ISAC (NZ) Limited v Managh

[2012] NZHC 1911

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2011-441-396 [2012] NZHC 1911

IN THE MATTER OF     the Companies Act 1993

AND

IN THE MATTER OF      the liquidation of Gambling Helpline

Limited (in liquidation)

BETWEEN  ISAC (NZ) LIMITED Applicant

ANDJOHN MANAGH Respondent

Hearing:         26 July 2012 (Heard at Napier)

Counsel:         R.B. Hucker - Counsel for Applicant

M.J.S. Macfarlane - Counsel for Respondent and for Non-Party the
Trustees of the Lifeline Auckland Trust

Judgment:      2 August 2012

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment of Associate Judge Gendall was delivered by the Registrar on 2

August 2012 at 3.30 pm under r 11.5 of the High Court Rules.

Solicitors:           Hucker & Associates, Solicitors, PO Box 3843, Shortland Street, Auckland

Sainsbury Logan & Wiliams, Solicitors, PO Box 41, Napier

ISAC (NZ) LIMITED V J MANAGH HC NAP CIV-2011-441-396 [2 August 2012]

Introduction

[1]      Before the Court is an application by the applicant for further and better discovery on the part of the respondent liquidator and/or alternatively an order for non-party discovery against a third party, the trustees of the Lifeline Auckland Trust (Lifeline Trust).

[2]      Mr  Hucker  appeared  as  counsel  for  the  applicant  and  Mr  Macfarlane appeared as counsel for both the respondent liquidator and the Lifeline Trust.

[3]     The application specifically seeks particular discovery of the following documents:

... the minutes of the Board of Lifeline Trust and the reports of the Chief Executive

Officer to the Board in the period from 1 April 2010 to 1 July 2011 ...

[4]      The application is opposed by the respondent and also by Lifeline Trust as the non-party.

Background Facts

[5]      The   respondent   is   the   liquidator   of   Gambling   Helpline   Limited   (in liquidation) (Gambling Helpline), a company which was placed into voluntary liquidation by shareholders’ resolution on 25 March 2011.

[6]      The sole shareholder of Gambling Helpline which passed this shareholders’

resolution for liquidation is the Lifeline Trust.

[7]      The substantive proceeding before the Court seeks to set aside a decision of the respondent as liquidator declining to admit a Proof of Debt from the applicant in the liquidation of Gambling Helpline.

[8]      That Proof of Debt relates to a contract dated 2 March 2011 headed “IT Services Supply Agreement” (the IT Contract) which was purported to be entered into on behalf of Gambling Helpline with the applicant only some 3 weeks prior to its liquidation.  The contract in question deals with the provision of IT services by

the applicant to Gambling Helpline.   The IT contract was for a 27 month period expiring 30 June 2013.   At clause 11.2 the IT Contract contained a termination clause.   This provided that, in the event of early termination of the contract, the applicant as IT provider could require Gambling Helpline to pay 100% of the “fixed charges” that would otherwise have been payable under the contract from the date of its termination to the 30 June 2013 end of the term together with 30% of any “anticipated charges” for that period.

[9]      The Proof of Debt in question which has been passed by the applicant to the respondent claims the sum of $178,802.00 (including GST) and relies upon the contractual provisions in the IT contract which the applicant says entitle it to require payment for the balance of the term due to run on that contract which it has done.  It is that amount (together with certain other incidental costs) which the applicant effectively seeks by way of damages for early termination of the IT Contract in its claim in this proceeding.

[10]     That claim is opposed by the respondent as liquidator of Gambling Helpline. In doing so, the respondent disputes the applicant’s entitlement to the payment, in particular on the basis that the IT contract it is said was not properly executed by or on behalf of Gambling Helpline and does not bind it, and that in any event the amount claimed is in effect an irrecoverable penalty.

