LDC Finance Limited v Miller
[2015] NZHC 3165
•11 December 2015
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
CIV-2012-442-000391 [2015] NZHC 3165
BETWEEN LDC FINANCE LIMITED
First Plaintiff
JANET VERENA WILSON, KAYE DENISE WHALAN, ANGUS IAIN MCNEILL and GRETEL MCNEILL as trustees of the McNeill Family Trust Second Plaintiffs
JANET VERENA WILSON, KAYE DENISE WHALAN and ORS
Third Plaintiffs
ANGUS IAIN MCNEILL and GRETA MCNEIL as trustees of the McNeill
Family Trust, FAWDAN SUBDIVISIONS LIMITED and ROLAND LLOYD FAWCETT, JULIE BETHANY MORTON and PAULETTE FAWCETT as trustees of the Fawcett Family Trust
Fourth Plaintiffs
ANGUS IAIN MCNEILL and GRETEL MCNEILL as trustees of the McNeill Family Trust
Fifth Plaintiffs
IAIN BRUCE SHEPHARD and HEATH LESLIE GAIR as interim liquidators of LDC Finance Limited (In Receivership and Interim Liquidation)
Sixth Plaintiffs
AND
DAVID GORDON MILLER, KEVIN ELLIOTT, CHRISTOPHER JOHN HARDIMAN AND JOHN CHARLES JANETTO
First Defendants
CARRAN MILLER STRAWBRIDGE LIMITED
Second Defendant
LDC FINANCE LIMITED v DAVID GORDON MILLER, KEVIN ELLIOTT, CHRISTOPHER JOHN HARDIMAN AND JOHN CHARLES JANETTO [2015] NZHC 3165 [11 December 2015]
PERPETUAL TRUST LIMITED Third Defendant
SHERWIN CHAN WALSHEE Fourth Defendant
Hearing: 3 December 2015 Appearances:
H Rennie QC, D G Dewar and J Haig for Plaintiffs
R Ord for First Defendants
M C Smith and O L Ostrovsky for Second Defendant
O J Meech and E McCann for Fourth DefendantJudgment:
11 December 2015
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS Regarding Mode of Trial
[1] This judgment determines the application by the third defendant, which is supported by the first and fourth defendants, in relation to the way this case should be tried. The application is dated 20 March 2015. It is opposed by the plaintiffs.
[2] The question of how this case should be tried has been the subject of a great deal of debate between counsel, and before the Court. It was comprehensively aired in a chambers hearing with counsel on 26 June 2015 and discussed in some detail in a Minute issued on 1 July 2015 as a result.1
[3] The third to fifth plaintiffs represent, with Court approval, three classes of investors in LDC Finance Limited (LDC) who placed monies with LDC for investment at various time periods, full details of which are set out in the judgment of the Court dated 12 November 2013.2 However, at present the Court has not approved the representative action intended by the second plaintiffs. The reason approval has been deferred in respect of this proposed class is again thoroughly
canvassed in the judgment of 12 November 2013, but stems principally from limitation issues.
[4] Although this class has not yet been approved, it is not thought that this should hold up the settling the way in which this case should be tried. In argument presented on this application, this issue did not feature with any prominence. It will therefore be revisited in a Minute which will be issued after this judgment.
[5] The current pleading is the fourth amended statement of claim. Since this document was filed and served early in July, the plaintiffs have served a number of briefs of evidence of witnesses who will be called at the trial, including experts. However, it is clear that although they intended to do so, and indeed were directed to do so by Friday, 30 October 2015, the plaintiffs have not yet filed all the briefs of evidence of witnesses they intend to call. I gather that the bulk of this exercise has been completed, however. This has not resulted in the plaintiffs and the defendants
reaching agreement on how the trial of this case should proceed, as had been hoped.3
The defendants’ submissions on mode of trial
[6] The principal premise underpinning the arguments on behalf of all the defendants is that although generally the plaintiffs may present their case on the basis they choose, they cannot set up a method of trial that prevents the defendants from ensuring that the Court considers the cases of individual investors, if there are issues which relate to those individual investors. They say that a case presented by representatives allows common issues to be tried, but not individual issues. The principle individual issues relate to reliance on the defendants. The evidence served for the plaintiffs does not deal with reliance by the plaintiffs on the defendants when they invested. The defendants are entitled, if they wish, to explore with individual plaintiffs the extent, if at all, that they in fact relied on the actions of the defendants.
