Great Northern Land Company Limited v Richardson
[2012] NZHC 2342
•12 September 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2011-404-001785 [2012] NZHC 2342
BETWEEN GREAT NORTHERN LAND COMPANY LIMITED
Plaintiff
ANDKIRK RICHARDSON Defendant
Hearing: 21 March 2012
Appearances: A Commons for plaintiff
J P Nolen for defendant
Judgment: 12 September 2012
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 12 September 2012 at 11.30am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
M Hornabrook, Hornabrook Macdonald Lawyers, P O Box 91845, Auckland
J P Nolen, Lowndes Associates, P O Box 7311, Auckland 1141
Counsel:
A Commons, P O Box 1804, Shortland Street, Auckland
GREAT NORTHERN LAND COMPANY LIMITED V KIRK RICHARDSON HC AK CIV 2011-404-001785 [12 September 2012]
[1] This application for further answers to interrogatories arises out of two agreements for the sale and purchase of land in a development known as Port Marsden Industrial Park, Ruakaka.
[2] Commercial Capital & Equities Limited (Commercial Capital), a shelf company of which the defendant Mr Richardson was sole director, agreed to purchase two lots in the development, intending to nominate another company (to be formed specially for the purpose) to complete the purchase. Commercial Capital did not complete the purchase, or proceed with nomination of the other company, and has since gone into liquidation.
[3] The vendor under the agreements was Great Northern Land Company Limited (Great Northern). Great Northern commenced this proceeding, suing Mr Richardson for breach of his duties as director of Commercial Capital, contending that he had not arranged the finance needed to meet Commercial Capital’s obligations under the agreement. After commencing this proceeding, Great Northern sold its interest in the development, including the two lots and its rights in respect of the cancelled agreements, to the present plaintiff (GNLC). GNLC has been substituted for Great Northern as plaintiff.
[4] GNCL issued interrogatories seeking information about funding arrangements. It was dissatisfied with Mr Richardson’s response, and has applied for orders that Mr Richardson provide more specific answers.
[5] Mr Richardson has provided two further responses since the application was filed, and opposes the application on the grounds that the orders sought are oppressive, and also unnecessary as the interrogatories have been answered sufficiently.
The context
[6] On 23 February 2007 Commercial Capital entered into agreements to buy lots
40 and 41 in the Port Marsden Industrial Park development for $342,702 (plus GST)
and $346,178 (plus GST) respectively. The agreements were conditional on Commercial Capital notifying Great Northern within 10 working days that it was satisfied with the properties and the agreements in all respects, and on Great Northern obtaining specified consents for the development, within six months (subject to a power to extend for up to six months if the necessary applications had been lodged). Settlement was to take place seven working days after a search copy of the certificates of title became available.
[7] Commercial Capital confirmed its satisfaction with the properties and the agreements on 8 March 2007. Great Northern notified Commercial Capital that the conditions as to local authority consents were satisfied on 5 October 2007 (having earlier exercised the right to extend that date). Commercial Capital paid deposits due under the agreements.
[8] Certificates of title for the two lots were issued on 23 September 2009. Commercial Capital failed to settle on the due date of 2 October 2009. After Commercial Capital failed to comply with a settlement notice, Great Northern obtained an order for specific performance. Commercial Capital failed to comply with that order. It was put into liquidation on 13 July 2010. Subsequently, Great Northern obtained discharge of the order for specific performance and cancelled the agreements.
[9] GNLC pleads that Mr Richardson has breached duties owed to Commercial
Capital under both s 135 and s 136 of the Companies Act 1993 (the Act):
(a) By causing or allowing the business of Commercial Capital (a company with no assets or means to settle the agreement) to be carried on in a manner likely to create a substantial risk of loss to a creditor (initially Great Northern but now GNLC) by entering into the agreements without having finance arranged to enable it to complete the settlement (s 135); and
(b)By agreeing to Commercial Capital incurring an obligation under the agreements (to pay the purchase price totalling $723,326) without
having reasonable grounds to believe that it would be able to meet that obligation when required to do so (s 136).
