GJ New Zealand Holdings Limited v Chase
[2020] NZHC 446
•19 February 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-2743
[2020] NZHC 446
BETWEEN GJ NEW ZEALAND HOLDINGS
LIMITED (Discontinued) Plaintiff
AND
ERIC STEPHEN CHASE
Defendant
AND
PAUL ROBERT EWING
First Third Party
JOHN ARCHIBALD BANKS
Second Third Party
Hearing: 19 February 2020 Appearances:
No appearance for the Plaintiff D J Clark for the Defendant
P Sills for First and Second Third Parties
Judgment:
19 February 2020
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Wilson McKay (D J Clark), Remuera, for the Defendant Hornabrook McDonald, Auckland, for the Third Parties Copy for:
Paul Sills, Auckland, for the Third Parties
GJ NEW ZEALAND HOLDINGS LIMITED v CHASE [2020] NZHC 446 [19 February 2020]
[1] There are two live applications. The first and second third parties apply for security for costs against the defendant, and the defendant has applied for discovery orders against the third parties.
[2] The third parties filed their security for costs application in October 2019. The defendant filed his discovery application with his opposition to the security for costs application in November 2019. The close of pleadings date for the proceeding was 4 February 2020. The case has a hearing for eight days beginning 4 May 2020. The proceeding was started in November 2017.
[3] The case concerns the New Zealand master franchise for Gloria Jean cafés. At the start of 2016 the master franchise was held by Jireh International (NZ) Ltd from an Australian company, Retail Food Group Pty Ltd. Mr Paul Ewing, the first third party, was the director of Jireh. Jireh’s holding company is Ewing Trustee Services Ltd. Mr Banks and Mr Ewing, the two third parties, held all the 100 shares in the company. The evidence shows that they held the shares in Ewing Trustee Services Ltd as trustees. Mr Banks is no longer a trustee of the shareholding trust. Mr Ewing is the sole director of Ewing Trustee Services Ltd. He wanted to put the master franchise on the market for sale. An agent to introduce the purchaser was appointed. Mr Chase, an Auckland businessman, was interested. In early 2016 there was a due diligence agreement between Jireh and Saville Chase Ltd, one of Mr Chase’s companies.
[4] The led to a sale of the master franchise by GJ New Zealand Holdings Ltd to Boost Group Ltd. The master franchise held by Jireh was terminated and replaced by a fresh franchise granted to GJ New Zealand Holdings Ltd. That is another Ewing company, whose sole shareholder is Ewing Trustee Services Ltd. Mr Chase incorporated Boost Group Ltd as the company to hold the master franchise. He is the sole director and shareholder of Boost Group Ltd. The purchase price was
$1.8million. On settlement, Boost Group Ltd paid $1.2 million. The balance was left in by way of vendor finance. The $600,000 was repayable after a year. Ordinary interest was 10 per cent per annum. There was default interest at 14 per cent per annum. The Bank of New Zealand took a first ranking general security agreement over the assets of Boost Group Ltd and GJ New Zealand Holdings Ltd took a second
ranking general security agreement. It also took a general security agreement over Mr Chase’s shares in Boost Group Ltd and he gave GJ New Zealand Holdings Ltd a personal guarantee.
[5] The vendor finance was repayable in September 2017. The amount required to be repaid was $660,000, principal and interest. There were some discussions about exchanging information, as Mr Chase was making complaints, but in the event GJ New Zealand Holdings Ltd moved quickly to appoint receivers of Boost Group Ltd. Not long after, the company was put into liquidation. Mr Chase, as shareholder, passed the liquidation resolution. The receivership of Boost Group Ltd resulted in preferential creditors being paid. There was a small payment to the Bank of New Zealand as the first ranking securityholder. There were no payments to GJ New Zealand Holdings Ltd.
