Gold Star Invest Limited v v
[2022] NZHC 653
•1 April 2022
UNTIL FURTHER ORDER OF THIS COURT THERE IS AN INTERIM ORDER PREVENTING THE PUBLICATION OF THE NAMES OF THE DEFENDANTS AND NON-PARTY PUBLIC OR MEDIA FROM HAVING
ACCESS TO THE COURT FILE OR ANY DOCUMENTS RELATING TO THE PROCEEDING HELD BY THE COURT WITHOUT THE MATTER BEING REFERRED TO A JUDGE FOR DIRECTION.
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2019-442-000023
[2022] NZHC 653
BETWEEN GOLD STAR INVEST LIMITED
Plaintiff
AND
V
First Defendant
AND
W
Second Defendant
AND
C
Third Defendant
AND
H
Fourth Defendant
AND
P
Fifth Defendant
Hearing: 10 March 2022 Appearances:
C J Griggs for Plaintiff
J F Anderson QC and K T van der Plas for First Defendant (by VMR)
S M Pasley for Second Defendant (by VMR)
F B Barton and A L Clarke-Tahana for Third Defendant (by VMR) J R Sumner and R Williams for Fourth Defendant (by VMR)
C S Lawes for Fifth Defendant (by VMR)
Judgment:
1 April 2022
GOLD STAR INVEST LIMITED v V [2022] NZHC 653 [1 April 2022]
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 1 April 2022 at 12.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
[1] This is an application by the first defendant, supported by all other defendants, for an order under r 10.15 of the High Court Rules 2016 (the Rules) that the Court determine a question separately from, and prior to, the full trial of the proceeding.
[2] The plaintiff’s position is to formally abide the decision of the Court, but its counsel has made submissions to the effect the first defendant has not shown a split trial is warranted. For the reasons that follow, I agree with that assessment.
Background and the pleading
[3] The plaintiff (Gold Star) alleges the defendants took part in a conspiracy by unlawful means to injure it. It seeks to recover damages of more than $4,700,000.
[4] Gold Star was incorporated in March 2011 by the second defendant, with Rolf Häring (Mr Häring) as the sole shareholder and director. In August 2012, the fifth defendant, who was then the partner of Mr Häring, was appointed director of Gold Star and Mr Häring resigned his directorship shortly thereafter. The fifth defendant remained sole director of Gold Star until 5 July 2017.
[5] From 2005 to 2010, Mr Häring had defrauded Mazda Motor Europe GmbH (Mazda) of a large sum. In July 2013, he was adjudicated bankrupt in Germany and Dr Alex Kulas was appointed Mr Häring’s insolvency administrator.
[6] Mr Häring was convicted of charges of embezzlement from Mazda, and tax fraud. In June 2013, he was sentenced to imprisonment and released on probation on
1 July 2016. He remained the sole shareholder of Gold Star, subject to the administration of Dr Kulas.
[7] The plaintiff alleges Gold Star was used as a vehicle to receive and hold substantial funds Mr Häring had obtained through his criminal activities. As a result, in the financial year ending 31 March 2012, Gold Star had accumulated assets of
$5,652,493 represented principally by shares in three property owning companies. The assets owned by each of the three companies were sold or otherwise disposed of and the resulting funds were converted into liquid assets between November 2012 and
September 2013 totalling $4,938,498. Of that sum, it is alleged an amount of
$4,589,633 was paid by Gold Star as drawings to or on behalf of Mr Häring. These payments are defined in the amended statement of claim as “the distributions”.
[8] Gold Star pleads that the funds Mr Häring obtained by fraud, along with any property acquired using those funds and the proceeds of sale of such property, were subject to an institutional constructive trust for the benefit of Mazda. It then pleads that the distributions were not authorised, in compliance with s 52 of the Companies Act 1993, by the fifth defendant as the sole director of Gold Star, and that Gold Star could not, immediately after the distributions, satisfy the solvency test.1
[9] There is then a further pleading that the “authorisation of the distributions” by the fifth defendant was in breach of her duty of care as a director under s 137 of the Companies Act, because it was known that the funds were proceeds of property which had been acquired using money that had been fraudulently obtained from Mazda.
[10] There are further pleadings that the defendants acted in combination, knowing that the funds of Gold Star had been acquired fraudulently from Mazda, and that by their conduct they were causing loss to Gold Star by rendering it insolvent.
Procedural history
[11] While this proceeding was commenced in 2019, it remains at an early stage with discovery not yet commenced.
