Insurego Limited v Harris
[2014] NZHC 2261
•18 September 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-003789 [2014] NZHC 2261
UNDER the Companies Act 1993 BETWEEN
INSUREGO LIMITED First Plaintiff
AND
PACIFIC TRUSTEES & NOMINEES LIMITED
Second Plaintiff
AND
PETER ALLAN HARRIS First Defendant
AND
ALISTAIR LEIGHTON HUTCHISON Second Defendant
Hearing: 16 September 2014 Appearances:
A R Gilchrist for Applicants (Plaintiffs)
R E Harrison QC for Respondents (Defendants)
F J Thorp for non-party, Crowe Horwath New Zealand
(appearing but then excused)
No appearance for non-party, ANZ National Bank Limited
(attendance excused)Judgment:
18 September 2014
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
as to particular discovery
This judgment was delivered by me at 3.30 pm on 4 July 2014 pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
INSUREGO LIMITED v PACIFIC TRUSTEES & NOMINEES LIMITED [2014] NZHC 2261 [18 September
2014]
Introduction
[1] The plaintiffs apply for orders that the defendants discover particular documents.
Background to the plaintiffs’ claim
[2] The plaintiffs’ claim relates to the sale of their shares in CBL Insurance Ltd (CBL). The plaintiffs are associated with Anthony Thomas, who was previously involved, alongside the defendants, in governance and executive positions within CBL. The plaintiffs held shares in CBL.
[3] In December 2008, after Mr Thomas had left CBL, each plaintiff entered into an agreement for the sale and purchase of its shares to the defendants and entities associated with them. The purchase price of each share was 23 cents, equating to a total sale price of $1,150,000 for the first plaintiff and of $115,000 for the second plaintiff.
[4] The plaintiffs now assert that the fair value of the shares at the time of the sale was 72 cents per share.
[5] The plaintiffs assert that the defendants, in their capacities as directors of CBL, were in possession of information which would not otherwise have been available to them and which was material to an assessment of the value of the shares. The plaintiffs plead six alternative causes of action, including a breach of s 149 of the Companies Act 1993. They sue for the 49 cent per share difference between the sale price and the asserted value (representing claims of $2,450,000 and $245,000 for the first and second plaintiffs respectively).
[6] The plaintiffs assert that the negotiated sale price was based on the accuracy of the audited accounts of CBL for the year ending 31 December 2007. The plaintiffs assert that although those accounts reflected fair value as at 31 December
2007, they did not indicate the fair value of the shares at the time of the agreement in December 2008. The plaintiffs say that management accounts provided by the defendants in June 2008 were consistent with the 31 December 2007 accounts but
differed significantly from the subsequent December 2008 accounts (the December accounts not being shown to the plaintiffs before the agreements were signed). They further say that there were oral representations by the defendants throughout 2008 that the financial position of CBL was “not great”.
[7] The defendants deny the plaintiffs’ claims and seek a declaration that they did not contravene s 149(1)(a) of the Companies Act 1993. They also counterclaim for other orders related to such a declaration.
Particular discovery
The Rule
[8] Rule 8.19 High Court Rules provides:
8.19Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a) to file an affidavit stating—
(i) whether the documents are or have been in the party's control; and
(ii) if they have been but are no longer in the party's control, the party's best knowledge and belief as to when the documents ceased to be in the party's control and who now has control of them; and
(b) to serve the affidavit on the other party or parties; and
(c) if the documents are in the person's control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.
[9] I adopt, in relation to r 8.19, what I observed in Managh (as liquidator of
Titan Building (HB) Ltd (in liq)) v Hasselman):1
[4] Rule 8.19 (formerly, 8.24) refers to an order for particular discovery, rather than to further and better discovery, but its use is in relation to a situation where a party has provided discovery which is found to be deficient.
[5] Rule 8.19 gives the Court a discretion to order particular discovery where there are grounds for believing that a party has not discovered one or more documents or a group of documents which ought to have been discovered.
[6] The predecessor rule, r 300, required an applicant to establish that the order is necessary. The present rule does not - an amendment representing a “significant relaxation” of the previous threshold: ANZ National Bank Ltd v Tower Insurance Ltd.
[7] The plaintiff must generally establish a prima facie indication the documents are or have been in the party's control, but the plaintiff does not need to prove that the documents actually exist. See Simunovich Fisheries Ltd v Television New Zealand Ltd (No 6).
[8] The plaintiff must also establish that the documents sought are relevant as posited by the authors of McGechan at HR 8.19.03(3).
The touchstone of relevance should be fashioned or tailored to reflect those matters which will be actually in issue before the Court.
[10] I adopt also the approach of Asher J in Air National Corporate Ltd v Aiveo Holdings Ltd,2 in which his Honour favoured an assessment (for r 8.19 purposes) akin to tailored discovery (under rr 8.8–8.10). His Honour noted:3
It has been observed that it would be rare that an order would be made for particular discovery if such an order is not necessary to do justice between the parties. I agree with the observation of Wylie J in ANZ National Bank Ltd v Tower Insurance Ltd that this reservation does not go to the basis on which the discretion falls to be exercised. In my respectful view now that the requirement for necessity has been removed it is best to put the concept of necessity to one side. An application for particular discovery can be approached as an assessment of discoverability under the rules, akin to an assessment of a tailored discovery application.
1 Managh (as liquidator of Titan Building (HB) Limited (in Liq)) v Hasselman HC Napier CIV-
2011-441-824, 1 June 2012 (footnotes omitted).
2 Air National Corporate Ltd v Aiveo Holdings Ltd [2012] NZHC 2258.
3 At [15] (footnotes omitted).
[11] The parties have an obligation to ensure proportionality,4 which has a relationship to the concept of tailored discovery under r 8.8. I adopt what I said in Karam v Fairfax New Zealand Ltd:5
The discovery rules which came into effect on 1 February 2012 were designed to reduce disproportionate cost and delays caused by discovery and to reduce the tactical use of discovery. They do that in a number of ways. Particularly relevant to this case are the duties to:
(a) co-operate to ensure that the processes of discovery and inspection are proportionate and facilitated by agreement on practical arrangements (r 8.2(1)); and
(b) to consider options to reduce the scope and burden of discovery (r
8.2(2)), such as by standard discovery under r 8.7 (involving an adverse documents regime) or by tailored discovery under r 8.8 (tailoring discovery to meet the interests of justice).
[12] The legislated focus on proportionality therefore has a similar purpose to the Court’s traditional focus in discovery matters on whether an order would be oppressive. As I stated in Karam v Fairfax New Zealand Ltd,6 the concept of proportionality involves a balancing of the time and costs of making discovery against the potential value of discovery. It is the concept of proportionality which now reinforces and sharpens the requirement that a discovery order not be oppressive.
[13] The potential scope of a discovery order is dealt with by r 8.14 High Court Rules which provides that a party must make a reasonable search for documents within the scope of the discovery order.7
[14] The scope of a discovery order is dealt with specifically in relation to electronically stored data by r 8.12, which relevantly provides:
Orders that may be made
…
(4) A discovery order does not require a party to discover electronically stored information that is not primary data.
4 High Court Rules, r 8.2(1)(a).
5 Karam v Fairfax New Zealand Ltd [2012] NZHC 887 at [131].
6 At [137]–[142].
7 What amounts to a reasonable search depends on the circumstances and has regard to factors identified in High Court Rules r 8.14(2).
(5) Despite subclause (4), the Judge may order a party to discover electronically stored information that is not primary data if the Judge is satisfied that the need for, and the relevance and materiality of, the non-primary data sought justify the cost and burden of retrieving and producing that data.
(6) For the purposes of this rule, primary data means active data and readily retrievable archival data.
The focus of this application
[15] It is common ground that CBL’s June 2008 management accounts (which were provided to the plaintiffs during the negotiations) recorded a net profit of
$832,683 whereas the 2008 published accounts (post-dating the sale agreements) showed a net profit of $6,299,000. The plaintiffs’ asserted fair value figure for the CBL shares of 72 cents per share stems from the December 2008 accounts.
[16] Mr Gilchrist, for the plaintiffs, in his written synopsis described in this way the documents of which particular discovery is sought:
In broad terms, it is documentation … showing how there was such an improvement in company performance that is sought, as it will show what information the Defendants had that bore on CBL’s performance that was not available to the Plaintiffs and allow the Plaintiffs experts to take all relevant information into account when assessing fair value.
[17] Mr Gilchrist observed that the documents sought by the plaintiffs fall into two categories, namely those said not to have been provided at all and those in relation to which material has been discovered but to a lesser extent than ought to have been. I will deal with the items in the application in that order.
Categories of documents not provided
(a) Documentation relating to the audit of CBL for the year ending 31 December
2008
[18] CBL’s audits have been completed by Crowe Horwath New Zealand.
[19] Discovery orders were made in this proceeding on 10 December 2013 and amended on 12 March 2014 (collectively “the discovery order”). Relevantly, the discovery order required the defendants to discover correspondence to and from
CBL’s auditors relating to the period 1 August 2007 to 31 December 2008 regardless of the date on which the documents were created.
[20] It is common ground that the documents to December 2007 have been disclosed (through the informal cooperation of Crowe Horwath). The defendants were apparently under the misapprehension that the Crowe Horwath disclosure had included documents relating also to the 2008 period. Crowe Horwath has clarified through counsel that the informal disclosure covered only the 2007 period.
[21] The defendants’ notice of opposition asserted that all documentation relevant to the 2008 year had been disclosed. In the initial affidavit in opposition the first defendant deposed that CBL’s Chief Financial Officer, Carlin Mulholland, had diligently perused the paper records and had aggregated as best he could the existing information (including audit information) and made that available to the plaintiffs. Mr Harris also deposed that he had spent “numerous hours” searching bank records and that a search had been “a very difficult and time consuming exercise”. He referred to having been out of the country on business for 56 days in a little less than four months. Mr Mulholland also provided an affidavit but did not deal specifically with the documentation in relation to the 2008 audit.
[22] In terms of r 8.19, I find that there are grounds to believe that the defendants have not discovered documents in relation to the CBL audit for 2008. The parties have already recognised the relevance of those documents by including them in the discovery order. They should have been discovered and have not been.
[23] There will be an order for their discovery.
(b) Correspondence between CBL and any rating agency
[24] The discovery order required the defendants to discover correspondence to and from rating agencies relating to the period 1 August 2007 to December 2008 regardless of when the documents were created.
[25] The defendants gave no discovery of documents in this category. The plaintiffs seek an order for discovery which encompasses all correspondence
between CBL and any rating agency up to the end of 2010 insofar as the correspondence relates to the period up to December 2008. The reason for the application is that Standard and Poor’s made a Press release on 10 May 2010 in which it was stated:
Underlying earnings increased to NZ$2.8 million for the year ended Dec. 31,
2009, from NZ$1.9 million the previous year.
[26] In other words, it is clear that Standard and Poor’s had been provided with
information as to CBL’s $1.9 million profit in 2008.
[27] The defendants opposed the plaintiffs’ application upon the basis that CBL’s correspondence with any rating agency until 2010 was irrelevant as CBL did not receive its first rating until May 2010.
[28] The defendants’ ground of opposition misses the point, namely that CBL had evidently provided Standard and Poor’s with information as to its 2008 performance. Mr Mulholland’s evidence in opposition provided further clarification of what had occurred, Mr Mulholland deposing that in January 2010 CBL had received Standard and Poor’s modelling spreadsheets and had completed those (prior to receiving a rating). Mr Mulholland goes on to state that there is no information in the spreadsheets relating to or referring to fair value.
[29] How CBL presented its 2008 performance and financial position is relevant. Mr Mulholland’s evidence identifies the spreadsheets as the means by which CBL relayed that information to Standard and Poor’s. There will be an order in that regard.
(c) Correspondence between CBL’s bankers and the defendants in relation to
CBL’s accounts from 1 August 2007 to 31 August 2008
[30] Correspondence between CBL’s bankers and CBL (or the defendants) was not
targeted in the discovery order.
[31] The plaintiffs nevertheless applied for an order that such correspondence be produced on the grounds that the documents should have been discovered in terms of r 8.19.
[32] The defendants’ grounds of opposition related not to the absence of a previous discovery order but rather to the proposition that they had no such documentation relevant to any issue in the proceeding.
[33] In correspondence after the plaintiffs’ application was made, Mr Gilchrist explained to the defendants’ solicitors the focus of the request for correspondence with the bank. He explained that Mr Thomas was aware that in 2007 CBL had guaranteed a company in which both defendants were shareholders. What was sought was any correspondence between the defendants and the bankers relevant to the accounts of CBL.
[34] Mr Mulholland’s affidavit of opposition addressed this category of documents. He deposes that CBL did not provide guarantees but rather then defendants and he provided personal guarantees to the bank. This was done to protect CBL from incurring an otherwise substantial loss on the bonds provided on behalf of a client introduced by Mr Thomas to CBL. The client had become insolvent.
[35] Faced with Mr Mulholland’s explanation (that is that the guarantees were being provided not by CBL but by the individuals in favour of CBL), Mr Gilchrist submitted simply that it was incomprehensible that the Bank would allow borrowings without seeing the accounts.
[36] For two reasons, the application cannot succeed. First, the targeted discovery agreed by the parties did not encompass the bank documents and it is not possible to conclude in terms of r 8.19 that bank correspondence should have been discovered. (I recognise that the plaintiffs may nevertheless have sought a discovery order by way of an amended application under r 8.17, High Court Rules for variation of the existing discovery order, but such would have been inappropriate for the reason which immediately follows). Secondly, copies of the accounts sent to the Bank add
nothing, as the accounts are already the subject of discovery. There is no relevance to the requested correspondence in that regard. There will be no order in relation to CBL’s correspondence with its bankers.
Incomplete discovery
(a) Non-deductible expenses
[37] CBL’s accounts for 2008 identified non-deductible expenses of $565,000 incurred by CBL.
[38] The plaintiffs applied for an order that the defendants provide “a list of the non-deductible expenses and associated dollar values of those expenses for the 2008 year”.
[39] The defendants opposed the application upon the basis that they do not possess a list of the expenses as sought. They also noted that information had previously been provided to the plaintiffs as to the approximate make-up of the expenses. Mr Mulholland has since deposed in some more detail as to the origin of this item in the accounts.
[40] Mr Gilchrist indicated that the plaintiffs regarded this aspect of the application as resolved by the information provided in Mr Mulholland’s affidavit. No order is pursued.
(b) Related party receivables/impairment losses
[41] CBL’s accounts had shown significant impairment losses. By the application and Mr Thomas’s supporting affidavit, the plaintiffs sought a schedule of associated related parties, the dollar value of the receivables, and the impairment against each receivable, together with an identification of whether any of those related parties being receivables have also been related parties before.
[42] After the application was filed, the defendants’ solicitors explained the single
set of transactions (involving a fully owned subsidiary) to which the impairment
losses relate. They stated that no schedule of the associated related parties exists. The related party balances are set out in notes to the audited accounts for each year.
[43] Mr Mulholland has exhibited a document (located by a staff member in a hunt for historic information) which contains detail as to the impairment losses associated with subsidiary.
[44] The relevant information has therefore now been produced. Mr Gilchrist confirmed that in the circumstances the plaintiffs do not seek an additional affidavit verifying that document.
[45] No order will be made in this regard.
(c) Outstanding insurance claims
[46] CBL’s accounts for 2007 and 2008 identified the totals of outstanding insurance claims (approximately $3 million and $5 million respectively). The plaintiffs had requested a schedule showing client names and balances to identify the makeup of the total figures.
[47] When the defendants did not provide such a schedule the plaintiffs applied for such an order that the defendants produce such a schedule “for the years ending December 2007 and 2008”.
[48] Shortly after the application was filed, the defendants’ solicitors provided by
letter a detailed schedule of the insurance claims as at 1 December 2007 and 1
December 2008 respectively. They also provided notes provided by the auditors on outstanding insurance claims.
[49] Mr Gilchrist submitted that a similar schedule should be provided of outstanding insurance claims as at June 2008 (or that the defendants should produce the source documentation that existed at the time – a category of documents not specified in the application itself).
[50] Mr Mulholland deposed that a schedule does not exist for the June 2008 period. He deposes that to source the required detail for a particular date would involve great difficulty having regard to the lapse of time.
[51] As with a number of other aspects of the plaintiffs’ application, Mr Gilchrist accepted in the course of his submissions that the request for the compilation of a schedule is more appropriately the subject of interrogatories than of a discovery application. Prime records might have been an appropriate subject matter if applied for. That said, the more fundamental difficulty with this application is that neither relevance nor proportionality is established. The plaintiffs entered the agreements for sale and purchase in December 2008, which happens to be very soon after the 1
December 2008 date for which a schedule of outstanding insurance claims has now been provided. That is the information most relevant to any assessment of the fair value of the shares sold in December 2008. The fact that the plaintiffs received management accounts for the period to June 2008 does not render a breakdown of insurance claims as at that date relevant to the plaintiffs’ claims.
[52] There will be no order in this regard.
(d) Management fees
[53] The CBL accounts record management fees for the years 2005 to 2008.
[54] In parallel to the application relating to insurance claims, the plaintiffs had sought a schedule of management fees identifying the entities for which such payments were made in the relevant years.
[55] Initially, after the application was filed, the defendants’ solicitors advised that no such schedule existed. In opposition it was also asserted that the information is irrelevant.
[56] Subsequently Mr Mulholland sourced individual details of management fees and has by his affidavit provided a table of management fees for 2007, 2008 and
2009. The table identifies the management fees paid to Mr Thomas and to Mr
Harris’s interests in those years. Mr Mulholland deposes that the table represents
“the individual details of the management fees”.
[57] Mr Gilchrist noted the concern that there was no deposition as to Mr Hutchison not having received any management fees. Mr Harrison, for the defendants, noted that the clear meaning of Mr Mulholland’s affidavit is that the management fees listed represent all the management fees paid. That is also how I read the affidavit.
[58] On that basis, Mr Gilchrist accepted that it would not be appropriate for the
Court to make any orders in this regard.
(e) Wages/salaries
[59] The CBL accounts showed totals for wages/salaries in the 2007 and 2008 years.
[60] In parallel with earlier topics, the plaintiff had sought a schedule of payments made to individual employees (together with some commentary on the market rates and the reasoning behind increases). The understandable concern of the plaintiffs was to establish the reason for a significant increase between 2007 and 2008 (from
$684,000 to $1,201,000).
[61] By their application, the plaintiffs sought a schedule of wages and salaries, together with the other supporting information they had informally requested.
[62] The defendants opposed the application upon the basis that no such schedule exists and that the information sought is not relevant.
[63] Subsequently, Mr Mulholland has sourced the individual details of salary payments. In his affidavit he has included a schedule with identified (by first name) employees followed by two columns of (annual) payments.
[64] The information provided by Mr Mulholland is incomplete in the sense that surnames have not been provided and confirmation is needed that the two columns
relate to 2007 and 2008 respectively. Subject to that, Mr Gilchrist accepts that the information provided would satisfactorily deal with the need for wages and salaries details.
[65] The form of order I make below will allow the defendants time to provide the additional information informally by way of a schedule or, failing that, will require them to provide the source material to permit understanding of Mr Mulholland’s schedules.
(f) Long-term receivables
[66] CBL’s accounts disclose a long-term receivable attributed to RMSEA.
[67] The plaintiffs had sought a copy of the agreement concerning the RMSEA
receivable and management confirmation as to collections pursuant to it.
[68] The defendants opposed the application on the grounds that the request sought compilation of information into a single document and that payments in reduction could be seen from the balance sheets under “Long-Term Receivables”.
[69] Subsequently Mr Mulholland deposed that the agreement in question is dated
12 September 2004 but has not been located. He confirms that the repayable amount and interest were paid pursuant to the agreement. He records that none of the principal repayments under the agreement affect profit. He deposes that Mr Thomas took a number of files and records from CBL when he left and it is possible that he may already have the agreement or a copy of it.
[70] It transpires (through a letter subsequently sent by Mr Gilchrist to the defendants’ solicitors) that Mr Thomas does have an unsigned copy of the agreement which has now been provided to the defendants. In his letter, Mr Gilchrist still sought details as to any alterations made from the agreement.
[71] Given the point matters have now reached, I am satisfied that production of the agreement itself has been taken as far as it can be. Any remaining issues are more strictly in the nature of matters for interrogation.
(g) CBL accounts for 2009
[73] The plaintiffs apply for CBL’s accounts for 2009 for comparison purposes.
[74] The defendants opposed this application on the basis that the accounts in question had already been discovered and supplied to the plaintiffs.
[75] It transpires that what the plaintiffs have access to is a publicly accessible set of the accounts which do not have complete notes.
[76] Mr Harrison accepted that a complete version (with notes) of the 2009 accounts needs to be provided. The 2009 accounts are relevant.
[77] I will make an order in this regard.
Costs
[78] This proceeding has yet to be categorised for costs purposes. There is a difference between the parties as to whether category 2 or category 3 should apply.
[79] At the conclusion of the hearing I heard briefly from counsel as to the incidence of costs. There was disagreement as to the appropriate order, Mr Gilchrist submitting that costs should follow the event whereas Mr Harrison submitted that costs ought to lie where they fall having regard to the mixed outcomes for the parties.
[80] I make directions below which apply if costs are not resolved by agreement.
[81] I order:
(a) The defendants shall file and serve within 15 working days a supplementary verified list of documents by which they give discovery of:
(i) documents relating to the audit of CBL’s accounts for the
period to 31 December 2008;
(ii)the modelling spreadsheets and any similar material which CBL provided to Standard and Poor’s in obtaining CBL’s first rating;
(iii)in the event the defendants do not provide within 10 working days an informal schedule of CBL wages and salaries in the
2007 and 2008 years with completed surnames and identified years, the prime records which provide identification of those facts;
(iv) the complete accounts of CBL for the year ending 31
December 2009, including the notes to the accounts.
(b)The defendants are to provide inspection of their supplementary documents within 25 working days.
(c) Costs are reserved. In the event the parties are unable to agree on costs, the parties are to file submissions (three page limit) first by the plaintiffs (within 10 working days) and then by the defendants (within
five working days thereafter). I will then determine costs on the papers.
Associate Judge Osborne
Solicitors:
Blackwells Law, Auckland
Counsel: A Gilchrist, Barrister, Auckland
Fortune Manning, Auckland
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