Luscombe v O'Sullivan HC New Plymouth CIV 2010-443-000073
[2011] NZHC 1852
•15 August 2011
IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY
CIV 2010-443-000073
BETWEEN CHARLES REX LUSCOMBE, DOROTHY TURNER AND KATHLEEN WHYTE, AS ALL OF THE EXECUTORS NAMED IN THE WILL OF WINIFRED ANNE LUSCOMBE
Plaintiffs
ANDDILLON O'SULLIVAN First Defendant
ANDKELVIN JOHN SYMS Second Defendant
ANDSIMON ROBERT PURVIS Third Defendant
Hearing: 28 July 2011
Appearances: S Hughes QC and K Towt for the Plaintiffs
A S Ross and M A Wisker for the Fifth and Sixth Defendants
Judgment: 15 August 2011
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
15.08.11 at 4:30pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors/Counsel:
K Towt, Dennis King Law, New Plymouth – [email protected]
S Hughes, Barrister, New Plymouth – [email protected]
A Ross and M Wisker, Chapman Tripp, Auckland – [email protected] /
CHARLES REX LUSCOMBE, DOROTHY TURNER AND KATHLEEN WHYTE, AS ALL OF THE EXECUTORS NAMED IN THE WILL OF WINIFRED ANNE LUSCOMBE V DILLON O'SULLIVAN HC NWP CIV 2010-443-000073 15 August 2011
ANDANDRE GAYLARD Fourth Defendant
ANDBRET PAUL JACKSON Fifth Defendant
ANDKENNETH DAVID SWAIN Sixth Defendant
ANDDONAL FRANCIS CURTIN Seventh Defendant
ANDJOHN PERRIS Eighth Defendant
[1] The fifth and sixth defendants have applied for summary judgment/strike out of the plaintiffs‟ claims against them. This decision deals with the fifth and sixth defendants‟ contentions that none of the plaintiffs‟ claims can succeed against them.
Background
[2] The fifth and sixth defendants were directors of FP North Limited
(Northplan) or its predecessors in title.
[3] Northplan was an Auckland based company which, through various entities and offices throughout New Zealand offered financial advice. One such office operated from Hawera with which the first defendant Mr O‟Sullivan was engaged as a financial advisor. It was Mr O‟Sullivan that the plaintiffs engaged for financial assistance. The plaintiffs concern was the investment of their mother‟s estate. Their mother was elderly, frail and unable to conduct her affairs independently.
[4] The plaintiffs plead that by the start of 2007 their mother‟s portfolio was worth approximately $500,000. By the end of that year the plaintiffs estimate portfolio losses amounting to about $333,000 had occurred. The reason, they claim was due to the management of the portfolio funds in that period.
[5] They say Mr O‟Sullivan had assumed a responsibility of recommending a conservative investment portfolio for the plaintiff‟s mother. Instead, it is pleaded:
(a) The portfolio was inadequately diversified.
(b)Eighty two per cent of the portfolio had been placed in finance companies as fixed interest investments.
(c) There were fixed interest investments other than finance companies that could have been invested in and were safer than investment with finance companies.
(d)Some of the finance companies investments were not as stable as the plaintiffs were led to believe.
(e) There were conflicts of interest between Northplan, subsidiaries, the board and investment committee members‟ interests, in the recommendations for investments made.
[6] By the manner of this pleading the plaintiffs have sued not only Mr O‟Sullivan, the person the plaintiffs say provided the investment advice, but also directors of Northplan who, the plaintiffs claim, assumed responsibility for control of investment advice given to investors.
[7] The strike out application by the fifth and sixth defendants challenges the plaintiffs ability to hold them, as directors as Northplan, to account for the losses claimed.
[8] The second third and fourth defendants were also directors of Northplan at various times. The seventh and eighth defendants were members of Northplan‟s investment committee.
The evidence in support of the summary judgment/strike out applications
Mr Jackson
[9] The fifth defendant Mr Jackson was appointed to Northplan‟s board at a time when he was a director of St Laurence Private No.1 Fund Limited when in late 2005 the fund acquired 25 per cent of the shares in Northplan from the principal shareholder and CEO, Mr Syms, the second defendant. Mr Jackson was appointed to the board in the outcome of that acquisition and attended his first board meeting on 16 December 2005.
[10] Mr Jackson attended monthly board meetings of Northplan in Albany, Auckland. He describes their meetings as being standard corporate board meetings. The agenda and management reports were comprehensive and covered what he considered to be standard matters concerning the performance of the business and its
associated businesses. Agenda items covered trading performance, strategy, operations, finance, reporting on total funds under management including broad asset allocations, human resources, trading and so on.
[11] Mr Jackson said at these meetings there was usually an update from Westplan Financial Services Limited (Westplan) (in which Northplan had a 40 per cent shareholding).
