blomfield and S Hawksworth for Tenth and Eleventh Defendants
Judgment:
17 February 2022
JUDGMENT OF WYLIE J
[Discovery]
This judgment was delivered by Justice Wylie On 17 February 2022 at 11.00 am
Pursuant to r 11.5 of the High Court Rules Registrar/Deputy Registrar
Date:…………………………
FULLARTON v AROWANA INTERNATIONAL [2022] NZHC 202 [17 February 2022]
Defendants continued
ROBERT CHARLES FACER
Second Defendant
CHRISTOPHER MORTON KELLY
Third Defendant
CRAIG DOUGLAS McINTOSH
Fourth Defendant
JAMES ALEXANDER CHARLES TURNER
Fifth Defendant
RUSSELL JOHN WOODARD
Sixth Defendant
GLEN WILLIAM DOBBIE
Seventh Defendant
NICO ANDRE MARX
Eighth Defendant
KEVIN TSER FAH CHIN
Ninth Defendant
DAVID MALCOLM KEEFE
Tenth Defendant
JOHN COLINTON MOORE
Eleventh Defendant
Introduction
[1] These proceedings arise out of the 2014 initial public offering (IPO) of shares in Intueri Education Group Ltd (Intueri). The plaintiffs, who are suing in a representative capacity pursuant to r 4.24 of the High Court Rules 2016, allege that information contained in the IPO and circulated to investors was misleading.
[2] The proceedings rely on ss 55 and 56 of the Securities Act 1978, s 9 of the Fair Trading Act 1986, ss 19B, 42ZA and 42ZB of the Securities Markets Act 1988 and ss 270, 486, 494 and 495 of the Financial Markets Act 2013.
[3] Intueri was a wholly owned subsidiary of the first defendant, and the second to eleventh defendants were at all material times directors of either Intueri or the first defendant. Intueri was involved in delivering New Zealand Qualifications Authority (NZQA) accredited qualifications to students who enrolled with it. It charged students and also received direct government funding from the Tertiary Education Commission (TEC). Sometime prior to the IPO, Intueri became interested in acquiring an entity known as Quantum Education Group and various associated entities (jointly Quantum). Quantum was also involved in the delivery of accredited qualifications to students. Some of the money raised by the IPO was used to purchase Quantum and its business. The claim arises as a result of the purchase of Quantum and the effect this ultimately had on Intueri.
[4] The plaintiffs have already sought summary judgment on their claim. While that application was declined, Fitzgerald J, in the course of her judgment,1 undertook a comprehensive analysis of the competing issues arising from the pleadings. I gratefully adopt that analysis. Relevantly, Fitzgerald J stated as follows:
[2] The IPO involved Intueri bringing together a number of New Zealand and Australian private training establishments (PTEs), which provided (in New Zealand at least) NZQA-accredited qualifications to domestic and international students. The IPO raised $174.7m, of which $53m was used by Intueri to acquire Quantum … which owned and operated three New Zealand- based PTEs. Quantum’s student base included many “second chance learners”, being students who had failed to complete earlier secondary or tertiary education.
1 Fullarton v Arowana International Ltd [2021] NZHC 931.
[3] The IPO materials comprised an investment statement and a prospectus (collectively, the IPO Documents). Intueri and Quantum’s size, track record and revenue streams featured prominently in the IPO Documents. This included statements that Quantum had:
(a)4,628 student enrolments in the 2013 year; and
(b)a course completion rate of 91 per cent for the 2012 year.
[4]These statements are central to the plaintiffs’ claims. To explain:
(a)It is common ground that the figure of 4,628 was a reference to Quantum’s total gross enrolments for the 2013 year, and did not take into account those students who had enrolled in but then withdrawn part way through a course.
(b)Under the Education Act 1989 … PTEs were only required to refund course fees to students who withdrew from their course within a prescribed time period. As it applies in this case, that prescribed time period was up to and including the eighth day of the course for domestic students (the Refund Period). Accordingly, if a student withdrew from his or her course after the Refund Period, the Act permitted the PTE to retain the student’s course fees in full.
(c)A number of agencies had oversight of PTEs, including the … TEC, which provides direct government funding to PTEs. For this purpose, PTEs were required to report to TEC three times a year on a range of metrics, including the number of enrolled Equivalent Full Time Students (EFTS). This reporting was not, however, based on the total gross enrolments in any given year. Rather, PTEs were required to report to TEC on the number of EFTS who remained enrolled in courses at the earlier of 10 per cent of the course length and one calendar month from the start date of the course (referred to in the industry as the “SDR Date”). The rationale for reporting enrolment numbers as at the SDR Date was because PTEs were not entitled to direct funding from TEC for students who withdraw from a course before that date.
