Houghton v Saunders
[2013] NZHC 2437
•18 September 2013
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2008-409-348 [2013] NZHC 2437
BETWEEN ERIC MESERVE HOUGHTON
Plaintiff
AND
TIMOTHY ERNEST CORBETT SAUNDERS, SAMUEL JOHN MAGILL, JOHN MICHAEL FEENEY, CRAIG EDGEWORTH HORROCKS, PETER DAVID HUNTER, PETER THOMAS and JOAN WITHERS
First Defendants
CREDIT SUISSE PRIVATE EQUITY INC (FORMERLY CREDIT SUISSE FIRST BOSTON PRIVATE EQUITY INC)
Second Defendant
CREDIT SUISSE FIRST BOSTON ASIAN MERCHANT PARTNERS LP
Third Defendant
FIRST NEW ZEALAND CAPITAL
Fourth DefendantFORSYTH BARR LIMITED
Fifth Defendant
| Hearing: | 16 September 2013 |
Counsel: | A J Forbes QC and P A B Mills for plaintiff A R Galbraith QC (leave to withdraw), D J Cooper and S V A East for first defendants A S Olney for second and third defendants D H McLellan QC for fourth defendant A C Challis for fifth defendant |
Judgment: | 18 September 2013 |
RESERVED JUDGMENT OF DOBSON J
HOUGHTON v SAUNDERS [2013] NZHC 2437 [18 September 2013]
[1] A further interlocutory hearing was conducted on 16 September 2013 to advance a number of issues that have arisen.
Leave for Bell Gully to continue acting for the first defendants
[2] By memorandum dated 9 September 2013, Bell Gully, in their capacity as solicitors for the first defendants other than Mr Horrocks, sought leave under the relevant rules to continue acting in light of the prospect that a partner of that firm,
Mr Gilbertson, is likely to be called to give evidence for the first defendants.[1]
[1] Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, r 13.5.2.
[3] Mr Gilbertson was a member of a due diligence committee formed by Feltex for the purposes of the relevant initial public offering. He attended meetings and prepared documents that are referred to in the statement of defence filed on behalf of the first defendants. There is a reasonable apprehension that he will be called to give evidence of fact, but not opinion evidence.
[4] In the absence of opposition, I have ordered that Bell Gully may continue as solicitors for the first defendants other than Mr Horrocks in these circumstances, on the condition that external counsel will complete the briefing of Mr Gilbertson and leading of any evidence from him that is called at trial.
Security for costs
[5] In my judgment of 19 July 2013,[2] I ordered that further security for costs was to be provided in favour of the defendants against the contingency that the Court might subsequently make costs orders in their favour against the plaintiff.
[2] Houghton v Saunders [2013] NZHC 1824.
[6] As to the mode of security, that judgment specified:
[121] What I direct is that the plaintiff provide a form of security that is unconditionally enforceable on the making of demand by any one or more of the defendants to meet the extent of any costs order in favour of the defendants and against the plaintiff in this proceeding. The commitment has to be one which is enforceable in New Zealand.
[122] It seems likely that the simplest form of security would be for the litigation funder to procure a bank bond or guarantee, the cost of which
would hopefully be minimised by the existence of some form of assignment of the funder’s interest in the policy. However, from the perspective of the plaintiff and the litigation funder, having committed to the cost of the ATE policy, they may wish to minimise or avoid additional costs in supplementing the ATE policy with additional arrangements by way of such a guarantee or bond.
[123] An alternative might be a combination of commitments from the insurer and the funder that they both acknowledge the interest of the defendants in the proceeds of the policy, contingent only on the existence of a costs order in favour of the defendants made against the plaintiff. Such acknowledgements would have to be on terms that the insurer and the funder acknowledge the exclusive jurisdiction of the New Zealand High Court for resolution of any disputes in relation to the defendants’ rights to the proceeds of the policy. In proposing this alternative, I am not suggesting any expectation that the funder and insurer ought to agree to them. It is a possible alternative that is entirely a matter for them.