[12] Those reports were made by Westplan‟s general manager, Mr O‟Sullivan, the first defendant. Mr Jackson believed that Westplan also paid a fee to Northplan for the use of the AEGIS Registry and Custodial System (supplied to Northplan and other financial advisory businesses by another company) and for the recommendations of the investment committee.
[13] Mr Jackson provided a copy of the agenda for Northplan‟s board meeting held on 14 July 2006. It indicates the nature of the governance role that the board of Northplan played with respect to the financial planning business of Northplan and related entities. Northplan‟s agenda comprised 121 pages, on some three pages were set out the allocation of asset funds. Of those funds 42.64 per cent were allocated to fixed interest investments and of those 5.19 per cent was invested with Bridgecorp,
5.72 were Boston Finance, 9.27 per cent with Capital and Merchant Finance, 7.65 per cent with St Laurence, 5.78 per cent with Property Finance Securities, 0.01 per cent with Strategic Finance, and 5.38 per cent with MFS Group.
[14] It is clear that the pages in question referred to the general allocation of all investment funds.
[15] Mr Jackson comments that it is clear from the agenda papers, that the Northplan board did not review specific investment advice. Rather, it kept an overview of the overall balance of the various portfolios, in part as a cross-check to the recommendations of the investment committee. He said it was not his or the board‟s role to interfere with the decisions about the recommended investment portfolios or specific client advice.
[16] Mr Jackson reports that his particular input into the board of Northplan was in the area of strategy and business development, which is the background he comes from. He says he was not a financial planner and had no involvement with clients or the investment portfolios of clients.
[17] As a director he says he was naturally aware of the investment committee which was already in place prior to his joining the board. He said the investment committee‟s purpose was to recommend a variety of model investment portfolios. He understood that the committee reviewed the performance of the products and fund managers. It also analysed products available in the market for possible inclusion in the model portfolios.
[18] Mr Jackson was aware, he says, that the membership of the committee included an independent chairman in the form of Mr Curtin (the seventh defendant) who he says was a highly regarded and well recognised advisor on investment portfolio design. He was aware Mr Curtin had been the head economist for the Bank of New Zealand and also led its national private banking unit (which had an investment advisory service for the bank‟s wealthiest customers). Mr Curtin also had appointments including chairman of the Public Trust Investment committee and was a member of the Commerce Commission.
[19] Mr Jackson said other members of the investment committee included directors of Northplan who had long experience with business and financial advisory backgrounds. He said only a minority of the committee had an ownership interest (shares) in Northplan.
[20] Mr Jackson said the investment committee used Mr Giffney as an independent consultant. He knew Mr Giffney as a very experienced investment banker who had been managing director of Jordan Sandman Were, a member of the Takeovers Panel, and who had been a stockbroker for 30 years.
[21] Mr Jackson was also aware that the investment committee relied on external rating reports, including reports prepared by Property Investment Research (PIR). Mr Jackson said PIR was an Australian rating agency, approved under the Australian
Securities and Investment Commission to provide ratings of companies issuing prospectuses to the market. He said PIR‟s expertise and experience was in property and fixed interest investments.
[22] Mr Jackson states he was comfortable both with the nature of the investment committee and its processes. That committee developed model portfolios for different kinds of investors. It was then up to the investment advisors to present those options to clients who would select the portfolio based on their particular needs. The model portfolios were not the only asset allocations available for individual clients. He said each client‟s needs had to be evaluated, and their instructions understood. The advisors had a discretion about recommendations given to clients. According to Mr Jackson the point of having such a committee was to put some separation between the board of the company (which he said should be concerned with governance and strategy matters), and the specific development of client investment models. The idea was to assure clients of the business that the model investment portfolios put forward by the company were developed with the assistance of experts independent of the board itself, albeit that several directors participated in investment committee procedures. According to Mr Jackson this structure is common in companies such as banks and investment banks engaged in giving investment advice.
[23] Mr Jackson said investment advisors were staff employed by Northplan who dealt directly with clients. He had no dealings himself with individual investment advisors in that capacity. He never participated in any particular discussion with any investment advisors about the advice that the advisor ought to give, or any other matter affecting clients directly. He said advisors had a discretion to vary the recommended model portfolios within limits; greater variation being allowed with higher management level approvals. He said there were some products that had greater inherent flexibility than others. He was satisfied that the system was appropriate and functioned as intended. He said the board‟s role was to oversee the systems within the company and to ensure that management pursued and adhered to the procedures required by the board and the business‟s strategic direction.
[24] Mr Jackson recalls that early on with his involvement in Northplan, MFS (an Australian public company) made an approach to the shareholders of Northplan with a view to buying the company. When the first approach was made in March 2006
Mr Jackson had been a director for just over three months. A transaction was not signed until early December 2006 and was settled in January 2007. With the settlement of that transaction in January 2007 Mr Jackson resigned as a director and had no further involvement with the company.