[11]     Turning to the present application the documents sought by the applicant here (being specifically minutes of the Board of Lifeline Trust and reports of the Chief Executive Officer to the Board for the period 1 April 2010 to 1 June 2011) are said by the applicant to be relevant and discoverable on the following grounds set out in the application itself:

(a)      The documents are relevant to issues in the proceeding namely as to the  extent  of  the  delegated  authority  of  the  CEO  of  Gambling Helpline, the knowledge of Lifeline in terms of the contractual arrangements between the applicant and Gambling Helpline, the extent to which the impending liquidation of Gambling Helpline was disseminated and the knowledge of the trustees of the Lifeline Trust at

the time the services of the applicant were dispensed with by the respondent;

(b)      The trustees of the Lifeline Trust hold all of the shares in Gambling Helpline and in the event the rejection of the applicant’s Proof of Debt is upheld will receive the balance of funds held in the liquidation of Gambling Helpline as its shareholder and as a result has an interest in the outcome of the proceedings;

(c)The documents are documents which can be considered to be in the power, possession and control of the liquidator under sections 261 and 266 of the Companies Act 1993 and ought to have been listed in the liquidator’s list of documents;

(d)      The  Chief  Executive  Officer  of  Lifeline  Auckland  has  sworn  an affidavit in this proceeding and a subpoena for the production of those documents could be issued in any event;

(e)There is co-operation between Lifeline Auckland and the respondent; no formal order was necessary for the affidavits to be filed by Lifeline Auckland’s Chief Executive Officer who has produced documents in the power possession and control of Lifeline Auckland in affidavits filed in this proceeding;

(f)       To  the  extent  the  respondent  elects  not  to  exercise  his  statutory authority to obtain relevant documents as an incident to his investigations the documents ought properly be made available by Lifeline Auckland as a non-party to the proceeding;

(g)      Given Lifeline Auckland’s interest in the outcome of the proceeding and the assets of the liquidation Lifeline Auckland ought to meet its own costs in complying with the non-party application for discovery.

[12]   In so far as the present discovery application against the respondent is concerned, this is opposed on the basis that the respondent says he does not have power,  possession  or  control  over  any  of  the  documents  sought  and  thus  he concludes that the discovery requirements under Part 8 of the High Court Rules have not been met and the applicant’s reliance on ss 261 and 266 of the Companies Act

1993 is misplaced.  Further, and as an alternative argument, the respondent contends that the documents sought cannot be considered to be either relevant or necessary here.  Finally, the respondent maintains that the present application is simply too late and  that  in  addition  the discovery sought  should  be rejected as  it  would  cause needless expense and possible delay here.

[13]     And, in so far as the application for non-party discovery against the Lifeline Trust is concerned, the grounds advanced in opposing that application are essentially that  the  documents  sought  are  neither  relevant  nor  necessary  and  again  the application by the applicant is simply brought too late and discovery would cause needless expense.

Application for Particular Discovery

[14]     Turning first to the application against the respondent here, the applicant in this seeks particular discovery from the respondent as it says the documents in question are relevant and within the control of the respondent and they are necessary for the applicant to properly pursue its claim.

[15]     That  application  is  made  in  reliance  on  r  8.19  High  Court  Rules  which provides:

8.19      Order   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.

[16]     Addressing this new r 8.19, in Managh (as liquidator of Titan Building (HB) Limited) (in liq) v Hasselman, HC, Napier, CIV-2011-441-824, 1 June 2012, Associate Judge Osborne noted:

[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]       That said it will be rare for an order to be made for particular discovery if it is not necessary to do justice between the parties. See Cynotech Securities Ltd v People Ltd.

[8]       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).

[9]       The plaintiff must also establish that the documents sought are relevant as posted 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.”

[17]     And, a little earlier, in Karam v Fairfax New Zealand Limited, HC, Auckland, CIV-2010-404-5021, 10 May 2012, Associate Judge Osborne had stated:

[131]     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(i)); ...

[135]     Notwithstanding  the  submissions  of  counsel  to  the  contrary,  there  is nothing in (the new) r 8.19, which applies to this application, to require the Court to automatically apply the assumptions which underpinned discovery rules up to January 2012. While, for instance, the Peruvian Guano approach may still form the basis of an order of the Court after 1 February 2012, that will be because the Court finds it to be the appropriate order even in the new discovery climate. If further discovery is appropriate, and a different approach to the additional documents such as standard discovery under r

8.7 is appropriate, then such an order is within the Court’s armoury.