[10] GNLC seeks an order under s 301 of the Act for payment to it of the loss it has suffered as a consequence of Mr Richardson’s conduct. It claims loss in value in the two properties (261,945.91) together with interest and costs.
[11] Mr Richardson’s response to the claim is:
(a) He and a business partner (Mr Graeme Sievwright) decided in late
2006 to purchase the two lots through a special purpose company to be established. They negotiated terms with Great Northern’s agent. As the special purpose company had not been set up, they agreed that Commercial Capital would enter into the agreements as purchaser, with provision for it to nominate the special purpose company when established (a company named Northland Industrial Land Ltd was incorporated on 29 March 2007, with Mr Richardson and Mr Sievwright as directors and shareholders, as the intended nominee). As the subdivision was only in the early stages of development, it was known that settlement would be a considerable time later.
(b) At the time of entering into the agreements in February 2007 he and
Mr Sievwright were aware that first tier lenders were lending up to
80% of the purchase price of property, and they agreed that they would jointly contribute the 10% deposit and the balance of the purchase price up to an additional 15% of the purchase price (thus allowing for the possibility that the first tier funding would only be
75%).
(c) In addition, at the same time as entering into the agreements, Commercial Capital entered into an agreement with Merlot Homes Ltd (Merlot) under which Merlot agreed to complete the purchase of the two lots in the event that Commercial Capital was unable to do so.
(d) Merlot went into liquidation in mid 2008.
(e) When he attempted to obtain finance from Westpac Bank in September 2009, when the titles became available and the agreements were due to settle, the global financial crisis had intervened and Commercial Capital could not obtain the necessary finance as banks were not lending more than 50% of valuation.
[12] The central issues in the case are:
(a) Did Mr Richardson, as director of Commercial Capital, cause the business of Commercial Capital to be carried on in a manner likely to create a substantial risk of serious loss to Great Northern, a creditor, by causing Commercial Capital to enter into the agreements when it had no assets or finance arranged? (Would an ordinary prudent director with knowledge of Commercial Capital’s circumstances have foreseen the possibility that this could cause serious loss to Great Northern/GNLC?) (the s 135 claim); and
(a) Did Mr Richardson believe, on reasonable grounds, at the time that Commercial Capital entered into the agreements that it would be able to perform its obligations under them (the s 136 claim)?
The interrogatories being sought
[13] On 5 October 2011, GNLC issued a notice requiring Mr Richardson to answer interrogatories. The interrogatories were directed towards establishing:
(a) detail of the steps that were taken, if any, to have funding in place to enable Commercial Capital or the intended nominee to settle the agreements;
(b)what previous experience Mr Richardson or Mr Sievwright had in relation to the funding of property acquisitions; and
(c) the financial position of Mr Richardson and Mr Sievwright (and related entities), and their ability to meet their contributions towards the purchase price and to fund the finance needed from the first tier lender.
[14] Mr Richardson responded to the notice, stating in general terms the understanding that he and Mr Sievwright had about the availability of funding, and the agreement they had about contributions prior to or at the time of entry into the agreements (as summarised in [11] above). He resisted answering the questions relating to previous experience in funding property acquisitions, or financial circumstances, on the grounds that those matters were not relevant to the issues in the case.
[15] After some correspondence between the parties, Mr Richardson agreed to expand upon his answers, without resiling from his general position that the interrogatories had been answered sufficiently by his first response. Before he did so, GNLC filed the present application. Mr Richardson subsequently filed and served a second response, expanding on his first. GNLC still did not accept that he had given a sufficient answer. At that point, Mr Richardson filed a notice of opposition to the application on the grounds that all relevant interrogatories had been answered sufficiently, and that an order was unnecessary as the further information that GNLC was seeking comprised matters of evidence which would addressed in due course, or it was irrelevant to issues in the case.
