Green Gecko Limited v Cox
[2013] NZHC 1951
•6 August 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-0009 [2013] NZHC 1951
BETWEEN GREEN GECKO LIMITED Plaintiff AND
JOHN ANDREW REGINALD COX First Defendant
DENIS JOHN FETHERSTON Second Defendant
ANNA-MAREE FETHERSTON Third Defendant
RISCOVERI LIMITED Fourth Defendant
Hearing: 26 July 2013 Appearances:
D Wu for Plaintiff
D J Fetherston, Second Defendant, in personJudgment:
6 August 2013
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 6 August 2013 at 11:00am
pursuant to Rule 11.5 of the High Court Rules.
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Registrar/Deputy Registrar
Solicitors:
D B Law, Auckland, for Plaintiff
Copy for:
D Wu, Auckland, for Plaintiff
D J Fetherston, Auckland, Second Defendant
GREEN GECKO LIMITED v COX [2013] NZHC 1951 [6 August 2013]
[1] Green Gecko Ltd, the plaintiff, applies under s 76(2) of the Insolvency Act
2006 to continue this proceeding against Mr Fetherston, the second defendant. Mr Fetherston is on his second bankruptcy. He was initially adjudicated bankrupt on
30 October 2008 and was discharged on 30 October 2011. This proceeding was started on 20 December 2012. Mr Fetherston was adjudicated bankrupt a second time on 24 January 2013. Because he has been adjudicated bankrupt after this proceeding started, this proceeding has been halted under s 76 of the Insolvency Act
2006:
76 Effect of adjudication on Court proceedings
(1) On adjudication, all proceedings to recover any debt provable in the bankruptcy are halted.
(2) However, on the application by any creditor or other person interested in the bankruptcy, the court may allow proceedings that had already begun before the date of adjudication to continue on the terms and conditions that the court thinks appropriate.
[2] One of the reasons Green Gecko Ltd gives for wanting to continue the proceeding is that it wants to establish that if and when Mr Fetherston is discharged from his second bankruptcy, he will not be discharged from any liability to Green Gecko Ltd. Green Gecko Ltd wants to rely on the exception under s 304(2)(a) of the Insolvency Act 2006 that a bankrupt is not released from any debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party.
[3] Mr Fetherston opposes.
The claims made by Green Gecko Ltd
[4] Mr Gordon Rendell is a retired farmer. He and a family trust are the shareholders of Green Gecko Ltd. He is Green Gecko Ltd’s sole director. Green Gecko Ltd is the corporate entity through which the family trust has made investments.
[5] This case concerns shares it bought in the fourth defendant, Riscoveri Ltd. In
November 2009 Green Gecko Ltd bought 200,000 shares in Riscoveri Ltd, paying
$200,000. In March 2010 it bought 500,000 shares, paying $500,000. Riscoveri Ltd is said to be a company established to develop and exploit software based on what is termed the HASIEMAN software system. Green Gecko Ltd bought the shares from the trustees of the RMS Property Trust. The first, second and third defendants were the trustees of that trust. Green Gecko Ltd’s case is that its investments in Riscoveri Ltd have proved fruitless.
[6] Its statement of claim seeks relief under these causes of action:
(i) 2009 share purchase, void under s 37 and s 37A Securities Act
1978;
(ii) 2010 share purchase, void under s 37 and s 37A Securities Act
1978;
(iii) 2009 purchase, breach of term implied by s 6A Securities Act
1978;
(iv) 2010 purchase, breach of term implied by s 6A Securities Act
1978;
(v)Civil liability under s 55 of the Securities Act 1978 for 2009 purchase for untrue advertisement;
(vi)Claim for Quistclose resulting trust for funds received on both purchases;
(vii) Contractual misrepresentation for 2009 purchase; (viii) Contractual misrepresentation for 2010 purchase;
(ix) Breach of s 149 of the Companies Act 1993 by first and second defendants;
(x) Breach of ss 9, 10 and 13 of the Fair Trading Act 1986 for the
2009 purchase;
(xi)
Breach of ss 9, 10 and 13 of the Fair Trading Act 1986 for the
2010 share purchase;
(xii)
Claim for relief under s 174 of the Companies Act 1993.
