Internet Traders Limited v Hutson (formerly Williams)
[2016] NZHC 1269
•13 June 2016
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV-2014-470-158 [2016] NZHC 1269
UNDER the Companies Act 1993 BETWEEN
INTERNET TRADERS LIMITED First Plaintiff
IT PHARMACEUTICAL SUPPLIES LIMITED
Second Plaintiff
JOHN ROULSTON HEALE Third Plaintiff
JOHN ROULSTON HEALE
LAUREN JOYCE HEALE as trustees of the JR and LJ HEALE FAMILY TRUST and
HOLLAND BECKETT TREUSTEE NO.5
LIMITED Fourth Plaintiffs
AND
NICOLE JEAN HUTSON (FORMERLY NICOLE JEAN WILLIAMS)
Defendant
Hearing: 9 May 2015 at 2:15pm Appearances:
D H McLellan QC and A Sinclair for Plaintiffs
R E Harrison QC for DefendantJudgment:
13 June 2016
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 13 June 2016 at 5:00pm
pursuant to Rule 11.5 of the High Court Rules
Solicitors/Counsel:
…………………………………………………….
Registrar/Deputy Registrar
Daniel H McLellan QC, Auckland, for Plaintiffs
Ken Patterson, Tauranga, for Plaintiffs
Rodney E Harrison QC, Auckland, for DefendantAbernethy Broatch Law, Mt Maunganui, for Defendant
INTERNET TRADERS LIMITED v HUTSON (FORMERLY WILLIAMS) [2016] NZHC 1269 [13 June 2016]
Introduction
[1] This is another decision on the plaintiffs’ pleadings. In the first decision I dealt with the plaintiffs’ second amended statement of claim.1 In the second, Heath J addressed the third amended statement of claim.2 After that, the plaintiff instructed new counsel and a fourth amended statement of claim was filed. The defendant objected to that pleading. I gave directions on 10 February 2016 for the plaintiffs to
file and serve a draft proposed amended pleading and for the defendant to file any applications in respect of that proposed pleading. She applied to strike out the proposed amended pleading, or for further particulars.
[2] The background to the proceeding has been given in earlier judgments,
especially Heath J’s decision on the plaintiffs’ application for an interim injunction.3
Notwithstanding changes in pleadings, the most important part of the plaintiffs’ case has always been that, leading up to her resignation as director on 23 June 2014, Mrs Williams (now Mrs Hutson4) breached duties she owed to IT Pharmaceutical Supplies Ltd. Those breaches affected the business of the company adversely and also enabled her to set up a competing business. In that new business she has used confidential information obtained while a director of IT Pharmaceutical Supplies
Ltd.
[3] The draft pleading has these causes of action:
1Internet Traders Ltd sues Mrs Hutson for breach of directors’ duties under the Companies Act 1993 for making unauthorised payments, and also for certain actions, which are pleaded elsewhere (in paragraph 29), as detrimental to and in breach of duty to
IT Pharmaceutical Supplies Ltd.
1 Internet Traders Ltd v Williams [2015] NZHC 1809.
2 Internet Traders Ltd v Williams [2015] NZHC 2562.
3 Internet Traders Ltd v Williams [2014] NZHC 3407, [2015] NZCCLR 7.
4 At the start of the proceeding, she was Nicole Jean Williams, but she has remarried and is now
Nicole Jean Hutson.
2In the alternative to the first, Internet Traders Ltd sues her for breach of fiduciary duty, relying on the same actions as in the first cause of action.
3IT Pharmaceutical Supplies Ltd sues her for breaches of directors’ duties under the Companies Act. Paragraph 29 pleads 24 separate actions by Mrs Hutson, some of which took place only after her resignation.
4 In the alternative to the third, IT Pharmaceutical Supplies Ltd sues
Mrs Hutson for breach of fiduciary duty for the matters in paragraph
29.
5Mr Heale sues Mrs Hutson as partner of the H A Medic Group for payments she is alleged to have received but not accounted to him.
6The trustees of the J R and L J Heale Family Trust as shareholders of IT Pharmaceutical Supplies Ltd sue Mrs Hutson for oppressive or unfairly prejudicial conduct under s 174 of the Companies Act.
[4] Mrs Hutson does not challenge the pleading of the fifth cause of action.
[5] Under the fourth amended statement of claim, the only plaintiffs were IT Pharmaceutical Supplies Ltd and Mr Heale. Mrs Hutson was the only defendant. Claims against other defendants, Glencove (2014) Ltd, Tentacle Enterprises Ltd and KiwiPharma Ltd, have all been abandoned and are no longer pursued. At the outset, Internet Traders Ltd was a plaintiff. It was dropped under the fourth amended statement of claim but has now been added again. To tidy these matters up, I make an order under r 4.56 of the High Court Rules re-instating Internet Traders Ltd as a plaintiff and adding the trustees of the J R and L J Heale Family Trust as plaintiffs. I also record Mrs Hutson’s change of name.
Plaintiffs’ proposed adjustments
[6] In response to Mrs Hutson’s application, the plaintiffs have reconsidered some aspects of their draft pleading and propose to delete some matters criticised by Mrs Hutson. It is therefore unnecessary to deal with those parts. The matters deleted are:
1 In the first cause of action by Internet Traders Ltd, paragraphs 21(b)
and 22(c),
2 The entire second cause of action by Internet Traders Ltd, and
3 Paragraph 27(b) alleging as relevant the duty under s 135 of the
Companies Act.
