Ingenious Asset Management Limited v McConnon
[2024] NZHC 624
•21 March 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-2103
[2024] NZHC 624
IN THE MATTER OF the Companies Act 1993 BETWEEN
INGENIOUS ASSET MANAGEMENT LIMITED
Plaintiff
AND
SIMON MCCONNON
First Defendant
JOHN BAIRD MCCONNON
Second Defendant… cont over
Hearing: 11 March 2024 Counsel:
G Jindal for the Plaintiff
K P McDonald / N P D Percy for the First, Second and Third Defendants
R M Stewart / A J Wakeman for the Fourth and Fifth DefendantsJudgment:
21 March 2024
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 21 March 2024 at 12 midday Pursuant to r 11.5 of the High Court Rules.
…………………..
Registrar/Deputy Registrar
Solicitors/Counsel:
Ormiston Legal, Auckland
D’Archy Thompson Law, Christchurch Fee Langston, Auckland
Kevin McDonald & Associates, Auckland Freedom Chambers, Christchurch
INGENIOUS ASSET MANAGEMENT LTD v MCCONNON [2024] NZHC 624 [21 March 2024]
AND KEVIN BRUCE RAMSEY
Third Defendant
STEPHEN MARK LAWRENCE
Fourth Defendant
CHRISTOPHER CAREY MCULLAGH
Fifth Defendant
Introduction
[1] Global Dairy Ltd (in liquidation) (Global Dairy) was placed into liquidation on 13 March 2020. Global Dairy’s creditors included MG International Ltd (MG), Northern Foods (1991) Ltd (Northern Foods) and Health & Nutrition Dairy Trust Ltd (H&N). Those three creditors are collectively referred to as the creditors.
[2] The creditors received a distribution in the liquidation of approximately 48% of the debts they claimed in the liquidation. The collective shortfall is approximately
$42,000 and interest.
[3] Between May and July 2023, the creditors purported to assign their unsatisfied claims in the liquidation to the plaintiff, Ingenious Asset Management Ltd (Ingenious). The consideration for each of the assignments was $1.
[4] In this proceeding, Ingenious seeks to bring causes of action against three directors of Global Dairy and the liquidators of Global Dairy, on the basis that the causes of action were available to the creditors and assigned to Ingenious.
[5] The directors and the liquidators have filed statements of defence, and now seek orders requiring Ingenious to give security for the defendants’ costs. The defendants seek an order that Ingenious pay $200,000 into Court, in stages, on a global basis for all defendants.
[6] Ingenious concedes that the threshold for an order for security of costs has been met. Ingenious argues that global security for all steps in the proceeding should be
$31,500 and asks the Court to exercise its discretion and limit security to an undertaking from a director of Ingenious, Dr Jindal, to meet any adverse costs award against Ingenious.
Legal principles
[7] The Court has a discretion to grant an application for security of costs under r 5.45(2) of the High Court Rules 2016 if it would be just in all the circumstances to
do so. That discretion is, however, only engaged if the threshold test in r 5.45(1) is met, as admitted in this case.
[8] Exercise of the Court’s discretion under r 5.45(2) requires a balancing of the interests of the plaintiff and defendant, as summarised by the Court of Appeal in A S McLachlan Ltd v MEL Network Ltd:1
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
[9] The following additional principles, extracted from case law, are relevant to the balancing exercise:
(a)While the Court will endeavour to assess the merits and prospects of success of the plaintiff’s claim, there are limits in the ability to do so at a summary stage of the proceeding.2
(b)If the defendants’ conduct has caused the plaintiff’s impecuniosity, that may be a factor against security for costs.3
(c)Delay in applying for security for costs may be a factor against security for costs.4
[10] If the applicant persuades the Court to exercise its discretion and order security for costs, the Court is then required to determine the amount of security and whether a stay should be ordered pending provision of the security.5
1 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
2 McNaughton v Miller [2022] NZCA 273 at [19].
3 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [23(a)].