[7]
All the cause
s of action claim relief against Mr Fetherston.
[8]
Mr Fethersto
n was one of the trustees of the RMS Property Trust, which had
been allotted shares by Riscoveri Ltd and sold some of its shares to Green Gecko Ltd. Mr Fetherston was also styled the Chief Technical Officer of Riscoveri Ltd. Green Gecko Ltd contends that Mr Fetherston’s role went further than that: he was a de facto director of Riscoveri Ltd.
[9] Mr Cox, the first defendant, is a solicitor who acted for Riscoveri Ltd but was also for a period director of that company and also a trustee of the RMS Property Trust. The third defendant, Mrs Fetherston, is married to Mr Fetherston and is also a trustee of the RMS Property Trust.
[10] Green Gecko Ltd applied for summary judgment. The summary judgment application has not yet been heard. Green Gecko Ltd filed evidence in support of its summary judgment application. That evidence has provided useful background information for the present application.
The approach under s 76
[11] Decisions under s 76 of the Insolvency Act seeking permission to continue a proceeding invariably cite the decision of Paterson J in Saimei v McKay.1 That was a decision under s 32 of the Insolvency Act 1967 but what Paterson J said there
remains equally applicable under the Insolvency Act 2006. He said:2
1 Saimei v McKay (1998) 6 NZBLC 102,611 (HC).
2 At 102,614.
While not necessarily an exhaustive list, the following principles are applicable:
(a) The court has a discretion to do what is right and fair according to the circumstances of the case;
(b) When a person is adjudicated bankrupt, his assets are to be administered in an orderly fashion for the benefit of all his creditors and a particular creditor should not be able to obtain an advantage by bringing proceedings against him. There should thus be no prejudice to other creditors or to the ordinary administration of the bankruptcy if the action were to proceed.
(c) The claim should not be clearly unsustainable but the court will not investigate the merits of the claim.
(d) The claim should normally be of a type which is more suitably determined by action rather than by lodging a proof of debt in the bankruptcy. If the claim could just as easily be dealt with in the bankruptcy, leave is not likely to be granted.
(e) Leave is more likely to be granted where there is an insurance company standing behind the defendant to pay any judgment debts the plaintiff might obtain, because if it is successful, such an action is unlikely to prejudice the creditors of the defendant.
(f) It may be desirable to impose a condition that the plaintiff will not enforce any judgment against the defendant without the leave of the court to ensure that the Official Assignee retains ultimate control.
(g) Mere delay itself in applying for leave will not prevent leave being granted. Leave is not to be withheld simply and solely as a punishment.
(h) Leave may be granted after the expiry of the relevant period of limitation to continue an action commenced within the limitation period, without the leave of the court.
There is no direct reference in the principles extracted from the authorities which suggest that leave should not be granted if there is no prospect of the applicant benefiting financially if leave were to be granted. However, in my view, this is also a relevant matter when considering what is right and fair according to the circumstances of the case.
[12] For completeness, Mr Wu also cited De Alwis v Luvit Foods International
Ltd, Navix Line (NZ) Ltd v Milo, and F E Investments Ltd v Klisser.3 These decisions helpfully show various applications of the principles set out by Paterson J.
3 De Alwis v Luvit Foods International Ltd (2007) 10 NZCLC 264,304 (HC); Navix Line (NZ) Ltd v Milo HC Auckland CP281-SD99, 5 December 2002; F E Investments Ltd v Klisser [2010] 2
NZLR 217 (HC).
[13] For my part, I add this. It is helpful to bear in mind the purpose of the halt on proceedings under s 76 of the Insolvency Act. On an adjudication in a bankruptcy, the property of the bankrupt vests in the Official Assignee, who is given a wide range of powers to realise the assets of the bankrupt and to distribute them to the creditors according to the provisions of the Insolvency Act. The Insolvency Act contains provisions for the lodging of claims, their consideration and acceptance or rejection by the Official Assignee, and for decisions of the Official Assignee in turn to be subject to challenge, not only by the creditor, but also by the bankrupt. Given these provisions for creditors to make claims in the bankruptcy and for the orderly administration of the estate of the bankrupt by the Official Assignee, the continuation of existing proceedings during the bankruptcy may be disruptive. On that basis, any creditor seeking permission to continue a proceeding starts with an initial onus to satisfy the court that there is good reason for allowing the proceeding, notwithstanding that claims ought ordinarily to be determined under the provisions of the Insolvency Act.
