JKA Holdings Limited v Wallace
[2019] NZHC 1072
•16 May 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-0345
[2019] NZHC 1072
BETWEEN JKA HOLDINGS LIMITED and VULCAN TRUSTEE CO (2012) LIMITED (in their
capacities as trustee of the Douglas Hilton Family Trust)
Plaintiffs
AND
JAN SUSAN WALLACE and MARTIN
BRIAN SHERWIN in their capacities as administrators of the estate of Douglas Hilton Sherwin
First Defendants
MARINO TE MOANA SHERWIN
Second Defendant
Hearing: 6 May 2019 Appearances:
B A Vautier for the Plaintiffs
E W Davies, holding a watching brief for the first-named First Defendant
P J Dale QC for the proposed counterclaim plaintiffs (thesecond-named Defendant Martin Brian Sherwin, and Paul Hilton Sherwin)
B P Molloy for the Second Defendant (given leave to withdraw)
Judgment:
16 May 2019
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 16 May 2019 at 11.00am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel: Glaister Ennor, Auckland Martelli McKegg, Auckland P Dale QC, Auckland Haigh Lyon, Auckland
JKA HOLDINGS LIMITED v WALLACE [2019] NZHC 1072 [16 May 2019]
[1] This is an application by one of the defendants, the second-named first defendant Martin Sherwin (Martin), for an order adding himself and his brother Paul Hilton Sherwin (Paul) as counterclaim plaintiffs in the proceeding. Paul is not presently a party in the proceeding.
[2] In the event leave is granted to file the counterclaim, Martin asks for a number of further orders and directions, including orders for tailored discovery relating to the counterclaim issues.
The parties
[3] The plaintiffs are the current trustees of the Douglas Hilton Family Trust (the Trust), a family trust established by the late Dr Douglas Hilton Sherwin (Dr Sherwin) by deed dated 19 June 1985. Dr Sherwin died on 12 June 2006, and letters of administration in his estate were granted to two of his children, the first defendants (Jan and Martin), on 25 September of that year.
[4] The second defendant, Ms Marino Sherwin (Marino), had been married to Dr Sherwin before his death. Marino is the mother of Dr Sherwin's daughter Zoe.
[5] The deceased had four children from an earlier marriage, being the first defendants Jan and Martin, Paul, and Wayne Sherwin (Wayne).
The application
[6] Martin applies under r 5.57 of the High Court Rules 2016 for an order joining himself and Paul as counterclaim plaintiffs in the proceeding. The proposed counterclaim would be brought by Martin and Paul as a discretionary and final beneficiaries of the Trust, and it would seek a declaration that the debt referred to below is not owed by the Trust to Dr Sherwin's estate. The proposed counterclaim also alleges that the plaintiffs have misconducted themselves in various respects in the discharge of their duties as trustees of the Trust.
[7] The other discretionary and final beneficiaries of the Trust are Dr Sherwin's other children, Jan, Wayne and Zoe. They have not joined Martin in his application for leave to file the counterclaim.
[8] The application is opposed by the plaintiffs. They deny that Martin and Paul have standing to bring the proposed counterclaim, and they say that the issues in the draft counterclaim are separate and distinct from their own claims in the proceeding. They also say that Martin has delayed in making the application, and that if the application were granted it would be almost inevitable that the five day fixture for the hearing of their claims (commencing on 19 August 2019) would have to be adjourned. They submit that in those circumstances considerations of fairness do not require that the issues in the proposed counterclaim be heard with their claims, and leave should be refused accordingly.
The plaintiffs' claims
[9] The plaintiffs commenced this proceeding on 27 February 2018. In it, they seek directions relating to the distribution of the assets of a farming partnership in which the Trust was formerly a partner. The plaintiffs' allegations include the following.
[10] On or about 3 November 1999, Dr Sherwin and Marino formed a partnership to operate a dairy farming business ("the first partnership"). They say that the partners in the first partnership were Dr Sherwin and Marino in their capacities as the then-trustees of the Trust as to a 50 per cent share, Dr Sherwin personally as to a 25 per cent share, and Marino personally as to the remaining 25 per cent share.
[11] On or about 3 November 1999, the first partnership acquired a farm property in Paparoa (the first farm block). The first farm block was comprised in four certificates of title. Dr Sherwin and Marino were registered as proprietors as to a one-half share, and the then-trustees of the Trust as to the other half share.
[12] On or about 21 May 2011, the first partnership acquired another farm property in Paparoa (the second farm block), which is adjacent to the first farm block. The second farm block was comprised in two certificates of title. The registered
proprietors in each case were Dr Sherwin and Marino jointly as to a one-half share, Dr Sherwin as to a one quarter share, and Marino as to a one quarter share.
[13] The financial statements of the first partnership recorded the first farm block, the second farm block and the various farm assets, as assets of the first partnership.
[14] Following the acquisition of the second farm block, the first partnership amalgamated the first farm block and the second farm block into one farm ("the farm"). The first partnership continued to operate a dairy farming business from the farm.
[15] On or about 13 November 2001 the first partnership acquired a residential property in Skelton Crescent, Paparoa ("Skelton Crescent"), adjacent to the farm. Skelton Crescent was registered in the names of Dr Sherwin as to a one-half share and Marino as to a one-half share, as tenants in common. Skelton Crescent was used as the main residence for the farm, and from the date of its acquisition it was treated as an asset of the first partnership.
[16] Dr Sherwin and Marino separated in or about October 2002. Thereafter, the financial statements for the first partnership for each year show that the partners continued to share the first partnership's losses.
[17] On the death of Dr Sherwin on 11 June 2006, the first partnership was dissolved by virtue of s 36(1) of the Partnership Act 1908. From that date a new partnership ("the second partnership") was formed to carry on the dairy farming business at the farm.
[18]The partners in the second partnership were:
(i)the then-trustees of the Trust as to a 50 per cent share;
(ii)the first defendants in their capacities as administrators of Dr Sherwin's estate as to a 25 per cent share; and
(iii)Marino as to a 25 per cent share.
[19] Following the dissolution of the first partnership, all assets of the first partnership were transferred to the second partnership, at market value. The partners' capital account balances in the first partnership were also transferred to the second partnership. Each partner's share of the capital gains made on the transfer of the assets at market value was credited to that partner's capital account in the second partnership.
[20] In August 2012 the then-trustees of the Trust retired, and the present trustees (the plaintiffs) were appointed as trustees of the Trust.
[21] In 2015 the second partnership sold the farm and Skelton Crescent, for a total of approximately $2.5 million. Part of the farm was sold to a third party for $800,000. The plaintiffs say that the balance of the farm and Skelton Crescent were purchased by a partnership comprising Martin, Paul, Jan and Mr Graham Wallace, with assistance of $1.2 million paid by the Trust. Payment of the $1.2 million by the Trust to the second partnership was effected by deducting the $1.2 million from the Trust's credit balance in its capital account with the second partnership.
[22] The only other significant assets of the second partnership were Fonterra shares it held relating to the farm. The Fonterra shares were sold in two tranches in February and August 2016, for a total sum of approximately $428,500.
[23] After allowing for the repayment of advances made by the Trust totalling approximately $1,628,500, the net proceeds of sale of the assets of the second partnership were approximately $1,376,250 as at 30 June 2017. Those proceeds are held for the second partnership by the Trust's solicitors.
[24] By emails dated 14 December 2017 and 25 January 2018, the plaintiffs on behalf of the Trust gave notice to the first and second defendants to dissolve the second partnership. They proposed to repay the remaining liabilities of the second partnership (as listed in the second partnership's financial statements for the three months ending 30 June 2017), and distribute the remaining partnership funds in accordance with the partners' respective capital accounts.
[25] The plaintiffs say that the parties have been unable to agree on the proper distribution of the assets of the second partnership. They ask for the following orders:
(i)A declaration that the second partnership was dissolved by notice on or before 25 January 2018.
(ii)An order that the plaintiffs are to pay the remaining liabilities of the second partnership (as set out in the financial statements) from the partnership funds held by them, and that they are to distribute the balance of the funds as set out in the financial statements.
(iii)An order that such payments are to be a final accounting as between the partners of the first and second partnerships.
(iv)In the alternative, an order directing an account to be taken as to the amounts owing to each of the partners.
Martin and Paul's proposed counterclaim
[26] In their draft counterclaim Martin and Paul referred to the deed which created the Trust in 1985. The deed provided that the final distribution date would be 20 years after Dr Sherwin's death.1 Prior to the final distribution date the trustees in their uncontrolled discretion could apply trust income or capital towards the personal support, benefit, maintenance, education or advancement in life of Dr Sherwin's wife and his children as described above. On the distribution date, the trustees were required to hold the remaining capital and income of the trust for such of Dr Sherwin's children who were then living (with the common substitution of issue provision if a child of Dr Sherwin should die before Dr Sherwin, leaving a child or children of his or her own).
[27] Dr Sherwin and Marino separated in 1994, and entered into a relationship property agreement on 24 June 1994. In or about 2007 Marino remarried and in terms of the Trust deed she was no longer a beneficiary from that time.
1 The final distribution date will accordingly be 12 June 2026.
[28] The plaintiffs were appointed trustees of the Trust on 27 August 2012. Earlier trustees had included Mr Robert Eades and Mr Stuart Callender. Marino had also been a trustee, but she was removed as such by deed dated 18 December 2007.
[29] Martin and Paul say that the principal beneficiary of Dr Sherwin's estate is Wayne, who takes 50 per cent. The remaining 50 per cent of the estate was left to Martin, Paul, Jan and Zoe in equal 12.5 per cent shares.
[30] The proceeds of sale of a property owned by the estate were distributed to Marino pursuant to the relationship property agreement, and on 21 December 2007 the balance of the estate was distributed to the beneficiaries.
The first cause of action: $1.049 million said to be owed by the Trust to Dr Sherwin's estate
[31] The plaintiffs say that the Trust owes Dr Sherwin's estate $1.049 million (the Debt). Martin and Paul contend that the Trust does not owe the Debt.
[32] Following their appointment in 2012, the plaintiffs looked into the Trust's financial records, and Mr Meltzer of JKA Holdings Ltd prepared a report in October 2013. Martin and Paul contend that the report contained a number of material errors which led the plaintiffs to conclude that the balance owing on advances said to have been made by Dr Sherwin to the Trust was $1,049,000 (ie the Debt).
[33] Martin and Paul say that there are no documents supporting the existence of this debt, and the conclusion that the Trust owes the Debt to Dr Sherwin's estate is inconsistent with the financial statements the accountants, Buchanan MacDonald, had prepared for the year ended 31 March 2005 – those statements showed that the Trust owed only $8,410 to Dr Sherwin.
[34] Martin and Paul say that it is not in the best interests of the beneficiaries of the Trust for the plaintiffs to have conceded, as they have, that the Trust owes Dr Sherwin's estate the Debt. Martin and Jan, as administrators of the estate, have made no demand for the Debt, and if demand were now made it would be time-barred. There is no evidence of Dr Sherwin himself having made any demand for repayment of the Debt.
[35] Martin and Paul allege that at the time the Debt is said to have been created the then-trustees did not maintain adequate records for the Trust, including records of the use of funds by Dr Sherwin for his personal benefit.
[36] Martin and Paul acknowledge in the draft counterclaim that if the Debt is paid to Dr Sherwin's estate, the winner will be Wayne: while Dr Sherwin's children are all beneficiaries of the Trust, and stand to share equally in the final distribution of the assets of the Trust, Wayne is entitled to a substantially greater share of any assets of Dr Sherwin's estate than his siblings.
[37] Martin and Paul seek a declaration that neither the Debt nor any part of it is owing to Dr Sherwin's estate. They expressly acknowledge Martin's conflict in seeking to claim (as a prospective counterclaim plaintiff) that the Debt is not owing, while at the same time he is one of the two administrators of Dr Sherwin's estate (to whom the Debt would be paid).2
The second cause of action — alleged breach of duty relating to the Debt
[38] In the second cause of action, Martin and Paul allege breach of duty by the plaintiffs as trustees of the Trust. They allege that the plaintiffs have failed to make reasonable enquiries as to the enforceability of the Debt (including whether any Limitation Act defences might apply), and that they failed to make demand of Marino for the return of the Trust records. They say that the plaintiffs failed to call for and inspect the original accounts for the Trust, which would have assisted in understanding the flow of funds between the Trust and Dr Sherwin, and they failed to take into account that there was no evidence of records establishing the existence of the Debt (or of any demand for repayment of the Debt made by Dr Sherwin). More generally, the plaintiffs are alleged to have failed to act with reasonable care and skill (particularly in compiling the October 2013 report, which contained errors of fact). If the Trust is found to be liable for the Debt by reason of concessions (wrongly) made
2 An administrator's duties include getting in all debts owed to the deceased, and in this case the Trust stands ready to pay the Debt. If it did pay the Debt, Martin would receive 12.5 per cent of the Debt, less any further costs, from Dr Sherwin's estate. If the Debt were not paid, and Martin survived to the Trust distribution date, he would receive on the final distribution of the Trust assets 20 per cent of the Debt (subject to any distributions the Trust might have made, or expenses it might have incurred, in the meantime).
by the plaintiffs, Martin and Paul seek judgment against the plaintiffs for the amount of the Debt, interest and costs.
The third cause of action — relief sought under s 68 of the Trustee Act 1956 or by way of enquiry or accounts
[39] The third cause of action in the draft counterclaim seeks relief under s 68 of the Trustee Act 1956, and/or an order for the taking of accounts pursuant to r 16.2 of the High Court Rules 2016. Alternatively, an enquiry is sought into losses allegedly suffered by Martin and Paul and the Trust. Martin and Paul ask for an award of damages for such amounts as may be found due to them following the enquiry.
[40] The matters pleaded as giving rise to the need for this relief include the following:
[41] All of the funds used to purchase the farm were provided by the Trust, and all funds for the subsequent upkeep of the farm and maintenance and capital contributions were provided by the Trust. There are questions as to why the Trust made further advances to the farm without security, without identifying the purpose of the advances, and without claiming interest. More broadly, the Trust and the partnership are alleged to have wrongly continued working the farm when it was unprofitable.
[42] Prior to the appointment of the plaintiffs as trustees, the trustees are alleged to have failed to prepare up-to-date financial reports, and failed to charge interest on advances made by the Trust to the partnership. Martin had queried the trustees' failure to investigate his allegation that Marino had not contributed at all but was nevertheless able to build up substantial assets. General concerns had been expressed about the level of fees that had been charged by the trustees to the Trust.
[43] Following their appointment as trustees, the plaintiffs are said to have represented that they would investigate the complaints raised by Martin and Paul. They are alleged to have assured Jan, Martin and Paul that issues with the Trust would be resolved within six months of their appointment, failing which proceedings would be issued against the former trustees.
[44] Martin and Paul say that notwithstanding their knowledge of the issues Martin and Paul had raised, the plaintiffs have failed to properly investigate the issues or undertake an audit of the Trust. The plaintiffs' failure to charge interest on advances made by the Trust to the partnership, and the alleged excessive fees they have charged (in excess of $500,000), are also pleaded in this cause of action.
[45] Martin and Paul challenge the settlement agreement the plaintiffs entered into with Marino on 19 February 2015. The settlement was entered into on the basis that Marino was a partner in the partnership, and that draft accounts prepared for the period to 31 March 2015 accurately reflected the financial position of the partnership. It provided for the payment to Marino of a one quarter share of the farm proceeds, based on the accounts to 31 March 2015.
[46] Martin and Paul allege that if interest had been charged on advances made by the Trust to the partnership Marino would not have been entitled to any share of the partnership assets, as loan advances and interest would have been paid in priority to the return of capital. The Trust beneficiaries would have been better off by a sum of not less than $500,000 (roughly corresponding to Marino's one quarter share of the partnership assets).
[47] The broad allegations against the plaintiffs in this cause of action are summarised as follows:
(a)failing to make adequate enquiries of the prior trustees following their appointment as trustees;
(b)failing to pursue legitimate claims for breach of duty by the former trustees;
(c)failing to address the issue of interest on loan advances made by the Trust to the partnership (Martin and Paul contend that if the plaintiffs had charged interest on the advances made by the Trust the assets of the Trust would not have been depleted by the losses incurred in the farm venture);
(d)compromising the Trust's ability to argue that Marino was not entitled to any payment from the partnership asset;
(e)failing to act in a timely manner in respect of the complaints particularised by Martin and Paul;
(f)charging excessive fees.
Statutory provisions relevant to the proposed counterclaim
[48]Section 68 of the Trustee Act 1956 provides:
68 Applications to court to review acts and decisions of trustee
(1)Any person who is beneficially interested in any trust property, and who is aggrieved by any act or omission or decision of a trustee in the exercise of any power conferred by this Act, or who has reasonable grounds to anticipate any such act or omission or decision of a trustee by which he will be aggrieved, may apply to the court to review the act or omission or decision or to give directions in respect of the anticipated act or omission or decision; and the court may require the trustee to appear before it, and to substantiate and uphold the grounds of the act or omission or decision that is being reviewed, and may make such order in the premises as the circumstances of the case may require: provided that no such order shall—
(a)disturb any distribution of the trust property made without breach of trust before the trustee became aware of the making of the application to the court:
(b)affect any right acquired by any person in good faith and for valuable consideration.
(2)Where any such application is made, the court may,—
(a)if any question of fact is involved, direct how the question shall be determined:
(b)if the court is being asked to make an order that may prejudicially affect the rights of any person who is not a party to the proceedings, direct that any such person shall be made a party to the proceedings.
[49]Section 27 of the Partnership Act 1908 materially provides:
27Rules as to interests and duties of partners subject to special agreement
The interests of partners in the partnership property, and their rights and duties in relation to the partnership, shall be determined, subject to any agreement (express or implied) between the partners, by the following rules:
(a)all the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm:
…
(c)a partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital which he or she has agreed to subscribe is entitled to interest at the rate of 5% per annum from the date of the payment or advance:
(d)a partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him or her:
…
Martin's evidence in support of the application
[50] From about 1995 Dr Sherwin was on a sickness benefit, and had no other source of income. Martin said that Dr Sherwin's affairs and those of the Trust were a mess — Dr Sherwin did not prepare resolutions or keep proper records, even though (apart from his sickness benefit) the Trust was his only source of funds. Mr Eades had expressed concern about the way Dr Sherwin was administering the Trust, as far back as 1998.
[51] In respect of the acquisition of the farm, Martin said that neither Dr Sherwin nor Marino contributed anything to the acquisition of the farm, notwithstanding the allocation of a one quarter share to each of them. The Trust provided all of the funds to purchase the farm.
[52] Martin's evidence was that Mr Eades, although he was also the solicitor for Dr Sherwin and the Trust, has been unable to explain whether there was a partnership or some other form of ownership intended. However, because of the passage of time
and the factual complexity of the matter he and Paul now accept that the farm was owned in a partnership.
[53] Martin said that his co-administrator of Dr Sherwin's estate, Jan, has elected not to be involved in the proposed counterclaim; she would prefer to settle with the plaintiffs. That has not been acceptable to Martin and Paul.
[54] Martin provided a detailed account of his reasoning leading to the conclusion that the plaintiffs were wrong in concluding that the Trust owes the Debt to Dr Sherwin's estate. However, it is not necessary for the purposes of this decision to set out the detail of that reasoning.
[55] On the issue of why the Trust did not charge interest to the partnership, Martin said that Mr Porus, a solicitor associated with one of the trustee/plaintiffs, Vulcan Trustee Co (2012) Ltd, told him that there was no agreement for the payment of interest by the partnership. Martin contended that the trustees may have been negligent in overlooking the provisions of s 27 of the Partnership Act relating to the liability of a partnership to pay interest.
[56] Martin confirmed his belief that Marino had no entitlement from either the partnership or Dr Sherwin's estate. Nevertheless, the plaintiffs advised her in 2015 that if she signed a transfer of her share of the farm she would receive one quarter of the partnership assets. Marino has since contended that the plaintiffs are estopped from denying that entitlement. Martin's position is that if the plaintiffs have made that concession to Marino and there has been a settlement, they have acted negligently and the Trust will have suffered loss as a consequence. In his view, all of the partnership funds were owed to the Trust.
[57] Martin referred to two mediations which have been convened in an attempt to resolve the various disputes.
[58] On the question of the fees charged by the plaintiffs, Martin said that he did not believe that fees in excess of $500,000 are justified. He wishes to have the fees reviewed by an independent person familiar with trust issues.
[59] Specifically in respect of the addition of the proposed counterclaim in this proceeding, Martin acknowledged that the proceeding has been allocated a five day fixture in August 2019. However, he said that there are other issues that need to be resolved, in addition to the taking of partnership accounts. Martin said:
I do not believe the taking of accounts itself would be of particular difficulty save that there is an issue regarding interest that should have been charged by the Trust for the advances made to the partnership.
[60] Martin also acknowledged that, if leave is given to him and Paul to file the counterclaim, Wayne would be entitled to be heard, and he should be served with a copy of the proceedings. Martin produced evidence of a letter sent by his counsel on 7 February 2019 to a barrister acting on behalf of Wayne, inviting Wayne's view on the Trust's liability for the Debt. The purpose of the letter was said to be invite the barrister to take instructions from Wayne "in the hope that he will confirm that he accepts the Debt is not recoverable". Mr Dale told me at the hearing that no response has yet been received to his February 2019 letter.
The other parties' responses to the application
[61] The plaintiffs filed a notice of opposition, without any affidavit in support. They made submissions (written and oral) in opposition.
[62] Jan did not oppose or support the application. Mr Davies had only a watching brief on her behalf.
[63] Marino's counsel filed a memorandum advising that, although she does not accept Martin's evidence filed in support, she does not wish to be actively involved and would therefore abide the decision of the Court. Mr Molloy was excused from attending the hearing any further, shortly after the case was called. Counsel advised me at the hearing that negotiations are under way which it is hoped will resolve all issues in the proceeding insofar as they concern Marino's entitlement to share in the assets of the first partnership and the second partnership.
The plaintiffs' opposition
[64]The plaintiffs oppose the application.
[65] They say that the proceeding is not a proceeding relating to the administration of the Trust — it is solely intended to bring to an end the second partnership. The defendants in the proceeding have been named as such because they were the partners in the second partnership.
[66] The plaintiffs then say that Martin does not have Jan's authority to act as executor of Dr Sherwin's estate without his co-executor's (Jan's) consent, and he does not have that consent. They also say that there is an apparent conflict between Martin's position as co-administrator of Dr Sherwin's estate and his position as prospective counterclaim plaintiff in his capacity as a beneficiary of the Trust.
[67] The plaintiffs then say that the issues raised in the draft counterclaim are not related to any dispute between the partners in the second partnership. There are issues in the draft counterclaim that have nothing to do with the other parties and which would add considerably to the complexity of the issues the Court would have to resolve. These issues would also give rise to a potential conflict of interest for the plaintiffs in having a continuing role in the proceeding.
[68] The plaintiffs further say that joinder of Paul and the granting of leave to bring the counterclaim would result in additional delays and additional costs for the current defendants (despite them having no interest in the additional issues being raised).
Discussion and conclusions
Legal considerations
[69]Rule 5.57 of the High Court Rules 2016 materially provides:
5.57Counterclaim against plaintiff and another person
(1)A defendant who has a counterclaim against the plaintiff along with any other person (whether a party to the proceeding or not) for any relief relating to or connected with the original subject matter of the proceeding may, within the time allowed for filing a statement of defence, file a statement of the counterclaim and serve a copy on the plaintiff and that other person (to be referred to as a counterclaim defendant).
…
(3) A counterclaim defendant must file a statement of defence to a counterclaim within 25 working days after the day on which the counterclaim was served.
…
(6)The court may at any time order that a counterclaim to which subclause (1) applies be struck out, upon such terms as it thinks just, if it appears—
(a)that, by reason of the counterclaim, the plaintiff is likely to be unduly delayed in obtaining relief; or
(b)that the trial (if a trial is necessary) is to be held at a place where it could not be held if a counterclaim defendant had been made defendant to an independent proceeding by the defendant in respect of the subject matter of the counterclaim; or
(c)that the relief sought in the counterclaim is not related to or connected with the original subject matter of the proceeding.
[70]Rule 5.58 materially provides:
5.58Place of trial of counterclaim
(1)A counterclaim must be tried at the same place as the statement of claim in the original proceeding and either simultaneously or immediately afterwards.
(2)Despite subclause (1), if it appears to the court that a counterclaim and the statement of claim can more fairly or conveniently be tried separately, it may, subject to such conditions as it thinks fit, make an order that the counterclaim be tried at some other place or time.
(3)Subject to subclauses (1) and (2), after a counterclaim has been served it must proceed in the same manner as if the defendant had commenced an independent proceeding against the plaintiff.
[71]Rules 4.23 materially provides:
4.23 Trustees, executors, and administrators
…
(2) There is no need to join persons beneficially interested in a trust or an estate to a proceeding because the trustees, executors, and administrators represent those persons.
…
[72] There is an immediate question as to whether the words "along with any other person …" in r 5.57(1) contemplate some person, not presently a party to the proceeding, joining with a defendant to make a claim against an existing plaintiff. In Pender v Taddei, the UK Court of Appeal considered that such joinder was not within the scope of the UK equivalent of r 5.57.3 Chitty LJ said:4
The words of the rule can only be construed as referring to cases where the defendant raises by counterclaim questions between himself and the plaintiff along with other persons, and not as including a case where the defendant raises questions between himself along with other persons and the plaintiff. The rule only applies where the defendant could have brought a cross-action against the plaintiff and the other persons. If the rules do not give the defendant power to counterclaim jointly with another person against the plaintiff directly, then, counterclaim being entirely the creature of the Judicature Act, I do not think he can be allowed to do the same thing indirectly in the manner proposed.
[73] Pender was referred to by Wylie J in New Zealand, in Nippon Credit Australia Ltd v Girvan Corporation New Zealand Ltd.5 The defendant, sued on a guarantee, filed a counterclaim purporting to join a second counterclaim plaintiff, alleging that the second counterclaim plaintiff had also executed a guarantee in favour of the plaintiff. In the draft counterclaim the defendant sought a declaration that both the defendant's guarantee and the guarantee of the second counterclaim plaintiff were invalid.
[74] Wylie J considered that a non-party may not join with the defendant in a counterclaim at the time of filing as of right. The non-party may commence separate proceedings which may then, if appropriate, be consolidated with the original proceeding. Wylie J referred to Pender v Taddei as direct authority for the proposition that a third person not a party cannot be joined as a co-counterclaim plaintiff with the defendant.
[75] Counsel for the defendant in Nippon Credit Australia submitted that the Judge should not follow Pender, which was said to have been decided on a strict interpretation of the rules then applicable, and was not consistent with the more
3 Pender v Taddei [1898] 1 QB 798 at 801.
4 At 801.
5 Nippon Credit Australia Ltd v Girvan Corporation New Zealand Ltd (1991) 5 PRNZ 44.
modern approach of promoting the speedy and inexpensive resolution of all disputes between the parties. Wylie J said:6
Strictly the case is not binding on me, but nothing in the arguments presented to me has persuaded me that the decision is not valid in New Zealand today. There is nothing which I perceive in the different wording of the relevant rules which suggests a different approach should be taken, and the case is still cited as authority in the notes to RSC O 15 r3 in the 1991 edition of the White Book.
[76] Wylie J concluded that the proposed co-plaintiff on the counterclaim was not entitled as of right to join the proceeding as such.
[77] Wylie J nevertheless considered whether the broader provisions of r 97 of the High Court Rules (as they then stood), relating to joinder of additional parties generally, might permit the joinder.7 His Honour rejected a submission that r 97 had no application to counterclaims: once a counterclaim has been validly raised, jurisdiction to add parties must thereafter be available.
[78] Mr Dale referred to the r 5.58(1) provision that a counterclaim must be tried at the same place as the statement of claim in the original proceeding and either simultaneously or immediately afterwards. That is the starting position under the rule, but the Court has a discretion to order that claim and counterclaim be tried separately if it appears that the interests of fairness or convenience so require. In Talyancich v Cole, an application for separate trials of claim and counterclaim was rejected.8 Among the factors considered relevant by Chambers J was whether there would be any significant overlap between the issues raised in the claim and in the counterclaim, and whether there would likely be any saving in trial time, and therefore costs, if the claim and the counterclaim were tried separately. Chambers J also accepted that, in
6 At 53.
7 The current equivalent of r 97 is r 4.56. Rule 4.56 materially provides:
4.56 Striking out and adding parties
(1) A Judge may, at any stage of a proceeding, order that—
…
(b)the name of a person be added as a plaintiff or defendant because—
(i)the person ought to have been joined; or
(ii)the person’s presence before the court may be necessary to adjudicate on and settle all questions involved in the proceeding.
…
8 Talyancich v Cole (1999) 14 PRNZ 195 (HC).
circumstances where discretionary relief had been sought in the claim, it would not be appropriate to hear the claim for discretionary relief without also hearing the matters raised in the counterclaim.
[79] In Goodship v Minister of Fisheries the Court held that an order for separate trials would not be made if the matters to be traversed in each trial might substantially overlap, if there were a risk of res judicata or conflicting findings, or if substantially more court time would be taken by separate trials.9
[80] An applicant for an order that the claim and a properly commenced counterclaim be heard separately carries a heavy, or "not insignificant", onus.10
Application of legal principles to the facts in this case
[81] I do not think the counterclaim can proceed under r 5.57 as Martin and Paul propose. Paul is not at this stage a party to the proceeding, and on the authority of Pender v Taddei and Nippon Credit Australia Ltd he does not come within r 5.57. The issue would appear to be whether he should nevertheless be added as a counterclaim party under r 4.56. There must also be an additional issue over the lateness of the proposed counterclaim: a r 5.57(1) counterclaim is required to be filed within the time allowed to a defendant to file a defence to the plaintiff's claim.
[82] Mr Dale submitted that the central question must be whether considerations of fairness and convenience favour Martin's proposed counterclaim being heard with the plaintiffs' claim rather than at some later stage. I accept that that is the central consideration, but in my view the interests of fairness and convenience point to the application for leave to add Martin and Paul as counterclaim plaintiffs being refused. My reasons for coming to that view are set out below.
[83] First, I do not consider that joinder of Paul is justified under r 4.56, and (as noted above) he is not within the category of non-parties a defendant may join under r 5.57. For the reasons set out below, I am not satisfied that Paul ought to have been
9 Goodship v Minister of Fisheries [2001] NZAR 274 at [13].
10 Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV-2009-404-4392, 5 May 2010, at [10].
joined in this proceeding,11 and nor am I satisfied that Paul's presence before the Court may be necessary to adjudicate on and settle all questions involved in the proceeding.12
[84] Secondly, I accept Mr Vautier's submission that the granting of leave to add the proposed counterclaim plaintiffs would almost certainly result in significant delays for the plaintiffs in getting their case to trial. Mr Dale acknowledged that if the counterclaim were to proceed Wayne would have to be served, and if Wayne were to oppose Martin and Paul's contention that the Debt is not owing to Dr Sherwin's estate I think there would be no realistic possibility of the case proceeding to trial in August. I also accept Mr Vautier's submission that the allegations of negligence against the plaintiffs which are contained in the second cause of action in the draft counterclaim would inevitably require the plaintiffs, both of whom are professional men, to involve their insurers in the defence to the counterclaim. There would likely be new legal advisers involved for the plaintiffs, and the plaintiffs themselves might take the view that the allegations made against them place them in a difficult position in continuing in their roles as trustees of the Trust. Determining all matters necessary to complete the winding up of the second partnership could be extensively delayed, and I do not consider such delay would be either necessary or appropriate in the interests of fairness and convenience.
[85] I also accept Mr Vautier's submission that the allegations in the proposed counterclaim are distinct from the plaintiffs' allegation in their claim. The plaintiffs are concerned only with settling the rights and liabilities, as between themselves, of the former partners in the first and second partnerships. The proceeding is not concerned with the dispute between the Trust and Martin as to whether the Debt is owed to Dr Sherwin's estate. Nor will the plaintiffs' claim be concerned with whether the trustees should have put Trust money into the partnership, or whether they may have been negligent in discharging their duties as trustees of the Trust in any of the respects alleged by Martin and Paul. The plaintiffs' claim will presumably be limited to establishing the assets and liabilities of the second partnership as at the date of dissolution, including the credit or debit balances owing to or by the partners on their respective current accounts with the second partnership. Whether an agreement was
11 Rule 4.56(1)(b)(i).
12 Rule 4.56(1)(b)(ii).
or was not made with Marino affecting her claim to an interest in the second partnership will presumably be an issue to be determined as between the partners in the plaintiffs' proceeding, and Dr Sherwin's estate will be represented in that proceeding and able to make submissions on it. But the question of whether or not the plaintiffs should have made any agreement with Marino which the Court may find was made, must be a matter between the plaintiffs as trustees and the beneficiaries of the Trust. As such, it is difficult to see how it could be an issue in the plaintiffs' proceeding.
[86] Similarly, whether the first partnership and/or the second partnership is liable for interest on amounts advanced to it by the Trust will presumably be an issue to be determined in the context of the present proceeding: if the second partnership is liable to the Trust for interest, that will affect the amount of the Trust's current account with the second partnership. If on the other hand the Court hearing the plaintiffs' claims determined that the trustees of the Trust agreed not to require payment of interest under s 27 of the Partnership Act, the question of whether the plaintiffs were negligent or acted in breach of trust in participating in any such agreement will not be a matter for determination on the plaintiffs' claims as they are presently framed.
[87] I think the same is true of all of the claims where Martin and Paul allege negligence or other misconduct on the part of the plaintiffs. Their claims are in my view separate and distinct matters from those presently in issue in the proceeding, and although they may well be affected by the judgment in the present proceeding13 I do not see any likely unfairness or inconvenience if Martin and Paul's claims are left to be dealt with in any separate proceeding they may elect to file against the plaintiffs after the present proceeding has been heard and determined.
[88] I did not understand Mr Dale to contend that if the counterclaim were not permitted to be filed and to proceed to a hearing with the plaintiffs' claims there would be a risk of conflict between the findings of the Court hearing the plaintiffs' present claims and those of the court later hearing Martin's and Paul's claims against the
13 For example, if the Court were to hold in the present proceeding that the second partnership is liable to the Trust for interest under s 27 of the Partnership Act, there would presumably be no need for Martin and Paul to pursue any claim against the plaintiffs on that issue.
plaintiffs. I think Mr Dale was correct in not putting any weight on a res judicata, or "conflicting findings", argument.
[89] The plaintiffs' present claims are concerned only with establishing the rights and liabilities of the Trust vis a vis its former partners in the second partnership; they are not concerned with the relationship between the Trust and the beneficiaries. In the ordinary course, if a dispute arises between a trust and a third party there would be no question of the beneficiaries of the trust being joined as parties in any resulting court proceeding. That is reflected in r 4.23(2), which provides that there is no need to join persons beneficially interested in a trust or an estate to a proceeding because the trustees, executors, and administrators represent those persons. So in this case, the plaintiffs represent the beneficiaries of the Trust in the proceeding relating to the dissolution of the second partnership. In those circumstances, I do not think there would be any significant risk of conflicting findings if the claims made by Martin and Paul in their proposed counterclaim were not heard with the plaintiffs' claims. To the extent that findings might be made in this proceeding that will affect the claims Martin and Paul wish to make against the plaintiffs as trustees of the Trust, Martin and Paul will be bound by those findings (because the trustees will have conducted the proceeding as the representatives of the beneficiaries).
[90] A further consideration, which also points against the grant of leave to add the proposed counterclaim plaintiffs, is that, at least in the absence of agreement with Wayne (and none has yet been reached), allowing Martin to pursue the proposed counterclaim allegation that the Debt is not owing to Dr Sherwin's estate would appear to place Martin in a clear conflict position between his interest as a beneficiary of the Trust and his duty as a co-administrator of Dr Sherwin's estate. Absent some agreement between the affected family members as to the Trusts' liability for the Debt, there would seem to be a substantial risk that Martin will be required to retire as administrator of the estate. If that happened, Martin would presumably be removed as a party in this proceeding, and any standing he may have had to bring the counterclaim (which would be dependent on his status as a party) would no longer exist.
[91] I can understand the desire of Martin and Paul to endeavour to have all issues dealt with in the one hearing, and to have everything over and done with after judgment has been given following an August hearing on all issues. But for the reasons set out above, I do not think their wish to achieve finality on all matters can realistically be achieved over five days in August. If leave to add the proposed counterclaim were given, there would inevitably be a substantial and detailed response by the two professional trustees who are the current plaintiffs, and there would inevitably be additional discovery and possibly other interlocutory steps. Wayne would have to be served, and he might or might not take an active part in the proceeding. Particularly if he did, the prospects of all of the issues that Martin and Paul now raise being heard and determined at the August fixture would be remote.
[92] It is true that many of the same individuals involved in the present proceeding would also be involved in the proposed counterclaim, but I think any convenience there might be in having just one hearing dealing with all matters is countered by (i) the fact that not all parties to the proceeding do have an interest in the proposed counterclaim (for example, Marino would not appear to have an interest), and (ii) the long delay that would be likely before a new fixture could be obtained to hear both claim and counterclaim. Five days would not seem to be long enough to accommodate both claim and counterclaim, and it seems likely that a new fixture would not be obtained until late 2020 at earliest.
[93] For all of those reasons, I am of the view that if Martin and Paul wish to pursue their claims as beneficiaries of the Trust (including their claims relating to the Debt), they should do so in a separate proceeding. The application for leave to add Martin and Paul as counterclaim plaintiffs will accordingly be dismissed.
[94] For completeness, I add only that I have not found it necessary to decide the issue of whether Martin and Paul would have standing to apply under s 68 of the Trustee Act. It may be that their status as final beneficiaries would be sufficient, as Mr Dale submitted, but I do not need to make any finding on that issue. Nor have I found it necessary to make any finding on Mr Vautier's submission that Martin's status as a "defendant" in the proceeding is limited by the capacity in which he has been sued (as one of two administrators of an estate), so that he would not qualify as a
"defendant" for the purposes of any counterclaim he might wish to file in his personal capacity.
Result
(1)For the foregoing reasons, the application by Martin for an order joining himself and Paul as first and second counterclaim plaintiffs is refused.
(2)The discovery and timetable orders sought by Martin (which were consequential on the joinder of Martin and Paul as counterclaim plaintiffs) are also refused.
(3)Mr Dale asked for costs to be dealt with by memoranda. My initial impression is that costs should be awarded to the plaintiffs on a 2B basis, but if counsel are unable to agree, memoranda may be filed. Any memorandum from the plaintiffs is to be filed and served within 20 working days of the delivery of this judgment. Any memorandum in response from Martin is to be filed and served within 10 working days of service of the plaintiffs' memorandum.
Associate Judge Smith
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