[6] In November 2017, GJ New Zealand Holdings Ltd began this proceeding against Mr Chase, suing him on the guarantee he gave in support of the vendor finance. It did not apply for summary judgment. In response, Mr Chase filed a statement of defence and counterclaim. He alleged pre-contractual misrepresentations. He has repeated the allegations of pre-contractual misrepresentation in his claims against the third parties. Some of the matters in his statement of defence and counterclaim are also pleaded as breaches of contract but I do not consider that the allegations against the third parties are made in contract. There is no allegation of a contractual relationship between Mr Chase on the one hand and Mr Ewing and Mr Banks on the other.
[7] The misrepresentation pleadings are set out in paragraphs 9 of the statements of claim against the third parties. The matters alleged against Mr Banks are not as extensive as the matters alleged against Mr Ewing. Specifically, Mr Chase pleads that the agreement for due diligence provided that he would be able to talk to franchise store owners. He says, on the other hand, that both Mr Ewing and Mr Banks dissuaded him from having any meetings with franchise owners as they were concerned that the discussions would “spook” the franchise owners when the parties were only at the due diligence stage. They gave him further assurances that the relationships between
GJ New Zealand Holdings Ltd and the franchise store owners were harmonious and there were no issues for concern. Mr Chase pleads that to the contrary, both Mr Ewing and Mr Banks were aware that the plaintiff was involved in litigation or disputes with at least two named franchise owners, and there were other franchisees who held concerns about the lack of support, grievances over purchase costs, and grievances over representations made to them over purchases of stores. Mr Chase says that none of these matters were disclosed to him.
[8] Against Mr Ewing, Mr Chase pleads other misrepresentations. They all appear material to the decision whether to enter into the agreement for sale and purchase. Some of the alleged misrepresentations are more in the nature of omissions, but they are arguably actionable omissions in that failure to disclose them would amount to half-truths. The representations include allegations that Jireh and the plaintiff were parties to leases when it had been represented that the store leases were held by the store owners; that equipment in certain franchised premises was subject to securities in favour of a financier, Silver Chef Ltd, given by Jireh. A full list of debts owed by franchise owners to Jireh had not been disclosed. It had not been disclosed that Silver Chef Ltd had de-credited Jireh and the plaintiff as customers. It had not been disclosed that franchise fees for one franchise store had been waived, and that GJ New Zealand Holdings Ltd had served notices on another franchisee for non-payment of rent. There was no disclosure that some suppliers who had undertaken fit-outs on new stores had not been paid.
[9] Mr Chase also pleads that after settlement he discovered other matters that had not been disclosed. I do not intend to list them in full but there are some 12 of them.
[10] He also pleads that the third parties provided a set of financial records for Jireh for the year ending March 2015, but that turned out to be inaccurate with the true income being less than shown and the costs and expenses higher than had been represented. There was also a failure to provide financial accounts for the year ending March 2016. In short then, Mr Chase’s claim against the third parties is for misrepresentations made to induce the purchase of a business and is not an unusual one of its sort.
[11] Mr Chase has pleaded four causes of action against Mr Ewing, three against Mr Banks. He pleads deceit against Mr Ewing alone. Against both third parties he pleads breaches of ss 9 and 13 of the Fair Trading Act 1986, accessory liability under s 43 of the Fair Trading Act, and negligent misstatement.
[12] As to his losses, he pleads that at the date of settlement of the purchase the value of his shares in Boost Group Ltd should have been equivalent to the purchase price of $1.8 million. He says, however, that the true value of the shares was significantly less, based on the actual profitability of the master franchise business rather than the figures which were represented in the financial records provided to him. He claims as his losses the total value of his shareholding in Boost Group Ltd and a loss of income. I will come back to these aspects of his claim when I consider the merits of the proceeding.
[13] The third parties have filed statements of defence. In response to some of the particularised misrepresentation allegations, their pleadings are not helpful. They complain that the allegations are general and not particularised. There is however enough stated for them to be able to answer the substance of what is pleaded against them, but they have not addressed the substance. In cases where Mr Chase has pleaded that Mr Ewing failed to disclose certain matters, there is a general denial. That general denial is evasive. Where there is a pleading that something was not done, the answer needs to say whether the thing was done or not. If it is to be denied, the pleader must give particulars when it was done – or alternatively, he has to say that the matter did not need to be done and say why. A general denial is not sound pleading.