[16] Mr Richardson has filed a further verified response since then, clarifying one of his responses.
[17] In written submissions filed ahead of the hearing, counsel for Mr Richardson raised a further ground of opposition, namely that the interrogatories are oppressive having regard to their number, the efforts that Mr Richardson has made to respond to them, the lack of relevance of remaining questions, and the fact that they will be addressed in evidence in due course.
[18] The issues that arise on the application are whether the interrogatories still being sought are:
(a) oppressive; or
(b) sufficiently answered already; and
(c) relevant.
Further affidavit
[19] At the start of the hearing, counsel for GNLC sought leave to file a further affidavit producing the following additional documents from Mr Richardson’s discovery, apart from one which appears to have been obtained from Westpac:
(a) Email correspondence between Westpac and Mr Sievwright on
18 September 2009 concerning discussions over funding, and a
Westpac requirement for a valuation;
(b)A valuation dated 25 September 2009, that appears to have followed that email exchange, and which contains a mortgage recommendation of approximately 50% of the assessed values, and subject to an independent determination of the borrower’s ability to service any proposed loan advance; and
(c) The agreement to underwrite between Merlot and Commercial
Capital, dated 16 February 2007.
[20] Counsel for GNLC said that the evidence was being introduced to address the additional ground of opposition introduced in the submissions of counsel for Mr Richardson that the request for further answers was oppressive. He said that the email correspondence and valuation were to show the very limited discovery that is available with regard to approaches to funders and to support GNLC’s argument that it should be provided the information now, so that it has an opportunity to investigate
and establish grounds for cross-examination rather than wait until delivery of briefs of evidence just before trial. The underwrite agreement was produced because it was referred to in the submissions for Mr Richardson.
[21] Although there is an issue about relevance of steps taken after entry into the agreements (to which I will return), I do not see that Mr Richardson can be prejudiced by the late filing: he has said that there are no other approaches, and these documents have been borne out of his discovery (although the email contains one further communication from that disclosed in Mr Richardson’s affidavit). GNLC has leave to file and refer to the affidavit.
Legal principles
[22] The Court of Appeal has recently summarised the principles relating to the nature, purpose and permissible scope of interrogatories in Todd Pohokura Ltd v Shell Exploration NZ Ltd:[1]
[1] Todd Pohokura Ltd v Shell Exploration NZ Ltd [2009] NZCA 561.
[14] It is appropriate to summarise briefly the nature, purpose and permissible scope of interrogatories. An interrogatory is a question asked before trial for the purpose of eliciting an answer on oath or affirmation which is admissible in evidence at trial. Like all questions, it must be directed towards advancing one side’s case or damaging the other’s case. It must accordingly be relevant to an issue raised on the pleadings or a fact in dispute for determination.
[15] An interrogatory must also, like a question in cross-examination, be precise and unequivocal, and amenable to a direct and meaningful answer from information within the knowledge of or reasonably available to the person required to answer. It must not place unnecessary or burdensome obligations on the interrogated party, or be prolix. And its purpose must not be to search or probe on the speculative basis that an answer may prove relevant (colloquially known as fishing). A question which offends these elements will fall within the general category of oppressiveness.
[16] An interrogatory is an exception to the settled manner of adducing evidence and in particular to a defendant’s right not to call evidence at trial. Accordingly the Court must be satisfied that the interrogatory is necessary where an application to issue interrogatories is opposed: r 8.5 High Court Rules. A material consideration is whether briefs of evidence will be given by the party to be interrogated. Moreover, an interrogatory is not to be confused with a request for further particulars.
Have the interrogatories been answered sufficiently?
[23] Mr Richardson acknowledges that the steps that he and Mr Sievwright took, leading to the decision to enter into the agreements, provide material information. However, he says answered questions relating to that in the answers he has provided already: referring to their understanding of the availability of finance at that time (up to 80%) and the agreement between himself and Mr Sievwright to fund the balance. He referred to their payment of the deposit (10% of the purchase price), and asserts that he was in a position to meet the balance of his commitment, and his belief that Mr Sievwright was able to meet his part.