[25] Mr Jackson has never met the plaintiffs. He has said he has never heard of them until served with their claim against him. He said he had no knowledge of their particular investment needs or requirements.
[26] It appears to Mr Jackson the plaintiffs were clients of the first defendant, dating back to at least 2001. His enquiries show that the plaintiffs made similar investment decisions (to those now complained of over the years 2006 and 2007) as they had long before his time as a director of Northplan board. By use of a chart Mr Jackson has demonstrated that the plaintiffs had already committed $212,000 of investments through the first defendant before he joined the Northplan board. They made three new investments during his tenure, totalling $44,000 and rolled over a further $71,000. After he left the board, the plaintiffs committed another $140,000 of new funds, and rolled over a further $61,000.
Mr Swain
[27] Mr Swain‟s (the sixth defendant) business background is in life insurance. In
1979 he established Swain Holdings Limited as a general agency with National Mutual Life insurance specialising in risk assurance. In 1997 he established Swain Investment Services Limited (Swain Investments) with a Mr Price who was a qualified accountant and who was at that time completing his investment advisors accreditation.
[28] Mr Swain first became involved with Northplan in around 2002. He said by that time Swain Investments had grown to such a size that they recognised that they needed expert advice “as to the asset allocation of product selection”. He said
Northplan offered to provide the service for a fee, and they accepted the arrangement. From that time he said Swain Investments had the benefit of the model portfolios recommended by the investment committee of Northplan. In 2004 he sold
20 per cent of his shareholding in Swain Investments to Northplan which appointed a
director to Swain Investments‟ board.
[29] Mr Swain states that MFS purchased Northplan in December 2006 and in March 2007 MFS purchased the remaining 75 per cent of the shares in Swain Investments. In that arrangement Mr Swain remained an employee of Swain Investments (at a salary of $80,000 pa) and was required, if called upon to do so, to accept an appointment as director of Northplan. He said in July 2007 he was appointed to the board of Northplan. He resigned as a director on 15 April 2008.
[30] Mr Swain states he has no formal qualifications as an investment advisor. Nor was his opinion sought on investment matters. He said he was satisfied that highly qualified people with the necessary training and experience had been engaged to fulfil their duties as members of the investment committee. He said that was one of the reasons for Swain Investments having sought advice from Northplan in 2002.
[31] Mr Swain does not regard himself as competent to give the kind of input that the investment committee was asked to provide. He ceased giving investment advice in 2002 when he recognised that special skills and training were needed.
[32] Mr Swain does not know the plaintiffs nor anything about their investments, their background or anything that could have been relevant to their or the first defendant‟s decisions about the allocation of their investment portfolio.
[33] Mr Swain was not on the board at the same time as Mr Jackson but confirms Mr Jackson‟s description of the relationship between the board and the investment committee as it was during his own time on the board.
The plaintiffs’ claim
[34] Ms Hughes accepts the plaintiffs‟ pleadings are encapsulated by Mr Ross‟
summary. Adopting that, the pleadings contain the following parts:
(a) The plaintiffs‟ received advice from Northplan from January 2004.
(b) Mr Jackson was a director of Northplan from 2 December 2005 until
31 January 2007.
(c) Mr Swain was a senior executive of Northplan from 3 April 2001 and was a director from 16 July 2007 until 15 April 2008.
(d) It was an implied term of the contract for advice that the plaintiffs‟
investment plan would be “conservative”.
(e) The plaintiffs received advice on numerous but unstated occasions from the first defendant and relied on it.
(f) There was an investment committee [of which Mr Jackson and Mr
Swain were not members].
(g)The plaintiffs made various investments on the alleged advice of the first defendant and Northplan.
(h) There have been losses in connection with those investments.
(i)Mr Jackson and Mr Swain aided and abetted alleged breaches of the Fair Trading Act by “enforcing” an internal policy and “failing to ensure” that investment options were suitably diversified and that the first defendant made appropriate disclosures to the plaintiffs.
(j) Mr Jackson and Mr Swain breached ss 134 and 137 of the Companies
Act 1993.
(k)Northplan and/or the first defendant owed fiduciary duties to the plaintiffs.
(l)Mr Jackson and Mr Swain knowingly assisted [the cause of action now known as “dishonest assistance”] the supposed breach of fiduciary duty by failing to cause the company to disclose competing interests and allowing the company to prefer its own interests over the plaintiffs‟ interests.
(m) Mr Jackson and Mr Swain owed direct duties of care to the plaintiffs
to “take care in how [Northplan] was managed and [governed].
The causes of action
[35] There are three such pleaded: pursuant to the Fair Trading Act 1993;
dishonest assistance in breach of fiduciary duty; and negligence.