[12]The first defendant originally sought orders as follows:2
(a)the following questions be determined separately from, and prior to, the full trial in the proceeding (“Separate Questions”), or alternatively, such questions as the Court thinks appropriate:
(i)whether the payments identified at paragraph 57 of the amended statement of claim are “distributions” for the purposes of s 52 of the Companies Act 1993 (“Act”);
(ii)whether the distributions breached s 52 of the Act; and
1 Companies Act 1993, ss 4 and 52(2).
2 Application dated 17 December 2021.
(iii)whether those breaches of s 52 of the Act amount to “unlawful means” for the purpose of a tortious conspiracy cause of action.
(b)[i]n the event of findings against the plaintiff on the above issues, or any one of them, Judgment be entered in favour of the defendants and the proceeding be dismissed; and
(c)the plaintiff pay the first defendant’s costs.
[13] When that application came before me on 21 February 2022, after hearing from counsel I reserved my decision. As a consequence of my exchanges with counsel, I then received a memorandum indicating the first defendant wished to amend the application to seek an order that only one question be heard separately. That question is as follows:
Whether the payments identified at paragraph 57 of the amended statement of claim are “distributions” for the purposes of s 52 of the Companies Act 1993 (“Act”).
[14] I had the application called before me again on 10 March 2022 to hear further submissions. Prior to that hearing helpful memoranda were filed.
The Rules and relevant principles
[15]Rule 10.15 of the Rules provides as follows:
10.15Orders for decision
The court may, whether or not the decision will dispose of the proceeding, make orders for—
(a)the decision of any question separately from any other question, before, at, or after any trial or further trial in the proceeding; and
(b)the formulation of the question for decision and, if thought necessary, the statement of a case.
[16]Pursuant to r 10.14, the “question” in r 10.15 includes:
… any question or issue in any proceeding, whether of fact or of law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties, or otherwise.
[17] The relevant principles to be applied in applications under r 10.15 are set out in McGechan on Procedure and are not in dispute.3 The starting-point is a presumption against a split trial because having all matters in issue determined in one trial would normally be the most expeditious and efficient manner of dealing with a proceeding. The burden of displacing the presumption rests on the party contending for a split trial. The burden has been variously described as “not insignificant”, “moderate” and “heavy”. An appropriate approach is to consider whether the applicant has established good, preponderant reasons in favour of a separate question determination. The Courts have warned against the difficulties that arise from split trials, including that experience shows a shortcut may prove to be the longest distance between two points.4
[18] A list of matters that have been taken into account in deciding whether to exercise the discretion to order a split trial were identified in Turners & Growers Ltd v Zespri Group Ltd.5 I find more useful the approach taken in Haden v Attorney- General where Kós J identified that important questions to be addressed by a Court before granting an application under r 10.15 were as follows:6
(a)Will there be difficult demarcation questions between those issues to be addressed at the first trial and those left for the second?
(b)Will the separate question bring the proceedings to an end?
(c)What potential time saving does the separate question offer?
(d)How will appeals be dealt with?
(e)Are there any other practical considerations tending one way or the other?
3 Andrew Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR10.15.05] and [HR10.15.06].
4 Clear Communications Ltd v Telecom Corporation of New Zealand Ltd (1998) 12 PRNZ 333 (HC) at 335; Tilling v Whiteman [1980] AC 1 (HL) at 25; and Treaty Tribes Coalition, Te Runanga o Ngati Porou and Tainui Maori Trust Board v Urban Maori Authorities [1997] 1 NZLR 513 (PC).
5 Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV-2009-404-4392, 5 May 2010 at [11].
6 Haden v Attorney-General (2011) 22 PRNZ 1 (HC) at [50].
Submissions
The defendants’ submissions
[19] The first defendant, supported by all other defendants, submits the separate question is a discrete one that can be determined without affecting other aspects of the proceeding, or the second trial if it is necessary. It contends the resolution of the separate question will save a significant amount of cost and time. If discovery is needed it will be tailored discovery and small in volume and the hearing time to determine the separate question will be a fraction of what will be taken up with a full trial. The estimate provided was that the separate question could be determined in one and a half days. It is said, by comparison, a full trial will be lengthy and costly, involving five defendants who are spread across four different jurisdictions and time zones and may require translators as well as discovery in several different languages.
[20] The first defendant argues the Court’s decision on the separate question may be determinative of the proceeding. It considers that if the plaintiff fails to establish the amounts paid to Mr Häring were distributions for the purposes of s 52 of the Companies Act, the claim must inevitably fail (or at least will suffer a mortal blow). It argues the plaintiff could not then amend the claim to include a new basis for an unlawful means conspiracy or add any new causes of action because such claims would likely be time-barred.