[7] That judgment contemplated that any arrangements for security to be provided other than by way of a bank bond or guarantee were to be in place by 16 August 2013. The first tranche of additional security comprising $800,000 was to be in place by 30 August 2013. That point has not been reached and on 9 September 2013 the fourth defendant made application for orders to enforce my orders as to security for costs, seeking a stay of the proceedings if security in an appropriate form was not promptly provided on behalf of the plaintiff.
[8] In memoranda dated 16 August and 3 September 2013, counsel for the plaintiff signalled proposals as to how those supporting the plaintiff might comply with the orders for further security for costs. The form that such arrangements to provide security for costs might take was further advanced in a relatively full amended notice of opposition to the fourth defendant’s application, and a synopsis of submissions that was filed and served electronically only during the weekend before the Monday of the hearing. Counsel for the defendants were entitled to criticise these steps as not complying with the timetable I had set. The reality is that the timing of these steps on behalf of the plaintiff may have taken into account my acknowledged unavailability between the dates on which the provision of further security for costs ought to have been progressed, and the second week of September 2013.
[9] Mr Cooper advanced argument on an analysis of the “gaps” between an enforceable commitment in favour of the defendants, and the initiatives that the
plaintiff had proposed on behalf of the litigation funder (HLIF) and the after the event insurer (AmTrust). His analysis did not take account of the latest proposition advanced for the plaintiff. In particular, the amended notice of opposition proposed:
(i)HLIF will undertake to the Court and the defendants that it will pay any order for adverse costs in favour of the defendants up to the amounts of the further security for costs as ordered by Your Honour’s judgment dated 19 July 2013 at [130], this undertaking to be unconditionally enforceable by the High Court of New Zealand and to be governed by New Zealand law;
(ii)) the insurer (AmTrust) will execute a further endorsement to the policy to confirm that it acknowledges the effect of the deed of assignment is to assign the policy proceeds to the plaintiff and that the indemnity under the policy will then be available to cover any adverse costs award made against the plaintiff in favour of the defendants;
[10] In argument, Mr Forbes QC confirmed that the undertaking contemplated from HLIF would be unconditional in all respects, so that it survived cancellation of either or both of the investment agreement between JAFL and HLIF, and the insurance policy between AmTrust as insurer and HLIF as insured.
[11] Further, the endorsement to the policy contemplated by AmTrust was to be set out as an annexure to a proposed deed of assignment of the proceeds of the insurance policy. Because the endorsement will be completed between HLIF and Mr Houghton, Mr Forbes suggested that AmTrust would be treated as having been a party to that deed so that its commitment to accept the assignment would bind it to comply with Mr Houghton’s requests as if he were the insured.
[12] I did not hear argument on the legal effect of the proposed form of acknowledgement by AmTrust. I have reservations that the enforceable commitment Mr Forbes contemplates would arise by virtue of an endorsement on the form of policy. AmTrust’s completion of the acknowledgement that it had notice of, and accepted the effect of, the deed of assignment of the insured’s benefit of the policy, where that assignment is formalised by a deed, may not bind the insurer if it is not included as a party to the deed. The proposed terms of such a deed were annexed to the second memorandum of counsel for the plaintiff, dated 3 September 2013. The terms of a Notice of Assignment to Insurer and Acknowledgement appended as a
schedule to the proposed deed include appropriate acknowledgements for Mr Houghton to claim under the policy, and acceptance of the jurisdiction of the New Zealand High Court to settle any disputes, but AmTrust is not included as a party to the deed.
[13] Mr Forbes argued for more time to settle a form of security along these lines. He submitted it would comply with the requirements in my judgment of 19 July 2013, and that there would be prejudice to the plaintiff if a conventional form of security by way of payment into Court or bond or guarantee was now required to be provided by an appropriate financial institution in New Zealand.
[14] The defendants disputed that there was any material prejudice, contemplating that the commitments made by the litigation funder must, or ought reasonably to, have contemplated the need for substantial security for costs. Certainly there was no suggestion that provision of security in a conventional form would prevent the claim being pursued.