Fair Trading Act claim
[36] Assuming for present purposes there is an arguable case of a breach by the first defendant under the Fair Trading Act, the issue is whether or not Mr Jackson and Mr Swain aided and abetted (were accessories to) any breach.
[37] Case authority is clear in that for there to be accessory liability under the Fair Trading Act, mens rea is required, that is actual (as opposed to constructive) knowledge of contravening actions and incorporates a level of involvement in that contravention. 1
[38] Therefore the plaintiffs must show that Mr Jackson and Mr Swain:
(a) Performed acts of “aiding and abetting, counselling or procuring”
deliberately.
1 Body Corp 202254 v Taylor [2008] NZCA 317 at [66]; Megavitamin Laboratories (NZ) Ltd v Commerce Commission (1995) 6 TCLR 231, at 250, per Tipping J; Specialised Livestock Imports Ltd v Borrie (CA 72/01, 20 September 2002 at [156] and [157].
(b)Had knowledge of the essential factual features of the allegation between the plaintiffs and the first defendants.
(c) Intended to assist the first defendant to perform the misleading conduct.
(d) Knew that the first defendant‟s conduct was deceptive.
Dishonest assistance in breach of fiduciary duty
[39] Although the plaintiffs have pleaded a test of “knowing assistance” Ms Hughes acknowledges the plaintiffs are required to plead a breach of duty as “dishonest assistance”; that that has been the law since Royal Brunei Airlines v Tan; and US International Marketing Ltd v National Bank of New Zealand Ltd 2.
[40] As Mr Ross notes the three key elements of dishonest assistance, are:
(a) Money is lost as a result of a breach of trust or a breach of fiduciary duty.
(b)The defendant has participated in the breach of duty by helping or assisting in some way with those breaches.
(c) There is dishonesty (objectively assessed) on the part of the defendant.
[41] It follows that for the purposes of a pleading of dishonest assistance the plaintiffs should identify particulars of time, place, names of persons, nature and
dates of instruments and other relevant circumstances.
2 Royal Brunei Airlines v Tan [1995] 2 AC 378 (PC); US International Marketing Ltd v National Bank of New Zealand Ltd [2004] 1 NZLR 589 (CA).
Negligence
[42] The pleading is contained in a claim that the directors owed duties to third parties to govern companies properly. The Companies Act 1993, and common law position is that those duties are usually owed only to the director‟s company.
Relevant summary judgment principles
[43] Summary judgment is available to a defendant who can satisfy the Court that none of the causes of action in the plaintiffs‟ statement of claim can succeed.
[44] The Court will assess whether there is a credible dispute of fact and will consider whether the plaintiffs‟ evidence passes the threshold of credibility. It is often noted that the Court does not resolve material conflicts of evidence or assess the credibility of deponents. However the Court need not accept evidence that is inherently lacking in credibility because it is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently
improbable. 3
[45] The Court ought to take a robust and realistic approach where the facts warrant it. 4
[46] Summary judgment should only be awarded in clear cut cases.
Relevant strike out principles
[47] The Court may strike out the whole or part of a pleading if it discloses no reasonable cause of action. A Court should assume the pleaded facts are true even though they may not be admitted. A pleading may be struck out if the causes of action are clearly untenable and cannot succeed.
[48] Although difficult questions of law may be involved and require extensive argument the jurisdiction to strike out is not excluded. However, the Court should be
3 Eng Mee Wong v Letchumanan [1980] AC 331 at 341.
4 Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
hesitant to strike out a claim in any developing area of law, perhaps particularly where a duty of care is alleged in a new situation.
[49] If the relevant pleading is incapable of amendment because it cannot succeed in law or is so deficient as to require at a novo start and then strike out is appropriate. 5
The plaintiffs’ case in opposition
[50] It relies upon:
(a) Claims of material disputes of fact.
(b)That claims addressing the scope of the personal liability of directors is a developing area of law.
(c) An analysis of the pleaded causes of action.
Material disputes of fact
[51] This proposition is advanced in reliance in part upon the evidence of Mr Luscombe for the plaintiffs, but also by argument that the claims of Mr Jackson and Mr Swain cannot, in material respects, be acceptable.
[52] Addressing Mr Jackson‟s claims that “the investment committee provided... some separation between the board and the company... and the specific development of client investment models” Mr Luscombe stated that none of the documents discovered during the course of the litigation revealed that the board discussed questions or even queried the investment committee‟s reports; nor was there evidence to suggest the board checked or monitored its investment committee.
[53] Mr Luscombe opined that the board acted as a „rubber stamp‟ for the decisions made by its investment committee. Mr Luscombe says Mr Jackson „was
also at the helm when, in August 2006, another circular letter was sent to all of
5 Marshall Futures Ltd (in Liq) v Marshall [1992] 1 NZLR 316, 323 – 324 (HC).
[Northplan‟s] clients advising them not to heed media and other reports warning investors against investing in finance companies‟. Mr Luscombe observed that the letter was part of a chain of correspondence that Northplan‟s clients were sent between 2005 and 2007 where directors maintained that investors “should heed Northplan‟s advice and take little notice of media reports suggesting Finance Companies were unstable”.