[14] There was another application to be heard today. Mr Chase applied for security for costs against GJ New Zealand Holdings Ltd, but I do not have to deal with that application because of events of the past week. On 10 February 2020, as sole shareholder, Mr Ewing resolved that GJ New Zealand Holdings Ltd be put into liquidation. He appointed Ms Finnigan and Mr van Delden, recognised insolvency practitioners, as liquidators. The liquidators have discontinued the claim of GJ New Zealand Holdings Ltd against Mr Chase. They have also pointed out that Mr Chase’s counterclaim against GJ New Zealand Holdings Ltd has been stayed under s 248(1)(c)
of the Companies Act 1993. They have not consented to the counterclaim being continued while the company is in liquidation.
[15] I treat the discontinuance as final. While the rules provide that discontinuances may be set aside, the test for setting aside a discontinuance is strict and not easily satisfied. In the circumstances where the company has been put into liquidation I do not regard it as realistic to suggest that liquidators might at some time change direction and wish to revive the company’s claim against Mr Chase. In short, he has been released from the company’s claim against him and therefore does not need to seek security for costs.
[16] As the company has discontinued its claim against him, there will be a question of costs. I leave Mr Clark to file submissions as to costs. The court is still free to determine costs on a proceeding that has been discontinued after liquidation. No doubt Mr Sills, or other lawyers instructed by the liquidators, will be able to respond. I allow them two weeks after receiving Mr Clark’s submissions, in which to file any submissions on costs. I will then decide costs on the papers.
[17] I have been provided with a copy of the liquidators’ first report. They say that after the sale of the business to Boost Group Ltd, GJ New Zealand Holdings Ltd continued to trade as a consultancy until December 2019 when it stopped trading. The company no longer has the means to pursue recovery from Mr Chase. The company is insolvent. It owes related-party advances which it cannot repay, and it has some other minor obligations. The Inland Revenue is owed a small amount for GST as a preferential creditor. Other secured creditors are estimated at approximately
$200,000. The liquidators’ report does not show Mr Chase or Boost Group Ltd as creditors of the company.
An evidential issue
[18] Before I move to the security for costs application, I deal with an evidential issue. In the security for costs application there is the threshold question whether there is reason to believe that Mr Chase will be unable to pay the costs of the third parties if
his claim against them is unsuccessful. As part of their evidence, Mr Ewing and Mr Banks relied on statements made by Mr Chase at a meeting in May 2019. I have disregarded that evidence. That is because I am satisfied that the purpose of the meeting was to have frank discussions to see whether the parties could resolve this proceeding. No settlement agreement was reached. In my view, the parties are to be encouraged to have settlement discussions. In settlement discussions the parties should feel free to make full and frank disclosure on the basis that there will be no come-back if they are unable to reach agreement. It is inappropriate for the other side to disclose the contents of that meeting in evidence for this proceeding and I will disregard it.1 I draw no inference from the fact that the parties had settlement discussions but were unable to reach an agreement. I do not regard either side as having given any waiver. While Mr Banks did volunteer the information which he alleges Mr Chase disclosed, and Mr Chase’s response was to deny that he had made the statements alleged against him, in response Mr Banks was at pains to point out that the meeting was without prejudice. I am satisfied that it was, and the statements attributed to Mr Chase should never have been raised in the first place.
The security for costs application
[19] As I have outlined, the third parties say that there is reason to believe that Mr Chase will be unable to pay costs if he is unsuccessful. He is a defendant and they are third parties, but under r 5.45(6) the usual rules as to security for costs apply. The circumstances of the failure of Boost Group Ltd give reason to believe that Mr Chase will not be good for costs. He guaranteed the loan by the Bank of New Zealand to Boost Group Ltd to buy the master franchise. The receivers’ report shows that the receivership resulted in only a small amount to reduce the liability to the bank. The fact that he purchased the franchise with 100 per cent finance and without injecting any funds of his own, gives concern whether he has other capital. In short, he appears to have a liability to the Bank of New Zealand under his personal guarantee for an amount in the order of $1 million.