[14] It is also helpful to bear in mind the effect of s 76. On adjudication, a proceeding against a bankrupt is halted. That halt is subject to the power under s 76(2) to allow the proceeding to continue. Mr Fetherston suggested in his submissions that he had been removed as a party to the proceeding and he treated the present application as if it were an application to start a fresh proceeding against him. With respect, that shows a misunderstanding. Mr Fetherston is a party to this proceeding, even though the claims against him have been halted. What has to be decided is whether the proceeding should be allowed to continue against him, notwithstanding his bankruptcy.
Merits of Green Gecko Ltd’s claims
[15] Mr Fetherston submitted that Green Gecko Ltd had no claim against him. Green Gecko Ltd had not suffered any loss. Indeed, although there was no evidence to support him, Mr Fetherston contended that Riscoveri Ltd was on the verge of success and the shares in the company would be extremely valuable. I note that that submission is consistent with Mr Rendell’s evidence that Mr Fetherston made representations along those lines to induce the purchases of the shares.
Mr Fetherston also coupled that submission with another submission – that if Green Gecko Ltd were to continue with its claim, it could jeopardise the success of Riscoveri Ltd. He gave no evidence to support that submission and I attach no weight to it.
[16] Mr Fetherston contended that at relevant times he was a bankrupt, and his role was no more than Chief Technical Officer of Riscoveri Ltd. The Official Assignee had given him clearance to work as Chief Technical Officer, and therefore Green Gecko Ltd’s claim that he was a de facto director was misconceived. He also contended that the various claims based on the provisions of the Securities Act were misconceived. Riscoveri Ltd had not issued shares directly to Green Gecko Ltd. Instead, Green Gecko Ltd bought the shares from RMS Property Trust, and that transaction was outside the scope of the Securities Act. Green Gecko Ltd was said to be out of time for a claim under s 37A of the Securities Act. Green Gecko Ltd was a habitual investor and therefore the provisions requiring a prospectus did not apply.
[17] In Saimei v McKay Paterson J indicated that the court was not required to investigate the merits of the claim so long as the court was satisfied that the claim was not clearly unsustainable. Green Gecko Ltd’s evidence, especially the affidavit Mr Rendell swore in support of the summary judgment application, shows that Mr Fetherston was very much the man behind Riscoveri Ltd and that he claimed and exercised control of the affairs of the company. With hindsight, there was good reason for not accepting much of the information and assurances that Mr Fetherston had given. For this application the claims based on misrepresentation and breach of the Fair Trading Act seemed to be plainly arguable. Neither side presented a thorough analysis of the provisions of the Securities Act and for this application I do not consider that it was required. I doubt that the provisions on which Green Gecko Ltd is relying can be as easily side-stepped as Mr Fetherston would have me accept. Without a full investigation of the merits of the claims against Mr Fetherston, I find that they are not clearly unsustainable. I also find that in light of Mr Rendell’s evidence a potential outcome of the proceeding is that any liability proved against Mr Fetherston may have arisen from fraud on his part. Green Gecko Ltd’s wish to prove fraud against Mr Fetherston cannot be dismissed as farfetched.
Other factors
[18] I find that there are good reasons for allowing the proceeding to continue against Mr Fetherston, notwithstanding his bankruptcy.
[19] The first arises from Green Gecko Ltd’s wish to establish that Mr Fetherston was fraudulent under s 304(2)(a) of the Insolvency Act so that on discharge from bankruptcy he will not be released from the debt. While it might be possible to wait for Mr Fetherston’s discharge from bankruptcy to decide whether he has been fraudulent within s 304(2)(a), it is obviously desirable that that matter be decided early, rather than later. It is especially desirable as the case involves contests on disputed questions of fact, particularly as to oral statements promoting the investments and also as to the management of Riscoveri Ltd.
[20] While the provisions of the Insolvency Act allow for the lodging of claims, their consideration and acceptance or rejection, that procedure does not readily lend itself to an enquiry whether Mr Fetherston was fraudulent in incurring any liability to Green Gecko Ltd. The Official Assignee is not required to make decisions as to the application of s 304. Even if he could, the procedure for challenging any decision by him, by originating application to this court, is not a convenient vehicle for deciding contested questions as to alleged fraud. On the other hand, an ordinary proceeding in this court is a more appropriate procedure in which to decide whether Mr Fetherston was a party to fraud.
[21] A second factor is that this proceeding will continue against the other defendants. Mr Fetherston is a central figure in this proceeding, not only in relation to the claims against him, but also in relation to the claims made against the other defendants. There will be overlapping issues of fact and law in the claims against all four defendants.
[22] In the case of Mr Fetherston, the court will also be required to establish whether any liability on the part of Mr Fetherston involved fraud, something which may not be required for the other defendants, but that factor, peculiar to Mr Fetherston, does not mean that there are not a large range of overlapping issues
Ltd’s claims against Mr Fetherston to be heard at the same time as its claims against
the first, third and fourth defendants.
[23] Against that, Mr Fetherston contended that he was at a disadvantage. As a bankrupt, he could not afford legal representation. It was unfair that this proceeding should be run against him while he is bankrupt. That consideration is not strong enough to persuade me not to allow the proceeding to continue even if Mr Fetherston is unlikely to be able to afford legal representation. Mr Fetherston is likely to be at the same disadvantage if any enquiry whether his conduct was fraudulent were deferred until after his discharge. The considerations favouring an early determination of that question and at the same time as the claims against the other defendants outweigh any disadvantage to Mr Fetherston from the claims being heard during his bankruptcy.
Outcome
[24] Overall, I am satisfied that this is an appropriate case to allow the proceeding to continue. Permission to continue the proceeding needs to be subject to conditions:
(a) Any judgment Green Gecko Ltd may obtain will not be enforceable against Mr Fetherston before his discharge from bankruptcy, without leave of the court. If liability is established, Green Gecko Ltd will be able to claim as a creditor in Mr Fetherston’s bankruptcy.
(b)After Mr Fetherston has been discharged from bankruptcy, any judgment will only be enforceable against Mr Fetherston if the court has found that Mr Fetherston was a party to fraud for that liability under s 304(2)(a).
(c) Green Gecko Ltd will need to amend its claim so as to provide a properly particularised pleading setting out in which respects and for which causes of action it contends that Mr Fetherston was fraudulent.
the application of s 304(2)(a) of the Insolvency Act.
(d)As I do not regard alleging and proving fraud against Mr Fetherston as appropriate for a summary judgment application, Green Gecko Ltd is no longer to continue with its summary judgment application against Mr Fetherston.
[25] I make these orders:
(a) I allow Green Gecko Ltd to continue this proceeding against Mr Fetherston during his bankruptcy, subject to the conditions in [24] above.
(b)I direct Green Gecko Ltd to file and serve an amended statement of claim within 20 working days. For the causes of action in which Green Gecko Ltd alleges that Mr Fetherston was fraudulent, Green Gecko Ltd is to provide fully particularised pleadings of fraud against Mr Fetherston and to seek relief as to the application of s 304(2)(a) of the Insolvency Act 2006.
(c) The Registrar is to allocate a case management conference involving all parties for further directions to be given in respect of both the summary judgment application against the other parties and in respect of the case generally.
[26] Green Gecko Ltd applied for costs on the application under s 76. As it has succeeded in its application it is entitled to an order fixing costs. However, the order for costs shall not be enforceable by execution during Mr Fetherston’s bankruptcy without leave of the court. Green Gecko Ltd may claim for the order for costs in the bankruptcy.
[27] I also find that the liability for costs is not a liability incurred fraudulently under s 304(2)(a). Although he was unsuccessful, Mr Fetherston was entitled to be
heard in opposition to the application under s 76(2). The liability for costs arises from the application of the High Court Rules as to costs, especially the principle that costs follow the event.4 The liability is independent of any question of fraud and I do not find any fraud on the part of Mr Fetherston in his opposition to the application.
[28] I fix costs in the sum of $6,268.50 plus disbursements of $200.00, a total of
$6,468.50. These costs have been calculated on a 2B basis.
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R M Bell
Associate Judge
4 High Court Rules, r 14.2(a).
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