[54] Mr Luscombe notes that the March 2006 board reports reveal that “of the
41.69 per cent of fixed interest investments in New Zealand, $256.292 million was invested in Debentures/Mortgage Trusts and only $1.857 million was invested in managed funds. He said the report also “clearly shows that the Debentures/Mortgage Trusts were spread among only nine finance companies”.
[55] Mr Luscombe noted the same report contained minutes of the investment committee meeting dated 7 March 2005 [sic 2006?] in which “John Price, a chartered accountant on the investment committee expressed his concerns with regard to Boston and noted that [the investment committee] are answerable to [its] clients”.
[56] Mr Luscombe stated that Mr Price was concerned about the legitimacy of Boston Finance which was a subsidiary of [Northplan] and a company in which the second defendant was one of its directors. Mr Luscombe reported that the minutes suggested Mr Giffney undertake independent research on Boston. He noted the matter was concluded with the chairman Mr Curtin suggesting that:
... it would be a good idea to put the Boston financials through the investment committee at some stage as they needed to be formalised due to the possible conflict of interest.
[57] Mr Luscombe stated that minutes of board meetings that followed do not reveal that the board addressed any issues or checked to ensure that they had been resolved before including Boston Finance and the list of products recommended for a conservative portfolio.
[58] Accordingly to Mr Luscombe:
The documents that had been discovered during the course of this case so far reveal that [Northplan‟s] directors should have been aware of media headlines about problems with finance companies and they should have known [Northplan‟s] conservative portfolios were not being properly diversified. They knew Bridgecorp was in trouble and they did not follow up John Price‟s concerns about Boston Finance Limited.
The directors knew or should have known that [Northplan‟s] conservative portfolios were in danger yet they actively encouraged all of its clients to continue having faith in its advice. That advice was given to me only after it had been approved by [Northplan‟s] investment committee, a committee that should have been properly monitored by the board of directors who appear to have merely „rubber stamped‟ its recommendations.
[59] Mr Luscombe also comments upon Mr Swain‟s affidavit. He views that affidavit as an attempt to avoid liability for the decisions of Northplan‟s directors. Although Mr Luscombe has not sighted Mr Swain‟s original employment agreement he notes that the variation of same confirms Mr Swain was paid $80,000 per annum for an average 24 hours of work per week and was responsible for, among other things:
Providing mentorship and guidance to senior management and advisors, building relationships with key referees and clients, being appointed as a director of [Northplan] if so requested by the CEO of MFS and acting as a non executive director of [Northplan] for so long as requested to do so by the CEO of MFS; and any other duties requested from time to time by the CEO...
[60] Noting that although Mr Swain was appointed to the board in July 2007 there were “other documents that have come to light during discovery [which] reveal that Swain had a much longer and far closer association with [Northplan] than that of a mere employee of [Swain Investments]”, he added:
For example, as at 2005 Swain was a 40 per cent shareholder of Complete Financial Solutions Limited. The remainder of those shares were owned by [Northplan]. He was a director of [Swain Investments] and owned shares in that company along with Best Companies South Limited which was a wholly owned subsidiary of [Northplan]. Discovered documents also reveal that as early as April 2004 Swain was being sent emails by [the second defendant]... headed „FYI pertaining to issues [Northplan] had with Bridgecorp‟.
[61] Mr Luscombe further stated:
Swain‟s involvement on the board of [Swain Investment], his role as an advisor, his years of association with [Northplan], his acceptance of a „new company proposal‟ for [Swain International] that involved millions of dollars in an amalgamation with [Northplan], reveal that he was very familiar with
[Northplan‟s] practices and its use of an investment committee to
recommend suitable investments for differing portfolios.
Between 2004 and February 2007 Swain was copied into several emails concerning Bridgecorp... Swain should have known that Bridgecorp was removed from [Northplan‟s] list of recommended products in 2005 but by mid-2006 it was back on [Northplan‟s] list despite media reports questioning its stability.
On 2 July 2007 Bridgecorp went into receivership and later that month a
circular letter was sent to every one of [Northplan‟s] clients advising that:
Whilst a limited number of our clients do have funds invested with Bridgecorp, we are comfortable that because of our process of portfolio diversification none of our clients are overexposed to Bridgecorp. You will no doubt have seen the media full of „expert‟ commentators beating their chests about how they saw the Bridgecorp receivership coming for years. We can only speculate about how much the commentary of these „experts‟ in the past has contributed to their predictions becoming self „fulfilling‟. These „experts‟ implied that all of the advisor firms with clients‟ funds in Bridgecorp have sat idly by and should have seen it coming... that most certainly is not true for [Northplan].