1 Evidence Act 2008, s 57.
[20] Those circumstances - which were known about the start of the proceeding – are enough by themselves for Mr Ewing and Mr Banks to be able to say there is reason to believe that Mr Chase may not be able to be good for an order for costs if he is unsuccessful.
[21] With that, some response is required from Mr Chase to set at ease any concerns that he will not be good for costs. His response is sparse. He has not disclosed any assets in his name. His affidavit indicates that he has significant creditors. The best he can put it is that he has been able to “manage” his creditors since September 2017. He says that he has reached a confidential settlement with the Bank of New Zealand, but he does not elaborate on that. He maintains that he is far from a spent force and says that he does not accept that a security for costs order against him is warranted.
[22] The lack of detail gives cause for concern. He has not set out in full what his creditors are. He has not set out assets under his control to which he could have resort if he had to meet an order for costs. I am not reassured by his evidence. I consider that there is a reasonable risk that the costs may not be paid if the third parties succeed in their defence. It appears from his evidence that on the failure of Boost Group Ltd he had substantial liabilities. I am left with the impression from his own affidavit that many of these liabilities remain unsatisfied. In short, the third parties have met the threshold under r 5.45(1) of the High Court Rules.
The exercise of the discretion
[23] That requires the court to exercise its discretion whether to make an order for security. It may do so only if the judge considers it just in all the circumstances. That invariably requires not only a review of the merits of the case but also taking account of factors going both ways. As always, I have found the decision of Kós J in Highgate on Broadway Limited v Devine2 helpful in listing factors for consideration in deciding whether to order security.
2 Highgate on Broadway Limited v Devine [2012] NZHC 2288.
[24] Necessarily, any view I express as to the merits of the case is provisional. I have been provided with pleadings and some affidavit evidence. In his affidavit, Mr Chase has recited parts only of his statement of evidence that he has prepared for the substantive hearing. I have not been provided with any of the evidence of the third parties. My impression of the case is gained more from the pleadings than from the parties’ evidence.
[25] There is one matter on which I wish to comment: the relief sought by Mr Chase. This is not quite Mr Sills’ submission, but this is the way I see it. Mr Chase pleads that he lost the value of his shares in Boost Group Ltd. That strikes me as flawed. First, the damages claimed are more in the nature of a loss of expectation. He is suing as though he wished the third parties to make good on their misrepresentations. But his claims are in tort and for breach of the Fair Trading Act. The measure of loss is how much the plaintiff’s position has been made worse by acting in reliance on the representations made. Mr Chase cannot claim for the representations to be made good. So far as the Fair Trading Act is concerned, the tortious measure of damages is recognised as appropriate.3
[26] Moreover, a claim for loss of value in the shares is not likely to give Mr Chase the sums that he is seeking. That is because Boost Group Ltd bought the franchise with 100 per cent finance. One can imagine what a balance sheet for Boost Group Ltd would look like at the date of purchase. There would be assets of $1.8 million (being the master franchise that it had acquired) and there would be corresponding liabilities, namely the $1.8 million comprising the debt to the Bank of New Zealand and the debt to GJ New Zealand Holdings Ltd. There would in short be minimal, if any, equity. Just as there was no equity in the business on taking purchase, there would be no equity on receivership. There would have been no change in value in the shares. Instead, it appears that Mr Chase’s claim can be put on an alternative basis – which would be an orthodox way of recognising that he has suffered losses which can be compensated by damages on a tort measure. That is the extent to which his personal position has been made worse as a result of Boost Group Ltd buying the master
3 Cox v Coxon [1999] 2 NZLR 15 (CA).
franchise. In buying the master franchise, Mr Chase gave a guarantee to the Bank of New Zealand for its loan, and he gave a guarantee to GJ New Zealand Holdings Ltd for the vendor finance. To the extent that the company was not good for those liabilities, he incurred a personal liability himself and, to the extent that he has had to meet those liabilities, his position has been made worse than he was before the purchase of the master franchise.
