Green Meadow Holdings APS v Sargison

[2019] NZHC 562

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-3098

[2019] NZHC 562

UNDER

the Building Societies Act 1965

IN THE MATTER OF

the dissolution of KIWI DEPOSIT

BUILDING SOCIETY (In dissolution)

BETWEEN

GREEN MEADOW HOLDINGS APS

First Plaintiff

LILAC POND HOLDINGS APS
Second Plaintiff

AND

PAUL GRAHAM SARGISON and SIMON DALTON

Defendants

Hearing:	25 March 2019
Appearances:	Noel Ingram QC and Duncan McGill for the Plaintiffs Sean O McAnally for the Defendants
Judgment:	25 March 2019

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Duncan Cotterill (D McGill), Auckland, for the Plaintiffs

Keegan Alexander (S O McAnally), Auckland, for the Defendant

Copy for:

Noel Ingram QC, Auckland, for the Plaintiffs

GREEN MEADOW HOLDINGS APS v SARGISON and DALTON [2019] NZHC 562 [25 March 2019]

[1]        The plaintiffs have appealed against my decision of 5 October 2018.1 They have applied for an order staying the proceeding until their appeal has been heard and finally determined.

What the case is about

[2]        The case concerns the Kiwi Deposit Building Society, which is in insolvent dissolution. It was put into dissolution in April 2013. The defendants are the trustees appointed to carry out the dissolution. The plaintiffs, Danish companies, held preference shares in the society with special rights to track their investments in property holdings in England and Sweden. The trustees say that the creditors of the society exceeded the assets that they have realised in the dissolution and there are no funds available for members of the society, including the plaintiffs. There will be a shortfall for creditors.

[3]        The plaintiffs do not accept that. The plaintiffs began this proceeding in response to a notice by the trustees under s 75 of the Trustee Act 1956. The original statement of claim had two causes of action. The trustees applied for strike-out. In response, the plaintiffs tendered a proposed amended statement of claim with three more causes of action.

[4]        In the first cause of action, the plaintiffs pleaded that by distributing the funds of the society to unsecured creditors, the trustees disregarded the terms of the instrument of dissolution and a judgment of Davison J of 22 April 2016.2 The trustees had refused to distribute the investment assets to the plaintiffs as required under the instrument of dissolution, and the trustees thereby breached their duty to adhere to the terms of the deed for the appointment of them as trustees.

[5]        In the second cause of action, the plaintiffs pleaded that they and the unsecured creditors were all beneficiaries under a trust created by the instrument of dissolution. By preferring the unsecured creditors over the plaintiffs, the trustees breached their

1      Green Meadows Holdings v Sargison [2018] NZHC 2216.

2      Re Kiwi Deposit Building Society: ex parte Sargison and Dalton [2016] NZHC 782.

duty of impartiality amongst the beneficiaries, and by using the proceeds of the investment assets to benefit the unsecured creditors, the trustees preferred one set of beneficiaries over another. They also breached a direction by Davison J that the society be put into liquidation. In both the causes of action they sought equitable compensation.

[6]        In the draft amended statement of claim there was a third cause of action which alleged that the trustees had failed to act as prudent trustees in realising assets and examining the creditors’ claims. The plaintiffs alleged that the sale of a property in Sweden was under-value and that the trustees had failed to examine claims of creditors adequately. Some of the creditors’ claims might be linked to Messrs McCaw and Williams, the founders of the society and their claims should be rejected.

[7]        The fourth cause of action is a claim against the trustees as trustees de son tort. As the building society was insolvent at the date of dissolution, the instrument of dissolution was not a valid exercise of the power to dissolve the society. The appointment of the trustees was accordingly not valid and enforceable. As they were not validly appointed, they were acting as trustees de son tort and were liable for not distributing the proceeds of sale of the investment assets to the plaintiffs but misapplied them by paying creditors instead.

[8]        The fifth cause of action is a constructive trust claim based on assertions that the trustees dealt with the trust fund in a manner inconsistent with a trust that had arisen by reason of the society being insolvent from the date of dissolution.