[62] It is clear the letter in question bore the signature of the chief executive officer. It is also clear that other documents to which Mr Luscombe refers are also documents of Northplan and not from its board.
[63] Mr Luscombe states further:
Despite knowing, since at least 2004 that Bridgecorp was not as stable as its directors may have portrayed, [Northplan‟s] board of directors, including Swain, told its advisors that [Northplan] did not know Bridgecorp was in trouble or have any idea that it might be in trouble until such time as it was placed in receivership.
After I was assured by O‟Sullivan that the rest of my mother‟s portfolio had been reviewed and was safe, I continued making decisions in line with [Northplan‟s] advice but within a few short months Capital and Merchant Investments was placed into receivership as was Property Finance and MFS Boston Finance.
All of those companies failed while Swain was on [Northplan‟s] board of directors and after I had been assured by O‟Sullivan, and the advice of the Board, that [Northplan] was satisfied with the current status of my mother‟s portfolio.
Within one month Swain‟s resignation from the board of directors MFS
Pacific Finance was also placed into receivership.
Since 2002 Swain had built up a multimillion dollar business providing financial advice to clients in Christchurch, Invercargill and Queenstown. He should have known that [Northplan] did not adequately diversify its conservative portfolios and upon his appointment to the board of directors he should have ensured that all the information flowing to [Northplan‟s] clients was true and correct.
[64] Ms Hughes submits that whilst Mr Jackson denies being „at the helm‟ of anything to do with Northplan that claim is not accepted „while he was on the board of directors‟. Nor do the plaintiffs accept it was appropriate for directors at that time to do nothing in circumstances where a potential for conflict had been identified.
[65] Ms Hughes submits “Mr Jackson delegated the most important of Northplan‟s tasks to an investment committee without adequately supervising or monitoring their recommendations, questioning its decisions, properly reading the information presented to him at board meetings or putting measures in place to protect the „mum and dad‟ investors who were relying on the advice Northplan was giving them”.
[66] It appears Ms Hughes is even more critical of the role played by Mr Swain. She submits evidence shows frequent communication with Northplan‟s directors „in his capacity as an investment advisor for Swain Investment. Yet, and improbable it may seem submits Ms Hughes, Mr Swain denies he provided any investment advice to any individuals.
[67] Ms Hughes submits that as early as 2004 Mr Swain had been copied into correspondence from Northplan pertaining to Bridgecorp. Ms Hughes submits he must have done something to have earned “that $80,000 part time salary” which was part of the employment package arranged when Northplan acquired an interest in Swain Investments. Ms Hughes invites the Court to be sceptical about Mr Swain‟s claim that Mr Price‟s concerns about Boston Finance Limited were not expressed to him. Ms Hughes suggests that claim ought be capable of a thorough examination of evidence at trial. She submits “the Court cannot accept the defendant‟s version of facts without full and proper consideration of the entire factual matrix, including whatever evidence might be given by their fellow board members, [Northplan‟s] management team and investment committee members. Only after the Court is
appraised of the complete picture can the Court properly understand how
[Northplan] was governed and managed”.
Developing area of law
[68] Ms Hughes reports that the actions of the plaintiffs are not unique because
they have been echoed in “numerous statements of claims around the country by
„mum and dad‟ investor plaintiffs seeking to hold directors liable for failing to properly govern and manage companies”. Referring to the cases of Armitage 6 and Cameron 7 Ms Hughes submits that in both of those cases the Court refused to strike out the plaintiff‟s claim or grant summary judgment to defendant directors. She notes “many more cases await hearings”.
[69] Ms Hughes also draws support from the recent decision of the Federal Court of Australia in Healey 8. In that case Middleton J noted:
While directors are required to take reasonable steps to place themselves in a position to guide and monitor the management of the company. A director must become familiar with the fundamentals of the business in which the corporation is engaged; a director is under a continuing obligation to keep informed about the activities of the corporation; directorial management requires a general monitoring in corporate affairs and policies, and a director should maintain familiarity with the financial position of the corporation.
[70] Middleton J went on to say:
Directors cannot substitute reliance upon the advice of management for their own attention in examination of an important matter that falls specifically within the board‟s responsibility... [175]
[71] Ms Hughes also refers to the decision of Heath J in R v Moses 9 recording the learned Judge‟s findings in the criminal prosecution of directors of Nathan Finance NZ Limited. The case concerned Nathan Finance‟s loan of considerable sums to a parent company to fund an ultimately unsuccessful attempt to break into the US
vending machine market. Key issues included the terms of adequacy of disclosure,
6 Armitage v Church HC Wellington, CIV 2009–485–1952, 27 May 2011, Dobson J.
7 Cameron v Muriel Dunn Financial Service Ltd [2010] DCR 14.
8 Australian Securities Investments Commission v Healey [2011] FCA 717.9 R v Moses & Ors CRI 2009-004-1388, 2 July 2011.
the extent of related party lending, the quality of Nathan Finance‟s loan book, and
the company‟s governance practices and liquidity.