[7] The first abandons a claim for losses sustained by Internet Traders Ltd by reason of damage Mrs Hutson is said to have caused to IT Pharmaceutical Supplies Ltd. The second was removed to meet a complaint of repetition. Under the third a reckless trading allegation is withdrawn.
The strike out application
[8] Mrs Hutson’s application seeks partial or total strike-out of the draft statement of claim and, in the alternative, an order for a more particularised pleading. Barring a challenge to the cause of action under s 174 of the Companies Act as unarguable, she generally attacks the quality of the pleading rather than saying that the entire statement of claim does not disclose any arguable cause of action. While not able to present an argument that all of the plaintiffs’ case is bound to fail, she contends for total strike-out on what seem to be disciplinary grounds. I consider her attack on the quality of the pleadings by referring to certain topics.
Allegations directed at Mrs Hutson’s post-resignation conduct
[9] Paragraph 29 of the statement of claim is part of the third cause of action, IT
Pharmaceutical Supplies Ltd’s claim against Mrs Hutson for breach of director’s
duty. The paragraph pleads 24 separate matters alleged to be breaches of directors’ duties. 18 go to alleged breaches before her resignation as director on 23 June 2014. The remaining six are directed at her conduct after resignation. Those allegations, amongst other things, go to her re-naming Glencove (2014) Ltd as KiwiPharma Ltd, applying to the Ministry of Health for a licence to permit KiwiPharma to export pharmaceuticals and obtaining the licence, trading in competition against IT Pharmaceutical Supplies Ltd and misuse of confidential information.
[10] In the third cause of action Mrs Hutson is alleged to have breached duties to:
(a) act in good faith and in what the director believes to be the best interests of the company under s 131 of the Companies Act; (b)
exercise a power for a proper purpose under s 133;
(c)
exercise care, diligence and skill to the standard required by s 137;
and (d)
not disclose, use or act on information she has or had in her capacity
as a director of the company that would not otherwise be available to her under s 145. [11]
Mrs
Hutson accepts that while she was a director, she did owe IT
Pharmaceutical Supplies Ltd those duties. She also accepts that the allegations of misconduct while she was a director may arguably be in breach of those duties. But she submits that those duties stopped on resignation and she cannot arguably be in breach of those duties after she resigned. In particular, she did not breach those duties by competing against the company after resignation.
[12] In Hunter and Kane Ltd v Watkins,5 Mr Livesey QC, sitting as a Deputy
Judge, derived a number of principles after examining the authorities. His statement is useful as showing in what circumstances a director may be under a continuing
5 Hunter and Kane Ltd v Watkins [2003] EWHC 186 (Ch).
duty after resignation. Those principles, which are equally applicable in New
Zealand, are:6
1A director, while acting as such, has a fiduciary relationship with his company. That is, he has an obligation to deal towards it with loyalty, good faith and avoidance of the conflict of duty and self- interest.
2A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage, either belonging to the company or for which it has been negotiating, especially where the director or officer, is a participant in the negotiations.
3A director’s power to resign from office is not a fiduciary power. He is entitled to resign even if his resignation might have a disastrous effect on the business or reputation of the company.
4A fiduciary relationship does not continue after the determination of the relationship which gives rise to it. After the relationship is determined, the director is in general not under the continuing obligations which are a feature of the fiduciary relationship.
5Acts done by the directors while the contract of employment subsists but which are preparatory to competition after it terminates are not necessarily “in themselves” a breach of the implied term as to loyalty and fidelity.
6Directors, no less than employees, acquire a general fund of skill, knowledge and expertise in the course of their work, which is plainly in the public interest that they should be free to exploit it in a new position. After ceasing the relationship by resignation or otherwise a director is in general (and subject of course to any terms of the contract of employment) not prohibited from using his general fund of skill and knowledge, the “stock in trade” of the knowledge he has acquired while a director, even including things such as business contacts and personal connections made as a result of his directorship.
7A director is however precluded from acting in breach of the requirement at 2 above, even after his resignation where the resignation may fairly be said to have been prompted or influenced by a wish to acquire for himself any maturing business opportunities sought by the company and where it was his position with the company rather than a fresh initiative that led him to the opportunity which he later acquired.
6 These principles were approved in In Plus Group Ltd v Pyke [2002] EWCA Civ 370, (2002) BCLC 201 and Foster Bryant Survey Ltd v Bryant [2007] EWCA Civ 200. For New Zealand examples, see Pacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 328 (HC) and SSC
& B: Lintas New Zealand Ltd v Murphy [1986] 2 NZLR 436 (HC).
8In considering whether an act of a director breaches the preceding principle, the factors to take into account will include the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s relationship to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or indeed even private, the factor of time in the continuation of the fiduciary duty, where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.
9The underlying basis of the liability of a director who exploits after his resignation a maturing business opportunity of the company is that the opportunity is to be treated as if it were the property of the company in relation to which the director had fiduciary duties. By seeking to exploit the opportunity after resignation, he is appropriating for himself that property. He is just as accountable as a trustee who retires without properly accounting for trust property.
10It follows that a director will not be in breach of the principle set out as point 7 above where either the company’s hope of obtaining the contract was not a “maturing business opportunity” and it was not pursuing further orders, nor where the director’s resignation was not prompted or influenced by a wish to acquire the business for himself.