[15] At one point, Mr Forbes suggested that the additional cost to the plaintiff of providing security in a conventional form would include the cost of JAFL charging a 25 per cent project management fee in respect of the amount of any security for costs paid into Court. The rationale for such a charge was not immediately apparent, and after an adjournment Mr Forbes confirmed that whether or not JAFL had a contractual entitlement to such a charge, it would not be levied. That left the cost to the plaintiff (or more accurately those supporting his pursuit of the claims) of providing either the cash for a payment into Court, or the cost of a bond or guarantee arranged with an appropriate financial institution in New Zealand until, say, the end of July 2014 when the proceeding and any costs entitlement pursuant to substantive determination ought to be resolved.
[16] There is thus far no evidence as to the cost of providing a bond or guarantee of payment of the sum of $800,000 for a period of approximately 10 months, and a further $1 million for a period of approximately seven months. HLIF is prepared to commit to an unconditional undertaking to pay such amounts in the event of an adverse costs award made against Mr Houghton. Given its apparently very strong
financial position, there is a credible prospect that international organisations providing banking services to HLIF would be able to facilitate provision of such a bond or guarantee for a modest fee. They would undertake their own assessment of the risk of not being able to recover any payment required to be made to meet the bond or guarantee from HLIF outside New Zealand. Material prejudice to the plaintiff can hardly be made out, unless there is a disproportionately high cost in arranging such a bond.
[17] Mr Cooper submitted that in contemplating a commitment “which is enforceable in New Zealand”,[3] the reasoning implicitly required such a judgment to be enforceable against an entity with assets in New Zealand sufficient to meet that liability. At the July hearing, no concerns were raised about the solvency of HLIF or AmTrust. The concepts of enforceability of a contractual entitlement, and sufficient solvency to meet it, are distinct. The alternative arrangements I contemplated might be satisfied by commitments from an entity resident out of New Zealand with
sufficient solvency, but without necessarily having assets to meet any costs liability in New Zealand.
[3] At [121].
[18] Mr Cooper argued that any security arranged on that basis afforded materially less protection for the defendants entitled to an order for security for costs than would be the case if HLIF was itself a plaintiff. Customarily, an overseas resident plaintiff is required to have security against which a costs order could be pursued, within the New Zealand jurisdiction.
[19] Although the defendants have no evidentiary basis for challenging the assurances that have been given throughout as to HLIF’s substantial solvency, the financial statements previously relied on by plaintiff’s counsel are now out of date, being to 31 December 2011. Nor is there any detailed evidence as to whether those assets are indeed in the United Kingdom, or elsewhere.
[20] The unresolved issues are inter-related. I have accordingly directed that before 5pm on 20 September 2013, plaintiff’s counsel are to provide the complete terms of the undertaking proposed from HLIF as described in [9] above, together
with a copy of the financial statements for HLIF for the 12 months to 31 December 2012. If six monthly accounts to 30 June 2013 have been prepared, a copy of those is also to be provided. To the extent that the financial statements do not disclose the jurisdiction in which the assets of the fund are located, counsel are to provide that information, at least in outline.
[21] In addition, the plaintiff is to provide a statement as to the costs to HLIF of providing a bond or guarantee by a reputable New Zealand financial institution, committing that institution to paying the extent of adverse costs orders made in favour of one or more of the defendants up to the sum of $800,000 forthwith, and up to the sum of $1.8 million from 15 January 2014 until determination of the High Court proceedings.
[22] Solicitors for the defendants will have until 5 pm on Wednesday, 25 September 2013 to file memoranda identifying any fresh concerns they have as to the enforceability of the undertaking in light of the final terms settled on behalf of the plaintiff.
[23] I will address any remaining issues as to the form in which security for costs is to be provided by means of a telephone conference.
Further particulars
Paragraph 77.2
[24] The third amended statement of claim (3ASC) was filed on 3 September 2013. Residual concerns at the adequacy of some allegations were raised. On behalf of Mr Magill, Mr Cooper sought a direction for further particulars in relation to paragraph 77. That relates to a cause of action against Mr Magill in relation to losses allegedly suffered by shareholders following the allotment of shares. It alleges that certain conduct by Mr Magill was misleading or deceptive, or likely to mislead or deceive, for the purposes of liability under s 9 of the Fair Trading Act 1986. The gravamen of the claim is that Mr Magill disguised a worsening of Feltex’s financial position for a 12 month period following the allotment of shares, thereby depriving shareholders of a fully informed opportunity to assess the prospects of giving notice
to avoid the allotments and obtain repayment of their subscriptions. The particular in paragraph 77.2 alleges:
Mr Magill developed and implemented Feltex’s sales strategy designed to meet the prospectus forecasts and projections.