[72] Criminal charges were laid under s 58 of the Securities Act 1978 under which every director of a company that distributes a prospectus or advertisement (including an investment statement claim) that contains an “untrue statement” commits a criminal offence punishable by a term of imprisonment of up to five years or a fine of $300,000.
[73] The Securities Act deems a statement to be “untrue” where it is “misleading”, either affirmatively or by omission of a material particular. A defence is available where the director can prove, on the balance of probabilities, that “he or she had reasonable grounds to believe, and did, up to the time of the distribution of the prospectus, believe that the statement was true”.
[74] Accepting that the Crown had proved beyond reasonable doubt that the statements were misleading, Heath J rejected the directors‟ claim that they were entitled to believe, on reasonable grounds, that the statements were true because they had relied on advice to this affect from other parties, including external advisors and senior management.
[75] Heath J disagreed with the directors‟ claims. He considered that the directors “failed, on all material occasions, to give sufficient personal attention to the content of the relevant offered document” and that this was “not a delegable duty”. He added:
There was a fundamental failure, on the part of all directors, to review the content of the offer documents and to ask themselves whether the information conveyed presented, to a prudent but non expert person, an accurate impression of Nathan‟s business and the associated risks. That exercise should have been undertaken by excluding their own insider knowledge. That is one of the reasons why a collective approach at a board meeting would likely have resulted in a different outcome. Discussion among the directors, properly led by the chairman, was likely to tease out a number of issues of concern.
[76] Heath J considered that independent consideration of the accuracy of financial statements was a non delegable duty of directors of a finance company. He said finance company directors must be financially literate:
It is axiomatic that a director of a finance company will be assumed to have the ability to read and understand financial statements and the way in which assets and liabilities are classified... Such requirements are not unduly oppressive; nor could they be said to act as a disincentive to qualified persons acting as directors of finance companies. They represent no more than the basic level of understanding needed to run a finance company, which any investor would expect a director to have.
[77] Heath J cited with approval Miller J in Davidson v Registrar of Companies 10
where the learned Judge said:
A director must understand the fundamentals of the business, monitor performance and review financial statements regularly. It follows that a degree of financial literacy is required of any director of a finance company.
[78] Ms Hughes comments that in light of recent case authority the scope of director‟s liabilities is a developing area of law. She suggests any other viewpoint is nonsensical, particularly when many of these cases are attaching liability to defendant directors under the far more cumbersome burden of proof required in criminal law matters.
Fair Trading Act claim
[79] Ms Hughes submits that under the Fair Trading claim Mr Jackson and Mr Swain knew that Northplan was enabling Mr O‟Sullivan to engage in misleading conduct. From this submission it is to be assumed that the board was aware of the portfolio recommendations made by the first defendant to the plaintiffs. Ms Hughes submission is that if the plaintiffs can prove there was that knowledge then there is a foundation for a claim that the board (including Mr Jackson and Mr Swain) aided and abetted the first defendant‟s actions. Ms Hughes sums the submission up in this way:
... When appointed to a directorship of a company whose business it is to provide financial advice, that an appointee has no knowledge of matters of
10 [2011] 1 NZLR 542 (HC) at [121].
finance but is there for his strategic and corporate expertise does not entitle him to escape liability under the Fair Trading Act.
[80] Ms Hughes submits that Mr Swain knew (because he had been copied in on emails whilst a director of Swain Investments) that Bridgecorp had been in trouble since 2004. She said that he was a member of the management team and a director at the time „keynotes‟ were sent to Northplan‟s advisors telling them that when speaking to investors they were to confirm:
... In light of the recent Bridgecorp receivership, we have reviewed the other investments in your portfolio and are satisfied with the current status of the portfolio.
[81] Responding to Mr Swain‟s claim of lack of involvement, Ms Hughes submits “it is inconceivable, that Mr Swain could have been a senior executive and board member when such communications were issued without knowing of those communications and having participated in the decision of such. If, as he says, he had no role to play within (Northplan) despite drawing a $80,000 salary for 24 hours of work per week, he certainly had a duty to govern and manage the company without turning a blind eye to documents that he knew were being given to advisors and would be relied upon by „mum and dad‟ investors”.
[82] Ms Hughes submits that Mr Jackson and Mr Swain knew promotional material was being sent to investors which represented that investments were being undertaken appropriately, and that the board was exercising the appropriate level of skill in managing the plaintiffs‟ funds; that there is no meaningful dispute that an internal policy was enforced by the board at that time which limited the first defendant in the investment options that he could recommend to the plaintiffs.