4 Jo v Johnston [2013] NZHC 552 at [18].
5 Busch v Zion Wildlife Gardens Ltd (in rec and in liq) [2012] NZHC 17 at [2].
The merits of the plaintiff’s claims
The assignments
[11] The liquidators investigated the conduct of the directors who are now defendants in this proceeding, Messrs Simon McConnon, John Baird McConnon and Kevin Ramsey. The liquidators determined that it was appropriate to file a proceeding against the directors alleging breach of the directors’ duties under the Companies Act 1993 (the Companies Act). The creditors declined to participate in or fund that proceeding, and the liquidators issued the proceeding at their own cost.
[12] The liquidators settled with the directors. Pursuant to the settlement deed, Messrs Simon and John Baird McConnon paid $250,000 to Global Dairy (the settlement payment) and the deed recorded a compromise as follows:
The terms of this Deed are in full and final settlement, satisfaction and release of matters, claims and disputes between GDL, the liquidators, Simon, Baird, Kevin and the Proceedings.
[13] The liquidators deducted their fees and costs from the settlement payment, and the balance was distributed to the creditors to discharge approximately 48% of the creditors’ claims in the liquidation.
[14] The deed of assignment between MG and Ingenious is dated 21 May 2023. The operative part is as follows:
Whereas the assignor is a creditor of GLOBAL DAIRY LIMITED (6069702) and hence is a claimant of funds and monies in the liquidation pursuant to sections 253, 312, 313 and Schedule 7 of the Companies Act 1993 (the Property).
The Assignor and the Assignee agree that the above Property should be assigned to the Assignee.
Now it is hereby agreed as follows:
In consideration of the payment of the sum of One New Zealand Dollar (the receipt whereof the Assignor hereby acknowledges) the Assignor hereby assignees to the Assignee the above identified Property in full, together with all rights, remedies, interests and powers.
[15] The deed of assignment between Northern Foods and Ingenious is dated 3 July 2023. The operative part is as follows:
Whereas Global Dairy Limited (6069702) (in liq) is indebted to the Assignor. The Assignor’s claim against Global Dairy Ltd was admitted by the liquidators of Global Dairy Limited (in liq) and during the liquidation process, partial recovery of approximately 48% was made but there remains a significant amount of money (including interest) which has not been recovered (the Property).
The Assignor and the Assignee agree that the above Property and all related legal and equitable rights should now be absolutely assigned to the Assignee.
Now it is hereby agreed as follows:
In consideration of the payment of the sum of One New Zealand Dollar (the receipt whereof the Assignor hereby acknowledges) the Assignor hereby absolutely assigns to the Assignee all the above identified Property in full, together with all things in action, legal rights, remedies, interests, and powers. This absolute assignment includes rights to claim any interest, costs, and repayment of debt from Global Dairy Limited and/or its past and present directors and/or its managers, administrators, liquidators, or receivers.
[16] The deed of assignment between H&M and Global Dairy is dated 19 July 2023. The form is substantially the same as the deed between Northern Foods and Global Dairy.
Ingenious’ causes of action in this proceeding
[17] Ingenious pleads that it is a creditor of Global Dairy, by virtue of the assignments and s 50 of the Property Law Act 2007 (the Property Law Act) which provides for the absolute assignment of things in action.
[18] Ingenious claims against the directors for knowing assistance in a breach of trust, or alternatively for knowing receipt of trust property. In essence, the key pleadings are:
(a)the creditors made payments to Global Dairy that were “impressed with a trust”;
(b)Global Dairy breached the trust and misapplied the funds; and
(c)the directors knowingly assisted in that breach of trust or knowingly received the trust money.
[19] Ingenious pleads alternative causes of action against the directors for breach of duties in the Companies Act, including allowing Global Dairy to trade while insolvent, failing to act in good faith and in the best interest of Global Dairy, reckless trading, incurring obligations that Global Dairy was unable to perform and failing to exercise reasonable care while acting as directors. Ingenious seeks a remedy under s 301 of the Act.
[20]Against the liquidators, Ingenious pleads that:
(a)the settlement payment was a recovery of the “entrusted property” and not part of the pool of assets in the liquidation of Global Dairy available to unsecured creditors; and
(b)the liquidators were only entitled to charge a reasonable salvage cost, and not entitled to deduct their actual fees and costs.
[21] Ingenious seeks an order that the liquidators repay part of their fees and costs, with the payment to be made to Ingenious pursuant to s 301 of the Companies Act.
[22] In addition, Ingenious pleads that the liquidators failed to comply with a duty under s 60 of the Insolvency Practitioners Regulation Act 2019, to investigate the conduct of the directors, and the liquidators failed to conduct a proper investigation of the affairs of Global Dairy.
Legal principles applicable to assignments
[23] Assignment of a debt is permissible and specifically provided for in s 50 of the Property Law Act, even where litigation will be necessary to recover the debt.6
[24] However, assignments of bare causes of action in tort and other personal actions are, with certain exceptions, not permitted in New Zealand.7 The recognised
6 Camdex International Ltd v Bank of Zambia [1998] QB 22, [1996] 3 All ER 431 (CA);
PricewaterhouseCoopers v Walker [2017] NZSC 151, [2018] 1 NZLR 735 at [78].
7 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at [57].
exceptions are an assignment to a party with an antecedent commercial relationship with the assignor, or an assignment by a liquidator.8
[25] When determining whether there has been an impermissible assignment of a bare cause of action, the Court should look at the totality of the transaction.9 If the cause of action is ancillary to a property right that has been assigned, then it is not an assignment of a bare cause of action.10
[26] An assignment may be impermissible when the substance of the transaction is analysed even if the form of the transaction is “dressed up” as an assignment of debt.11
Ingenious’ argument
[27] The creditors made payments to Global Dairy for goods to be supplied by Global Dairy. Mr Jindal submitted that the payments to Global Dairy gave rise to a constructive trust or equitable lien over the money, relying on Herbert Equities Ltd v Mamfredos.12
[28] On that basis, it was argued that the creditors assigned to Ingenious: their equitable rights; the debt obligations owed by Global Diary to the creditors; and the creditors’ rights in the liquidation of Global Dairy arising under the Act. Mr Jindal submitted that these various rights are property rights and not bare causes of action.
[29] It was submitted that the assigned equitable rights include the creditors’ rights against the liquidators for failing to account to the creditors for the full amount of the
$250,000 recovered from the directors less only reasonable salvage costs.
[30] Mr Jindal submitted that the assigned causes of action are incidental to the assigned property rights.
8 PricewaterhouseCoopers v Walker, above n 6, at [77].
9 Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (HL) at 703.
10 At 703.
11Camdex International Ltd v Bank of Zambia, above n 6, at 38–39; PricewaterhouseCoopers v Walker, above n 6, at [79].
12 Herbert Equities Ltd v Mamfredos HC Auckland CIV-2005-404-3679 18 September 2009.
Analysis
[31] It is difficult to evaluate the merits of Ingenious’ claim that the creditors had equitable rights against Global Dairy when there is no evidence on that topic. Herbert Equities involved a breach of fiduciary duties owed by the defendant to the plaintiff. Ingenious will need to establish that there was a fiduciary relationship between the creditors and Global Dairy, rather than an orthodox relationship of customer and supplier.
[32] Ingenious seeks to rely on s 301 of the Companies Act in circumstances where the liquidators have already commenced and settled a proceeding under that section. No counsel was able to point to any authority on whether these circumstances prevent a creditor of Global Dairy from bringing a second and subsequent claim under s 301, on the grounds of a compromise, res judicata, or estoppel.
[33] Even if the creditors’ claims against the directors and liquidators are arguable, the more fundamental problem is the validity of the assignments. All defendants have a strong argument available to them that the assignments are impermissible assignments of bare causes of action.
[34] The creditors proved in the liquidation, and the liquidators’ reports confirm that the distributions were made to the creditors as unsecured creditors. After the distributions, the creditors’ outstanding debts were prima facie worthless. The creditors were prepared to assign their rights for $1. There is no evidence that the creditors have any interest in the outcome of this proceeding.
[35] Ingenious had no antecedent commercial interest in the subject matter of the assignments. Ingenious has offered no explanation of its motivation for accepting the assignments and commencing this proceeding.
[36] At the time of the assignments, Ingenious was aware that there would be no further distributions in the liquidation towards satisfaction of the debts, and it is at least arguable that in substance the rights assigned were the creditors’ personal causes of action against the directors and the liquidators.
[37] It is common ground that Ingenious has no assets, and its sole director is Dr Jindal, the wife of Mr Jindal, counsel for Ingenious. This raises the issue of whether Ingenious is simply a vehicle for Mr Jindal and Dr Jindal to pursue causes of action personal to the creditors, which suggests trafficking in litigation.
Conclusion on the merits of Ingenious’ claims
[38] My preliminary view is that Ingenious’ claims are problematic and carry a serious risk of failure.
Other discretionary factors
[39] This is not a situation where Ingenious finds itself taking on the cost and risk of litigation due to conduct of the defendants directed towards Ingenious. Ingenious has voluntarily assumed the cost and risk of this litigation.
[40] This is not a situation where Ingenious finds itself impecunious as a consequence of the defendant’s conduct. No explanation has been offered regarding Ingenious’ impecuniosity, which is admitted.
[41] Dr Jindal has offered an undertaking to meet any costs ordered in favour of the defendants against Ingenious. In support of that undertaking, Dr Jindal refers to her unblemished credit history and standing in the community. Dr Jindal does not offer any evidence regarding her personal financial situation.
[42] Dr Jindal deposes that she is prepared to give an undertaking as trustee of Sira Trust, which owns two leasehold properties. The value of the Trust’s equity in the properties is said to be approximately $110,000. Dr Jindal is prepared to commit the Trust to giving a charge over the properties.
[43] However, Dr Jindal has not provided any evidence to confirm her power to grant such charges in her capacity as a trustee of the Sira Trust. The trust deed is not in evidence. There is no evidence of the value of the Trust’s two properties.
[44] Given the lack of certainty regarding Sira Trust’s ability to give or meet an undertaking, I consider that this is an appropriate case for security to be in the form of a payment into Court.
Quantum and staging
[45] I accept the submissions of counsel for the defendants that a staged global award is appropriate.
[46]Mr Jindal relies on r 14.15 of the HCR, which provides:
14.15 Defendants defending separately
The court must not allow more than 1 set of costs, unless it appears to the court that there is good reason to do so, if—
(a)several defendants defended a proceeding separately; and
(b)it appears to the court that all or some of them could have joined in their defence.
[47] Rule 14.15 does not necessarily apply in this case. The positions of the three directors in this proceeding are not identical. Mr Ramsey asserts that he had no knowledge of certain key acts by Simon McConnon and John Baird McConnon. It is appropriate for Mr Ramsey to have independent representation. The interests of the liquidators are discreet and require separate representation.
[48] However, there is scope for all five defendants to cooperate in advancing aspects of their defences where their interests are the same. Mr Jindal submitted that the size of any global award of security should reflect the degree of cooperation to be expected from the defendants, which should limit the plaintiff’s exposure to an adverse costs award.
[49]The plaintiff has applied for:
(a)orders striking out those parts of the defences that plead that the assignments were invalid; and
(b)summary judgment for a declaration of trust in respect of the payments made by the creditors to Global Dairy.
[50] The defendants intend to file cross-applications for strike out of the plaintiff’s claim, or for defendants’ summary judgment, primarily on the ground that the assignments were invalid. The defendants can be expected to cooperate in prosecuting those applications.
[51] I convened a telephone conference with counsel on 19 March 2024 to discuss the future conduct of the proceeding, and to ascertain whether there is a consensus view on the steps to be included in stage one for the purpose of fixing security.
[52]The parties agree that the plaintiff’s application for strike out, being orders 1
(a) and (b) of the plaintiff’s application dated 30 January 2024 (not the plaintiff’s claim for summary judgment), and the cross-applications by the defendants for strike out and/or summary judgment should be heard together.
[53] There will need to be limited tailored discovery from the plaintiff before the defendants are required to file their applications for strike out and/or summary judgment. The discovery would be limited to all documents relevant to the assignments. The defendants will be required to complete inspection.
[54] During the telephone conference, the parties agreed that determination of the cross-applications for strike out will be stage one for security.
[55] All parties have made submissions on likely awards of costs on a 2B basis if the defendants are successful in striking out the plaintiff’s claim. Initially, the defendants prepared their estimate of 2B costs on the basis that there would be costs ordered for all steps in respect of both the plaintiff’s application for strike out and the defendants’ applications for strike out, including certification for second counsel.
[56]I have revised the defendants’ estimate of 2B costs and disbursements to be
$25,895, as set out in sch 1 annexed to this judgment. This revised estimate is based on the following assumptions:
(a)The cross-applications for strike out will require only one hearing.
(b)As recorded in the “Amount Claimed” column in sch 1, the defendants would be entitled to a global award of costs for steps 11, 22, 24, 25 and 29, but three separate awards (for the first and second defendants as to one part, the third defendant as to one part and the fourth and fifth defendants as to one part) for steps 13, 21, 23 and 26.
(c)That includes an allowance for three counsel to appear at the hearing, one for each of the defendant groups, but no certification for second counsel.
[57] Mr Jindal submits that costs would be $13,277, based on various reductions to 2B costs, only one award for all defendants as a group, and a further discount of 40% to ameliorate the impact that security might have on the plaintiff’s ability to proceed with the claim.
[58] Given my assessment of the merit of the plaintiff’s claim, I consider that the defendants’ revised estimate of costs is reasonable, justifying global security for stage one of $25,000.
[59] I consider that it is appropriate to defer fixing security for the balance of the proceeding until the first stage is completed.
Costs
[60] My preliminary view is that costs should follow the event in respect of this application, and the defendants are the successful parties. I consider that it was appropriate for:
(a)the three groups of defendants to each bring separate applications for security;
(b)one counsel to represent the director defendants at the hearing;
(c)separate representation for the liquidators at the hearing, because their interests are sufficiently distinct.
[61] Counsel shall endeavour to agree costs. I will make directions for submissions on costs should agreement not be reached.
Orders
[62] The plaintiff shall pay $25,000 into Court as security of costs for all defendants globally, for all steps in the proceeding until determination of the plaintiff’s application for strike out and any cross-applications by the defendants for strike out and/or summary judgment.
[63] Leave is reserved to the defendants to apply for further security following completion of the above steps.
[64] Leave is reserved to the plaintiff to apply for a variation of the amount of security for stage one if the defendants do not apply for orders striking out the proceeding and/or for summary judgment.
[65] Leave is reserved to the defendants to apply for a variation of the amount of security for stage one if the plaintiff elects to proceed with its claim for summary judgment (in addition to or instead of the claim for strike out, being orders 1 (a) and
(b) of the plaintiff’s application dated 30 January 2024).
[66]This proceeding is stayed until the plaintiff complies with the order in [62].
[67] On payment of the security, the proceeding shall be allocated a case management conference for further directions regarding the applications for strike out.
[68] If the parties cannot agree on costs in respect of the applications for security then:
(a)The defendants may file and serve memoranda on costs, of no more than four pages, by 5 April 2024;
(b)The plaintiff may file and serve a memorandum in reply, of no more than four pages, by 19 April 2024; and
(c)I will then determine costs on the papers.
Associate Judge Brittain
Schedule 1
| Step | Description | Amount Claimed | Time Allocation (Band B) | Total (Category 2) |
| Case management | ||||
| 11 | Filing memorandum for subsequent case management conference or mentions hearing. | 1 | 0.4 | $956 |
| 13 | Appearance at subsequent case management conference. | 3 | 0.3 | $2,151 |
| Interrogatories, discovery and inspection | ||||
| 21 | Inspection of documents. | 3 | 0.5 (reduced from 1.5) | $3,585 |
| Applications for Strike Out/Summary Judgment | ||||
| 23 | Filing notice of opposition to plaintiff’s interlocutory application. | 3 | 0.6 | $4,302 |
| 22 | Filing interlocutory application. | 1 | 0.6 | $1,434 |
| 24 | Preparation of written submissions. | 1 | 1.5 | $3,585 |
| 25 | Preparation of bundle for hearing. | 1 | 0.6 | $1,434 |
| 26 | Appearance at hearing of defended application for sole or principal counsel. | 3 | 1 | $7,170 |
| 29 | Sealing order or judgment. | 1 | 0.2 | $478 |
| Subtotal (Calculated @ $2,390 per day= Category 2 proceeding) | $25,095 | |||
| Disbursements | ||||
| Filing Fee - Interlocutory Application ($500). | $500 | |||
| Filing Fee- Notices of Opposition x 3 ($110 x 3). | $330 | |||
| Total | $25,895 | |||
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