[9]        In my decision of 5 October 2018,3 I struck out the first and second causes of action and directed that the fourth and fifth causes of action could not be pleaded. The essential basis was that I held that the creditors in the dissolution were to be paid ahead of any members of the society. Those causes of action failed substantively for their assertions that the interests of the plaintiffs could prevail over creditors of the society. I did not, however, dismiss the proceeding.

3      Green Meadows Holdings v Sargison [2018] NZHC 2216.

[10]      I considered that the pleading of the proposed third cause of action in the draft statement of claim was procedurally deficient for not giving adequate particulars of the claim. That was because creditors in the dissolution came to some $37,540,000 and recoveries by the trustees had come to some $22,700,00, giving a shortfall of

$14,840,000 for the creditors. Accordingly, for the plaintiffs to recover in a claim against the trustees for breach of duty, they would need to show that the trustees had caused losses that exceeded the shortfall for the creditors so that there could be funds available for distribution to members of the society. The pleading did not set that out. The pleading was deficient in making general allegations only, without particulars showing how any damages could be sufficient to give some return to the plaintiffs.

[11]      While that pleading was deficient, I gave the plaintiffs the opportunity to amend to set up a valid pleading against the trustees for breach of duty and lack of due care and skill. Ordinarily, a pleading which relies on speculative assertions cannot be allowed to stand, and a plaintiff cannot bolster a claim based on speculative assertions by hoping that something might come out of discovery. But I recognised that the plaintiffs may have independent and substantive rights of access to the trustees’ records under the principles laid down by the  Supreme Court in  Erceg v Erceg.4       I said:5

[60] In those circumstances it is appropriate to allow the plaintiffs more  time to reconsider their proposed claim for mismanagement of the liquidation in the light of further disclosure by the defendants. I contemplate that the defendants may allow inspection of dissolution records under the principles in Erceg v Erceg. As guidance only, the classes of documents to be inspected should be limited to the matters the plaintiffs have pleaded or referred to in their evidence. The plaintiffs have a proper basis for seeking disclosure as being contingently interested in the funds for distribution. There may need to be redactions of documents for confidentiality, for example, identity of beneficiaries of creditors who are trustees. The plaintiffs should pay the defendants costs in allowing inspection.

[12]      I directed that the plaintiff would have until 16 November 2018 in which to file and serve a new statement of claim with a cause of action for breach of duty of care giving particulars showing how there would be a surplus after creditors’ claims had been met and particulars of loss.

4      Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320.

5      Green Meadows Holdings v Sargison [2018] NZHC 2216 at [60].

[13]      The plaintiffs have appealed against that decision. I have been advised today that steps have been taken to obtain a hearing in the Court of Appeal. A casebook has been filed and an application has been made for a hearing date. Counsel have suggested to the Court of Appeal that one day will be required for hearing. It was suggested that the appeal might be heard in the third quarter of this year.

[14]      In their notice of appeal, the plaintiffs say that I erred in a number of respects. They appeal against the orders striking out the first and second causes of action and directing that the fourth and fifth causes of action could not be pleaded. They also appeal against my directions for re-pleading the proposed third cause of action. As emerged in argument this morning, they strongly object to the limited time I gave for the plaintiffs to re-plead the third cause of action.

[15]      There is a preliminary procedural point. The plaintiffs applied under r 20.10 of the High Court Rules. That rule applies only to appeals to the High Court from some other court or tribunal. It does not apply to appeals from this court to the Court of Appeal. Instead, the Court of Appeal (Civil) Rules 2005 govern appeals to that Court. The appropriate rule is r 12(3). It is recognised that the court appealed from and the Court of Appeal have a concurrent jurisdiction under r 12(3) although the practice of the Court of Appeal is to encourage applications first to the court appealed from.

[16]In Minnesota Mining and Manufacturing Company v Johnson and Johnson

Buckley LJ said:6

The object, where it can be fairly achieved, must surely be so to arrange matters that, when the appeal comes to be heard, the appeal court may be able to do justice between the parties, whatever the outcome of the appeal may be.