(d)The plaintiffs allege that 1,741 enrolled students were reported by Quantum to TEC for the 2013 year. Accordingly, the plaintiffs say that of the 4,628 enrolments reported in the IPO Documents, 2,887 students had in fact withdrawn before the SDR date. … (“Early Withdrawal Students”).
(e)The exact number is not known, but the plaintiffs allege that “most” of the Early Withdrawal Students withdrew after the Refund Period but before the SDR Date … The plaintiffs say that as a result, Quantum was permitted to retain the course fees paid by those Early Withdrawal Students … (“Early Withdrawal Revenue”).
(f)It is not in dispute that Quantum’s course completion rate of
91 per cent for the 2012 year (as reported in the IPO
Documents) was 91 per cent of the total EFTS enrolments reported to TEC for that year, and not 91 per cent of Quantum’s total gross enrolments in 2012.
[5] Against this backdrop, there are three central themes to the plaintiffs’ case:
(a)first, that Quantum adopted an “early withdrawal practice,” by which it retained significant Early Withdrawal Revenue;
(b)second, that significant regulatory and reputational risk attached to Quantum’s early withdrawal practice, such that if the regulators became aware of it and put a stop to it, the Early Withdrawal Revenue was unsustainable; and
(c)third, that the Early Withdrawal Revenue made up a significant proportion of Quantum’s overall revenue (said by the plaintiffs to be around 53 per cent in the 2013 year), and thus Quantum’s overall business model was not sustainable without it.
[6] The plaintiffs say the IPO Documents were misleading by omission. They say that none of the matters referred to at [5] above [was] disclosed in the IPO Documents but ought to have been. More specifically, the plaintiffs say that the IPO Documents:
(a)did not explain that the reported enrolment numbers and completion rates were compiled on different bases;
(b)did not explain that Quantum’s high course completion rates did not reflect the significant number of Early Withdrawal Students;
(c)did not explain the extent of Quantum’s Early Withdrawal Revenue, and the significance of that revenue to Quantum’s overall trading performance and the value of its business; and
(d)did not convey the resulting risk to the sustainability of Quantum’s (and thus Intueri’s) ongoing business.
[7] The plaintiffs therefore say that the IPO Documents contained “untrue statements” for the purposes of s 55 of the Securities Act and were misleading and deceptive for the purposes of s 9 the Fair Trading Act. They say that each of the defendants (as promotor, director of a promotor, or director of an issuer, as the case may be) [is] liable for investors’ losses resulting from the untrue statements.
[8] The defendants, on the other hand, say that the number of enrolments and completion rates reported in the IPO Documents were factually correct, both statistics having been compiled in accordance with the regulatory regime in place at the time. The defendants further say that the plaintiffs’ case, including the suggestion of a commercially driven early withdrawal practice, mischaracterises Quantum’s business. They say there was no “practice” around early withdrawals, and certainly no impropriety involved. The defendants say that many second chance learners (whether at Quantum or
elsewhere) withdraw early from a course, and Quantum’s Early Withdrawal Revenue was simply the result of the relevant provisions of the Act and the regulatory regime governing PTEs. They also say that … contrary to the suggestion that Quantum adopted some form of active practice around early withdrawals, Quantum sought at all times to attract and retain its student base. The defendants also say that TEC and other regulators were aware of and had raised no concerns about Quantum’s approach to early withdrawals or its form of reporting. For these reasons, the defendants say there was no specific reputational or regulatory risk concerning early withdrawals (or Quantum’s Early Withdrawal Revenue) which needed to be disclosed in the IPO Documents.
[9] In the event the Court were to find that the IPO Documents did contain untrue statements, the defendants rely on the “due diligence defence” under s 56(3)(c) of the Securities Act. The defendants will also, if necessary, seek orders that they ought fairly to be excused from liability pursuant to s 63 of the Securities Act.
(citations omitted)
The present applications
[5]There are two applications before the Court:
(a)an application for tailored discovery orders brought by the plaintiffs; and
(b)an application by the plaintiffs for particular discovery by Conor McElhinney and Kare Johnstone, both members of the accountancy firm, McGrathNicol. They were the former liquidators of Intueri.
[6]I deal with each application in turn.
Tailored discovery by defendants
[7] In a minute dated 21 October 2021, I noted that the parties had agreed that this application could be dealt with on the papers and I made various timetable directions. The parties complied with those directions but unfortunately the Registry did not refer the submissions that had been filed to me until 4 February 2022. As a result, I have only recently turned my mind to the tailored discovery application. I apologise to the parties for the delay which has occurred.
[8] Rule 8.8 of the High Court Rules provides that tailored discovery must be ordered when the interests of justice require an order involving more or less discovery than standard discovery would involve.