And then in paragraph 77.4:
Mr Magill was directly involved in and had knowledge of the matters pleaded in paragraph 63 above.
[25] Paragraph 63 alleges a practice of post-dating sales orders in terms of the documentation given to a customer, but recognising the invoice as being generated in the month in which the order was placed. Mr Forbes clarified that “sales strategy” referred to in paragraph 77.2 is the practice described in paragraph 63.
[26] Accordingly, Mr Magill’s concern is adequately addressed by amplifying paragraph 77.2 to relate “Feltex’s sales strategy” to the practice alleged in paragraph 63.
Paragraph 32.2
[27] For the second and third defendants, Mr Olney sought particulars of the generic allegation made against each of the defendants in paragraph 32.2 of 3ASC. In relation to a cause of action under s 9 of the Fair Trading Act for conduct prior to the allotment of shares, that paragraph alleges that each of the defendants engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in their role and conduct in the preparation, content and publication of [inter alia] a May 2004 NZX announcement. Paragraph 20 of 3ASC alleges that the relevant NZX announcement was made in May 2004 by Messrs Saunders and Magill “… on behalf of all of the directors”.
[28] In alleging a cause of action in negligence, paragraph 85.2 alleges that each defendant assumed, or is deemed to have assumed, responsibility to potential investors in Feltex to take reasonable care, inter alia, in the preparation, content and publication of the May 2004 NZX announcement.
[29] Mr Olney sought further particulars as to the facts and circumstances upon which it is alleged that Credit Suisse entities had any involvement in that announcement, or can be said to have assumed responsibility for its content.
[30] Mr McLellan QC for the fourth defendant and Mrs Challis for the fifth defendant supported Mr Olney’s concern and confirmed that the same issue arose for those parties.
[31] Mr Forbes has undertaken to review the adequacy of this pleading, and respond by 27 September 2013. I indicated to him that I was sympathetic to what appears to be an inadequacy in this aspect of the pleading.
Timetable slippages
[32] Mr Olney also wished to address delays by the plaintiff in attending to certain matters:
Theplaintiff was to give discovery of JAFL documents by 24 July 2013 but that has not been possible. By consent, I ordered that that is to occur by 27 September 2013.
Furtherdiscovery by Hunter Hall, including documents going to whether Hunter Hall was a qualifying shareholder. This has not been subject to a specific date and Mr Forbes and Ms Mills explained certain difficulties in completing the work necessary. I direct that that discovery is to be provided as soon as possible and at the latest by the date of service of the plaintiff’s briefs of evidence, which is scheduled for 25 October 2013.
MrOlney was also concerned at the absence of details of the losses claimed by represented shareholders. However, he accepts that an adequate form of that now appears in a schedule attached to the synopsis of submissions for the plaintiff that is dated (Sunday) 15 September 2013.
[33] Mr Olney also flagged the intention of the second and third defendants to challenge the inclusion in 3ASC of what are treated as new allegations, and whether
they introduce a new cause of action that cannot be introduced by amendment at this stage. There is an issue whether Credit Suisse or other defendants may apply to have those allegations struck out.
[34] I will have the Registry liaise with counsel as to possible dates as soon as possible. It would be of assistance if the second and third defendants could promptly file the interlocutory applications that they intend to make in this regard.
Dobson J
Solicitors:
Wilson McKay, Auckland for plaintiff
Bell Gully, Auckland for first to third-named and fifth to seventh-named first defendants Clendons, Auckland for fourth-named first defendant
Russell McVeagh, Wellington for second and third defendants Jones Fee, Auckland for fourth defendant
McElroys, Auckland for fifth defendant
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