[27] I suggest that Mr Chase may be able to re-cast his claim to show that his personal position has been made worse because of the liabilities he has incurred associated with purchase of the master franchise. That will require an amendment to his pleadings. It may also require further discovery on his part. He will need to particularise what his liabilities are. That may require some care because he says that he has entered into a confidential settlement with the Bank of New Zealand. He will not be able to claim, as part of his losses, his debt to GJ New Zealand Holdings Ltd under his guarantee because that debt has now been released. I understand from Mr Clark that he may have associated liabilities to suppliers and landlords.
[28] I direct that the proceeding be called in my chambers list on Friday, 28 February 2020 at 2:15pm. Ahead of that call, counsel are to confer and file a joint memorandum setting out how they propose to deal with amending pleadings, whether further discovery will be required, and whether further evidence will be required. If the parties’ proposals are sound, I will issue a minute vacating the call in the chambers list. Failing that, counsel are to appear and I will resolve any outstanding differences.
[29] Accordingly, I will continue with the security for costs application, not on the basis of the present pleading, but on the basis that Mr Chase may be able to amend his claims against the third parties so as to claim against them for the liabilities he has incurred and to show his actual net loss of financial worth as a result of the purchase of the master franchise. Mr Chase will also need to show that there are causal links between the purchase of the master franchise and the incurring of the liabilities, and that he has sustained the losses as a result.
The merits of the misrepresentation claims
[30] Now for the merits of the misrepresentation claims. As I have noted, the allegations against Mr Ewing and Mr Banks are different. Mr Chase’s affidavit has set out the passages from his brief of evidence in which Mr Ewing and Mr Banks gave the advice not to “spook” the store owners. It appears from evidence that Mr Chase looked to Mr Banks as someone he could trust. As is well known, Mr Banks is a former politician, holds himself out as a man of integrity and has significant business experience. Mr Banks was introduced as a “business mentor” of Mr Ewing. After the proceeding started, Mr Chase found out that Mr Banks is shown in the Companies Office records as a shareholder of Ewing Trustee Services Ltd along with Mr Ewing. Mr Chase was not aware of that when they were in negotiations. Mr Banks acknowledges that he was a trustee but no more than that. He says that he has since resigned as a trustee. He denies that he had any personal stake in Ewing Trustee Services Ltd or any of its subsidiary companies, and he denies receiving any payments as a trustee of Ewing Trustee Services Ltd.
[31] Mr Chase’s evidence also refers to an incident shortly before settlement of the purchase of the master franchise when he discovered that franchise fees of over US$160,000 had not been paid to Retail Food Group Pty Ltd, and that Retail Food Group had refused consent to the transfer until that payment was made. Mr Ewing told Mr Chase that that was an administrative slip, but Mr Chase was concerned that it had not been disclosed when it should have been. His evidence shows that there was a meeting at Mr Banks’ apartment. Mr Chase says that both Mr Banks and Mr Ewing gave him assurances that there were no other liabilities he needed to know about. On this, Mr Chase says that he relied on Mr Banks.
[32] There is then a claim by Mr Chase that seems to warrant a hearing in court so that its merits can be tested. Mr Banks has given only generalised denials of liability. His evidence does not go into specifics at all. I cannot say at this stage that Mr Chase’s claim against Mr Banks is hopeless, trivial or not worth considering.
[33] Mr Ewing has also given general denials. He says that none of the information that he provided has been shown to be inaccurate. He has not addressed the non- disclosure questions at all. I can only assess the matter on the pleadings. Mr Chase has given detailed allegations which Mr Ewing should be able to make substantive responses to, but he has not done so. To that extent, Mr Ewing’s position seems evasive and gives suspicion as to the merits of his defence. I infer that if he did have proper answers to the allegations made by Mr Chase, he would have taken the opportunity to provide them. His silence is reason to suspect that there is something in what Mr Chase says. Accordingly, I do not regard Mr Chase’s claim against Mr Ewing as hopeless.