That dictum has been cited with approval in New Zealand.7 That bears on applications for interim relief pending an appeal this way. If, for argument’s sake, a defendant has failed in a proceeding and appeals against the judgment, enforcement of the judgment may in some cases make the appeal pointless because the defendant will already have

6      Minnesota Mining and Manufacturing Company v Johnson and Johnson [1976] RPC 671 (CA) at 676.

7      Insulators Ltd v ABB Ltd (2006) 18 PRNZ 459 (CA) at [13].

been required to comply with the orders of the court of the first instance. It would be pointless to hear the appeal. The dictum of Buckley LJ is directed at ensuring that that injustice should not occur.

[17]      That makes it useful to consider how the stay application should be addressed in this case. Mr Ingram QC said that the plaintiffs sought a stay of this proceeding – in other words, that no further decisions should be made in this proceeding - until the Court of Appeal has first heard the appeal. The targets of his submission were my rulings first how any inspection of trustee records under Erceg v Erceg might be carried out, and second the time within which the plaintiffs should be required to file and serve an amended statement of claim.

[18]      For the stay application, the other parts of my decision are irrelevant.  While  I have directed that the pleadings are not to stand, the plaintiffs are adequately protected by appealing against that decision. On appeal, the Court of Appeal will decide whether my decision to strike out the pleadings was sound or not. If the Court of Appeal declares that I was in error, the plaintiffs will have their pleadings restored and will be able to continue the proceeding. There is therefore no need for interim relief on that part of the appeal.

[19]      I note that the plaintiffs have not sought interim relief to restrain the trustees from making distributions to creditors in the meantime. Notwithstanding that the plaintiffs have not sought it, one of the trustees, Mr Dalton, has stated that that the trustees do not intend to make any distributions to creditors until the Court of Appeal has given its decision on the appeal. I note also that there is no suggestion that the trustees will not preserve records of the society and their trusteeship so that if there is any inspection under Erceg principles the records will at least be available.

[20]      The matter then comes down to a narrow point: whether I should make any further decisions in this proceeding while the plaintiffs’ appeal against my directions as to the third cause of action is pending. The argument on appeal will turn mostly on the time I gave for filing and serving an amended statement of claim. While I indicated that the plaintiffs may be able to inspect the trustees’ records under the principles in Erceg, the plaintiffs will argue on appeal that I gave them far too short a time. They

will say that there are many records and they will need to make detailed enquiries. They also indicated that they will want to establish the identity of creditors because they are suspicious that some creditors may be connected or associated with the founders of the company, Messrs McCaw and Williams. They regard any claims by them as unsound. They also wish to enquire further into records of creditors who have done business with the society under its special terms and conditions, which provide that the customer assumes any risk if any investment should fail. Their hope is that with a full examination of trustee records, using their substantive rights under Erceg v Erceg, they may be able to establish that the trustees have acted in breach of duty and may therefore face personal liability.

[21]      In the hearing, Mr Ingram advanced a new matter. One feature of this dissolution is that there is a substantial creditor who advanced funds to the society on steep interest terms. Because the society did not go into liquidation, interest continues to accrue compounding monthly - apparently at 22 per cent. I was advised that the monthly interest bill is approximately $240,000 and increases monthly. While that matter might suggest that the dissolution ought to be brought to an end promptly, the plaintiffs on the other hand seek to make the trustees responsible for that by alleging that they ought to have arranged for the society to go into liquidation once it became clear that it was insolvent. I record the argument. It is novel, and it will clearly face difficulties, given that the trustees do not have standing to apply for a liquidation order.

[22]      There is a timing problem. The dissolution has been running since 2013. There may even be limitation issues for any alleged breaches of duty by the trustees in the early days of the dissolution. The trustees issued a notice under s 75 of the Trustee Act towards the end of 2017 in the hope that they could bring the dissolution to an end, no doubt hoping that there would be no proceedings by the plaintiffs. The plaintiffs did respond and the dissolution has since been put on hold while this proceeding is pending. There is the prospect of ongoing delay in finally resolving matters.