11As regards breach of confidence, although while the contract of employment subsists a director or other employee may not use confidential information to the detriment of his employer, after it ceases the director/employee may compete and may use know-how acquired in the course of his employment (as distinct from trade secrets – although the distinction is sometimes difficult to apply in practice).
[13] In this case, the plaintiffs do not rely on any binding restraint of trade. Nor do they say that this is a maturing business opportunity case. Accordingly, principles
7-9 do not require consideration. Principle 11 recognises that as regards confidential information, a director may be under a continuing restraint after resignation. The plaintiffs rely on that.
[14] Given these principles, the pleading needs to be tidied up. Allegations of breaches of duties that bound Mrs Hutson only while she was a director of the company and ceased to apply on resignation should be separated from any claims of breach of obligations after resignation. That will in turn require the plaintiffs to address separately the effects of pre-resignation breaches of duty and the effects of breaches of other duties that continued to bind after resignation. With that separation the plaintiffs should not be able to plead that Mrs Hutson’s going into competition
after resignation was by itself a breach of any duty. On the other hand, breaches of duties before resignation may arguably have post-resignation effects. Mrs Hutson’s post-resignation competition may be relevant to claims of breach of duty while a director. If so, IT Pharmaceutical Supplies Ltd needs to plead that expressly.
[15] In directing this separation I apply r 5.17 of the High Court Rules under which distinct matters are to be stated separately. Because breaches of duties that ended on resignation and breaches of duties that survived resignation are separate matters, they need to be pleaded as separate causes of action. IT Pharmaceutical Supplies Ltd may contend that the breaches of both sets of duties had a single cumulative effect, and that there is only one measure of damages in respect of the breaches of both duties. If so, it should make that clear in its pleading.
Survival of obligation under s 145 after resignation
[16] Principle 11 in Hunter & Kane v Watkins recognises that an obligation of confidence may survive resignation. Mrs Hutson submits however that that is not the case with duties imposed under the Companies Act. Section 145 says:
145 Use of company information
(1) A director of a company who has information in his or her capacity as a director or employee of the company, being information that would not otherwise be available to him or her, must not disclose that information to any person, or make use of or act on the information, except—
(a) for the purposes of the company; or
(b) as required by law; or
(c) in accordance with subsection (2) or subsection (3); or
(d) in complying with section 140.
(2) A director of a company may, unless prohibited by the board, disclose information to—
(a) a person whose interests the director represents; or
(b) a person in accordance with whose directions or instructions the director may be required or is accustomed to act in relation to the director’s powers and duties and, if the director discloses the information, the name of the person to whom it is disclosed must be entered in the interests register.
(3) A director of a company may disclose, make use of, or act on the information if—
(a) particulars of the disclosure, use, or the act in question are entered in the interests register; and
(b) the director is first authorised to do so by the board; and
(c) the disclosure, use, or act in question will not, or will not be likely to, prejudice the company.
[17] IT Pharmaceutical Supplies Ltd has pleaded that Mrs Hutson breached the duty under s 145 after resignation by using confidential information for her own purposes, namely in the business of KiwiPharma. Objecting, Mrs Hutson contends that that part of the case should be struck out on the ground that the obligation under s 145 does not survive resignation. In her submission, the duty under s 145 is no different from the duties under ss 131-137 of the Companies Act. They expire on resignation. As regards s 145 in particular, the exceptions in subs (2) and (3) contemplate that the person must be a current director and those exceptions accordingly prove the rule.
[18] In response, IT Pharmaceutical Supplies Ltd referred to Professor Watts’ “Directors’ Powers and Duties”:7
Section 145, by deploying the present tense, might be read as applying only to use of information while the director remains a director. If this is so, the section is narrower than the common law, which certainly did not permit a director to free himself or herself from fiduciary accountability before using inside information. It is also possible, however, to read the section as applying even where the disclosure or use occurs after resignation. Further, as with the other statutory duties, s 145 is probably not a code, except to the extent that it permits directors peers information in accordance with subs (2) and (3). The common law, then, will continue to catch the former director who uses inside information.
Given that such an eminent commentator as Professor Watts contends that the duty under s 145 may survive resignation, it would be bold to accept the submission that all allegations of post-resignation use of information in breach of s 145 are not
sustainable.
7 Peter Watts Directors’ Powers and Duties (2nd ed, LexisNexis, Wellington, 2015) at 190-191.
[19] Besides, any limit under s 145 confining it to use of information only while a director is not fatal to the plaintiffs’ case. That is for the added reasons given by Professor Watts. The duties under the Companies Act are not a code.8 At common law, allegations of confidence survived resignation: SSC & B: Lintas New Zealand Ltd v Murphy.9 It is therefore open to IT Pharmaceutical Supplies Ltd to plead the duty of confidence in the alternative, first as arising under s 145 and second at common law/equity.
Causation, loss and monetary relief
[20] In its causes of action for breaches of directors’ duties, statutory and fiduciary, IT Pharmaceutical Supplies Ltd alleges losses of profit after Mrs Hutson’s resignation, caused by her breaches of duty before resignation and breaches of confidence after resignation. The loss of profits claimed is $899,708.00. The draft statement of claim has a schedule attached to it called “Indicative Loss Calculation for ITPSL and ITL”. It does not, however, show a calculation of profits lost after
23 June 2014. It does not show any basis for calculating the alleged loss. The current pleading does not adequately state what effects Mrs Hutson’s breaches of duty had on IT Pharmaceutical Supplies Ltd, what losses it suffered as a result and what monetary relief it claims for those losses.