[24] I accept the submission of counsel for GNLC that this is not a sufficient answer. Mr Richardson has not said what his understanding of up to 80% of funding is based on: whether it is merely anecdotal or from some specific enquiry, and whether he was aware of any qualifications on funding at that level. He has not given any information as to the source of his contribution to the purchase price, nor has he stated what factual basis he has for his belief about Mr Sievwright’s ability to fund his share. Whether there was a reasonable factual basis for anticipating finance of 75-80% of the purchase price is material both to the objective assessment to be undertaken s 135, and the reasonableness of his belief (under s 136). This takes me to the next issue, namely whether the information still being sought is relevant.
Is the information still being sought relevant?
[25] There are two aspects to this ground of opposition. The first is to establish exactly what Mr Richardson did or did not do. As already mentioned, there is no issue over this being relevant as at the date of entry into the agreement, but there is an issue whether questions relating to the period between entry into the agreement and settlement are relevant.
[26] The second is whether Mr Richardson’s or Mr Sievwright’s previous experience in property, or their respective financial positions, can be relevant and, if so, whether that can be so after the point of entry into the agreement.
[27] Several of the interrogatories are directed towards steps taken by Mr Richardson/Commercial Capital, in two periods after entry into the agreements. The questions as to Mr Richardson’s and Mr Sievwright’s financial positions sought to establish both their positions at the date of entry into the agreements, at the dates that the Commercial Capital advised satisfaction of conditions, at the date of liquidation of Merlot, the dates that advice of issue of certificates of title and settlement date was given, and at the date of settlement.
[28] Counsel for GNLC conceded that this information could not be relevant to the claim under s 136 (which requires an assessment as at the time of entering into the agreements), but submitted that the information was relevant to the reckless trading claim (s 135), because that claim was not limited to time of entry into the agreements, but could also lie in respect of conduct up to the date of settlement.
[29] This claim, arising out of a single transaction, is different from the usual claim arising under s 135 where the complaint is that a director continues to trade in the face of concerns about solvency. Counsel refer to two previous authorities where the Court had considered claims in respect of a single transaction: Re Waits Investments Ltd (In Liquidation) and Goatlands Limited (In Liquidation) v Parsons.[2]
Re Wait concerned a claim against directors for entry into an unconditional
agreement, without having arranged finance and having no other funds available to complete the purchase. The directors and shareholders were not in a position to fund the purchase. The High Court found that no reasonable director could have permitted the company to have entered into the transactions (a substantial purchase) on an unconditional basis without having finance arranged. It considered that there was a real prospect that entry into the transaction would cause serious loss to creditors. However, the case was different to the present in that settlement was due within a month.
[2] Re Waits Investments Ltd (In Liquidation) [1997] 3 NZLR 96 (HC); and Goatlands Limited (In
Liquidation) v Parsons Hamilton HC CIV-2005-419-1643, 14 December 2006.
[30] In Goatlands the company again entered into an agreement to purchase land, which it was ultimately unable to settle. However, the issue in that case arose not in
respect of a claim by the vendor for a loss after selling a property, but from the fact
that the company claimed a substantial GST refund after the agreement became unconditional, and was unable to repay that refund when the company was unable to settle and the vendor cancelled. In that case, there was again a lengthy period between entry into the agreement and settlement. The Court found that the directors’ decision to use the deposit, in anticipation of sales of other property which did not eventuate, carried with it a substantial risk that it would be unable to sell properties, not only to allow it to complete its purchase, but also to extinguish the GST debt. The Court found that the downturn in the market which contributed to the difficulties in selling the company’s properties was not an unforeseeable event, and the spending of the GST refund, coupled with the absence of any bridging finance if the sales of its own properties did not eventuate, amounted to carrying on of the company’s business in a way that placed the Commissioner of Inland Revenue at substantial and illegitimate risk of serious loss. The Court also found that the claim under s 136 was established on the grounds that there was sufficient uncertainty as to the likelihood of one of the properties selling to render unreasonable any belief that the directors had as to its ability to settle the purchase on due date. That finding appears to relate to the entry into the agreement, rather than the expenditure of the GST refund.