[21] The defendants also note, as the case has not yet been set down for trial, there is no risk of losing trial dates already allocated. They submit the delay caused by any appeal that may result from a decision on the separate question is amply justified by the potential savings in time, cost and resources in avoiding a full trial.
[22] It is contemplated that the hearing of the separate question might proceed on a statement of the case under r 10.20 of the Rules but, in any event, the hearing is likely to require few witnesses, so the need to recall witnesses for the full trial is also unlikely.
The plaintiff ’s submissions
[23] The plaintiff submits the paucity of available hearing time in the present COVID–19 environment means the holding of two separate hearings will be an additional burden on the Court’s resources and would delay the final resolution of the proceeding.
[24] The plaintiff also submits there are inevitably time efficiencies to be gained from having all the issues heard at one trial so the time required to determine the proposed separate question is likely to be insignificant in the context of that trial as a whole.
[25] The plaintiff argues the resolution of the preliminary question will not bring an end to the litigation. This is because non-compliance with s 52 of the Companies Act is not the only basis upon which the payments made to Mr Häring are said to be unlawful. The plaintiff also pleads the payments were made in breach of s 137 of the Companies Act and a finding that this was the case does not depend on whether the payments come within the definition of distributions for the purposes of s 52. For that reason, it is said, regardless of any decision the Court makes on the separate question, most of the evidence, including whether the defendants conspired with fraudulent intent, will need to be traversed at the second trial and the trial is unlikely to be abbreviated to any significant extent.
[26] The plaintiff also says there is a real prospect of multiple appeals if a separate hearing is ordered. It says both the plaintiff and the defendants are likely to exercise their rights of appeal from a decision on the separate question.
My analysis
[27] Determining whether payments made to or for the benefit of a shareholder are distributions for the purposes of s 52 is not straightforward. The leading authorities
appear to be decisions of Heath J in Kitchener Nominees Limited v James Products Ltd,7 and Re DML Resources (in liq).8 In Re DML Resources (in liq) his Honour said:
[65] The use of the expressions “direct or indirect” and “to or for” the benefit of the shareholder [in the definition of “distribution” in s 2 of the Act] serve to confirm the necessary link between the negative impact on the net value of the company and the positive impact on the net value of the shareholder. They also emphasise that the inquiry is one of substance rather than form. An analysis based on the substance of the transaction lessens the likelihood of a shareholder using its influence, as an insider, to mask the true nature of the transaction to avoid compliance with the distribution rules.
[66] A distinction must be drawn between the transfer of wealth to a shareholder in its capacity as a shareholder and a bone fide transfer of wealth to that shareholder in some other capacity. Failure to draw that distinction would, in my view, undermine the purpose of the reforms made by enactment of the distribution provisions of the Act because those reforms were focused squarely on the protection of creditors or higher ranking shareholders …
[67] I am satisfied that the provisional view I expressed in Kitchener Nominees Ltd (that a distribution does not occur if the shareholder receives benefits from the company as part of a genuine arm’s length transaction for which valuable consideration is given) was correct. If a genuine loan contract has been entered into between a shareholder (as lender) and company (as borrower) repayment of that loan cannot be impugned unless challengeable, on liquidation, under other provisions of the Act … Similarly, if a shareholder is employed by the company and receives wages, provided the services rendered are genuine any payments made to the shareholder, qua employee, could not be impugned under the distribution provisions …
[28] The arguments the parties will present at trial are foreshadowed in submissions made to Grice J in support of an application to discharge a freezing order made earlier in this proceeding which were provided to me.9 I understand the defendants’ position is that any payments to or for the benefit of Mr Häring were not made to him qua shareholder but were in repayment of genuine loans advanced to Gold Star to fund its activities. However, the plaintiff’s analysis is the payments were not arms-length transactions or genuine loans entered into with Gold Star. It will submit there is no evidence the payments were made on any other basis other than Mr Häring’s capacity as a shareholder, and were unquestionably distributions for the purposes of s 52. When faced with these competing positions, Grice J recognised that the issue was one she could not resolve on the application before her, as it was early in the proceeding and
7 Kitchener Nominees Limited v James Products Ltd (2002) 9 NZCLC 262,882 (HC).
8 Re DML Resources Ltd (in liq) [2004] 3 NZLR 490 (HC).
9 Gold Star Invest Ltd v V [2019] NZHC 3504.
very fact-dependent.10 I agree with her assessment. The emphasis of the Court’s inquiry will be the substance of the transactions rather than their form and whether the payments conferred a net benefit upon Mr Häring.11
[29] Against this background, I have come to the view it is not appropriate to order a split trial. For the reasons that follow, I am not satisfied that making such an order will deliver the substantial advantages that the defendants consider it will.