[21] Mrs Hutson says that IT Pharmaceutical Supplies Ltd has stopped carrying on business. If that is the case, and if the effect of her breaches of duty as director was to inflict a fatal blow on its business, then the loss may be the total value of the business.
[22] Another approach might accept that Mrs Hutson was entitled to resign as director and also entitled to go into business in competition against IT Pharmaceutical Supplies Ltd, but that her breaches of duty gave her an illegitimate start. Such a case might claim that, without her breaches of duty, IT Pharmaceutical Supplies Ltd would have withstood her competition more
effectively. In that case, damages might be calculated by assessing the difference
8 Benton v Priore [2003] 1 NZLR 564 (HC) at [46]; Watts, above n 7, at 55-56 and 124.
9 SSC & B: Lintas New Zealand Ltd v Murphy, above n 6;and Pacifica Shipping Co Ltd v
Andersen, above n 6.
between actual earnings and those the company would have earned in the event of her departure without breach of any duties.
[23] It is, of course, for the plaintiffs to work out what effects the alleged breaches had on the business - total cessation or temporary setback – but it needs to set that out in its pleading and show the damages it claims for those losses. Appropriate particulars will, of course, be required. In my minute of 10 February 2016, I noted that the case would not be given a close of pleadings date until quantum had been settled. The draft pleading does not adequately state the effects of Mrs Hutson’s breaches of duty, the measure of any losses and the calculation of damages.
The claim under s 174 of the Companies Act
[24] In their claim under s 174 of the Companies Act, the Heale shareholders say that Mrs Hutson’s conduct pleaded in paragraph 29 (actions alleged to breach duties to IT Pharmaceutical Supplies Ltd) was oppressive or unfairly prejudicial to them as shareholders. They claim $2,407,000 as the loss in value of their shareholding, relying on the same schedule used to plead loss of profits suffered by IT Pharmaceutical Supplies Ltd caused by her breaches of directors’ duties.
[25] Mrs Hutson objects that the allegations of misconduct after her resignation cannot be caught by s 174, because once she had resigned she was not involved in running the affairs of IT Pharmaceutical Supplies Ltd. She also submits that s 174 only applies to a course of action, not to isolated or disparate acts, and that the impugned conduct must be oppressive or unfairly prejudicial to the plaintiff, rather than to the company itself. Insofar as pre-resignation conduct is alleged against her, that was conduct in pursuit of her own interests, rather than conduct in relation to the affairs of the company. The claim is in any event unnecessary, because the Heale interests are able to pursue the matter alternatively. Because he is sole director, Mr Heale has management of the company and can give instructions on behalf of the company to sue Mrs Hutson.
[26] Section 174(1) of the Companies Act says:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
[27] As a single act may be enough, I do not accept the submission that the section requires proof of a course of action. A claimant under s 174 need not be a minority shareholder. Even a majority may be oppressed by a minority shareholder.10
Conduct that is otherwise lawful, but which is oppressive or unfairly prejudicial within s 174, may give grounds for relief. Equally, conduct by those in control which is arguably in breach of duties to the company, for example, directors’ duties, may also be oppressive or unfairly prejudicial to other shareholders within s 174. For example, directors who award themselves exorbitant salaries and extract other benefits from the company (a paradigm under s 174) may both cause unfair prejudice to the interests of shareholders and also cause financial loss to the company. In principle then, it is open to the Heale shareholders to allege that the conduct of Mrs Hutson while she was a director of IT Pharmaceutical Supplies Ltd in using her position as a director of the company to advance her own interests at the expense of the company and her fellow shareholders falls under s 174. At least for strike-out purposes, such a claim cannot be dismissed.
[28] Mrs Hutson is on stronger ground in taking issue with those parts of paragraph 29 which relate to her conduct after resignation as coming within s 174. On the face of it, once she resigned, she no longer had any control and had no say in the conduct of the company’s affairs. (The effects of her pre-resignation conduct are another matter.) It may be possible to think of a case where a director who has formally resigned or a shareholder who has disposed of shares maintains some de facto control, perhaps as a shadow director. Conceivably, such action from behind the throne might come under s 174 but, in the circumstances of this case, that is not
plausible. If the Heale shareholders do contend that Mrs Hutson’s actions after
10 Sturgess v Dunphy [2014] NZCA 266 at [135].
resignation did amount to oppressive conduct within s 174, they will need to give very clear particulars as to how that could be.
[29] The court has a discretion as to relief under s 174, including whether to give it. The availability of other relief may be an appropriate reason for not making orders relief under s 174. After all, in this case the Heales are not powerless. Through Mr Heale’s control of the company, they have brought this proceeding against Mrs Hutson for alleged breaches of duty. That aspect, however, is a matter of discretion, if a case is made out under s 174. For strike-out purposes, it is generally inappropriate to knock out a pleading as unarguable solely on the basis of a discretion as to relief being exercised in a particular way.
[30] Accordingly, I decline to strike out the cause of action under s 174 of the Companies Act. I direct that it be pleaded again. In re-pleading it, the Heale shareholders should focus on how the affairs of the company have been conducted.
[31] The Heale shareholders have asked for monetary relief of $2,407,000 as compensation for the loss in value of their shares. Mrs Hutson takes issue with the calculations set out in the schedule to the statement of claim and submits they are for alleged trading losses incurred after she resigned as director. I also point out that there is no pleading linking the alleged conduct of the affairs of the company with the loss in share value. The Heale shareholders will need to give particulars as to the basis for any monetary relief they claim.
[32] I invite the Heale shareholders to review the relief they seek. For example, if their case shows that Mrs Hutson has in effect appropriated the business of the company to herself through the conduct alleged to be oppressive, an appropriate remedy might be a share buy-out under s 174(2)(a), rather than payment of a sum of compensation under s 174(2)(b). Certainly they are on notice that to the extent that they seek any payment in compensation, they will be put to proof as to how the particular conduct they plead has caused the loss in value to their shares, as opposed to post-resignation conduct not caught by s 174.
Disciplinary strike-out
[33] Mrs Hutson submits that the proceeding should be struck out completely, in effect as a form of punishment, because the plaintiffs have taken an inordinately long time to get their pleadings in order. In support of this aspect, she refers to the plaintiffs’ earlier pleadings, alleging that they were loosely drafted, poorly focused and lacked particulars, and to the need for repeated hearings to give rulings on pleadings. If accepted, this submission means that the plaintiffs would not be able to be heard although they have, even on her arguments, arguable cases for their causes of action.
[34] Those are not adequate reasons to strike out. The pleadings have an unfortunate history. The court is now considering a draft fifth amended statement of claim, which has not stood up to scrutiny. Notwithstanding that, the plaintiffs have always had a case against Mrs Hutson. Heath J recognised that in his decision of
23 December 2014 when he found had an arguable case against her.11 That has not
changed. The many amendments to the pleadings and the number of hearings on the pleadings do not by themselves provide grounds for strike-out. The standard reluctance to terminate a claim short of trial applies here, given that the plaintiffs have arguable cases, which are not vexatious, frivolous or an abuse of process.
The application for particulars
[35] The Court of Appeal’s judgment in Price Waterhouse v Fortex Group Ltd
remains authoritative:12
The principles are well enough known. Difficulties lie in application in marginal situations. This is one such situation.
The object of a statement of claim is to “state” the claim, so that the court knows what it is to rule upon, and the defendant knows the case which it must meet. As a matter of practicalities, this initial “statement” is not at the level of a full disclosure of all evidence and documentation. It is, of course, an abbreviated summary “statement” of the basic facts said to give rise to the claim, and of the relief which is sought.
11 Internet Traders Ltd v Williams, above n 3.
It is the level at which such abbreviation is to be set which causes ongoing difficulties. There is, of course, an eternal tension between plaintiffs who wish to keep the content as wide and general as possible, allowing maximum room to cover oversight and further developments, and defendants who wish to narrow issues and impose restrictions to the maximum possible degree. Determinations, with respect, are not greatly assisted by very general labels such as pleading the “general” nature the matters claimed, or mantras such as “what not how”. While they grasp an idea, they afford little hard guidance. Nor, with respect, does it greatly help to talk in terms of “facts” (to be pleaded) and “evidence” (for trial) as if there were some bright-line distinction between the two. There is not. “Facts” can merge into “evidence” without any clear dividing line.
In marginal cases, it is better to avoid generalities and rules of thumb, and to return to principle. The pleader and court simply ask “in the circumstances of this claim, is that statement sufficiently detailed to state a clear issue and inform the opposite party of the case to be met?”. This is not, under modern practice, simply some minimum which a defendant needs so as to be able to plead. It is intended to supply an outline of the case advanced, sufficient to enable a reasonable degree of pre-trial briefing and preparation. Discovery and interrogatories are only an adjunct, not a substitute for pleading.
In the result, and particularly in complex cases, a rather more detailed factual narrative has come to be required than was the case in earlier and simpler times. That does not require the full detail which later will be contained in a brief of evidence. Nor does the modern requirement for pre-trial exchange of briefs dilute the earlier and differently based requirement for sufficiently particular pleadings. What is required is an assessment based on the principle that a pleading must, in the individual circumstances of the case, state the issue and inform the opposite party of the case to be met. As so often is the case in procedural matters, in the end a common-sense and balanced judgment based on experience as to how cases are prepared and trial’s work is required. It is not an area for mechanical approaches or pedantry.
[36] Also relevant is Kós J’s judgment in Platt v Porirua City Council, where he noted that particulars are important to:13
1 inform a defendant as to the case it has to meet;
2limit the scope of matters the plaintiff may put in issue at trial (or in pre-trial settlement discussions);
3enable a defendant to know what witnesses it will need to retain and enable it to start preparing evidence ahead of the formal exchange of evidence;
4provide an opportunity for a defendant to seek summary determination on the basis that the claim as pleaded is untenable.
[37] It is also necessary to recognise that the court may not order particulars before discovery where the party seeking particulars is the only one with the information on which the other party could rely. In Sachs v Spielman, North J said:14
… it is suggested by the notice of motion that the Defendants are embarrassed by the form in which this pleading is framed. But how can it be said that the Defendants are embarrassed by not knowing these details? The Plaintiff has told them in his statement of claim that he has not the means of giving these details. They, on the other hand, are the persons who carried through the transactions, and have in their possession the books containing the full accounts; therefore they have full knowledge and means of knowledge, and can shew precisely what the cases are, if any, in which they did do what the statement of claim alleges they did. I do not see how they can possibly be embarrassed by not obtaining from the Plaintiff the information they have in their own possession. Of course I can see well enough why they press for these particulars. If the Plaintiff were obliged to condescend upon particulars, and to specify the instances in which the Defendants have done what he charges them with, the result might be that from his imperfect knowledge he would not be able to point out in the particulars some cases in which they had actually done what he says they have done; and inasmuch as, after particulars were given, their defence would be addressed only to those points, the ignorance of the Plaintiff might relieve the Defendants from being held responsible as to certain matters with respect to which they are open to the charge contained in the statement of claim.
[38] In Truck Master Ltd v Mastagard Waste Ltd, Associate Judge Osborne said:15
In some circumstances, particulars can neither be reasonably expected nor appropriately sought by order from a plaintiff. The cases recognise that the usual expectation as to detailed particulars of a claim will give way in cases where the party which would be entitled to particulars has knowledge concerning those particulars which the other party does not have. This is an approach to the requirements of pleading recognised in both England and in New Zealand. The Courts recognise as adequate a pleading which pleads all material particulars other than those which can be derived only from information within the particular knowledge or control of the defendant.
[39] In this case, while there have been shifts in pleading, the factual basis for the plaintiffs alleging liability has stayed the same. The plaintiffs have relied on the
same facts throughout. Mrs Hutson has been aware of that through evidence given
14 Sachs v Spielman (1887) 37 Ch D 295 at 303. See also Hickson v Scales (1900) 19 NZLR 202
in the application for an interim injunction. Her knowledge of the substance of the case is relevant to some of her requests for particulars.
The particulars
[40] I deal with the particulars in paragraph 116 of Mrs Hutson’s submissions. She did not plead all of them in her application, but I have addressed them in the interest of finality. The new particulars are: 2, 3, 6, 8, 9, 10, 11, 12 and 13. In her application, she raised matters under paragraph 33 of the draft statement of claim, but did not address that under the particulars section of her submissions. I have dealt with that in the section above dealing with post-resignation conduct.16
Particulars 1
[41] This is directed at paragraph 21(b) of the statement of claim, which Internet
Traders Ltd has now deleted. The particulars are accordingly no longer required.
Particulars 2
[42] This is directed at paragraph 21(a) which pleads that Mrs Hutson profited by making unauthorised payments ($38,061.98 to herself and $2,599.80 to Ms Kate Church) which Internet Traders Ltd was not liable to pay. The particulars sought are as to how the payment to Ms Church benefited Mrs Hutson and why the payment to Mrs Hutson was in whole or in part an unauthorised payment.
[43] As to the payment to Ms Church, Mrs Hutson is taking a pedantic point. The payment was of direct benefit to Ms Church. Any benefit to Mrs Hutson can only have been indirect at best, but nothing turns on the point. The real thrust of the allegation is that in arranging payments to Ms Church to which she was not entitled, Mrs Hutson did not act in accordance with her duties under ss 131 and 133 of the Companies Act.
[44] It is unnecessary to require the plaintiff to give further particulars how the payments were unauthorised. Internet Traders Ltd has pleaded that it was not liable to make these payments. Mrs Hutson understands the allegation already and has an answer for it. Her defence, on which she has already given evidence, is that these were legitimate payments of holiday pay. In querying how these payments could be “unauthorised” she is asking Internet Traders Ltd to engage with her on the merits of its case rather than seeking illumination as to the facts.
Particulars 3
[45] Paragraph 22(b) of the draft pleadings alleges, as part of the damage resulting from unauthorised payments, a tax liability of $24,162.12. Mrs Hutson is properly entitled to further particulars as to how this alleged tax liability arose. She asks when and how the tax liability was assessed by the Inland Revenue. But that is going too far. Tax assessments are made on returns by taxpayers, and in this case the taxpayer’s assessment may have acknowledged that liability without requiring it to be independently assessed by the Inland Revenue. More helpfully, Internet Traders Ltd should identify the relevant provisions of tax law going to the basis for the liability and show the calculations to reach the sum of $24,162.12.
Particulars 4
[46] This is directed at paragraph 22(c) of the statement of claim, which Internet
Traders Ltd has now deleted. The particulars are accordingly no longer required.
Particulars 5, 6 and 7
[47] These particulars are directed at parts of the second cause of action by Internet Traders Ltd, set out in paragraphs 23-26 of the statement of claim. As that cause of action is now abandoned, the particulars are not necessary.
Particulars 8
[48] Paragraph 27(d) in the first cause of action by IT Pharmaceutical Supplies
Ltd pleads a director’s duty under s 135 of the Companies Act – not to cause or
allow the company’s business to be carried on in a manner likely to create a substantial risk of serious loss to creditors. As the duty under paragraph 27(d) has been abandoned, it is unnecessary to direct these particulars.
Particulars 9
[49] Paragraph 29(j) - IT Pharmaceutical Supplies Ltd alleges that Mrs Hutson sent an email to one or more of its customers to advise of her imminent resignation and the establishment of a new pharmaceutical supply business. She seeks full particulars of the customers (other than PharmaPal) she sent the emails to.
[50] She is alleged to have sent the emails on or about 22 June 2014, that is, just before her resignation on 23 June 2014. To the extent that IT Pharmaceutical Supplies Ltd can obtain details from its computer system as to those customers she advised in or about 22 June 2014, it should provide particulars. It is not required to provide particulars of those matters outside its records, but within Mrs Hutson’s personal knowledge. There is a related allegation that she deleted a substantial number of emails from the company’s database. To the extent that the deletion of emails from the database prevents IT Pharmaceutical Supplies Ltd from identifying all the customers, it is not required to give particulars under the principle in [37] and [38] above.
Particulars 10
[51] Paragraph 29(n) has the allegation as to deleting emails. Mrs Hutson seeks full particulars of the emails originally deleted, identifying why the deleted emails or any of them constituted or brought about a situation involving a breach of any of the duties alleged.
[52] She does not deny deleting emails, but will say in her defence that they were not of any importance. They were junk, minor, of no significance or no longer required. The matter is already adequately set out for Mrs Hutson to address the allegation. Further particulars are not required. As the one who deleted the emails and was in effective control of the company up until her resignation, she is in just as
good a position as IT Pharmaceutical Supplies Ltd to assess the scale and importance of her deletions.
[53] The email deletion allegation is relevant:
1The very fact that Mrs Hutson deleted emails from the database is significant in light of allegations as to other steps she took to disrupt the business of IT Pharmaceutical Supplies Ltd (cancelling a storage lease and delivery agreement, giving notice to the Ministry that a licence would not be renewed, changing the post office box, giving notice terminating the company’s lease); and
2The scale of the deletions may have hampered the operations of IT Pharmaceutical Supplies Ltd. The extent and significance of deletions can be adequately addressed by the exchange of briefs and evidence at trial.
Particulars 11
[54] Paragraph 29(o) alleges that before her departure Mrs Hutson sent herself copies of the email addresses of all of the customers of IT Pharmaceutical Supplies Ltd. She seeks particulars of timing and manner. As to timing, IT Pharmaceutical Supplies Ltd should fix a start date as well as a finish date so as to provide a fixed period within which it alleges Mrs Hutson sent the email addresses to herself. A particular time or date is not, however, required.
[55] To the extent that it is able to establish from its own computer system and business records how Mrs Hutson sent those copies to herself, it should give particulars. It is not required to give particulars of matters outside its knowledge but within her knowledge.
Particulars 12
[56] Paragraph 29(p) of the statement of claim alleges that before her resignation
Mrs Hutson ordered and acquired a $55,000 computer system for her new business.
As the details of the transaction are within her knowledge, IT Pharmaceutical Supplies Ltd is not required to give particulars of the time of the order and acquisition. No doubt those matters will become apparent when she makes discovery.
Particulars 13
[57] Paragraph 29(q) alleges that before her resignation Mrs Hutson contacted the computer support company for IT Pharmaceutical Supplies Ltd and obtained a copy of the backup for the entire computer system. Particulars are sought as to the time and manner of her contact with the computer support company.
[58] To the extent that IT Pharmaceutical Supplies Ltd is able to obtain that information from its own business records or from its computer support company, it should state time and manner. That aside, the matters are within Mrs Hutson’s own knowledge.
Particulars 14
[59] Paragraph 29(w) alleges unauthorised payments: one of $80,000 to
Aesculapian Trust on 16 May 2014, a second of $10,000 to the trust on 23 June
2014, and a number of allegedly unauthorised credit card payments during the three years up to 23 June 2014 amounting to $78,410.57.
[60] Particulars of the payments to Aesculapian Trust being “unauthorised” are not required. For these two payments, the issues are already adequately identified. Mrs Hutson’s case is that these were dividend payments to the trust as a shareholder of IT Pharmaceutical Supplies Ltd. In seeking particulars, she is only trying to engage with IT Pharmaceutical Supplies Ltd on the merits of its allegations. She already has an answer to the allegations that the payments were unauthorised. On the other hand, she is entitled to fuller particulars of the allegations of unauthorised credit card expenditure. This is a new allegation in this proceeding. Apart from being presented with an overall figure, she is entitled to know of each transaction, its date, its amount, and the payee for each transaction.
[61] Mrs Hutson also seeks an explanation as to why each transaction was “unauthorised”. The contest is whether the payment was made for company purposes or personal. Mrs Hutson should assume that, except as might be further elaborated by IT Pharmaceutical Supplies Ltd, its case is that expenditure was personal and not for company purposes. At the hearing, IT Pharmaceutical Supplies Ltd will have the onus of showing that payments were not for the company purposes. But that will be a matter of evidence. Further pleading directions are not required.
Particulars 15
[62] Paragraph 29(x) is a pleading as to confidential information which Mrs Hutson is alleged to have used for her own purposes. She seeks particulars of the information alleged to be confidential, in particular whether it was in electronic form, written form or neither. She also seeks particulars as to time and manner of her alleged use of the information.
[63] The pleading refers to the confidentiality of a software licence agreement, and its accounting systems, document management systems, invoicing systems, contracts for supply, banking statement systems, international bank transfer systems, supplier lists, supplier contacts, customer lists and customer contacts. For pleading particulars purposes, that is adequate identification. She should be able to prepare a defence, which addresses whether any duty of confidentiality applies to that information after resignation and whether she used it in breach of confidence. In submissions, IT Pharmaceutical Supplies Ltd also stated that the unauthorised use of that information included the allegations in paragraph 29(i) and 29(q) – sending herself copies of customers’ email addresses and obtaining a copy of the backup for the entire computer system.
Particulars 16 and 17
[64] These go to the pleas of loss of profits in paragraphs 30(c) and 34(b) of the statement of claim. Mrs Hutson seeks full particulars. I have dealt with the question of losses above at paragraphs [21]-[25] and indicated the need for further particulars. Further directions are not required here.
Particulars 18
[65] Paragraph 35(b) alleges that Mrs Hutson profited from her breaches of fiduciary duty by using confidential information she obtained in paragraph 29(x) and by soliciting clients from IT Pharmaceutical Supplies Ltd to her own company, KiwiPharma. For particulars, she repeats her request in respect of paragraph 29(x). That has already been addressed above. In addition, she seeks particulars of the solicitation of clients including how, when and in respect of which clients the alleged solicitation occurred.
[66] Mrs Hutson, not IT Pharmaceutical Supplies Ltd, knows how she solicited customers for her new business. IT Pharmaceutical Supplies Ltd’s case is that before her resignation, she had access to its information as to its customers and that she took that information for herself. Once discovery is completed, it will be able to give better particulars. That aspect can be addressed after discovery has been completed. In the meantime, it is not necessary to require it to provide particulars of matters within Mrs Hutson’s own knowledge.
Particulars 19
[67] Paragraph 47 of the statement of claim in the cause of action under s 174 of the Companies Act alleges a loss of the value of the shares of $2,407.000. Mrs Hutson seeks particulars as to the alleged loss in value and how that alleged loss arose from her alleged oppressive conduct. I have dealt with that aspect in paragraphs [20]-[23] above. Further directions are not required here.
Case management matters
[68] In my minute of 10 February 2016 I directed a hearing to deal with any applications for discovery and also to re-hear the plaintiffs’ application under r 8.25 challenging privilege in some documents of Mrs Hutson.17 No discovery applications have been filed. Mr McLellan advises that the plaintiffs no longer wish
to challenge the privilege claim by way of a ruling on a pre-trial interlocutory
17 A rehearing directed by Heath J in his decision of 20 October 2015, above n 2, at [51].
application, but reserve the right to pursue that matter at the substantive hearing. Accordingly, the directions for hearing discovery applications in paragraphs [7]-[15] of my minute of 10 February 2016 are vacated. Counsel advise that they will confer as to discovery.
[69] The plaintiffs are to file and serve a fresh statement of claim that follows the directions in this judgment. The new pleading is to be filed and served by Friday 15 July 2016. I summarise the directions:
1The plaintiffs will be Internet Traders Ltd, IT Pharmaceutical Supplies Ltd and the trustees of the JR and LJ Heale Family Trust. The defendant will be identified as Nicole Jean Hutson.
2In its claim for a tax liability of $24,162.12 Internet Traders Ltd is to give particulars how the liability arose, including the applicable provisions of tax law and how the amount was calculated.
3IT Pharmaceutical Supplies Ltd’s claims against Mrs Hutson for breaches of duty before resignation are to be pleaded as separate causes of action from claims of breach of duty after resignation. If it contends that pre-resignation breaches had post-resignation effects, they are to be pleaded.
4For the allegation in paragraph 29(j) of the draft pleading as to Mrs Hutson advising customers of her resignation and establishment of a competing business, IT Pharmaceutical Supplies Ltd is to give details of those customers only in so far as it is able to do so from its own records, including its computer system.
5For the allegation in paragraph 29(o) of the draft pleading as to Mrs Hutson sending herself copies of email addresses of all customers, IT Pharmaceutical Supplies Ltd is to provide a start date and a finish date within which that occurred. In so far as it is able to
do so from its own records and computer system, it is to give particulars as to how she sent that information.
6For the allegation in paragraph 29(q) of the draft pleading as to Mrs Hutson obtaining a copy of the backup of the computer system, IT Pharmaceutical Supplies Ltd is to give particulars as to time and manner only in so far as it is able to do so from its own records or from its computer support company.
7For the allegation in paragraph 29(w) of the draft pleading as to Mrs Hutson incurring unauthorised expenses on credit cards, IT Pharmaceutical Supplies Ltd is to give details identifying each transaction by date, amount and payee.
8Any claim for breach of confidence after resignation may be pleaded under s 145 of the Companies Act and at common law/equity.
9IT Pharmaceutical Supplies Ltd’s claims for breaches of duty are to state the effects of those breaches, any financial losses, the measure of damages and the calculations of damages with adequate particulars.
10If the Heale shareholders contend that Mrs Hutson’s post resignation conduct comes under s 174 of the Companies Act, they are to give particulars to show why.
11Under the s 174 claim the Heale shareholders are to state the effects of Mrs Hutson’s conduct under that section and to link that to the relief sought. For any monetary relief, they are to set out the measure and calculations.
[70] There will be a further telephone case management conference at 10:00am on Wednesday 3 August 2016. Mrs Hutson will not be expected to have filed and served a statement of defence by the time of that conference, but will be expected to have worked on the pleading with a view to it being filed and served by
12 August 2016. Any objections to the new statement of claim will not be grounds for not filing a statement of defence.
[71] Counsel will be expected to have agreed terms for discovery and to have made substantial progress with a view to discovery being completed by about
9 September 2016. The conference will also consider what further directions may be required before a close of pleadings date can be set.
Costs
[72] I invite counsel to confer as to costs. If they cannot agree, memoranda may be filed for me to decide costs on the papers. The party responding to the costs application should file and serve submissions within five working days of the other side.
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Associate Judge R M Bell
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