[31] Counsel for GNLC submitted that his client had an arguable claim that Commercial Capital had an obligation to put funds in place to settle the agreement (given that it did not have assets of its own), and after the downturn in the market, chose to walk away from the agreements rather than properly explore the prospects of funding. He submitted that this was a question for trial, rather than any determination of this application, but submitted that it justified the interrogatories aimed at establishing whether or not any steps were taken over the relevant periods, apart from the acknowledged approach to Westpac shortly before settlement. Counsel argued that the interrogatories relating to the financial position (net assets and income) were similarly relevant to this argument, namely whether Mr Richardson and Mr Sievwright were in a position to contribute further funding, and to support that funding. If so, it gave GNLC a potential argument that Mr Richardson chose not to have Commercial Capital settle the agreement.
[32] It is not appropriate, on this application, for me to express a view on the possible outcome to the proposed argument for GNLC under s 135. However, I
accept that the answers to these interrogatories may allow GNLC to advance these arguments, and are therefore relevant. I note that the argument is not readily apparent from the existing pleadings, but can be developed from them. It is a matter for Mr Richardson whether or not to seek further particulars. For the purpose of the present application, I accept that the present pleading, although wide, is sufficient to raise the issue on which the interrogatories are based.
Are the further interrogatories oppressive?
[33] Counsel for Mr Richardson submitted that this was a relatively straightforward case, and did not warrant the level of detail being sought by GNLC. He referred to the number of questions (some 194 subparagraphs), and the repetitious nature of many of them. He contended that the detail being sought either was not available, or placed a burden that was out of proportion to any benefit to be gained by GNLC, as anything relevant would be addressed in Mr Richardson’s brief.
[34] I am not persuaded that it would be oppressive to direct further answers. As it is a “single transaction” case, and Mr Richardson has been involved in all aspects, it should not be unduly burdensome for him to describe any further arrangements that were made to obtain funding. It will be a relatively simple matter to respond if there were no such arrangements. On the other hand, the information is important, and I accept that GNLC should not have to wait until delivery of briefs, thereby reducing the amount of time available investigate any steps that Mr Richardson says were taken, ahead of trial.
[35] I also accept that the answers may well assist the parties in endeavours to settle this dispute and avoid incurring the costs of trial.
[36] Although, on first look, the interrogatories are somewhat repetitive, I accept that this is a consequence of GNLC’s lack of access to information with which to frame the questions. Nevertheless, I take the view that the questions could be reframed, far more specifically, with focus on the issues as they emerged in the hearing, and that that may reduce the task of answering.
Decision
[37] GNLC’s application is granted, subject to the requirement that it reframe its questions to identify those that relate to the claims based on entry into the agreement (whether based on s 135 or s 136), and those said to be based entirely on events after entry into the agreement (under s 135).
[38] I direct that the following steps be taken:
(a) GNLC is to submit a revised list of interrogatories to Mr Richardson, reflecting the findings in this judgment, within 10 working days;
(b)Counsel are to confer on that draft list. If there is any issue as to whether any question properly reflects a finding, counsel are to confer and file a joint memorandum identifying the difference and posing the question for determination by the Court, within a further 10 working days. The question will be determined on the papers unless counsel seek an opportunity to be heard;
(c) If counsel are agreed on the questions within five working days of the revised list being provided, Mr Richardson is to file and serve verified answers to the further interrogatories within a further 10 working days.
[39] As GNLC has succeeded in this application, it is entitled to its costs on a scale 2B basis, together with disbursements as fixed by the Registrar.
[40] The Registrar is to allocate a further case management conference for this proceeding at the expiry of the timetable set above.
Associate Judge Abbott
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