[7] For Sherwin Chan Walshe, Mr Meech makes specific reference to paragraph
231(b) of the current statement of claim. In this paragraph the plaintiffs plead that if
Sherwin Chan Walshe had fulfilled its contractual obligations, LDC would have been
prevented from taking, or unable to take, new money and reinvestments from investors from, at the latest, the date of prospectus four. As a particular of this allegation, the plaintiffs plead:
SCW, if acting as a reasonably prudent auditor, would not have furnished unqualified audit reports for LDC, which reports were required for the registration of LDC’s prospectuses pursuant to clause 36 Schedule 2 of the Securities Regulations 1983.
[8] There are other similar references to cl 36 elsewhere in the pleading, for example at paragraph 233(f)(i). Although counsel specifically referred to this reference, paragraph 233 is a pleading of reliance by LDC itself, not the investors, so its immediate relevance in the present context is not clear. However, in paragraphs
249 and 260 there are specific references to the investors relying on SCW.
[9] Given these and other similar references, counsel say that they must have an opportunity to ask individual investors about the pleaded reliance.4 At the same time they disavow any wish to abandon the representative nature of this case and substitute for it a claim by all 800 or so individual investors.
[10] Their solution is to ask the Court to direct a trial of all the claims by nominated representatives, in full, with those representatives giving evidence, and being selected so that they include investors who are, for example, known to not have considered the company’s accounts or audit reports when deciding to invest. This way, they say, the Court could rule on the issue of what degree of reliance or type of reliance on these documents is sufficient for plaintiffs to succeed.
[11] All other issues relating to the actions of the defendants would be tried as well. Trial in this way would conclude the cases for the named plaintiffs, would create a res judicata in relation to the findings of the Court on other aspects of the case, and would provide guidance to the parties in relation to the outcome of the cases of the remaining plaintiffs. A second trial would follow to decide all remaining issues of individual reliance, as well as issues relating to causation and quantum.
This is the method adopted in Houghton v Saunders.5
[12] Mr Smith for Perpetual referred specifically to paragraph 187 of the fourth amended statement of claim. In this paragraph it is pleaded that:
LDC’s investors relied or were induced to rely on Perpetual at all material times to ensure LDC provided proper and timely disclosure of its financial position and/or breaches of the deed and to take appropriate action to bring an end to LDC’s business.
[13] Particulars of this pleading are then given, and I will refer to these later in this judgment. Mr Smith’s point is that this is a specific pleading of reliance by the investors. Therefore it can only be fairly dealt with by a trial in the manner the defendants propose.
[14] The defendants rely on the decision of the Court of Appeal in Boyd Knight v Purdue.6 In this case the Court examined the issue of reliance on an audit report. The defendants rely on the following passage from the judgment:
[54] When auditors furnish a report for inclusion in a prospectus they express an opinion about the financial statements of the company which they have audited: they confirm the accuracy of those statements, in the sense of that word used above. However, they are not called upon to make any comment on the state of the company’s affairs. They undertake no duty to assess for would-be investors whether it is creditworthy. Their duty is to inform, not to give advice. The record shown by the financial statement speaks for itself. The true and fair view may be one of prosperity or poverty. The report therefore has no context for anyone who has not read the accounts. Without such a reading the report tells the reader nothing except that the company has a set of accounts which comply with the regulations and present a true and fair view. In so far as such a report refers to a true and fair view, it is almost meaningless unless read in conjunction with the figures in the accounts. It must follow, it seems to me, that in so certifying the accounts the auditors cannot be taken to have accepted an obligation to an investor who has not read and relied upon them. Reliance, and a consequential duty of care, cannot be asserted, as it were, in a vacuum. There must first have been a specific influence of the financial statements on the mind of the investor. It is not enough for the investor to say that, without troubling to look at the accounts, he or she relied in a general way upon the statutory scheme, making an assumption that an investment is sound or the issuer creditworthy because there was a trustee playing a supervisory role in connection with the prospectus and an auditor had furnished the report required by the regulations.