[30] As was noted in Haden v Attorney-General, the issues in the two hearings should be discrete and, if they are not, and there is a significant overlap, separate determination is far less likely to be appropriate.12 Kós J noted that particular consideration must be given to the potential difficulties from issue estoppel and, in a multi-party proceeding (as this is), inefficiencies associated with parties with limited connection to the separate question being required to attend the first hearing, simply to protect their positions.13 These are important considerations in this case.
[31] I do not accept that the issues arising in relation to the proposed separate question are discrete. Upon the pleadings, issues that will need to be determined in relation to it include whether the payments were the proceeds of property acquired from Mazda by fraud, were subject to an institutional constructive trust for the benefit of Mazda, were paid as drawings to Mr Häring and rendered Gold Star insolvent. The same issues will arise in relation to the plaintiff’s alternative argument that the payments were unlawful in breach of the fifth defendant’s duty of care under s 137 of the Companies Act.
[32] Related to this, I also do not accept the determination of the separate question will bring an end to the proceeding. While this is not determinative of this application, it is an important consideration against granting a split trial. On the pleadings, Gold Star plainly advances an alternative argument that the payments were unlawful under s 137 of the Companies Act. I do not accept the defendants’ submission the allegation of breach of s 137 is entirely derivative upon the payments being distributions within
10 At [40] – [41].
11 Re DML Resources, above n 8, at [65] and [88].
12 Haden v Attorney-General, above n 6, at [50(a)].
13 At [50(a)].
the meaning of s 52. I do not consider that is a correct reading of the pleadings and counsel for the plaintiff, Mr Griggs, confirms that they were not intended to be read in that way. In any event, even if the statement of claim might be clearer, it is plainly capable of amendment.
[33] There is insufficient information before me to determine that ordering a split trial will make any substantial time and cost savings. In Haden, Kós J said the applicant should be able to demonstrate by reference to reasoned time estimates the potential time saved if the separate question is answered affirmatively and also address the counterfactual of what total time will be taken if the question is answered negatively.14 In this case, there are no reasoned time estimates before me. It was submitted the hearing of the separate question might take only one and a half days but there was no reasoned basis for that and, given my view of the issues that are likely to arise, I do not accept it is a reliable estimate. My sense is that as the proceeding is at an early stage and the parties have yet to even undertake discovery, this application is premature.
[34] Also relevant in this context is the potential delay to the final resolution of the proceeding and associated inefficiencies resulting from splitting the trial into two parts. There can be no doubt, in my view, that splitting the trial will substantially delay the final resolution of this litigation. What is in effect proposed, is that the parties will go through interlocutory steps, such as discovery, to the extent required only in relation to the separate question prior to the first hearing. They may be waiting for a considerable time for that hearing. While the defendants hope that will bring an end to the litigation, I do not accept that is likely the case. The parties will then be faced with a further round of discovery, and potentially other interlocutory matters, before a further significant wait for a second trial which may re-traverse at least some of the matters that arose at the first trial. The potential for delay is obvious, significant and will be inefficient and costly in my view.
[35] I also agree with the submission of Mr Griggs that multiple appeals are likely to occur and that they are inefficient. While the issue that has arisen concerning s 52
14 Haden v Attorney-General, above n 6, at [50(c)].
is not novel, the leading authorities are two decisions of a single judge in this Court and the issue is plainly suitable for consideration at an appellate level. Given the sums at stake, it would be expected the parties would look to exercise their appeal options. Further, it appears to me the issue of the application of s 52 is an important one, that it is better resolved in the context of a full hearing with all the relevant evidence, and without the risk the parties will inadvertently fail to put all the relevant evidence before the Court.
Result
[36]The application is dismissed.
[37] As the plaintiff, at least formally, took no position on the application, there shall be no order as to costs.
[38] I direct that this case is to be set down before an Associate Judge on a date that suits counsel for a case management telephone conference. Counsel should file memoranda at least three working days prior to the conference with proposed timetable directions to advance the case to trial.
O G Paulsen Associate Judge
Solicitors:
Mahony Horner Lawyers, Wellington Wilson Harle, Auckland
Robertsons, Auckland
Anderson Lloyd, Christchurch Ford Sumner Lawyers, Wellington Knapps Lawyers, Nelson
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