Kimble Contracting Ltd v Wouldes
[2017] NZHC 1554
•7 July 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2121 [2017] NZHC 1554
BETWEEN KIMBLE CONTRACTING LIMITED
Plaintiff
AND
GRAHAM WOULDES First Defendant
ANMAR ALMOMEN Second Defendant
| Hearing: | 6 July 2017 |
Appearances: | J Strauss for the Plaintiff, to oppose |
Judgment: | 7 July 2017 |
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 7 July 2017 at 3:45pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Dyer Whitechurch (L M Nicholson), Auckland, for the Plaintiff
Skinners Law (J Skinner/C Paterson), Albany, Auckland, for the First Defendant
Counsel:
J Strauss, Auckland, for the Plaintiff
KIMBLE CONTRACTING LIMITED v WOULDES [2017] NZHC 1554 [7 July 2017]
INDEX
Paragraph
Introduction [1] The people involved [5] The statement of claim [9] Mr Wouldes’ position [15] The claim for pre-incorporation losses [26] Mr Wouldes’ liability as an accessory [32] The pleading requirements for claims of accessory liability [37] No assumption of personal responsibility [48] Result [49]
[1] Kimble Contracting Ltd sues Graham Wouldes for $923,000.00 it says it lost as a result of misleading and deceptive conduct under s 9 of the Fair Trading Act 1986. Kimble Contracting Ltd does not say that Mr Wouldes himself contravened s 9 of the Fair Trading Act, but rather that he was complicit under the accessory liability provisions, s 43(1)(b) and (d). The second defendant, Anmar Almomen (commonly called “Alex”) is said to have directly engaged in the misleading or deceptive conduct in trade that caused Kimble’s losses. But he has disappeared.
[2] Mr Wouldes has applied for strike-out and summary judgment. The application is made on a number of grounds, but two were the focus of submissions:
[a] Kimble cannot sue for the first $800,000 of its claim because that is for payments made before Kimble was incorporated;
[b] Mr Wouldes did not aid, abet, or procure a contravention of s 9 of the Fair
Trading Act.
[3] Some of the remaining grounds involve contestable questions of fact which are inappropriate for an application for strike-out or summary judgment. Another ground is that Mr Wouldes did not assume personal responsibility, but that is misdirected. While that is relevant to a common law claim in negligence, there is a different test for liability under the Fair Trading Act.
[4] Mr Strauss has only recently been instructed. He is not responsible for the pleadings. During the hearing he accepted that the statement of claim could not be sustained in its current form, but sought the opportunity to amend. On the other hand Mr Skinner for Mr Wouldes pressed for summary judgment to give his client certainty.
The people involved
[5] Kimble Contracting Ltd was incorporated on 3 March 2015 but it went into liquidation on 9 December 2016. Its director was Mr Karnie Smith. He was its sole shareholder. People
said to be associated with the company are Mr Hamish Clarke and Mr Samuel Tolich. The business of Kimble Contracting Ltd is not stated.
[6] Euro Vehicles Ltd was incorporated on 23 April 2012. It went into liquidation on 14
June 2016. It carried on business selling second-hand European cars from premises at East Street, Newton. On incorporation, Mr Wouldes was the sole director and shareholder. In June 2015 Mr Wouldes resigned as director and sold his shares to his son, Julian Sydney, and to Alex. They became directors. Later in November 2015 Mr Sydney resigned as director and transferred his shares to Alex. Mr Sydney is the son of Mr Wouldes. This case is concerned with the period of February and March 2015 while Mr Wouldes was a director and sole shareholder:
[7] Mr Wouldes says that his son looked after the financial side of the business, managing it and making sure it ran smoothly. Euro employed Alex as a salesperson. The plaintiff does not necessarily accept that description of Alex’s role. It says that he was a more hands-on manager.
[8] There are bankruptcies on both sides. Alex was adjudicated bankrupt on 2 February
2012 and was discharged on 24 February 2015. He has taken no steps in the proceeding. He was served by substituted service after efforts to trace him were unsuccessful. Mr Clarke was adjudicated bankrupt on 7 July 2016 and has not been discharged. He describes himself as a “property and construction consultant”. He was not a director of Kimble but it is arguable that he is in de facto control of the company.
The statement of claim
[9] The statement of claim pleads that in February and early March 2015 Mr Smith, Mr Clarke and Mr Tolich as representatives of Kimble met with Alex as manager of Euro Vehicles to discuss the purchase of motor vehicles. During those discussions Alex represented, on behalf of Euro Vehicles:
[a] Euro Vehicles, Mr Wouldes, Mr Sydney and he had undertaken successful property developments on the North Shore;
[b] Alex was a director of the company although he was not named or listed as such;
[c] Euro Vehicles was a successful property developer;
[d] Euro Vehicles operated a successful and profitable car importing/sales business;
[e] Euro Vehicles dealt significantly in cash when purchasing high-end second- hand vehicles;
[f] Euro Vehicles could double any money Kimble was prepared to lend or invest in the car business or the property business of Euro Vehicles;
[g] any money invested could be repaid on 14 days’ notice;
[h] Euro Vehicles had entered into similar arrangements in the past and its lawyers would draw up the necessary documents;
[i] Mr Wouldes, Mr Sydney and Alex would personally guarantee repayment of any monies that were invested in Euro Vehicles; and
[j] Kimble could register security on the personal property securities register over vehicles owned by Euro Vehicles.
[10] Kimble says that relying on these representation, it made these payments to Euro
Vehicles:
[a] 24 February 2015 - $35,000.00 by electronic transfer to Euro Vehicles Ltd;
[b] 24 February 2015 - $50,000 by electronic transfer to an account nominated by
Alex, said to be for a vehicle importer for the purchase of motor vehicles; [c] 26 February 2015 - $43,000 by electronic transfer to Euro Vehicles Ltd;
[d] 25 February 2015 - $38,000 by electronic transfer to an account which Alex then sent on to a vehicle importer for the purchase of motor vehicles;
[e] 27 February 2015 - $135,000 by bank cheque to Euro Vehicles Ltd; [f] 1 March 2015 - $170,000 by bank cheque to Euro Vehicles Ltd; and
[g] on various dates in February 2015 - $329,000 in cash, the particulars for which will be provided later.
The total amount of these payments is $800,000. The purpose of the payments was for investing with Euro Vehicles as Alex had proposed.
[11] On 17 March 2015 Kimble agreed to buy two Mercedes Benz cars and a vehicle mechanical warranty from Euro Vehicles Ltd. It paid a total of $123,000.00 - $60,000 on
17 March 2015, $40,000 on 18 March 2015, and $23,000 on 26 March 2015. The first vehicle broke down immediately after delivery and it was agreed that the vehicle would be repaired under the warranty. There were also mechanical problems with the second vehicle. Both were returned for repair. By May 2015 neither had been repaired. Alex agreed to refund the purchase price. The refund was never paid.
[12] All the representations attributed to Alex are alleged to have been made by him as agent of Euro Vehicles Ltd. They are also alleged to be misleading or deceptive.
[13] Mr Wouldes is said to be liable for Alex’s allegedly misleading conduct under
s 43(1)(b) of the Fair Trading Act by:
[a] appointing Alex as manager of Euro Vehicles Ltd;
[b] permitting him to run the business and to be solely responsible for running the business; and
[c] permitting Alex to represent to the public at large – and relevantly the plaintiff
– that he was the manager of the company and solely responsible for the conduct of its business.
[14] Mr Wouldes is also alleged to be liable under s 43(1)(d) of the Fair Trading Act because, as sole director and shareholder of the company, he had the means and/or opportunity and/or duty and/or ability to be aware of the facts pleaded in that he:
[a] had access to the bank accounts of Euro Vehicles Ltd and saw the funds being paid in by the plaintiff;
[b] had access to the stock records and lists of vehicles purchased and sold by Euro
Vehicles in the course of its business;
[c] had access to the sale and purchase of vehicles and agreements between Euro
Vehicles and its customers; and
[d] had overall responsibility for the conduct of the business of Euro Vehicles Ltd and its trading activities and accounts.
Mr Wouldes’ position
[15] Mr Wouldes generally denies liability. The affidavits of Mr Wouldes and Mr Sydney set out many arguable matters of defence. Alex was no more than a salesman - not a manager, a director or de facto director of the business. While Mr Wouldes was director of the company, he had no dealings with Kimble or anyone connected with it. He knew nothing about any of the transactions. He was not on site at any relevant time.
[16] Of the seven payments totalling $800,000, Euro Vehicles received only $383,000: [a] 24 February - $35,000;
[b] 26 February - $43,000; [c] 27 February - $135,000; [d] 1 March - $170,000.
[17] They say that Euro Vehicles did not receive the remaining amount of $421,000 and bank records need to be put in evidence. In March 2015, it received $100,000 not $123,000 from Kimble.
[18] Mr Sydney says that all the payments received were supported by genuine transactions, but that is contentious.
[a] He says that the payment of $35,000 on 24 February 2015 was for the purchase of a BMW M5 silver, registration EMP 223. The vehicle is shown on a stock list. A tax invoice is shown, but the tax invoice does not identify any purchaser. There are no documents recording a transfer of ownership of the vehicle.
[b] The $43,000 paid on 26 February 2015 is said to be for the purchase of a Lexus. No registration number is given. An invoice for the sale shows Mr V Sanders with a Christchurch address as the purchaser. Mr Sanders, who lives at that address, has given an affidavit that he did not buy a Lexus for
$43,000 in February 2015 but an Audi for $70,000. He is not connected with
Kimble.
[c] The payment of $135,000 on 27 February 2015 is said to be for the sale of two Mercedes Benz; the registration numbers are given, and the vehicles appear in a stock list. The tax invoice is to “AEM Wholesale”, not an entity known to Kimble.
[d] The payment of $170,000 on 1 March 2015 was for the purchase of a Maserati sports car. The vehicle is shown in the stock list, but the tax invoice is to a Karen Smith at a Birkdale address. A witness for Kimble has visited that address. She suggests that anyone living there would not own a high-end European sports car.
[19] There is conflicting evidence as to motor vehicle sales in March 2015. Mr Clarke has put in evidence two agreements for motor vehicle sales, each for a Mercedes. The first is for
$63,000 and the second for $50,680. Kimble Contracting Ltd is the purchaser in one;
Karnie Smith is the purchaser in the other. He confirms payments totalling $123,000. On the other hand, Mr Sydney says that Euro Vehicles received two payments from Kimble totalling
$40,000 and $60,000, a total of $100,000, and a further payment of $20,000. These were said to be for the purchase of a Bentley by a “Matthew Ajit” of Havelock North; and the second two payments for the purchase of a 2008 Maserati by Mr Clarke. Mr Sydney said that the purchase price for the Maserati was $76,000 and only $60,000 was received. Alex told him that the agreement for sale and purchase was then converted into a rental agreement, but Mr Clarke did not pay and the balance was written off.
[20] Kimble’s evidence includes an affidavit by Mr Ajit Ralm of Rotorua. He also goes by the name “Ajit Matthew”. He says that he did buy a brown two-door Bentley but that is not the vehicle in the invoice in Mr Wouldes’ evidence. He paid $92,000. Euro Vehicles owes him $25,000 (as a result of other transactions). He has not lived in Havelock North.
[21] Mr Sydney and his father do not say that they ever dealt with Kimble or any of the people connected with it. Their information appears to come from Alex. I have no confidence that in an application for summary judgment it is safe to rely on any information sourced from Alex including records of transactions in which he was involved.
[22] Mr Clarke has put in evidence an affidavit sworn by Alex in a liquidation proceeding brought by Kimble against Euro Sales Ltd, in which Alex claimed that Euro did not sell any vehicles to Kimble, Karnie Smith or Hamish Clarke. That is also contestable.
[23] At this stage I cannot make clear-cut findings on these matters:
[a] Alex’s actual authority: whether he was no more than a salesman or whether he had a wider managerial role;
[b] Whether he was also acting on his own account; and
[c] Whether Alex or Euro Vehicles received the $421,000 paid before 6 March
2015.
[24] But one matter is clear: none of the payments before 6 March 2015 totalling $800,000
came from a bank account in the name of Kimble Contracting Ltd. Kimble Contracting Ltd’s
initial disclosure, put in evidence, shows a bank statement for Kimble Contracting starting
6 March 2015. The account number is 12-3072-00-31854-00. The statement shows payments of $60,000 on 17 March 2015, $40,000 on 18 March 2015, $23,000 on 26 March 2015; but, obviously, no payments before the account was opened on 6 March 2015.
[25] The initial disclosure also includes bank statements for an account in Mr Clarke’s
name. The account number is 12-3136-0235910-51. Some of the payments made before
6 March 2015 are identified in his personal bank statements.
The claim for pre-incorporation losses
[26] Kimble claims for payments totalling $800,000 made before it was incorporated. Most
of them came from Mr Clarke’s bank account. There is no evidence as to the source of the
$329,000 in cash but as the payment was made in February 2015, the funds cannot have belonged to Kimble Contracting Ltd because the company had not yet come into existence. As the company did not own the funds which it says were for the alleged payments, it cannot have suffered any loss. Even if the representations by Alex led to the payments being made, someone else has suffered a loss - not Kimble Contracting Ltd. The point here is similar to that made by Lord Brandon in Leigh & Sillavan Ltd v Aliakmon Fishing Co Ltd
(The Aliakmon):1
[1] In order to enable a person to claim in negligence for a loss caused to him by reason of loss or damage to property, he must have had either the legal ownership of or a possessory title to property concerned at the time when the loss or damage occurred, and it is not enough for him to have had only contractual rights in relation to such property which had been adversely affected by the loss of or damage to it.
[27] That requirement for title to sue also applies to claims for loss under the Fair Trading
Act.
[28] Mr Clarke says that it was made known to Alex that he would be dealing with a company to be incorporated. He claims that these were pre-incorporation payments and that the statement of claim will be amended to reflect this. That does not really answer the point. There is nothing in the current pleadings or the evidence to show that any transactions before
the incorporation of Kimble Contracting Ltd on 3 March 2015 were pre-incorporation
Leigh & Sillavan Ltd v Aliakmon Fishing Co Ltd (The Aliakmon) [1986] AC 785 (HL).
contracts within ss 182-184 of the Companies Act 1993. Moreover, if there were any pre- incorporation contracts, they would have to be ratified. There is no evidence of any ratification of these contracts. Ratification is not possible now, because the company has gone into liquidation. The director of the company cannot ratify. Control of the company has passed to a liquidator. Besides, it is far too late to ratify.
[29] More importantly a claim based on a pre-incorporation contract does not change matters. The question here is one of property: who owned the money that was paid? It cannot have been Kimble.
[30] Given Mr Clarke’s bankruptcy, there is an obvious reason why the claim is being brought in the name of the company instead of in his own name. On his bankruptcy, his assets vested in the Official Assignee.2 That includes any causes of action under the Fair Trading Act. Only the Official Assignee, not Mr Clarke, can sue. This proceeding is abusive as a means by which Mr Clarke is contriving to obtain assets for himself which rightly belong to the Official Assignee to hold for Mr Clarke’s creditors.
[31] That justifies striking out so much of the pleadings as rely on the payments of
$800,000 made before Kimble was incorporated.
Mr Wouldes’ liability as an accessory
[32] Mr Wouldes is sued not because he himself engaged in misleading and deceptive conduct, but because he was an accessory to it. Section 43(1) says:3
This section applies if, in proceedings under this Part or on the application of any person, a court or a Disputes Tribunal finds that a person (person A) has suffered, or is likely to suffer, loss or damage by conduct of another person (person B) that does or may constitute any of the following:
(a) a contravention of a provision of Parts 1 to 4A (a relevant provision):
(b) aiding, abetting, counselling, or procuring a contravention of a relevant provision:
(c) inducing by threats, promises, or otherwise a contravention of a relevant provision:
Insolvency Act 2006, s 101.
Ng v Harkness Law Ltd [2014] NZHC 850 at [30].
(d) being in any way directly or indirectly knowingly concerned in, or party to, a contravention of a relevant provision:
(e) conspiring with any other person in the contravention of a relevant provision.
[33] The section distinguishes between liability as a principal and as an accessory.4
Section 43(1)(a) applies to principal infringers, s 43(1)(b)-(e) to accessories. The distinction is important because the courts have applied a mens rea requirement to establish liability against accessories, but not against principals. This requirement of mens rea for accessories is a test for criminal liability applied in a civil context. The High Court of Australia first drew the distinction in Yorke v Lucas.5 It has been applied in New Zealand. In Specialised Livestock Imports Ltd v Borrie the
Court of Appeal said:6
The equivalent language to that of s 43(1)(b) and (d) in the Trade Practices Act 1974 (Cth) was considered by the High Court of Australia in Yorke & Another v Lucas (1985) 158 CLR 661. The joint judgment of Mason ACJ, Wilson, Deane and Dawson JJ observed that “the words…´aiding, abetting, counselling or procuring’ are taken from the criminal law where they designate participation in a crime as a principal in the second degree or as an accessory before the fact” (p667). In New Zealand the principal parties provisions [sic] in the criminal law is s 66(1) of the Crimes Act 1961 which uses each of the 4 terms. In R v Samuels [1985] 1 NZLR 350, 356 this Court said of s 66(1): “The essence of aiding and abetting is intentional help.”
As s 43(1)(b) and (d) import the requirements of the criminal law, it follows that the Bendall parents will only be liable under that provision for their “intentional help” to Philip Bendall in his contravening acts – that is they must know of their son’s contraventions and intentionally participate in them. That knowledge must extend to all the essential facts which made Philip Bendall’s acts in relation to the 5 respondents’ contraventions of s 9.
[34] There is helpful guidance in the judgment of Tipping J in Megavitamin Laboratories (NZ) Ltd v Commerce Commission.7 That was a prosecution for breach of s 13 of the Fair Trading Act, not a civil proceeding. What he said has been held applicable in a civil context. Tipping J said:8
I think it would be wrong in principle if a mere junior employee could be held strictly liable for helping to draft some publicity material which turned out to be misleading without any knowledge that this was so. Another case might be an advertising agent who in good faith assists in the production of material which contains a false representation. It hardly seems right that such a person should be found criminally liable without knowledge of falsity.
Ng v Harkness Law Ltd [2014] NZHC 850 at [30].
Yorke v Lucas (1985) 158 CLR 661 (HCA).
Specialised Livestock Imports Ltd v Borrie CA72/01, 20 September 2002 at [155]-[156].
Megavitamin Laboratories (NZ) Ltd v Commerce Commission (1995) 6 TCLR 231 (HC).
At 249-250.
Therefore even if the offence in question is one of strict liability, a secondary party must have mens rea. To establish mens rea the prosecutor must show that the secondary party:
(i) Performed the actus reus (eg gave the assistance) deliberately;
(ii) Had knowledge of the essential factual features of the offence (eg the falsity of the representation), whether or not he knew they constituted the offence;
(iii) Intended the conduct constituting the actus reus to assist the principal to perform the conduct constituting the offence.
Step (ii) is a necessary precondition to step (iii) because unless the secondary party has the required knowledge he could hardly intend his conduct to amount to qualifying assistance.
[35] Kimble cited the Court of Appeal’s decision in New Zealand Bus Ltd v Commerce Commission but that can be put to one side.10 That was a decision under s 83(1) of the Commerce Act 1986, which is in similar terms to s 43(1) of the Fair Trading Act. The Court of Appeal declined to apply the criminal law analogy for cases under s 83. Hammond J proposed a test of “dishonest participation”.11 The basis for the rejection was the difficulty of applying the criminal test for liability in the context of a competition case, which requires the court to make evaluative assessments. That consideration does not arise in cases under s 43 of the Fair Trading Act. While the Court of Appeal referred to cases under the Fair Trading Act (and under Australian legislation), it did not suggest that the test for liability should be changed for that statute.
[36] Applying the approach of Tipping J in the Megavitamin Laboratories case, for Kimble to succeed at trial against Mr Wouldes as an accessory, it will need to show that:
[a] he deliberately assisted Alex in making the misrepresentations complained of;
[b] he knew the essential factual features that Alex was making representations and they were false; and
[c] he intended his assistance to help Alex in his misleading or deceptive conduct.
At 250.
10 New Zealand Bus Ltd v Commerce Commission [2007] NZCA 502, [2008] 3 NZLR 433.
At [153]-[156].
[37] The pleading requirements are important because the case to be made against
Mr Wouldes is that he was involved in deliberate deception. That alleges fraud.
[38] Under r 5.1(2) of the High Court Rules, a party alleging a state of mind of a person must give particulars of the facts relied on for that allegation. Under r 5.26, a statement of claim must not only show the general nature of the plaintiff’s claim to the relief sought, but it must also give sufficient particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances to inform the court and the party against whom the relief is sought for the cause of action.
[39] Where a cause of action involves fraud, dishonesty or other reprehensible conduct as one of the matters to be proved, plaintiffs are required to make sure that they have a proper basis for alleging fraud, to plead it clearly and to give adequate particulars. The Court of Appeal stated the standard approach in Schmidt v Pepper New Zealand (Custodians) Ltd:12
Allegations of fraud or dishonesty are very serious. They must be pleaded with care and particularity. As the authors of Bullen & Leake & Jacobs Precedents of Pleadings emphasise, counsel must not draft any originating process or pleading containing any allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it. Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved. General allegations, however strong the words may appear to be, are insufficient to amount to a proper allegation of fraud.
[40] In a different but related context (a proceeding to set aside a judgment on the grounds that it was fraudulently obtained), the Supreme Court has taken a similar position on allegations of fraud, saying that “[t]he plaintiff’s claim of fraud must be one that is fully and precisely pleaded and particularised and of sufficient apparent cogency that it should go to trial.”13 It also indicated that the adequacy and cogency of the pleadings could be tested by a
strike-out application under r 15.1 of the High Court Rules:14
Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15]. For the responsibility of counsel in alleging fraud or other reprehensible conduct, see X v Y [2000] 2 NZLR 748 at [58], and the Lawyers Conduct and Client Care Rules 2008, r 13.8.
Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013] 1 NZLR 804 at
[33].
Above, n 9 at [33].
So where a defendant in a proceeding involving the fraud exception applies to strike it out, the plaintiff is required to discharge the onus of showing it has a case with an evidential foundation amounting to a prima facie case of fraud.
[41] This last aspect is a departure from the standard assumption made in strike-out applications that the plaintiff will be able to prove what it has pleaded. In an application to strike out a fraud pleading a plaintiff fraud must show a prima facie case of fraud. I do not read the decision of the Court of Appeal in Ng v Harkness Law Ltd as holding that the
Supreme Court’s decision should not be followed.15
[42] Lord Millett set out the pleading requirements more fully in Three Rivers District
Council v Bank of England (No.3):16
It is well established that fraud or dishonesty (and the same must go for the present tort) must be distinctly alleged and as distinctly proved; that it must be sufficiently particularised; and that it is not sufficiently particularised if the facts pleaded are consistent with innocence: see Kerr on Fraud and Mistake, 7th ed (1952), p 644; Davy v Garrett (1878) 7 Ch D 473, 489; Bullivant v Attorney General for Victoria [1901] AC 196; Armitage v Nurse [1998] Ch 241, 256. This means that a plaintiff who alleges dishonesty must plead the facts, matters and circumstances relied on to show that the defendant was dishonest and not merely negligent, and that facts, matters and circumstances which are consistent with negligence do not do so.
It is important to appreciate that there are two principles in play. The first is a matter of pleading. The function of pleadings is to give the party opposite sufficient notice of the case which is being made against him. If the pleader means "dishonestly" or "fraudulently", it may not be enough to say "wilfully" or "recklessly". Such language is equivocal…
The second principle, which is quite distinct, is that an allegation of fraud or dishonesty must be sufficiently particularised, and that particulars of facts which are consistent with honesty are not sufficient. This is only partly a matter of pleading. It is also a matter of substance. As I have said, the defendant is entitled to know the case he has to meet. But since dishonesty is usually a matter of inference from primary facts, this involves knowing not only that he is alleged to have acted dishonestly, but also the primary facts which will be relied upon at trial to justify the inference. At trial the court will not normally allow proof of primary facts which have not been pleaded, and will not do so in a case of fraud. It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are
Ng v Harkness Law Ltd [2015] NZCA 411, [69]-[73].
Three Rivers District Council v Bank of England (No.3) [2003] 2 AC 1 (HL), [2003] 2 AC 1 (HL), the judgment of 22 March 2001, at [184]-[189]. Lord Millett was in the minority, but he and Lord
Hobhouse differed from the majority on the application of the principles in that case, not on the
principles to be applied. Lord Hope, one of the majority, gave a similar summary at [55]. The value of the dissenting judgments is that they were later vindicated when the case went to trial: see the costs judgment of Tomlinson J in Three Rivers District Council v Bank of England [2006] EWHC 816 (Comm).
consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved.
In Davy v Garrett 7 Ch D 473, 489 Thesiger LJ in a well known and frequently cited passage stated: "In the present case facts are alleged from which fraud might be inferred, but they are consistent with innocence. They were innocent acts in themselves, and it is not to be presumed that they were done with a fraudulent intent." This is a clear statement of the second of the two principles to which I have referred.
In Armitage v Nurse [1998] Ch 241 the plaintiff needed to prove that trustees had been guilty of fraudulent breach of trust. She pleaded that they had acted "in reckless and wilful breach of trust". This was equivocal. It did not make it clear that what was alleged was a dishonest breach of trust. But this was not fatal. If the particulars had not been consistent with honesty, it would not have mattered. Indeed, leave to amend would almost certainly have been given as a matter of course, for such an amendment would have been a technical one; it would merely have clarified the pleading without allowing new material to be introduced. But the Court of Appeal struck out the allegation because the facts pleaded in support were consistent with honest incompetence: if proved, they would have supported a finding of negligence, even of gross negligence, but not of fraud. Amending the pleadings by substituting an unequivocal allegation of dishonesty without giving further particulars would not have cured the defect. The defendants would still not have known why they were charged with dishonesty rather than with honest incompetence.
It is not, therefore, correct to say that if there is no specific allegation of dishonesty it is not open to the court to make a finding of dishonesty if the facts pleaded are consistent with honesty. If the particulars of dishonesty are insufficient, the defect cannot be cured by an unequivocal allegation of dishonesty. Such an allegation is effectively an unparticularised allegation of fraud.
[43] A plaintiff must be able to show a prima facie case for alleging fraud or dishonesty when filing the pleading. A plaintiff cannot get by in the hope that something might turn up in discovery or in cross-examination.17
[44] The statement of claim here does not meet the pleading requirements. Given my earlier findings on the claim for payments made before Kimble was incorporated, the focus is on the payments made for the Mercedes Benz cars in March 2015 in particular; but what I say also applies generally.
[45] For s 43(1)(b) aiding, abetting counselling or procuring, the alleged acts are appointing Alex as manager, permitting him to run the business and permitting him to make representations to the public. The appointment took place in 2012, long before the events in issue. It is equivocal. Leaving him in charge of the business and free to engage with the
public, including Mr Clarke, are not in themselves wrongful unless accompanied by the
See Lord Hobhouse in the 22 March 2001 Three Rivers judgment at [160].
requisite knowledge of the essential features that Alex was taking money from the public under false pretences. There is no plea that Mr Wouldes knew that. No particulars are given to show that he did know. There is also no pleading that Mr Wouldes intended to assist Alex in his misconduct. Similarly there is no evidence to support a prima facie claim that Mr Wouldes is liable under s 43(1)(b).
[46] Section 43(1)(d) involves being knowingly concerned in or a party to a contravention. Knowledge is actual knowledge. Recklessness might also count. But constructive knowledge, having the opportunity to find out if only the appropriate inquiries were made, is not knowledge under the subsection. The pleading goes to how Mr Wouldes could have found out what Alex was up to, but a plea of access to information is not a clear statement that Mr Wouldes actually knew what Alex was up to and he intended Alex to carry out his breaches of the Fair Trading Act. There is also no evidence to support a prima facie case of liability under s 43(1)(d).
[47] So not only are the pleadings inadequate but an evidential foundation for the allegations of secondary liability is also missing. Kimble’s case does not contain any evidence to support the allegations of fraud against Mr Wouldes. Following the approach of the Supreme Court in Commissioner v Redcliffe Forestry Venture Ltd,18 the claim that Mr Wouldes breached s 43 cannot stand.
No assumption of personal responsibility
[48] It was also argued for Mr Wouldes that he cannot be liable because as director of Euro Vehicles he did not assume personal responsibility for the actions of Alex. Obviously Mr Wouldes is not vicariously liable for the actions of Alex during his employment with Euro Vehicles. An argument that a director is liable to a plaintiff by reason of an assumption of personal responsibility is made in common law tort claims, not under the Fair Trading Act. That can be seen in the Court of Appeal’s decision in Body Corporate 202254 v Taylor, where
the judgments dealt separately with claims in negligence and under the Fair Trading Act.19
Above n 9.
Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17.
Result
[49] The appropriate course is to strike out the statement of claim under r 15.1 of the High Court Rules because Kimble Contracting Ltd does not have a cause of action for the payments made before it was incorporated and because it has not pleaded adequately or shown a prima facie case for secondary liability under s 43(1)(b) and (d) of the Fair Trading Act.
[50] I do not, however, give summary judgment. The strike-out is made on a procedural ground, whereas summary judgment would go to the merits. There may be a cause of action against Mr Wouldes, although it is not apparent on the current pleadings and evidence. My order is not intended to bar the liquidator of Kimble Contracting Ltd or the Official Assignee or someone else with standing from pursuing claims in respect of Alex’s actions which resulted in a genuine loss. A strike-out on procedural grounds does not create any cause of action estoppel.
[51] The case needs reassessment. I do not know whether a different case can be mounted, but if it can I do not intend it to be stymied by arguments that this decision stands in its way. Accordingly I do not dismiss the proceeding against Mr Wouldes under r 15.1(2). The proceeding may be continued with appropriate amended pleadings and by plaintiffs with standing. Mr Strauss anticipates filing any amended pleading within a month.
[52] Given Mr Clarke’s participation in this proceeding, I direct that a copy of this decision be sent to the Official Assignee.
[53] I make these orders:
[a] I strike out the statement of claim against Mr Wouldes but do not dismiss the proceeding against him.
[b] Mr Wouldes has costs on the strike-out application of $13,826 plus disbursements of $110. I record that the costs include the commencement of defence under step 2 of the Schedule 3 of the High Court Rules.
[c] The Registrar is to pay Mr Wouldes’ lawyers so much as has been paid into
court for security for costs.
[d] A copy of this decision is to be sent to the Official Assignee.
[e] The Registrar is to arrange a further case management conference in two months’ time, whether or not an amended statement of claim has been filed. If none is filed, the proceeding may be dismissed.
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Associate Judge R M Bell
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