[15] This passage speaks for itself and encapsulates the basis upon which the defendants say that trial of this case must proceed. Later in the judgment, however, the following passage appears:
[57] A broader approach is permissible where it is proved or, as here, admitted that if the accounts had been accurate no prospectus would have been issued and no investment could then have been made – in other words, that “but for” the inaccuracy there could have been no loss to a new investor. But even in such circumstances the limited scope of the duty of care must be remembered. In such a case there must at least be a reliance on the basic features of the financial statements – the results they show (profit level, balance of shareholders’ funds and, perhaps, the current assets/liability ratio). There must be evidence that these features were considered by the plaintiff and, taken as a whole, relied upon. The investor must prove that he or she paid attention to the content of the financial statements and noted these basic features – that it was not simply a case of glancing at the accounts, but in reality failing to consider them and, instead, relying in a general way on the fact that the investment offer was being made pursuant to a prospectus and that the regulations put some safeguards in place.
[16] The defendants say that the case presented by the plaintiffs is within the ambit of the description in the opening sentence of this paragraph. Therefore, in accordance with the third sentence, the plaintiffs must still show, at least, “a reliance on the basic features of the financial statements” and “there must be evidence that these features were considered by the plaintiff and, taken as a whole, relied upon”. In essence the defendants say this cannot be proved by the plaintiffs by the method of proof which they have adopted and the method of trial which they seek to run. Even if the response of the plaintiffs is that it is for them to decide how to run the trial, and if these passages present them with a risk in the process they wish to adopt, that is a risk they are entitled to take, nonetheless the defendants cannot be required to run the risk of the Court at trial finding against the defendants because they did not ask questions of the plaintiffs.
[17] Mr Ord supports the proposition that within each class of plaintiffs there may be those who acted one way and those who acted in another, in relation to consideration of the financial accounts and audit certificates. He suggests that affidavits might be produced from the plaintiffs giving basic information about their experience, their knowledge and other factors relevant to reliance. Then there could be a discussion about which of these witnesses gives evidence at trial and is
available for cross-examination. This would entail obtaining affidavits from each and every one of the 800 or so plaintiffs.
The plaintiffs’ submissions on mode of trial
[18] In the fourth amended statement of claim the second to fourth plaintiffs have pleaded a further cause of action against the third defendant, Perpetual Trust Limited (Perpetual). Various duties on the part of Perpetual are pleaded. It is clear, however, that this cause of action is, in a sense, a fallback claim because it is said that if neither Sherwin Chan Walshe, as auditor of LDC, or the directors, are found to have caused (or not to be liable, by reason of limitation or otherwise, for) the losses of the second to fourth plaintiffs, then Perpetual has caused or contributed to those losses by failing to make a claim against Sherwin Chan Walshe, in breach of certain alleged duties. The plaintiffs accept that consideration of this cause of action should be deferred to a time when it is known whether the premise on which this cause of action is based is valid. They therefore say this cause of action should be reserved for a second trial subject to the outcome of the first trial. This course is agreed to by the defendants.
[19] So far as the first trial of all other causes of action is concerned, they say that the mode of trial should be this:
A first trial comprising all of the plaintiffs’ causes of action as set out in their current statement of claim (subject to the plaintiffs’ general right to amend) save for the final cause of action …
[20] Mr Rennie QC says that the evidence which has been served falls into four categories:
(a) Expert evidence in respect of financial and audit issues; (b) Expert evidence in respect of trustee role and duties;
(c) Evidence of quantum and related liquidation information; (d) Evidence from some investors in LDC.