[34] There is another related aspect: Mr Ewing’s decision to put GJ New Zealand Holdings Ltd into liquidation. That suggests a lack of confidence in the company’s case. That is not because of any lack of merit in the claim under the guarantee, but rather in Mr Chase’s defences and counterclaims against the company. As GJ New Zealand Holdings Ltd was insolvent on account of unpaid related party advances, it would be expected that Mr Ewing would be keen to pursue Mr Chase for recovery. The liquidation and prompt discontinuance suggest that the claim was not considered worthwhile.
[35] I heard submissions on the question whether the third parties had caused the losses and Mr Chase’s impecuniosity. The impecuniosity that I have identified has arisen from the failure of Boost Group Ltd. Under Mr Chase’s case, that is attributable to the misrepresentations he has alleged against Mr Banks and Mr Ewing. To the extent that he has incurred liabilities arising from the failure of Boost Group Ltd, he has a case that Mr Banks and Mr Ewing have caused the impecuniosity which they rely on as the basis for seeking security for costs. In short, Mr Chase has in my view established that Mr Ewing and Mr Banks are arguably the cause of his financial misfortune. That is relevant in deciding whether he should provide security for costs.
[36] Another factor is the timing of the security for costs application. The applications were made in October 2019. Mr Banks and Mr Ewing say that they discovered Mr Chase’s financial position in May 2019. However, they were aware of
the matters which gave rise to his financial difficulties before that. In March 2018 there was to be a first case management conference. The parties advised that Mr Ewing intended to apply for security for costs and Mr Banks would apply to strike out or for security for costs. I directed them to file their applications by 28 March 2018. Accordingly, the time for making the security for costs application has run since the beginning of April 2018. That, therefore, is unreasonable delay. Delay in making a security for costs application is relevant. A plaintiff may commit himself to a proceeding and invest in it, spending money on lawyers and consultants. When he puts time and effort into getting the case ready on the assumption that he is not required to put up security, he should not be floored by a late application for security.
[37] In response, Mr Sills pointed out that the third parties were seeking only prospective security. He provided a schedule showing costs that would be incurred in the proceeding from this time onwards. He calculated those costs at some $37,000. I note the point. But the delay in applying has another aspect. The close of pleadings date has passed. Fixing security now would be disruptive. If the application for security had been brought earlier, security could have been set and the proceeding might be stayed until security was provided. So long as security was given, the case would then proceed smoothly. Requiring security now, on the other hand would be disruptive, when the close of pleadings date has passed, when a fixture has already been allocated, and the proceeding will be stayed to see whether security is put up. That disruption makes it undesirable to require security.
[38] Another aspect. In some litigation, the plaintiff is a corporate entity and the people behind the claim are not formally parties to the proceeding. Security for costs can be ordered only against the parties, not against those who support their claim. In this case Mr Chase has, if you like, put his own neck on the block. He is risking bankruptcy if he loses in this proceeding. I understand him to be entrepreneurial and he would therefore be keen to avoid bankruptcy and the restrictions that that entails. Likewise, I do not discern that the third parties would not enforce an order for costs against him if they succeed at trial. Mr Chase has made his own calculations and figured out that if he loses he would still do his utmost to avoid bankruptcy. In short, this case is a less pressing one for security than if the claimant were some corporate
entity with people behind that entity not exposed to the risk of a costs order if the plaintiff’s case fails.
[39] I appreciate that for the defendants there remains the risk that if they succeed at trial they may not recover costs fully from Mr Chase when he does appear to have financial difficulties. But, weighing the matters up altogether, the balance falls in favour of Mr Chase. That is, his interests in being able to have his claim heard in court prevail over the desire of Mr Ewing and Mr Banks to have no more than a barren order for costs against him.
[40]Accordingly, I dismiss the application for security for costs.
Defendant’s application for particular discovery
[41]Mr Chase seeks disclosure of three groups of documents by the third parties:
(a)Documents about the receivership: all correspondence (electronic and hard copy), documentation, meeting notes, texts generated as between the plaintiff and third parties and the receivers (Rodgers Reidy Ltd) over their appointment, funding and reporting to the plaintiff, the plaintiff’s solicitors and counsel, and with the third parties;
(b)Communications between Mr Banks and Mr Ewing, including all correspondence, documentation, meeting notes, texts, between the third parties from the point that the plaintiff was placed on the market for sale;
(c)Financial information: all documentation, including financial and taxation returns, relating to the receipt of the purchase funds from Boost Group Ltd to the plaintiff, and the distribution of those funds from the plaintiff to its shareholders including the third parties as shareholders of Ewing Trustee Services Ltd.
[42] Until now, Mr Chase had not required the third parties to make disclosure. He had instead been content to rely on the disclosure made by GJ New Zealand Holdings Ltd. He says that the purpose in seeking to disclosure from the third parties directly is to fill in gaps in the disclosure made by GJ New Zealand Holdings Ltd.
[43] The third parties did not file any formal opposition to the discovery application, and they have not addressed that in their affidavits. But I have heard submissions from Mr Sills on the discovery application.
[44] The application was formally made under r 8.19 of the High Court Rules. Orders under that rule are typically made only after a party has already made discovery. Mr Clark referred to the standard principles applying under r 8.19 and the test set out by Asher J in in Assa Abloy New Zealand Ltd v Allegion (New Zealand)
Ltd:4
(a)Are the documents sought relevant and, if so, how important will they be?
(b)Are there grounds for belief that the documents sought exist?
(c)Is discovery proportionate?
(d)After balancing the factors, is an order appropriate?
I regard these matters as equally applicable in this case where there has not to date been any discovery by the third parties. In short, I consider this as a formal application for tailored discovery, bearing in mind that Mr Chase has already had discovery from GJ New Zealand Holdings Ltd.
4 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760 at [14].
The receivership documents
[45] Mr Chase is concerned about the role of Mr Banks in the affairs of GJ New Zealand Holdings Ltd and Ewing Trustee Services Ltd. He believes that there may be some support for showing that Mr Banks had greater involvement than he has let on. He relies on a statement made by the receiver, Mr Vlasic, when he was first appointed. Mr Goldman, the chief financial officer of Boost Group Ltd says that when the receivers were first appointed, Mr Goldman queried how the plaintiff and Mr Ewing were able to fund the receivership. According to Mr Goldman, Mr Vlasic said that they were not funding it and, when asked who it was, Mr Vlasic said that it was Mr Banks.
[46] Formal documents relating to the receivership have been put in evidence: the appointment of the receivers and a deed of indemnity. The appointor is GJ New Zealand Holdings Ltd as the security-holder. The indemnity has been given by GJ New Zealand Holdings Ltd New Zealand Holdings Ltd.
[47] The receivers’ report shows that they obtained payment of various receivables of the company out of which they met their own costs and made distributions to preferential creditors and the Bank of New Zealand. There is no evidence in those documents of any financial support given to the receivership by Mr Banks. None of the formal documents put in evidence refer to Mr Banks. Mr Banks has himself denied any involvement in those matters.
[48] In submissions, Mr Clark developed an argument that Mr Ewing and GJ New Zealand Holdings Ltd had some ulterior motive for putting Boost Group Ltd into liquidation. That was because it was alleged that before the receivership the parties had a meeting where it was agreed to exchange information, but GJ New Zealand Holdings Ltd had gone back on its word.
I cannot see how these allegations of ulterior motive require disclosure of further documents relating to the receivership. When the vendor finance fell due, GJ New Zealand Holdings Ltd acted promptly to enforce its security. Invariably those
against whom securities are enforced believe that the creditor moves too fast, too abruptly and often too aggressively. But the simple point for this case is that the secured creditor did act and by doing so brought about the downfall of Boost Group Ltd, the loss of the master franchise and the loss of any value in the business, thereby exposing Mr Chase to the liabilities that he currently faces. Questions of ulterior motive are beside the point.
[49] Equally, I regard it as chasing the end of a rainbow to look for any documents linking Mr Banks to the receivership. I see that little useful purpose can be served by finding out what role, if any, Mr Banks may have taken in deciding on the receivership. Accordingly, I do not intend to order discovery under this head.
Communications between the third parties
[50] The second group of documents seeks disclosure of documents from when the master franchise was put on the market for sale. From the nature of the case it seems likely that there were communications between Mr Banks and Mr Ewing, even if they were only text messages, although they could have been something substantially more. After all, Mr Banks was one of the trustees of the shareholder of the holding company. It is plausible that he would have taken an active interest in the sale of the sole asset of a subsidiary company.
[51] Mr Sills accepted the relevance of communications between Mr Banks and Mr Ewing relating to the sale of the company. His only objection was that the scope of discovery was cast too wide. I accept his objection. I direct that the documents to be disclosed within the second group must be relevant under the “adverse documents” test and relate only to the sale of the master franchise, whether the master franchise is held by Jireh or by GJ New Zealand Holdings Ltd. The start date is when the master franchise was put on the market for sale. The end date is be one month after the date of settlement of the sale. These documents should be disclosed.
Financial information
[52] I understand from Mr Clark that he wishes to test Mr Banks’ denials that he received any financial benefits from the sale of the master franchise. To that end he wishes to have end-of-year financial statements, taxation returns, and records showing how funds were distributed to shareholders. That is all with a view to trying to establish Mr Banks’ liability for the statements he has made.
[53] I regard this discovery as pushing matters too far. This is “train of enquiry” material to see if there is something that can be established against Mr Banks. Mr Chase seems to have an arguable case that Mr Banks did make the statements he alleges; it is known that he was a trustee/shareholder who would, because of that office, have an interest in the sale of the master franchise; and he held himself out as acting as a business “mentor” for Mr Ewing. In those circumstances, if Mr Banks did make the statements, arguably he owed a duty of care to Mr Chase to ensure that what he said was true and correct. That would apply whether he had any financial interest or was receiving any benefit from any sale of the master franchise. It is consistent with his trusteeship that he would have a vital interest in any sale of a business, even if he did not receive any personal benefit. Accordingly, given the late state of this proceeding, I regard it as unnecessary and disproportionate to require discovery of documents in the third group.
Outcome
[54]I sum up:
(a)The application for security for costs is dismissed.
(b)On the application for discovery, I make an order for disclosure of documents in the second group, so long as those documents are limited to communications between Mr Banks and Mr Ewing relating to the marketing, promotion and sale of the master franchise, from the time when that business was first put on the market until one month after the settlement of the sale, with the “adverse documents” test to be used to establish the relevance of the documents.
(c)I make no order for disclosure of other documents.
[55] When the parties file their joint memorandum, ahead of the chambers list on 28 February 2020, they should advise the time required to make that affidavit of documents.
[56] As indicated, the case will be called on Friday 28 February 2020 at 2:15pm. I trust that counsel will have filed a joint memorandum beforehand. I would expect that joint memorandum to address the time for completing the discovery that I have now just ordered, the time for any further pleadings by both sides, whether any further discovery is required, and whether any further exchange of evidence is required.
[57] Mr Chase has succeeded on the application for security for costs. He has obtained some discovery but not all that he sought. On the other hand, the third parties took no formal steps in opposition, apart from Mr Sills’ submissions today. In my view, an appropriate way of dealing with it is to make an order for costs that covers both the application for security and the discovery application but there is not to be any double-up on any steps. I trust that counsel can confer on costs. If they cannot agree, I will consider written submissions.
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Associate Judge R M Bell
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