[83] Ms Hughes submits that Mr Jackson and Mr Swain knew that the representations being made to Northplan‟s clients were wrong and yet took no steps to challenge or correct same, and in that event they aided and abetted the first defendant in misleading the plaintiffs.
[84] In Ms Hughes‟ summary of the position Mr Jackson and Mr Swain accepted appointments to Northplan‟s board of directors; their membership of that undoubtedly added to the credibility thereof; despite which they argued they have no
liability for the decisions of the board. Ms Hughes concludes “the various publications emanating from the board at this time were probably false and were known by [Mr Jackson] and [Mr Swain] to be so”.
[85] Ms Hughes accepts there is nothing in the affidavits which confirmed that Mr Jackson and Mr Swain knew about the advice being given by the first defendant to the plaintiffs. Ms Hughes does not expect there would be. She submits it is something she says will be put to Mr Jackson and Mr Swain at trial to enable the Court to make a judgment regarding their credibility on the answers given.
[86] Concerning the claims of Mr Jackson and Mr Swain that they did not „help‟ the first defendant, Ms Hughes submits there can be no merit to that position when it is clear those persons “enforced an internal policy that limited the recommendations [the first defendant] could make”. Ms Hughes submits that “in enforcing that policy the defendants very clearly assisted the first defendant to give advice to „mum and dad‟ investors in circumstances where:
1.There were conflicts within [Northplan‟s] board and management team with various investments recommended.
2. Fixed interest investments were not adequately diversified.
3. There was a focus on finance companies for conservative investors.
4. There were problems with Bridgecorp.
5. None of those points were being made clear to investors.
Breach of fiduciary duty
[87] I have previously identified the authority of Royal Brunei Airlines. I referred to the case as identifying the test for breach of fiduciary duty as referring to “dishonest assistance”. Ms Hughes has referred me to paragraph 389 of that judgment:
In those situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiary. Nor does an honest person in
such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he, learn something he would rather not know, and then proceed regardless.
[88] Ms Hughes submits in this case there is no dispute that a fiduciary duty existed. She suggests the argument appears to be about the availability of evidence of such a breach. Ms Hughes submits that if Mr Jackson and Mr Swain had been honest directors they would not have closed their eyes to the lack of diversification available within recommended portfolios. “Nor would they have closed their eyes to the policy that the first defendant was bound by which meant he could only recommend investments made by the investment committee when they knew there were conflicts of interest”.
[89] Ms Hughes submits that an honest director would have properly guided the investment committee in light of those conflicts and asked questions about the high percentage of investor money directed to finance companies as fixed interest investments. She added that an honest director would have put “mum and dad investors” at the forefront of their minds when governing Northplan, a company that essentially had one role that being the provision of sound investment advice.
[90] Ms Hughes submits that Mr Jackson and Mr Swain failed to demand diversification of fixed interest investments, did not ask questions or scrutinise the investment committee or seek to ensure that Northplan‟s clients were furnished with full and frank facts during their time on the board. She said that “it is not how one would expect an honest director to behave”. She adds:
In the meantime it is presumed that [Mr Jackson and Mr Swain] continued to receive directors‟ fees and other financial benefits for their governance of the company. Classically they have acted to their own benefit and as such have aided and abetted the first defendant in breaching the fiduciary duty he owed to the plaintiffs.
Common law and negligence
[91] For the plaintiffs it is submitted that it is not right for Mr Jackson and Mr Swain to suggest they cannot be liable to the outside world for failing to discharge their duties. Ms Hughes submits that the authorities of R v Moses and ASIC v Healy are examples of authorities in which directors were found liable under the criminal
law for the actions that they take. She says they cannot “escape by claiming that they were less responsible than another director, that they did not know what was going on within the company or that they can behave as they wish without regard for their neighbours because only the company can hold them accountable. In failing to act as an honest prudent director would, [Mr Jackson and Mr Swain] are liable to the plaintiffs under the common law”.
[92] Ms Hughes submits it would take a clear and unequivocal statement in the Companies Act to result in such an outcome; that such an assertion would be contrary to public policy because it should effectively deny investors affected by the negligent acts of directors from any right of recourse; that the plaintiffs relied on Mr Jackson and Mr Swain to exercise governance over the affairs of the company prudently and with appropriate skill.
Considerations
[93] The plaintiffs never met Mr Jackson or Mr Swain. Instead the second – sixth defendants were all at some time directors of Northplan. The seventh and eight defendants were members of the investment committee. The proceeding is an attempt to sheet home responsibility to parties who occupied a position of governance. The whole case is about how it could be said the board of directors and the investment committee exposed themselves to personal liability to the plaintiffs. The whole case is about whether the directors knew or ought to have known the investment committee to which was delegated the investment functions, was giving negligent recommendations. The case is about whether the directors knew or ought to have known that the plaintiffs specifically had received bad advice and because of that the directors assumed responsibility and therefore liability to the plaintiffs.
[94] