Harding v LDC Finance Limited (in rec) HC Christchurch CIV 2008-409-001140

[2011] NZHC 1447

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV 2008-409-001140

BETWEEN  ANDREW JOHN HARDING AND MURRAY SCHOLFIELD

First Plaintiffs

ANDSTEPHEN DESMOND EATON AND SEDDON JAMES MARSHALL Second Plaintiffs

ANDLDC FINANCE LIMITED (IN RECEIVERSHIP)

Defendant

ANDPRICEWATERHOUSECOOPERS Proposed Second Defendant

ANDPERPETUAL TRUST LIMITED Counterclaim Defendant

Hearing:         25 & 26 October 2011 (Heard at Wellington)

Counsel:         JBM Smith and J D Haig for Plaintiffs

D Goddard QC and P J Woods for Defendant
B D Gray QC and P M Fee for PricewaterhouseCoopers
T M Weston QC and SWB Foote for Counterclaim Defendant

Judgment:      26 October 2011

JUDGMENT OF FOGARTY J

[1]      The issues before me during this hearing:

1.Whether Buddle Findlay should be joined as a party to the causes of action of dishonest assistance against PWC.

2.Where the trial set down for 20 February for approximately a month should be adjourned or split.

HARDING AND SCHOLFIELD V LDC FINANCE LIMITED (IN RECEIVERSHIP) HC CHCH CIV 2008-

409-001140 26 October 2011

3.Whether PWC is entitled to further particulars of the alleged wilful blindness.

4.        Whether LDC can interrogate F & I depositors in excess of $100,000.

[2]      The setting of this case is useful to set out in historical terms because it bears upon my judgment.  But before I do that I want to start with the first objective of the High Court Rules which is not often cited, r 1.2:

1.2      Objective

The objective of these rules is to secure the just, speedy, and inexpensive determination of any proceeding or interlocutory application.

[3]      I have explained in earlier interlocutory judgments the core of this case.  It revolves around the failure of three finance businesses: F & I - a partnership which lent quite a lot of money, and as a book, at present, I think, in the order of $16 million at the time of its insolvency but operated without a prospectus;   LDC – a finance company which did operate with a prospectus; and a third finance company, HFL, to which these other two companies lent money and which has also failed.

[4]      Both F & I and LDC were in vulnerable economic circumstances when they realised that HFL was at risk of failing and a plan was devised which, in broad terms, was intended to strengthen both F & I and LDC and ready LDC for sale, to the advantage of both these two companies.    It involved the transfer of some assets of F & I to LDC, partly in consideration for money and partly by way of issue of LDC shares. There were two transactions, one in 2006 and one in 2007.

[5]      These proceedings were commenced in May 2008.  It is now obviously about three and a half years later that we are nearing a trial date.   The case was originally allocated a trial date of 3 October 2011 on 14 September 2010.  In May 2011 LDC named Perpetual Trust as a defendant in its counterclaim.   Perpetual Trust is the trustee for the securities held by LDC and issued by it and as such acquired a ranking interest in the assets transferred from F & I.  Perpetual Trust claims, and is supported by LDC, to have a first ranking security ahead of any claim that depositors in F & I might have by reason of the trust imposed under the Securities Act 1978 s 36A.  If

there is a breach of the Securities Act by reason of the securities issued by F & I then as a consequence they will offer securities to the public.

[6]      This pleading emerged  and Perpetual Trust was joined as a party in the middle of this year.  F & I reacted by applying to join PWC in an action of dishonest assistance.  At the time of that application the trial set down for October of this year was not going to proceed for various reasons.   But the parties were confident that they could get the trial ready and be able to have it heard in February next, hence the fixture date of 20 February set down for approximately a month.

[7]      Since then two developments have occurred.  Firstly, I have been advised by Mr Bruce Gray QC, counsel for PWC, that there have been problems with discovery and it is simply not possible to get PWC’s case ready for hearing on the trial date. Second, F & I have now also applied to join Buddle Findlay as additional defendants in the dishonest assistance cause of action, to become the third such defendant, the other two being PWC and Perpetual Trust.  If joined Buddle Findlay will likely apply to joint another firm of solicitors, Rout, Milner and Fitchett.

[8]      It is, I think, common ground, certainly acknowledged by Mr Gray for PWC, that PWC, Buddle Findlay and Rout, Milner Fitchett, were all engaged in advice structuring and documentation of the transactions which are in dispute in this case. In that context there had been the issue of whether or not F & I were complying with the Securities Act had been identified.

[9]      In August when I agreed to join PWC I did so on the basis that the joinder would not delay the litigation and the trial could start in February.   There is now absolutely no prospect of the trial starting in February as including the dishonest assistance claims as PWC is not ready and it is unrealistic to expect Buddle Findlay and likely the Nelson firm, who are likely to be joined as well, to be ready to defend very serious allegations of wilful blindness in the context of dishonest assistance to facilitate a breach of trust.

[10]     There is no real issue that Buddle Findlay has to be joined.  Obviously, on the normal principles of joinder it is a proper and indeed necessary party, at least in

fairness to PWC to be a party to the proceedings.  On a similar basis, I cannot see how it can be avoided that the Nelson firm be joined if anyone applies.

[11]     Mr Smith says there may be reasons why that will not happen, but I gained impression from Mr Weston QC for Buddle Findlay that it is likely that if Buddle Findlay is joined they will make that application.

[12]     The problem then with the February trial date is that it cannot take place at all if the dishonest assistance causes of action are to be heard as they cannot be heard at that  period.    That  raises  the  question  of  whether  or  not  the  fixture  should  be adjourned so that all causes of action pertaining to these matters be heard together or that the trial be split.

[13]     The adjournment would be for at least another year.   Mr Goddard QC has doubted whether that is itself not a optimistic notion and that it could be more than a year.  I would agree that when four professional firms are sued for wilful blindness amounting to dishonest assistance one can naturally assume that independent of the monetary stake on the pleadings considerable efforts will be undertaken by those firms to ensure highly qualified representation, thorough preparation, and a very careful trial.

What is the nature of the split that we have been contemplating?

[14]     It is essentially between what might be called the proprietary issues and the wilful blindness, dishonesty issues.     The second plaintiffs, who are trustees representing depositors of F & I, have a proprietary claim.  They are arguing that because F & I are in breach of the Securities Act in offering securities to the public without a prospectus, that all deposits made during that period with F & I are held by F & I on trust.

[15]     They say that when good assets of F & I (these are performing loans) were transferred to LDC, LDC and Perpetual Trust were both on notice of the trust.  That is in the most simple terms.   So that they can follow then by way of remedy of

tracing those assets and recover back the fund which now represents the proceeds of those assets. That fund is currently standing at about $8.8 million.

[16]     Viewed  from  a  proprietary  sense  there  are  three  competing  groups  of investors contending for the $8.8 million.  There are:  the second plaintiff depositors in F and I;  unsecured depositors in LDC; and secured creditors of LDC.

[17]     LDC, I am told by Mr Goddard, has about 990 investors with an interest in the fund. There are 288 F & I investors awaiting the fate of this litigation.

[18]     Mr Smith for F & I opposes splitting the trial and favours the vacation of the fixture on the basis that in the long run his clients and he represents both the original partners as first plaintiffs and the depositors are best protected by having a full trial.

[19]     Mr Goddard for LDC favours, on balance, a split trial, primarily because of the  strain  placed  on  the  LDC  investors,  the  smaller  investors,  the  unsecured investors, by the freezing of the fund in the meantime.

[20]     Mr Gray for PWC has made some helpful submissions which are essentially neutral though I detected a slight favouring of a split trial.   But I accept from Mr Gray that I am faced with a very difficult decision.

[21]     Before I go into the arguments for or against a split trial I would not be candid if I do not observe that for some years the plaintiffs in these proceedings were running a proprietary claim, even including the first cause of action by the first plaintiffs seeking an unwinding of the transaction by way of discretional relief under the Contractual Remedies Act 1979.  As I have explained, it was only because of the advent of the Perpetual Trust claim for priority that triggered the dishonest assistance claims.

[22]     Part of Mr Smith’s submissions emphasised the right virtually of a plaintiff to choose parties to the proceedings and to have joined parties who properly should be joined.   That is so.   But equally Schedule 5 of the High Court Rules requires the question  of  appropriate  joinder  to  be  undertaken  prior  to  the  very  first  case

conference.   It is not part of the scheme of the High Court Rules that very late applications for joinder are to be received benevolently.   To be sure, the rules on joinder continue to apply but they are also addressed in the context in which they arrive.

[23]     Mr Smith and his Junior, Mr Haig, have helpfully prepared some written submissions which collect the considerations that are taken into account when a Court considers the ordering of separate trials and I particularly have regard to the collection of criteria by Asher J, in Young v St Lukes Square1

[6]       There are a number of matters that need to be considered by a Court when determining such an application. To list some factors of relevance in relation to a proposed split between liability and damages hearing:

a)The extent of the quantum evidence is relevant. If it is particularly complicated and will take a long time to hear, that can be a practical reason for granting a split trial: Clear Communications  Ltd  v  Telecom  Corp  of  NZ  Ltd  (1998)

12 PRNZ 333.

b)If there is an overlap in terms of the evidence between the damages and liability issues in a case, that can be a reason not to grant the severance. There is the possibility of duplication of evidence if there are split trials. This can lead to added expense.

c)Certain  types  of  cases  are  more  suited  to  split  hearings between liability and quantum than others. For instance, split hearings between liability and quantum are often ordered in cases based on copyright causes of action. In such cases the nature  of  the  copyright  cause  of  action  leads  to  a  more distinct demarcation between the relevant evidence as to liability and the relevant evidence relating to quantum, than in other types of commercial litigation.

d)A further  matter  of  relevance is the  prospect of  appeals, possibly multiple appeals, arising from the initial hearing, leaving the resolution of the whole case hopelessly delayed. There are a number of examples of cases where there have been extensive appeals relating only to the first part of complex litigation, which have delayed resolution of the whole case for years, and lead to enormous costs.  This can be seen particularly clearly in the series of appeals in Strathmore Group Limited v Fraser [1992] 3 NZLR 385.

1      Young v St Lukes Square (1993) Ltd HC Auckland, CIV 2003-404-3215, 17 November 2005

e)        There are also practical matters that need to be considered.

The availability of the Judge who presides over the liability trial for a damages trial at a later date is relevant as to the

possibility of the trial Judge becoming disqualified because

of particular credibility findings in the first trial.

f)         Finally,  a  split  between  liability  and  quantum may  leave quantum ignored by the parties, making the prospects of a realistic  addressing  of  settlement  less likely at  the initial trial. This can be a further reason for caution in the exercise of  the  discretion,  (although  in  this  case  it  is  clear  that damages have been fully considered).

[24]     I have read and considered all those submissions but I am going to focus on the points as emphasised in the subsequent paragraphs by Mr Smith.   I will start firstly with the overlap.

[25]     Obviously, if F & I were never in breach of the Securities Act there is no foundation in fact to the causes of action of wilful assistance and a breach of trust. To that extent there is clearly an overlap and theoretically there is a risk that if the trial is split the trial Judge of the first trial might find that F & I were in breach of the Securities Act giving rise to a trust;  whereas a second and different trial Judge, even possibly the original trial Judge, with different evidence at a second trial – this is only a theoretical possibility in the latter case – might take a different view.

[26]     In my view that theoretical possibility has to be viewed against a number of considerations and when it is so the risk is very much reduced.  Firstly, F & I was trading in Nelson for many years.   Mr Smith, at one point, observed 30-35 years. The way it traded is described by Associate Judge Faire, when describing the case to be put by the plaintiffs in a judgment he issued:   Harding v LDC Finance Ltd (in Receivership) HC Christchurch CIV-2008-409-1140, 19 November 2009.   It had a shop front in Nelson and a sign saying “Investments and Finance” and it obviously had quite a large loan book.   I have already mentioned the number of creditors currently awaiting the outcome of this litigation and it tended to lend money as one would  expect  on  hire  purchase  transactions  and  so  on  and  it  did  not  have  a prospectus.

[27]     The arguments against it trading in breach of the Security Act focus on a distinction drawn by the Court of Appeal in a case called Dodge[1] and I will preface these comments by noting this is not the whole of the argument.  But it is certainly an important part of it and drives some of the evidence to be given.  Dodge was a case in which the material facts had no parallel equivalents to the facts of this case. But in para [16] of the judgment of the Court of Appeal:

[16]     ... We think that s37(1) [the core provision of the Securities Act making regular allotments void] does not prevent an allotment (or a transfer caught by s6(2)) unless there is a connection between the unlawful offering of the security to the public for subscription and the subscription actually made and pursuant to which the allotment occurs. The nexus may be quite weak.   ... But in circumstances where the allottee knows nothing of the unlawful offer, and it has played no part in attracting the allottee towards the issuer, we consider that there is no breach of s37(1) in the making of an allotment and that accordingly s37(6) cannot operate – unless of course the offer to the allottee is by itself in breach of the Act because it is an offer to that person as a member of the public.

[1]

[28]     Illustrating  some  of  the  points  that  LDC  wished  to  raise  Mr  Goddard observed that one of the depositors represented by the second plaintiffs has the name Scholfield, the same surname of one of the first plaintiffs.  Of course, the Securities Act is a reasonably sophisticated document and has exclusions for allotments which are only two members of a family.  I am referring, for example to s 3(2)(a)(i):

3         Construction of references to offering securities to the public

...

(2)       None of the following offers shall constitute an offer of securities to the public:

(a)      An offer of securities made to any or all of the following persons only:

...

(i)       Relatives or close business associates of the issuer or of a director of the issuer:

(Emphasis added)

2      Dodge v Snow CA21/99 [2002] NZ Law Review 277

[29]     But in the context of arguing the want of a nexus, however weak or strong it has to be, I apprehend that the first defendant, LDC, is going to test the reasons why the depositors had made contact with F & I.   In that regard they are seeking interrogatories and I will come back to that in a moment.

[30]     It has been agreed between counsel that to test the law as to the extent to which there has to be a connection, it is appropriate that there be at least a sample of the F & I depositors giving evidence at the trial, to provide a context against which to test whether or not F & I was making an offer of securities to the public in a context which means that the deposits taken, which are the subject of this case, are in breach of the Securities Act.

[31]     That said, I do not apprehend that there be many credibility issues.  I see this type of issue, whether there is an offer to the public in breach of the Securities Act, as being largely a question of characterisation of the facts likely to be agreed or at least not challenged when proved and a consideration of the meaning and application of the Securities Act.  In short, a banco argument.

[32]    I also consider, and have no doubt, that those issues will be canvassed thoroughly by the two litigation teams for F & I and for LDC.  It is unlikely, in my view, that there would be a different outcome at a separate trial.   This is partly because whatever the trial Judge concludes, given the nature of the first defendant’s argument I apprehend that the law will likely to be tested further in the Court of Appeal in any event.

[33]     For that reason I do not think there is significant prejudice to PWC, Buddle Findlay and the Nelson firm, if it is joined, in not participating in the issue as to breach of the Securities Act or not.  (Perpetual will be represented in argument for the tracing issue.)  I also apprehend from Mr Weston that his client is not likely to want to, in any event.  However, I would certainly, as trial Judge, be quite ready to accommodate these two parties with a right of audience on this issue.  I do not want to take the matter any further than that.  It is up to those parties to decide if they want to be heard.  If they are heard and get engaged in trial of this issue then, of course, they expose themselves to issue estoppel.  On the other hand, they may elect to take

the view that the reality is that there is probably only going to be one trial on this issue.

[34]     Given that there is high quality legal representation already on both sides of the argument as to breach, I do not see any significant prejudice to these professional firms.  That similarly goes to the issue of tracing which follows on if breach of the Securities Act applies.   That is clearly going to be a sophisticated issue.   As I understand the position, one of the significant contentions is whether or not the assets that were transferred, that is prior to transfer, can be traced to the deposits made by the second plaintiffs.   I will refer to that exercise, with the assistance of experts, later in the judgment.

[35]     The issue of tracing is going to be both addressed by expert witnesses and in the hands of competent  counsel and  I see no  significant prejudice at  all to the professional firms who are defendants in the dishonest assistance causes of action.

[36]     Mr Smith makes the point that more time will be taken up by separate trials. I agree.  But I also agree with Mr Goddard’s reply that, for reasons which he set out, one should not presume that inevitably there would be a separate and second trial. He argues rather that if the plaintiffs succeed against LDC it is unlikely a second trial will proceed.   Secondly, if the plaintiffs failed against LDC because the evidence did not establish breaches of the Securities Act or because they cannot trace, it is very unlikely that the depositors would take on the burden of trying to persuade the Court to a different conclusion.  I would certainly agree that proposition if the plaintiffs fail to establish a breach of the Securities Act.  Mr Goddard also argues that the second trial is only likely if the plaintiffs succeed in showing LDC received funds from F & I but their proprietary claims are defeated by Perpetual’s GSA over LDC’s assets.

[37]     I do not think a second trial is inevitable.  It certainly cannot be ruled out and that is a factor which I have taken into account.  But in taking it into account I am very much influenced by the fact that it would involve delay of another year in proceedings which started in May 2008.  It would be a much longer trial.  It would impose a lot more costs on the plaintiffs in addition to running proprietary actions.  It

runs the risk of creating litigation costs which are disproportionate to what is at stake which is only $8.8 million.   I say “only” deliberately because in the context of litigation of this complexity I do not regard that as a large sum and I am keeping in mind r 1.2 of the High Court Rules.

[38]     There is also no doubt, as Mr Smith points out, that separating the trials could delay a second trial by reason of appellate litigation.  I have already indicated one area where there is likely to be appellate litigation.

[39]     On the issue of notice to Perpetual it is likely that Perpetual executives and PWC and Buddle Findlay partners will be cross-examined in one form or another. Issues are likely to arise as to the extent of cross-examination.  That will have to be managed by the Court, whose focus will simply be on whether Perpetual was on notice.   Plainly the trial Judge will not allow some mini trial of the very serious contentions of wilful blindness because that is not relevant to the question of whether or not Perpetual was on notice as to whether or not F & I was in breach of the Securities Act.

[40]     My judgment is that that is an issue that the trial Judge (at this stage I am designated the trial Judge) will simply have to and can manage.    I have given it some careful consideration as to whether it necessitates a combined trial.   In my judgment it does not.

[41]     I have been balancing the consequences of a full trial against the advantages to the investors of both LDC and F & I in getting an answer to the issues which will actually resolve to what extent they get access to the disputed $8.8 million fund at a cost proportionate to that fund, and at a much earlier time, given that they have already been waiting some considerable years.   I should also add, if I have not already mentioned it, that I consider it very unlikely that were the claim to succeed against the professional services for dishonesty, it would stop in the High Court. That is another factor, if we have one trial, this whole case could become very very complex and hugely expensive when you factor in the appeal Court costs as well.

[42]     I am grateful that Mr Gray said candidly that I was faced with a difficult issue.  It is a difficult issue, one does not lightly separate trials.  But I have decided that the just decision is to separate the trials and that that is the best way to secure the just, speedy and proportionate determination of the core issues between these parties. It started out as a proprietary claim and I think it should be tried first as one.

[43]     I would not have joined PWC back in August had there been a prospect at that stage that that would have delayed the litigation by another year to 18 months. I think to join Buddle Findlay now as I have to and to delay the trial would only compound a consequence which would not have happened had it been put to me back in August that this would require another year to 18 months.

[44]     So for these reasons there will be a split trial. There will be a split trial on the second plaintiffs’ proprietary claim both as to breach and tracing.   I also agree, albeit reluctantly, that for practical purposes there needs to be hearing of the first plaintiffs’ claim against LDC.   This is a kind of proprietary claim although normally it is a cause of action which would sound in damages.   But I accept Mr Goddard’s submission that unless that is resolved it would not be possible to distribute the fund should LDC succeed in obtaining judgment in its favour as defendant in respect of F and I’s proprietary claims.

[45]     I propose the wilful blindness claims be put under separate case management and in that regard I make one direction and an observation.   Firstly, if Buddle Findlay, PWC or F & I wish to join the Nelson firm then they should make the application within one calendar month.   If they do not do so within one calendar month they will put the Court under a lot of pressure.

[46]     Secondly, as an observation, as to further particulars of the wilful blindness, I am not persuaded by Mr Gray’s argument in total.  But I have not had an opportunity to study carefully the additional particulars that F & I have already proffered informally.   I am going to adjourn that application for particulars in the hope that counsel  and  solicitors  can  settle  it.    I  do  observe,  as  I  have  indicated  in  oral argument, in a case of wilful blindness it seems to me that the plaintiffs have to establish that and being akin to a fraud claim, of course, it will have to be established

on the balance of probabilities but in context that means that the plaintiffs will have to have cogent evidence.

[47]     I am not persuaded that the plaintiffs have to particularise all the transactional steps that were taken by those persons in putting the transactions in place because I would regard that as consequential to an issue of whether or not they were wilfully blind.   I will say no more about that.   But I just apprehended that some of the particulars that you were seeking Mr Gray, were not really necessary.  Another way of looking at it is that if one considers what the briefs of evidence of these persons would be and how they would be cross-examined I am not sure that one needs a great deal more pleadings to be alive to what is going to be contended.  However, that said, I am conscious that I simply have not had the time to study the correspondence in depth or to make a ruling it so I am adjourning it.   I hope the parties can settle it but I will leave it to the parties to apply for a hearing at some time and we will keep it on the agenda of any further case management of the wilful blindness claim.

[48]     Turning to the question of interrogatories sought by LDC against F and I, again similar to decisions as to joinder, the scheme of the rules is that interrogatories would normally follow after discovery.   It is very late in the piece to seek interrogatories  now.    This  litigation  has  been  going  on  for  some  time.    I  am conscious that it is easy to order interrogatories.   It is very difficult, however, to manage the process once the order is made and often they generate a great deal of work and can be causes for delay.  I much favour the solution, which I think has been sorted out between Mr Smith and Mr Goddard, whereby Mr Goddard will prepare a questionnaire which will be circulated amongst his selection of the depositors, I think largely those who have deposited more than $100,000, but that is up to him and his client to decide, supported with co-operation from F & I through their solicitors. That is the first and second plaintiffs, I mean, through their solicitors, so that these depositors know that they are encouraged to answer these questions and to co- operate.

[49]     I reserve leave for the question of interrogatories to be pursued.  There might be situations arising from a particular set of responses, or the absence of response,

where the application is pursued.  I am potentially very cautious about whether or not they can be fairly imposed as a cost on the plaintiffs at this stage on what is, for all practical purposes, the eve of the trial.   Certainly the eve if you measure the length of the proceedings from commencement to now to the likely trial date in February.

[50]     As to the costs of the hearing of the last couple of days I am going to reserve them.  I currently favour costs lying where they fall.  But I will reserve the position in case anyone wishes to apply now or at some time in the future.

[Judge has discussion with counsel re any issues not resolved.]

[51]     I formally order the joinder of Buddle Findlay.   I am not going to wrap around that order subsidiary orders as to filing of pleadings and timetabling.  I am confident I can leave that to counsel to sort out.

[52]     I have not fully described the compass of the first trial.  It will include both causes of action by the first and second plaintiffs against LDC.  It will include the issue as to whether or not Perpetual has a first ranking claim which would defeat the plaintiffs and we have discussed in argument.  I do recognise that it is quite possible, that the tracing remedy may not be capable of being completely resolved in the first trial.  It is also possible, though I do not want to encourage it, that the first issue of non  compliance  with  the  Securities Act    might  break  out  according  to  sets  of depositors.  That said then, when I refer to the first trial it is possible that the first trial might end, for example, with an interim judgment leaving some other issues to be resolved at a subsequent hearing.  I am conscious that Mr Smith and Mr Goddard and their juniors have been in discussions on these kind of issues and I am happy to accommodate them.  But we will start with a goal of trying to do it all in one trial.

Solicitors:

Gibson Sheat, Wellington, for Plaintiffs

Anthony Harper Lawyers, Christchurch, for Defendant

Lane Neave, Christchurch, for Counterclaim Defendant