[21] So far as the last of these categories is concerned, briefs have only been served from a relatively small number of investors. This case comprises claims from some 800 investors in all.
[22] Mr Rennie says that before trial, it is anticipated additional evidence will be served including evidence from additional investors, and briefs updating evidence already served and/or including any revisions arising from any changes to the pleadings. There may also be reply evidence, and additional formal evidence in relation to quantum. This element of the claim is said to be straightforward as each investor lost the sum invested, the amount of which is a matter of record.
[23] Mr Rennie says that on the assessment of counsel for the plaintiffs, the evidence shows the following:
(a) As to the directors of LDC, the first defendants, the company was from its incorporation insolvent and operating in breach throughout of prospectus disclosure and other requirements. The directors were conducting the operation of the company at least recklessly, incompetently and with disregard for the basic requirements of a finance company.
(b)As to Perpetual, the third defendant, from the time of incorporation of LDC onwards, it failed to act as a competent trustee, agreed to or acquiesced in actions which enabled trading to continue when LDC was insolvent, and failed to competently monitor LDC and exercise its duties as trustee.
(c) As to the auditor, Sherwin Chan Walshe, the fourth defendant, its actions or inactions enabled the issuing of a misleading prospectus, deficiencies in which were replicated and added to in later prospectuses. The auditors certified as compliant financial statements which omitted material matters and which did not conform to the requirements for reporting and disclosure of a finance company seeking monies from the public. Further, the auditor enabled LDC to continue to operate and to take deposits from investors by failing to identify
which borrowers from LDC were the primary cause of its insolvent position (despite requests to do so from Perpetual) and did not comply with the requirement to provide trust deed reports as to the status of LDC’s major borrowers.
[24] Mr Rennie therefore says that the evidence for the plaintiffs will show that from its incorporation, LDC was not an entity to which any informed or prudent investor would have entrusted investments. Its financial statements were a fiction, reporting as assets loans which were not recoverable when due or, in some major instances, at all. The company was at all times non-compliant with its trust deed, and accordingly it should not have been permitted to continue to trade. On this basis he says the plaintiffs as a group are entitled to proceed without the need to attribute their claim to particular periods or to investor-specific facts. He says that the facts now identified by the briefs of the experts could not have been ascertained by investors at the times when they made their investments, and were concealed by what he describes as the fiction which LDC and its prospectuses presented to the public.
[25] Mr Rennie says that given that this is the evidence to be led by the plaintiffs, and which is now in the hands of the defendants, they seek a trial of all issues. These issues, including reliance, are capable of proof by the evidence the plaintiffs will lead. Mr Rennie says that the way a case is formulated and presented are matters for a plaintiff to determine. Only if it is shown that a plaintiff is either in breach of the High Court Rules, or is proceeding in a way which affects the fair and just trial of the proceeding would a ground arise on which some Court direction might be made for the trial of the case to be undertaken in a different way.
[26] Mr Rennie says that is not the position in this case. In summary, all investors placed their monies in a company in which no informed investor would have invested. A feature common to all investors is that they all deposited funds into LDC while the company, its directors, trustee and auditor were in breach of their respective duties resulting in their funds being lost. Common features of the defendants’ conduct are recklessness, incompetence, continuing inaction and an
inability to carry through even the most basic requirements of the operation of a finance company.
[27] The defendants’ duties, Mr Rennie says, were continuous and not tied specifically to the issue of prospectuses. On that basis he says the classes of representation as they now stand are somewhat arbitrarily defined, and categorising the plaintiffs by date of investment appears to be unnecessary, and may even be irrelevant. All defences available to the defendants can be run. Based on the company’s records which will be produced to the Court, the Court can establish a cut-off date for limitation purposes. The losses claimed are the investments, so quantum can be established from LDC’s records.
Discussion
[28] In Boyd Knight, the plaintiffs’ case against the auditor of a failed finance company was not advanced on the basis that individual investors relied on the certificate of the auditor under cl 36 of the Second Schedule to the Securities Regulations. Individual or particular reliance was not pleaded. Rather, the plaintiffs relied on what their counsel described as a general reliance by investors on the audit report. Evidence was given by two investors of their actual reliance on the report and in closing counsel suggested that if proof of actual reliance were required from each investor the proceeding should be adjourned in respect of all other represented plaintiffs so that those who chose to do so could give evidence of their reliance.
[29] The Court of Appeal said that if the representative plaintiffs had tried to prove actual reliance on the financial statements, it would have been unfair if that opportunity had been denied to them at trial. In fact, however, the opportunity was given and was not taken. It was only in closing that counsel for the plaintiffs made the suggestion that I have recorded. This, the Court found, was contrary to the way the case had been run. The Court found it was also contrary to the intention evinced in the application for the representation order. That showed that it was intended to obviate the need for separate evidence from each member of the class. This course appeared to the Court of Appeal to have been adopted for the very reason that the plaintiffs were intending to prove only reliance of a general kind upon the audit
report. The Court was unable to see how a representative could give evidence on behalf of any other investor about how that investor may have relied upon financial statements. The Court found that as the plaintiffs had throughout the case taken the position that proof of general reliance would be sufficient to establish their claim, it would be fundamentally inconsistent with that if the request made for a further
hearing were to be granted.7
[30] To the extent the Court considers it to be relevant, that judgment will, of course, be binding on the High Court at trial of this case. It will have been at the forefront of the minds of those advising the plaintiffs at the time of formulation and development of the pleadings, and preparation of the evidence. If the plaintiffs’ case is found by the trial Judge to establish reliance only to the degree which the Court of Appeal has found to be unsatisfactory, then plainly the plaintiffs’ case at trial will flounder. In that event, as Mr Rennie recognised, it will be for the plaintiffs to take the case to the Court of Appeal for consideration of whether different criteria for reliance are appropriate in a case of the present kind, rather than mere application of the principles found to be appropriate in Boyd Knight.
[31] The foundation for approaching the case in the way the plaintiffs seek is found in the particulars to the pleadings of reliance which, as I have indicated, are spread through the causes of action in the fourth amended statement of claim. Mr Rennie says that in contrast to Boyd Knight the plaintiffs’ claims are not restricted to claims for breach of the auditor’s duty to provide cl 36 reports; rather, they arise from breaches of duties of care for which reliance is not an element necessary for success. He says it is for the plaintiffs to prove to the Court at trial that the broader approach referred to by the Court of Appeal applies, even recognising the need identified by his Honour for the investors to prove that they paid attention to
the content of the financial statements and noted certain basic features.8
[32] Thus, to take one pleading by way of example, the particulars in paragraph
187 demonstrate the way the plaintiffs intend to proceed. Paragraphs 187 and the consequent proposition in paragraph 188 state:
7 At [61]-[63] per Blanchard J.
8 At [57].
187.LDC’s investors relied or were induced to rely on Perpetual at all material times to ensure LDC provided proper and timely disclosure of its financial position and/or breaches of the deed and to take appropriate action to bring an end to LDC’s business
Particulars
(a) Letter from LDC to all investors dated 8 July 2004.
(b) All investors when completing investor application forms represented and confirmed they:
(i) applied having read LDC’s investment statements, which statements expressly or impliedly included that Perpetual would act in the investors’ interests and would inform them of all matters in respect of the deed that it considered was materially prejudicial to them; and
(ii) agreed to be bound by the provisions of the deed; and
(iii) in respect of stockholders, that they were deemed to have notice of the provisions of the deed.
188.Had LDC’s true financial position been disclosed and/or its breaches of the deed reported to the investors, LDC’s unsecured investors would have exercised their rights to withdraw their investments prior to its receivership and/or declined to renew existing investments.
[33] The letter in particular (a) is not in evidence. A small passage from it, however, is set out in the particulars stated in paragraph 20 of the statement of claim. This reads:
Letter dated 8 July 2004 that noted amongst other things: LDC Finance will be monitored by an independent trustee and by an auditor on behalf of investors.
[34] Again, the investor application forms referred to in (b) are not in evidence before me, but there are quotes from them in the particulars shown in paragraph 22. I need not set them out; they are summarised sufficiently in the particulars quoted above.
[35] Some of the background to the operation of LDC places these particulars in context. The business of LDC was originally conducted by LDC Investments Limited, which traded as a finance company receiving deposits from members of the public. The business was transferred to LDC in 2004. After an independent review of the business the Securities Commission ruled that the former company was not compliant with the Securities Act so on incorporation the directors of LDC arranged
to engage the second defendant, Carran Miller Strawbridge Limited (Carran Miller)
as its accountant, and they appointed Perpetual as a trustee and SCW as auditor.
[36] Registration of LDC’s first prospectus followed on 5 July 2004. Depositors in the former company were offered an opportunity to transfer their investments to LDC. The letter referred to in particular (a) was sent by LDC to all investors of the previous company three days after registration of the first prospectus. Further, in order to transfer their investments from the former company to LDC, all investors were required to complete and return an investment application form – hence the particulars in paragraph 187(b).
[37] Mr Rennie says that the evidence which will be led in relation to the creation of LDC, and the transfer of investments from the former company to LDC, will show that unless the new company could be brought into existence (for which purpose it required a trustee for its debenture, and an auditor) there would have been a run on the old company. Each investor had a choice on whether to take a refund, or invest in the new company. The latter course could not be adopted without the appointment of an auditor and provision of an auditor’s certificate. Thus, Mr Rennie says there is hard evidence of what would happen if the investors did not have an accurate audit report. The fact that they invested in LDC was reliance on the audit certificate; as I have already recounted, the evidence will be that the certificate was flawed. As to paragraph 188, Mr Rennie says that this will be established by expert evidence.
[38] The method of trial approved by the Court in Houghton v Saunders, is not a hard and fast rule about how representative actions should be presented at trial. It established a method of trial which was suitable for the case to be presented by Mr Houghton as representative of investors. There is an obvious attraction to picking up that method of trial as a blueprint, given that the present case is also a claim by investors against the directors of a failed company, and others. It avoided the difficulty which faced the plaintiffs in Boyd Knight, who had nailed their colours to the mast on proof of reliance by general evidence, only to find that the fallback position they suggested in closing was not to be made available to them. The second
stage of considering reliance for each individual plaintiff remained open in
Houghton v Saunders for consideration after the result of the first trial was known.
[39] This staged approach is not without its difficulties, however. Foremost among these are cost and delay. Delay is a crucial factor, particularly when considering a group of investors, such as the group in this case, who are described to me as being of increasing age and in some cases frailty. Counsel for the plaintiffs have throughout the early stages of this case impressed on the Court their wish to move as swiftly as practicable to trial and to achieving an outcome. The prospect of a second trial after the result of a first trial (not to mention any appeals) is very unpalatable. Unlike Houghton v Saunders, the plaintiffs in this case express a very firm wish not to have a two-stage trial, and to take the issue of reliance head on by proving each of the particulars pleaded, which they say must be sufficient in this case for the plaintiffs to succeed.
[40] This explains why the plaintiffs told the Court in June that they believed the position in relation to the method of trial would become clear once their briefs of evidence had been served. That has now occurred. It seems they expected or at least hoped the defendants would accept that the trial should proceed the way they wish once the extensive expert evidence had been considered. Although not available to me to review for this application, for obvious reasons, I have a clear summary from Mr Rennie of what the briefs, if accepted, would establish. The plaintiffs simply say, in effect, that is their case, that should be sufficient to prove reliance, and if the High Court takes the view at trial that the parameters of reliance enunciated by the Court of Appeal in Boyd Knight apply in this case, and that the evidence does not fall within them, they will take the matter up with the Court of Appeal.
[41] In my view the plaintiffs are entitled to run their case the way they wish, a method which has, as I have said, plainly been promoted in full knowledge of the judgment in Boyd Knight, unless there is a manifest disadvantage to any of the defendants in their so doing. Unless there is, I accept Mr Rennie’s submission that it is not for any of the defendants to dictate how the plaintiffs should run their case. Is there, therefore, such a disadvantage?
[42] From the memoranda and oral submissions presented for the defendants it is difficult to discern exactly what disadvantage any of them suggests would result from the plaintiffs proceeding as they wish. Their submissions, directed at the pleadings of reliance in the fourth amended statement of claim, are directed more at the proposition that the plaintiffs cannot succeed in proving the requisite degree of reliance in the way they intend to go about it. For example, in the memorandum of Mr Smith dated 2 December, he refers to the allegations in paragraphs 187 to 189 of the pleading, and equivalent paragraphs in other causes of action. He says they are individual allegations, but the plaintiffs assert that they intend to prove them by way of representative proof, on the balance of probabilities, and whether the proof is adequate is the plaintiffs’ risk. This is reference to the plaintiffs’ memorandum of the same date at paragraph 32(2). Mr Smith then says:
Such proof will plainly not be adequate and the claim as pleaded will not be made out without evidence from the individual investors to support it.
[43] If that is so, as I have observed the plaintiffs’ case will be in difficulty. On the other hand, if Mr Rennie’s assertion as to the appropriate evidence for proof of the claim as pleaded is accepted by the trial Judge, that will not be the case. Mr Smith’s assertion about the likely outcome of the trial can be no more than just that. Consideration of the memorandum filed by Mr Smith for Perpetual, dated
16 November, similarly fails to disclose any prejudice to Perpetual from the plaintiffs proceeding as they propose.
[44] This position is supported by Mr Meech, counsel for SCW. Again, whilst he too says that procedurally the correct way to conduct the trial of this case is in the manner approved in Houghton v Saunders, I detect only one reason why he maintains his client may be prejudiced by proceeding in the way Mr Rennie suggests. Apart from one point I will discuss all the prejudice identified by counsel is possible prejudice to the plaintiffs. There can be no doubt that Mr Rennie and assistant counsel for the plaintiffs have squarely accepted this risk, if risk there is.
[45] The single issue of prejudice identified by the defendants is this. They say the defendants cannot fairly be put in a position whereby an adverse finding of reliance is made against a defendant when that defendant had not had an opportunity
to explore reliance by way of cross-examination of a plaintiff who is alleged to have relied on the actions of the defendants. I do not think that this is correct as a matter of logic. If the plaintiffs establish to the satisfaction of the trial Judge, by their chosen method, that the plaintiffs relied, to the extent required by law, on each defendant, without the Court hearing from each plaintiff, it does not matter what any given plaintiff might have said in evidence in relation to reliance. If, for example, a plaintiff were to say in evidence that he or she did not read an audit report or certificate or the accounts to which it related (which would be the kind of evidence the defendants would hope to adduce in cross-examination) the defendants would submit that the case of that plaintiff cannot succeed.
[46] But, subject only to the Court taking into account documents the plaintiffs signed, that must be the default position which the plaintiffs must accept by not all giving evidence. The Court will reach a conclusion on reliance taking all the evidence into account, including any written statement or acknowledgement some or all plaintiffs made, but will have no other evidence from those plaintiffs on whether they read any audit report, certificate, or accounts, or did not. The Court will not assume they did, so the defendants are not prejudiced by not having an opportunity to ask them, and endeavour to show that they did not.
[47] It seems to me that the inevitable consequence of the defendants’ position in relation on how reliance should be proved, namely that there should be a subjective inquiry into the degree of reliance of each plaintiff, is that each and every plaintiff would need to give evidence. That in itself undermines the whole basis of using a representative action to try the plaintiffs’ claims, though as I have said all the defendants disavow any need to call all the plaintiffs. Their answer to this point is that if certain plaintiffs are called the judgment of the Court will give a clear guide on what reliance is sufficient, and what is not. From that the defendants seems to suggest consideration can be given to how to deal with the other plaintiffs.
[48] It is completely unclear to me how that can practically occur, apart from calling those plaintiffs one by one to give evidence. I cannot see how, by any other means, it could be shown that any given plaintiff, who has not given evidence at the trial, could be classified into the group of plaintiffs whose reliance has been
established, or excluded from that classification, without examination of the facts surrounding that plaintiff’s investing steps. And how could that occur other than hearing each plaintiff ’s evidence?
[49] Thus the inquiry goes full circle. If there has to be some inquiry on whether every plaintiff does or does not fit into the position established by the Court after considering the cases of the nominated plaintiffs, there is very substantial scope for argument in relation to every plaintiff which could only be resolved, in the end, by each plaintiff giving evidence. It is not difficult to foresee a situation where after judgment there is significant disagreement on how all the other plaintiffs should be treated. If the result of the trial is to find that all or any of the defendants’ conduct fell short of the required standards, their exposure to the losses suffered by the plaintiffs will be substantial, and certainly sufficient to encourage argument in relation to the eligibility of each plaintiff who has not given evidence in the trial to recover that plaintiff’s lost investment. So I do not see how proceeding under the Houghton model would best try this case.
[50] In contrast to this scenario, the way the plaintiffs, through their legal advisors, wish to present the case to the Court will result in an outcome, one way or the other, from the trial. In bringing their case the way they have they may – I stress may – be taking a greater risk in relation to proof of reliance to a degree that would satisfy the Court on the balance of probabilities, given the decision in Boyd Knight. But that is a risk they have taken with their eyes open and accepted in preference to the uncertainty over a longer period which proceeding as the defendants promote would inevitably result. I am unable to identify any prejudice to the defendants in the plaintiffs proceeding in the manner they wish. There is a risk of prejudice to the plaintiffs in terms of time, cost and uncertainty in proceeding the way the defendants wish.
[51] Mr Meech and Mr Smith make reference in their submissions to wanting further particulars of some of the allegations in the statement of claim, and indeed Mr Meech has given a written notice dated 26 November to the plaintiffs to provide further particulars. This notice was not argued in detail. The present decision on the
way in which the case is to be tried may result in disagreement in relation to the sufficiency of the particulars, but that remains to be seen.
[52] Counsel for the defendants also say that if the case is to be tried as the plaintiffs wish, the terms of the representation orders will need to be revisited. They correctly say that the representatives of each class of investor must comply with the requirements for representation. Apart from the first category of representation, that position has already been established.9 If it needs to be revisited, it will be necessary to show why. As I have already recorded it is the plaintiffs’ position now, given the way their case has developed since the representation orders were put in place late in
2013, that representation of investors by reference to the prospectuses in force at the time they invested may not in fact any longer be relevant.
[53] As I understand the plaintiffs’ case, they seem to be saying that all the investors are on the same footing, based on their assertion of the total inadequacy of the actions of the directors, accountants and auditors of the company, and the trustee of the debenture, from the time the company commenced trading. The thrust of their case now appears to be that as far as the actions of the defendants are concerned, all the plaintiffs are on the same footing. I say that with some hesitation, as representation was not fully argued before me on this application. In any event, there may be issues in relation to limitation (as noted, in relation to the first class of represented plaintiffs, above) or other issues which need to be drawn to the attention of the Court. This can be considered if and when the terms of the representation orders are reconsidered.
[54] I do not see that these are issues which have a bearing on the mode of trial. A Minute will be issued.
Outcome
[55] There will be a first trial of all the plaintiffs’ causes of action pleaded in the
fourth amended statement of claim, excepting the cause of action commencing at
9 LDC Finance Ltd v Miller, above n 2.
paragraph 279, and subject to the right of the plaintiffs to amend. Whether there will need to be a second trial on quantum is left open but appears to be unlikely.
[56] Costs are reserved.
J G Matthews
Associate Judge
Solicitors:
Thomas Dewar Sziranyi Letts, Lower Hutt.
Spear Law, Nelson.
WCM Legal, Wellington. Gilbert Walker, Auckland.
Minter Ellison Rudd Watts, Wellington.
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