[23]      Regardless of any decision I make, the plaintiffs will retain the right to seek disclosure of trust records under the principles in Erceg v Erceg. They have substantive rights which they can assert independently of any proceeding now

pending. In the light of argument I heard this morning, establishing what records they may be entitled to does not appear to be straightforward. Mr McAnally advised that the trustees will oppose disclosing some classes of documents on the grounds of confidentiality. As to confidentiality, I recorded in my decision of 5 October 2018 that I was unaware of the identity of the people behind the plaintiffs. I did not expect to know who they were. They have adopted corporate vehicles for their investments so as not to disclose their identity. I would not be surprised if there were other investors in whose name investments are held who would expect their identity also to be protected. Against that, the plaintiffs say that disclosing the identity of the investors is critical because they want to establish whether there is any relationship with Messrs McCaw and Williams. The problem may not be able to be resolved without reference to the court. That is likely to take considerable time, whether the plaintiffs or the trustees apply to the court for directions as to what documents can be disclosed. After hearing Mr Ingram’s submissions, I was left with the impression that the plaintiffs were contemplating a very thorough examination of the trustees’ records, something close to an audit.

[24]      In the light of that, it is improbable that the plaintiffs will be able to put together a statement of claim showing a sound pleading against the trustees in time for any hearing in the Court of Appeal. In short, the Court of Appeal will face a position not markedly different from the one before me when I heard the application to strike out.

[25]      The ongoing delays in distributions by the trustees has arisen because of the current proceeding and are causing prejudice to those creditors whose investments are not earning interest. Overall it is desirable that distributions to creditors be resumed as soon as possible.

[26]      The plaintiffs raise the prospect that their claims might be debarred by an application under s 75 of the Trustee Act. Mr McAnally, in response, indicated that this was unlikely because under the proposed third cause of action the trustees would be facing personal liability only and would not be entitled to indemnify themselves out of trust assets. That is because generally trustees cannot indemnify themselves out of trust assets for breaches of duty on their part. That would make sense in this case, as the plaintiffs claim that the funds for creditors ought to be supplemented by the

trustees for their breaches of duty in reducing the assets available for distribution. That then may clear the way for earlier distributions. In other words, it may not be necessary to await the plaintiffs’ claim and the trustees may be able to distribute early to the creditors if the Court of Appeal otherwise dismisses the appeal.

[27]      In light of that, there are efficiency arguments for not prolonging matters beyond any decision of the Court of Appeal, if the Court of Appeal should dismiss the appeal. The position then would be that the plaintiffs would not have any recognised cause of action against the trustees. It would not, however, mean that the plaintiffs could not begin a fresh proceeding later based on the third cause of action. That is because the third cause of action fails only for procedural grounds, not for substantive grounds. A proceeding that has been struck out only for non-compliance with procedural rules can be started again. Here, I refer to the Court of Appeal’s decision in Westpac Banking Corporation v MM Kembla NZ Ltd:8

The summary judgment is a judgment between the parties in the dispute which operates as issue estoppel, whereas if a pleading is struck out as untenable as a matter of law the plaintiff is not precluded from bringing a further properly constituted claim.

There is a qualification: that dictum would not apply in a case where a proceeding had been struck out as being substantively deficient, but it certainly applies when a proceeding is only procedurally deficient.9 So the plaintiffs could start again even if they fail on appeal, and they could still apply to the court for disclosure of trust records under Erceg v Erceg, whether or not they have any other proceeding pending.

[28]      Accordingly, I see no useful purpose in keeping the current proceeding alive. So far I have struck out two causes of action, but under r 15.1(2) of the High Court Rules the court may, in addition to striking out a cause of action, dismiss the proceeding. There is no extant cause of action. There is, at most, only a proposed cause of action. The dismissal of the proceeding will not stand in the way of the plaintiffs beginning a fresh proceeding based on that proposed cause of action, which has not formally become part of the record in the court.

8      Westpac Banking Corporation v MM Kembla NZ Ltd [2001] 2 NZLR 298 (CA) at [60].

9      Commissioner of Inland Revenue v Muir [2017] NZHC 1413 at [41]-[42].

[29]      I refuse the stay and I also dismiss the proceeding in the absence of any current pleading by the plaintiffs. This decision may also be reviewed on appeal. The plaintiffs will be able to argue on appeal, if their other arguments succeed, that this proceeding should be reinstated. The refusal of the stay does not prejudice the plaintiffs’ appeal rights.

[30]      The defendants will have costs not only on the stay application, but also for commencing the defence of the proceeding. If the parties cannot agree costs, memoranda may be filed.

……………………………….

Associate Judge R M Bell