[18]     Rule 8.7 of the High Court Rules introduces a direct relevance and “adverse documents test” for discoverable documents, that is, discovery is now restricted to documents that the party bringing the proceedings intends to rely on, documents that might adversely affect its own case, and documents that might support or adversely affect the case of any other party.

[19] As I have noted at [3] above, this application without further qualification seeks particular discovery of minutes of the Board of the non-party Lifeline Trust and the reports of the Chief Executive Officer of that Trust to the Board for the period 1 April 2010 to 1 July 2011. The documents sought are not minutes or reports of Gambling Helpline, for which the respondent has been appointed liquidator, albeit the Lifeline Trust is the sole shareholder of Gambling Helpline.

[20]     The  respondent  here  provided  an  original  affidavit  of  documents  on  19

August 2011.   In addition he has provided further affidavits in support of his opposition to the present application.   What appears clear from  all the material before the Court is that the documents now sought are those of the third party and not the respondent liquidator and that, despite requests he has made from officers of the Lifeline Trust he does not have these in his possession.

[21] Nevertheless, as noted at [11](c) above the applicant contends that these documents can be considered to be in the “power, possession and control” of the liquidator and thus properly discoverable, pursuant to the provisions of ss 261 and

266 of the Companies Act 1993, and they ought to have been discovered and listed

in the respondent liquidator’s previous affidavit of documents.

[22]     Section 261(1) Companies Act 1993 provides:

(1)       A liquidator may, from time to time, by notice in writing, require a director or  shareholder  of  the  company or  any  other  person  to  deliver  to  the liquidator  such  books,  records  or  documents  of  the  company  in  that person’s possession or under that person’s control as the liquidator requires.

[23]     Section 266(1) Companies Act 1993 goes on to provide:

(1)       The Court may, on the application of the liquidator, order a person who has failed to comply with a requirement of the liquidator under s 261 to comply with that requirement.

[24]     In his submissions before me on this jurisdictional requirement, Mr Hucker for the applicant contended that the respondent liquidator has to date obtained other documents from the Lifeline Trust  and has had  co-operation from that Trust in swearing an affidavit in this proceeding.  Nevertheless, Mr Hucker suggests that the respondent now elects to be selective in terms of the documents which are included in his discovery by opposing the present application.

[25]     Effectively therefore, the applicant here maintains a complaint against the respondent liquidator that, whilst he may not have the documents sought within his actual possession or control, he has an entitlement to those documents and they are in his power to obtain.

[26]     Whilst I acknowledge that the liquidator does have the possibility of making a  formal  s  261  request  and,  if  it  is  refused,  pursuing  that  in  this  Court  by an application under s 266, there is no guarantee that he would succeed on such an application.

[27]     And, on the question of “control” in terms of r 8.19(a) High Court Rules, r

1.3(1) provides:

Control, in relation to a document, means –

(a)        possession of the document; or

(b)        a right to possess the document; or

(c)        a right, otherwise then under these rules, to inspect or copy the document.

[28]     In  the  present  case,  it  seems  clear  that  the  respondent  does  not  have possession of the documents sought.   The question however is whether he has “a

right to possess the document” which I am satisfied means a presently enforceable legal right.

[29]     On this, in my view a right to request delivery of documents under s 261 and a right to apply to the Court pursuant to s 266 fall short of the definition of “a presently enforceable legal right” to possession of the documents in question.   If, however, a liquidator did succeed in obtaining from the Court a s 266 order then it is clear he or she would at that point have a legally enforceable right.  But that is not the case here.   And, this is a different situation as I see it from cases where for example the Courts have held that a document is within the power of a party because it is held by that party’s solicitors or accountants.

[30]     In addition, importantly in my view, it cannot be the case that an applicant can force a liquidator, in defending claims against him or her, to expend time and money on speculative pursuits of documents, the need and relevance of which may be seriously in question.

[31]     In summary, what the applicant contends here is that the respondent has a right  to  apply  for  a  court  order  to  obtain  third  party  documents  under  s  266

Companies Act 1993, and that must equal a power or enforceable legal right over those documents equating to control.  I reject this contention however.

[32]     Although it is clear that the documents sought in the present application, if indeed  they  do  exist,  are  documents  of  the  Lifeline  Trust  which  is  the  sole shareholder of Gambling Helpline, in my view, the present application against the respondent must fail at the outset on the jurisdictional ground that the applicant has been unable to establish a prima facie indication that the documents sought are or have been in the “control” of the respondent in terms of the High Court Rules.

[33]     And, in any event, as a general aside here, there is evidence before this Court from Ms Jo-Anne Denvir, the Chief Executive Officer of the Lifeline Trust, in an affidavit sworn 22 November 2011, and also in a hand-written note from Mr David Bogan, a previous Chairman of the Board of the Lifeline Trust, confirming that a

search has been conducted and none of the relevant documents sought here do in fact exist.  But, at this point I leave this aspect to one side.

[34]     For all the reasons outlined above, it will be apparent that the first application brought by the applicant seeking an order for particular discovery against the respondent must fail at the outset on what is effectively a jurisdictional ground.  That application is dismissed.

Application for Third Party Discovery Against Lifeline Trust

[35]     This application is based on r 8.21 High Court Rules which provides:

8.21      Order  for  particular  discovery  against  non-party  after  proceeding commenced

(1)       This rule applies if it appears to a Judge that a person who is not a party to a proceeding may be or may have been in the control of 1 or more documents or a group of documents that the person would have had to discover if the person were a party to the proceeding.

(2)        The Judge may, on application, order the person—

(a)        to file an affidavit stating—

(i)        whether the documents are or have been in the person's control; and

(ii)       if the documents have been but are no longer in the person's control, the person's best knowledge and belief as to when the documents ceased to be in the person's control and who now has control of them; and

(b)       to serve the affidavit on a party or parties specified in the order; and

(c)       if the documents are in the control of the person, to make those documents available for inspection, in accordance with rule 8.27, to the party or parties specified in the order.

(3)       An application for an order under subclause (2) must be made on notice to the person and to every other party who has filed an address for service.

[36] Here the principal argument advanced by Mr Macfarlane for the third party Lifeline Trust in opposing this application is that the documents sought are neither relevant nor necessary here. There has been a suggestion from Ms Denvir in her affidavit (noted at [33] above) that the documents in question may not exist, but certainly as I see the position on the face of the present application, there is a reasonable assumption that there may be some Trust Board minutes and reports to

the Board at the relevant time which affect Gambling Helpline, and at the very least, a proper discovery affidavit should be completed to depose to these aspects.

[37]     Turning now to the issue of relevance, it is clear from the authorities that the touchstone of relevance is to be fashioned or tailored to reflect those matters which will actually be in issue before the Court in a particular proceeding – see McGechan on Procedure at HR 8.19.03(3).

[38]     In the present situation, as I understand it, one of the functions of Gambling Helpline was to provide services to its shareholder, the Lifeline Trust, enabling the performance of a funding contract between the Lifeline Trust and the Ministry of Health.   Those services clearly required IT support, hence the entry by Gambling Helpline into the IT Contract.  And, indeed the non-party Lifeline Trust has already been involved in certain steps in this proceeding including, as I have noted above the filing of an affidavit in support by its Chief Executive Officer, Ms Denvir.

[39]     As the sole shareholder of Gambling Helpline, the Lifeline Trust is clearly a party that stands to benefit directly from the outcome of the Court’s decision in this case, given that the evidence before the Court indicates that this is a solvent liquidation.  That said, I am satisfied it would be artificial to treat the Lifeline Trust as an entity having no interest in the outcome of this proceeding.

[40]     Also, as I see it, the Board minutes and reports of the Lifeline Trust sought in this application must be seen as relevant to issues in this proceeding, either under the previous Peruvian Guano test or under the modified standard discovery test now applying as set out in r 8.7 High Court Rules.   This is in the sense that they are documents which support or adversely affect the case of either party here in that they may assist in determining first, the extent of the delegated authority of the Chief Executive Officer of Gambling Helpline in entering into the IT Contract, secondly, the knowledge of the Lifeline Trust as sole shareholder of the contractual arrangements between the applicant and Gambling Helpline and thirdly concerns over knowledge of the impending liquidation of Gambling Helpline.

[41]     I find therefore that the relevance test has been satisfied, and the documents sought if indeed they exist are necessary for a proper determination of this proceeding.

[42]     In addition, I dismiss the general complaints advanced by the Lifeline Trust here first, as to lateness on the part of the applicant in bringing this application, and secondly, as to proportionality and expense in completing the discovery sought.  On this last aspect, amendments to the orders sought by the applicant are to follow which will to some extent deal with this matter.

[43]     The application by the applicant against the non-party Lifeline Trust therefore succeeds, but with appropriate amendments to the order to be made as I note below. An amended order for discovery of the documents sought is to follow, but this is to be limited to those documents involving issues affecting Gambling Helpline, its liquidation  the  IT  Contract  and  its  relationship  with  the  applicant,  and  where required, with appropriate redactions of other material being made.

[44]     As to the costs and expenses of the non-party Lifeline Trust in completing discovery here, r 8.22 High Court Rules empowers the Court to order that these costs be met by another party.   In exercising any discretion to order payment of a non- party’s  discovery  expenses,  the  non-party  concerned  is  entitled  to  a  reasonable amount for time and labour expended in complying with the order – Berryman Properties Limited v C & L Limited (1987) 1 PRNZ 196 (HC).

[45]     In the present case, however, the Lifeline Trust as the sole shareholder of Gambling Helpline is involved in this proceeding to a certain extent, and as I have noted above stands to benefit depending upon the outcome.  As such, I do not think this is an appropriate case for the Court to exercise its discretion to order that Lifeline Trust’s expenses in complying with the reasonably limited discovery order I am about to make should be met by the applicant.  No such order regarding those expenses is to be made therefore.

[46]     For all the reasons outlined above, the application for particular discovery against the respondent himself fails and is dismissed.

[47]     The application for non-party discovery against the Lifeline Trust, however, succeeds and the following order is now made:

An  order  is  now  made  that  the  non-party,  the  Trustees  of  the  Lifeline

Auckland Trust, within 20 working days of the date of this judgment are: (a) to file in this Court an affidavit stating –

(i)whether the documents noted at [47](d) below are or have been in the control of the Trustees of the Lifeline Auckland Trust; and

(ii)if the documents have been but are no longer in the Trustees’ control, the Trustee’s best knowledge and belief as to when the documents ceased to be in the Trustee’s control and who now has control of them; and

(b)       to serve the affidavit on the applicant; and

(c)      if the documents are in the control of the Trusteess to make those documents available for inspection, in accordance  with r 8.27 to the applicant.

(d)the “documents” to be discovered under this order are to be those minutes of the Board of the Lifeline Auckland Trust and those reports of the Chief Executive Officer to the Board in the period from 1 April

2010 to 1 June 2011 which in each case mention and/or deal specifically with issues to do with Gambling Helpline’s liquidation, the  IT Contract  and  its  relations  with  the  applicant.   Appropriate redactions may be made of all other unrelated material in those documents.

[48]     As to costs on these applications I find and order as follows:

(a)      The respondent has been successful in opposing the application for particular discovery against him and I see no reason why he should not be entitled to costs in the usual way.  Costs are therefore awarded to the respondent on that application on a category 2B basis together with disbursements as fixed by the Registrar. An order to this effect is now made.

(b)The applicant has been  successful in its application for non-party discovery against the Lifeline Trust and again I see no reason why it should not be entitled to costs against that party in the usual way. Costs are therefore awarded to the applicant against the Lifeline Trust on   that   application   on   a   category   2B   basis   together   with disbursements as fixed by the Registrar. An order to this effect is now made.

[49]     Notwithstanding the costs orders made at [48], I note at this point that, given the close connection between Gambling Helpline and the Lifeline Trust, it may be that all the parties affected by this judgment might enter into discussions to set off one costs award made above against the other.   That is a matter for the various parties however.

‘Associate Judge D.I. Gendall’