[9] It is common ground that the costs of standard discovery by the defendants would be disproportionate given the matters at issue in the proceeding. Further, it is common ground that, because of the number of class members, the total sum in issue exceeds $2.5 million. As a result, the presumption as to tailored discovery directed by r 8.9 applies and the parties are agreed that tailored discovery is appropriate.
[10] The rules envisage that tailored discovery can be either narrower or broader than standard discovery. Usually tailored discovery will be narrower in scope than standard discovery but, in appropriate cases, it can be wider and extend to documents that may lead to a train of enquiry.2
[11] The plaintiffs seek tailored discovery of various categories of documents. The defendants agree with most of these categories. There are however some disagreements.
[12]Relevantly, the plaintiffs seek documents relating to:
(a)Quantum’s business or financial model;
(b)Quantum’s financial performance;
(c)Intueri’s financial performance;
(d)proposals or decisions to phase out the Quantum brand/PTEs;
(e)Intueri’s board packs, meeting agenda, meeting minutes and reports from 1 October 2013 onwards; and
2 Intercity Group (NZ) Ltd v Naked Bus NZ Ltd [2013] NZHC 1054 at [15].
(f)correspondence with listed regulators, namely the TEC, the NZQA, StudyLink/Ministry of Social Development and the Public Trust, or any person acting on behalf of these bodies/regulators (including Deloitte)—jointly the regulatory authorities.
[13] Counsel accepted that relevance to an issue in the proceedings is the starting point in determining the scope of tailored discovery.3
(a)The plaintiffs’ position was that documents in each of the above categories are relevant and that their discovery is both reasonable and proportionate.
(b)The defendants accepted that there are documents within each of the categories that will be relevant to the proceedings and which it would be proportionate to discover. They argued however that the plaintiffs’ proposed categories are wider than is necessary and that they potentially capture a significant number of documents that are unrelated to the issues in dispute and therefore irrelevant. They say discovery as sought would be disproportionate.
[14] I deal first with documents sought relating to Quantum’s business or financial model and to its and Intueri’s financial performance ([12](a)–(c) above).
[15] The plaintiffs say that this material is relevant because it is likely to have a bearing on the truth or otherwise of the statements in the IPO attributed to the defendants, the materiality of information it is alleged was not disclosed and the issue of causation—i.e., what caused Intueri to ultimately fail.
[16] The defendants argue that any obligation to undertake tailored discovery of this material should be limited to those aspects of Quantum’s business or financial model that relate to the revenue from government funding and any risk to that revenue. They
3 ASB Bank Ltd v Commissioner of Inland Revenue [2014] NZHC 2184, (2014) 26 NZTC 21-098 at [7].
suggest the same qualification in relation to Quantum’s and Intueri’s financial performance.
[17]I agree with the plaintiffs’ position.
[18] It is clear from the pleadings that one of the key issues will be whether or not Quantum had a practice of retaining government funding provided through the TEC in respect of students who withdrew from courses and the significance, from a financial perspective, of any such practice. The plaintiffs assert that this alleged practice was critical to Quantum’s profitability and by extension Intueri’s decision to buy Quantum, the value of the shares in Intueri offered to the public in the IPO, and ultimately Intueri’s profitability. They say that the risk inherent in the alleged practice should have been disclosed in the IPO. They go on to assert that Intueri and Quantum were required to change Quantum’s alleged practice and that thereafter, Quantum’s value was severely impacted. They allege that:
(a)in or about November 2015, Intueri announced that it had received notification that the TEC could be undertaking a review of Quantum and that the potential impact on the 2015 earnings would be between
$4 and $5 million;
(b)it was announced that there would be a downward revision of Intueri’s 2015 forecast EBITA;4
(c)that at some date, unknown to them, Quantum had a restriction on enrolments placed on it by the TEC;
(d)that this restriction resulted in enrolments decreasing by 34 per cent in the 2015 year;
(e)in March 2016, Intueri filed its annual report for the 2015 financial year, which recorded an impairment in the carrying value of Quantum in the sum of $53.1 million and a net loss after tax of $48.5 million; and
4 Earnings before interest, taxes and amortisation.
(f)that on or about 5 August 2016, Intueri announced that partly as a result of lower domestic enrolments at Quantum, underlying EBITDA5 for the full year to 31 December 2016 would be $15 million, compared to
$53.5 million for the previous year.
They claim that on or about 1 June 2017, Intueri and various of its subsidiaries went into voluntary administration and that in September 2017, Intueri and a number of its subsidiaries went into liquidation. They say that the plaintiff investors have lost money as a result.
[19] In these circumstances, it seems to me that Quantum’s overall business and financial model and its financial performance, as well as any practice Quantum had in relation to TEC funding and early withdrawals, will be in issue. I doubt that it will be possible to assess the significance of any enrolment/withdrawal practice to Quantum’s business and financial model or to its financial performance, or to that of Intueri, in isolation. I acknowledge that the defendants in their pleading deny the importance of early withdrawal revenue and its impact on the sustainability of Quantum’s business model. As was noted by Fitzgerald J,6 they say that there were a number of issues which led to Intueri’s collapse. These matters will ultimately be for the Court. In my judgment, the amendments proposed by the defendants would unduly narrow the scope of the discovery which is likely to be relevant to what will be overarching issues.
[20] Accordingly, I consider that the plaintiffs should be entitled to all documents that relate to Quantum’s business and financial model and to its financial performance, as well as to Intueri’s financial performance.
[21] I now turn to the documents sought by the plaintiffs relating to Intueri’s proposals or decisions to phase out the Quantum brand/PTEs and the reasons for such proposals or decisions ([12](d) above).
[22] The defendants do not oppose the inclusion of this sub-category but query what is meant by the words “phase out”. They suggest that the sub-category should be
5 Earnings before interest, taxes, depreciation and amortisation.
6 Fullarton v Arowana International Ltd, above n 1, at [139]–[143].
redefined to require them to discover proposals or decisions to “end the use of” the Quantum brand/PTEs and the reasons for such proposals or decisions.
[23] The proposed orders sought in plaintiffs’ application referred to proposals or decisions to “phase out (i.e. to end the use of)” the Quantum brand and PTEs. The plaintiffs have confirmed in their submissions that they intended that the words “to phase out” mean “to end the use of”. It seems to me that the documents sought are one and the same, whichever phrase is used.
[24] In my judgment, the sub-category should remain as requested by the plaintiffs—namely “proposals or decisions to phase out (i.e. to end the use of) the Quantum brand/PTEs and the reasons for such proposals or decisions”.
[25] I now turn to Intueri’s board documents ([12](e) above). The plaintiffs seek discovery of all board packs, meeting agenda, minutes and reports. They said that discovery of this material is necessary because the defendants have relied on various affirmative defences, including ss 56(3) and 63 of the Securities Act. They asserted that these affirmative defences put in issue the reasonableness of the directors’ beliefs and conduct in the circumstances which had arisen. They argued that the board packs which will have been prepared for the directors will likely contain a record of those circumstances and that the agenda, minutes and reports of each meeting will detail information provided to the directors in respect of each board meeting and the discussions and resolutions that followed.
[26] The defendants resisted discovery of all of this material. They agreed to produce board materials to the extent they are relevant to the issues in dispute, but argued that not all board materials are necessary to enable the Court to assess whether the affirmative defences can be made out. They noted that the board will have been called on to make a range of decisions and that only a subset of those decisions is likely to be relevant. By way of example, they pointed out that documents relating to health and safety and human resource issues are likely to arise in almost every monthly board pack, but would be plainly irrelevant.
[27] In my judgment, there is force in the defendants’ submissions. The width of the category of board papers sought by the plaintiffs is too broad. As worded it would include Intueri’s board documents which have nothing to do with the matters at issue in the proceedings and which would go beyond the affirmative defences raised. Information that is not relevant does not need to be discovered. In my view, this category of documents should be reworded as follows:
These documents shall include all Intueri board packs/meeting agenda/meeting minutes/reports relating to the matters set out in Category C 1 to 4 inclusive from 1 October 2013 onwards.
This should be sufficient to enable the plaintiffs to properly test the affirmative defences raised by the defendants and to enable the Court to deal with the issue.
[28] Finally, in regard to tailored discovery, I deal with the documentation and correspondence which passed between the regulatory authorities and Quantum ([12](f) above).
[29] The plaintiffs seek correspondence with “or documents relating to” the regulatory authorities dealing with various defined issues, including: student enrolments, course completions and withdrawals; reported student data; revenue from student course fees and government funding; and the risks to those sources of funding. They also seek any audits and reviews of Quantum and/or Intueri and any outcomes or changes to the applicable regulatory regime.
[30] The defendants said that this category should be restricted to correspondence and that it should not extend to documents relating to the regulatory authorities. They did however go on to acknowledge that it could extend to any internal documents of either Quantum or Intueri created in preparation for or in relation to correspondence with the regulatory authorities.
[31] In my judgment, the amendments sought by the defendants unduly narrow the appropriate scope of tailored discovery. If the defendants are only required to discover correspondence with the regulatory authorities and any internal documents relating to that correspondence, this would exclude any documents that relate to relevant regulatory matters but were not prepared for or in relation to correspondence with the
regulatory authorities. Any such documents could well be relevant to a proper and informed understanding and assessment of the risk alleged by the plaintiffs and the extent to which that risk was appreciated by Quantum and Intueri. Such documentation could, for example, include documents relating to or arising out of any internal reviews or monitoring of regulatory compliance carried out by Quantum or Intueri, but which were not created in preparation for or in relation to correspondence with the regulatory authorities. I prefer the wording proposed by the plaintiffs.
[32] Issues of proportionality in relation to all of the disputed categories of documents were raised, but not strongly. There were no affidavits before me detailing why requiring disclosure as sought by the plaintiffs would be disproportionate. I was invited to infer that there might be some disproportion but I decline to do so. It is not obvious to me that requiring tailored discovery of the documents, largely as sought by the plaintiffs, would be disproportionate nor that making the relatively subtle changes sought by the defendants would significantly reduce the scope of the discovery obligation.
[33] Accordingly, I order each of the defendants to provide a list of all documents that are or have been in their control within the various categories set out in schedule A attached to this judgment, such lists to be prepared in compliance with the High Court Rules. Each defendant is to provide inspection copies of the non-privileged documents in the categories set out in the schedule for inspection by the plaintiffs, including in their original electronic form if applicable.
[34]I deal with the costs of this application below.
Plaintiffs’ application for third party discovery
[35] As noted, the plaintiffs seek particular discovery against the former liquidators of Intueri, Mr McElhinney and Ms Johnstone (the former liquidators).
[36] There are approximately 1.3 million documents in the control of the former liquidators. It is proposed that they will provide discovery by creating an electronic copy of their existing eDiscovery database, such copy to include any descriptive metadata required to allow the parties to import the documents set into their own
discovery databases for searching and analysis. They propose a process for dealing with documents that may be privileged. I deal with this below.
[37] Rule 8.21 gives the Court power to order a non-party to provide particular discovery. The power to make such an order is discretionary.7 The usual considerations apply—namely relevance and proportionality.8 In addition, non-party discovery must be necessary in the sense that:
[o]ther sources of evidence are unlikely to be sufficient because they are materially incomplete or unreliable. And the documents sought may make a real difference, and are not merely marginal.9
[38] The defendants agree that the former liquidators are in control of documents they would have to discover if they were parties to the proceedings. They also accept that discovery by the former liquidators is necessary in the sense discussed. They do not oppose discovery by them but suggest that any order should be in rather different terms than are proposed by the plaintiffs.
[39] The first issue is whether the existing eDiscovery database should be discovered in full.
[40] It appears the earliest mention of Quantum (and its early withdrawal practice if any) was in documents produced in 2008. The defendants submitted that it is only documents from 1 January 2008 until the liquidation was completed in December 2017 which can be relevant. The plaintiffs say that this cannot be assumed. They note that Quantum traded before 2008. They cannot say that these were relevant documents prior to 2008, but they suggest that that possibility cannot be discounted.
[41] The former liquidators have agreed to provide a copy of their entire eDiscovery database. On the face of it, the provision of this database is the most efficient course. It would avoid the need for the former liquidators to incur additional time and cost (at the expense of one or other or both of the parties) in reviewing and modifying the documents contained in it.
7 Vector Gas Contracts Ltd v Contact Energy Ltd [2014] NZHC 3171, [2015] 2 NZLR 670.
8 Westpac New Zealand Ltd v Adams [2013] NZHC 3113 at [26]–[27].
9 Vector Gas Contracts Ltd v Contact Energy Ltd, above n 6, at [30].
[42] Notwithstanding the apparent convenience argument, in my view, any discovery ordered against a third party must meet the relevancy threshold. On the materials currently available, relevant documentation is only likely to have been generated over the period 1 January 2008 to 6 December 2017 (when the investigation and report by the voluntary administrators, the liquidation of Intueri and the release of a report by Deloitte had all occurred). Information falling outside this date range is prima facie irrelevant and unlikely to assist the parties’ respective cases. This appears to be implicitly accepted by the plaintiffs who, in their written submissions, argued that material outside this date range would not need to be reviewed by the parties; the implication is that it would not need to be reviewed because it could have no bearing on the proceeding. If it becomes apparent from perusal of post 1 January 2008 material that there may be earlier relevant documents, the plaintiffs or the defendants can always seek further and better non-party discovery.
[43] Accordingly, I am only prepared to order discovery by the former liquidators of the documents created over the date range suggested by the defendants. I appreciate that this is likely to involve some culling by the former liquidators and that that culling will be at the cost of the parties. There is no evidence however suggesting any significant cost difference. There is also a counter argument. If documents outside the relevant date range were to be included, the parties would need to review them even though they are likely to be irrelevant. Cost savings in this regard are likely to offset any additional costs incurred by the former liquidators in culling the database.
[44] Accordingly, I agree with the defendants’ proposals in this regard and consider that discovery by the former liquidators should be limited to documentation generated over the period 1 January 2008 to 6 December 2017.
[45]I now to turn to the issue of privilege.
[46] The plaintiffs acknowledge that there are likely to be documents held by former liquidators which may be privileged. It has been agreed that disclosure by the former liquidators of their eDiscovery database will not amount to a waiver of privilege. The defendants, for their part, accept that they cannot assert privilege on behalf of Intueri for documents in which it alone holds privilege. Rather, they seek to preserve the
privilege that any one or more of them may hold, either solely or jointly with Intueri. What is in issue is the process to be adopted in order to identify and isolate privileged documents.
[47] The plaintiffs suggest that the defendants should nominate the search terms, including the date ranges, which could be applied to the existing eDiscovery database to identify privileged documents. They will then respond in an endeavour to agree the search terms. If there is a dispute as to the appropriate search terms, it should then fall to the Court to determine the search terms to be used. They say that the former liquidators should then use the search terms to search the database and provide the resulting documents to the defendants for their review.
[48]The defendants query:
(a)whether it is appropriate for the plaintiffs to have any input into the search terms; and
(b)whether, in the absence of agreement between the parties, it is appropriate for the Court to determine the search terms to be utilised to identify and isolate documents over which they might be able to claim privilege.
They propose that they alone should nominate the appropriate search terms that the former liquidators should then use to isolate the privileged documents from the database. They will then review the privileged documents, determine the documents over which they believe privilege can be claimed and then file and serve an affidavit identifying these documents, asserting the privilege claims and setting out the basis for each claim. They suggest that any challenge to the privilege claimed can be dealt with by the Court in the normal way.
[49] In my judgment, the approach proposed by the plaintiffs is at odds with the defendants’ right to assert privilege and the procedures established by the High Court Rules for dealing with privilege claims. In particular, I agree with the defendants that there is no jurisdictional basis for the involvement the plaintiffs contemplate or for the
role the plaintiffs propose for the Court in settling the search terms. Rather, r 8.25 provides a mechanism for challenging a party’s privilege claims, once made.
[50] The plaintiffs argue that if they are not involved in the selection of the appropriate search terms, this could be prejudicial to them because the usual procedure for challenge is costly and time consuming. I am not persuaded that this is necessarily the case or that the process proposed by the plaintiffs would be less costly and time consuming. In any event, it is not a good reason for departing from the applicable provisions.
[51] In my judgment, the process proposed by the defendants is preferable and should be adopted. It is broadly in accordance with the rules relating to discovery and associated privilege claims.
[52] I record that the defendants have agreed to advise the plaintiffs of the search terms they will give to the former liquidators for the purpose of identifying privileged documents. That seems to me to be a sensible concession. Provision of the search terms may well save time and cost for all.
[53] The plaintiffs propose that the defendants should have 20 working days to review the privileged documents once they are identified by the former liquidators. The defendants suggest that this period should be increased to 40 working days on the basis that this is likely to be more realistic and thus appropriate.
[54] The parties do not know how many privileged documents there may be. In my judgment, it is preferable to retain a period of 20 working days, but to reserve leave to the parties to seek further orders if necessary.
[55] The defendants initially proposed that the former liquidators should assign a unique discovery number to each record in their eDiscovery database, and where reasonably possible, ensure that families of documents are associated with one another in the database.
[56] I am advised by Mr Kennedy, for the plaintiffs, that each document in the eDiscovery database already has a unique number. He did not know whether they are grouped in families. He was however concerned at the potential cost implications of requiring the former liquidators to group the documents if this has not already been done.
[57] The defendants accepted that the former liquidators should not be put to further cost and expense. They agreed that the existing unique numbers should suffice to identify each document. If the documents are already grouped in families, then that will be readily apparent. If not, they accepted that there is no need to require the former liquidators to undertake this exercise.
[58]Finally, the parties were at odds over the costs that will be incurred.
[59] The former liquidators have estimated that their costs to provide for the export of all files in their database will fall between (A) $7,800 and (A) $10,400. This estimate does not include additional costs likely to be associated with culling the database to exclude irrelevant material. Nor does it include the costs of identifying and isolating material in respect of which there may be a claim to privilege. There is no information available to me to assist in identifying what the likely additional costs could be.
[60] The plaintiffs say that the former liquidators’ reasonable costs should be met one third by the plaintiffs and two thirds by the defendants. The defendants contend that the Court has no jurisdiction to so order, but accept that the costs should be met in equal proportions.
[61]Relevantly, r 8.22 provides as follows:
8.22 Costs of discovery
(1)If it is manifestly unjust for a party to have to meet the costs of complying with an order made under this subpart, a Judge may order that another party meet those costs, either in whole or in part, in advance or after the party has complied.
(2)Despite subclause (1), the court may subsequently discharge or vary an order made under that subclause if satisfied that a different allocation of those costs would be just.
(3)If an order is made under rule 8.20(2) or 8.21(2), the Judge may, if the Judge thinks it just, order the applicant to pay to the person from whom discovery is sought the whole or part of that person’s expenses (including solicitor and client costs) incurred in relation to the application and in complying with any order made on the application.
[62] The usual approach is for the party seeking non-party discovery to meet the costs involved, at least initially.10
[63] In my view, there would be a manifest injustice in this case if the total costs were to be imposed on the plaintiffs. Although they are the applicants, they effectively seek third party discovery for the benefit of all. In the circumstances, apportionment of the costs is sensible. The approach proposed by the defendants seems appropriate. They are prepared to contribute one half of the former liquidators’ costs in attending to non-party discovery of the companies’ relevant and non-privileged documents. Final liability for the costs incurred can be addressed following trial.
[64] It follows from the above that, in my judgment, it is appropriate to make an order for non-party discovery by the former liquidators of Intueri. I order non-party discovery in terms of schedule B attached to this judgment.
Costs
[65] The plaintiffs have largely succeeded in regard to their tailored discovery application. The defendants have largely succeeded in regard to their opposition to the non-party discovery orders proposed by the plaintiffs. It is my preliminary view that costs should lie where they fall.
[66]If the parties disagree with this view, then I direct as follows:
(a)any memoranda seeking costs are to be filed and served within 10 working days of the date of release of this judgment;
10 Golden Grand Trading Ltd v Green Traders Ltd [2019] NZHC 2193 at [7]; and Churchill Group Holdings Ltd v Aral Property Holdings Ltd HC Auckland, CIV-2001-404-3203, 3 August 2005 at
[33] and [36].
(b)any memoranda in reply are to be filed and served within a further 10 working days;
(c)memoranda are not to exceed five pages.
I will then deal with the issue of costs and disbursements on the papers, unless I require the assistance of counsel.
Wylie J
Solicitors/counsel:
Thorn Law Ltd/L Taylor QC/Z G Kennedy, Auckland Belly Gully, Auckland
Wilson Harle, Auckland Simpson Grierson, Auckland
SCHEDULE A
TAILORED DISCOVERY CATEGORIES
Category
A.
Quantum:
Documents that relate to Quantum’s:
1. Management of student enrolments, course completion and withdrawals, and associated course fees; or
2. Reporting of data related to student enrolments, withdrawals and course completions to:
(a) The Tertiary Education Commission (TEC);
(b) New Zealand Qualifications Authority (NZQA);
(c) StudyLink/Ministry of Social Development (MSD);
(d) Public Trust; and
(e) Any person acting on behalf of these bodies/regulators (eg Deloitte); or
3. Business/financial model.
4. Financial performance.
B.
Quantum Acquisition and Intueri IPO:
Documents prepared for or by:
1. Intueri;
2. IEGHL;
3. IEHPL;
4. Arowana;
5. The Due Diligence Committees constituted for the Quantum acquisition and Intueri IPO;
6. Any of the defendants not listed above; or
7. Advisors to any of the above including Chapman Tripp, BDO, Macquarie Securities and UBS New Zealand (the Advisors)
where those documents relate to:
(a) The identification by Arowana/Intueri of the opportunity to acquire Quantum (including all internal reports, memoranda or communications relating to the review/assessment of that opportunity prior to the due diligence processes);
(b) The planning for, and design of, the due diligence processes for the Quantum acquisition and Intueri IPO; or
Category
(c) Due diligence of Quantum and/or Intueri or any of the following matters:
(i) Quantum’s student enrolments, course completion and withdrawals; or
(ii) Quantum’s reporting of student data to New Zealand based tertiary education regulators; or
(iii) Quantum’s revenue from student course fees and government funding, and risks to those sources of revenue including regulatory change; or
(d) The drafting and verification of the Prospectus and Investment Statement with respect to the allegedly Untrue Statements and the disclosure of risks relating to the allegedly Untrue Statements; or
(e) The opinions provided by Advisors and confirmations provided by management executives with respect to the due diligence processes and the form and content of the Prospectus and Investment Statement.
C.
Intueri:
1. Documents which relate to Intueri’s financial performance and structure.
2. Documents which relate to Intueri’s business/financial
model with respect to its revenue from Quantum’s student course fees and government funding, and any risks to those sources of revenue.
3. Correspondence with financial market regulators, exchanges and investigative bodies (including ASIC, FMA, NZX, ASX and the SFO) on any of the following matters:
(a) Quantum’s student enrolments, course completion and withdrawals; or
(b) Quantum’s reporting of student data to New Zealand based tertiary education regulators; or
(c) Quantum’s revenue from student course fees and government funding, and risks to those sources of revenue.
and any internal documents created in preparation for or in relation to that correspondence.
4. Proposals or decisions to phase out (i.e. to end the use of) the Quantum brand/PTEs and the reasons for such proposals or decisions.
These documents shall include all Intueri board packs/meeting agenda/meeting minutes/and reports relating to the matters set out in Category C 1–4 inclusive from 1 October 2013 onwards.
Category
D.
Regulators:
Correspondence with or documents relating to:
1. The Tertiary Education Commission (TEC);
2. New Zealand Qualifications Authority (NZQA);
3. StudyLink/Ministry of Social Development (MSD);
4. Public Trust; or
5. Any person acting on behalf of these bodies/regulators (e.g., Deloitte)
which relate to:
(a) Quantum’s:
(i) Student enrolments, course completion and withdrawals; or
(ii) Reporting of student data; or
(iii) Revenue from student course fees and government funding, and risks to those sources of revenue; or
(b) Any audits and reviews of Quantum and Intueri, and outcomes (including steps or measures taken); or
(c) Changes to the regulatory regime applicable to student enrolments, withdrawals, reporting of student data; and/or government funding.
E.
Collapse of Intueri
1. Documents not already captured by the preceding categories relating to the reasons for the de-listing of Intueri from the NZX and ASX and the reasons for the appointment of the voluntary
administrator and liquidators.
2. All correspondence with the voluntary administrator and
liquidators and any information provided relating to the cause(s) or possible cause(s) of Intueri’s collapse.
SCHEDULE B
Non-Party Discovery Orders
1.The former liquidators of Intueri Education Group Limited (Intueri) (and its subsidiaries), being Conor McElhinney and Kare Johnstone of McGrathNicol (Former Liquidators), shall provide non-party discovery to the parties to this proceeding in accordance with these orders.
2.Following removal of the documents referred to in paragraph 3 below, within 20 working days of the date of these orders, the Former Liquidators shall provide the parties with an electronic copy of their eDiscovery database of Intueri and its subsidiaries’ documents along with any descriptive metadata required to allow the parties to import the document set into a standard eDiscovery database for searching and analysis.
3.Prior to providing the eDiscovery Database to the parties, the Former Liquidators will exclude from it all documents which:
(a)are outside the date range of 1 January 2008 to 6 December 2017 (Irrelevant Documents); and
(b)are responsive to privilege search terms advised to the Former Liquidators by the Defendants within 10 working days of these orders being made (together with any family documents of the responsive document), in order to identify documents in which privilege or confidentiality may be held either by any of the Defendants solely or by any of the Defendants and Intueri (or its subsidiaries) jointly (Privileged Documents).
4.The Defendants are to advise the Plaintiffs of the search terms advised to the Former Liquidators as required by para 3(b) of this order at the same time as the Former Liquidators are advised.
5.At the same time as providing the eDiscovery Database (excluding the Irrelevant Documents and the Privileged Documents) to the parties, the Former Liquidators will:
(a)provide the Privileged Documents to the Defendants; and
(b)certify to the parties that the copy of the eDiscovery Database has been faithfully made and is complete (apart from the documents removed in accordance with paragraph 3 above).
6.Within 20 working days of receiving the Privileged Documents from the Former Liquidators, the Defendants will:
(a)file and serve an affidavit of documents in accordance with the High Court Rules 2016 of the Privileged Documents for which the Documents (or any one of them) claim privilege;
(b)provide a copy of that affidavit to the Former Liquidators as notice of documents over which privilege is claimed and that the Former Liquidators must hold as confidential and privileged pending further order of the Court; and
(c)provide inspection to the plaintiffs of any Privileged Documents over which the Defendants (or any one of them) do not claim privilege.
7.To the extent the eDiscovery Database contains any material in which privilege or confidentiality is held only by Intueri, privilege or confidentiality is not waived by the provision of the eDiscovery Database to the parties.
8.The eDiscovery Database, and all documents within it, shall be used by the parties only for the purposes of these proceedings (in accordance with r 8.30(4) of the High Court Rules).
9.The Former Liquidators shall maintain a retrievable archival copy of the eDiscovery Database as a ‘master copy’, which (subject to paragraph 5 above) they shall make accessible to any of the parties within 48 hours upon the joint request of the parties in writing, or otherwise as directed by the Court.
10.The Former Liquidators’ actual and reasonable costs of taking:
(a)the steps in paragraphs 3(b) and 5(a) above will be met by the Defendants; and
(b)all other steps required to comply with these orders will be met in the proportion of one-half by the plaintiffs and one-half by the Defendants.
11.Any dispute as to the Former Liquidators’ costs shall be referred to the Court
for determination.
12.The parties, and the Former Liquidators, have leave to apply to the Court for any further orders that may be required.
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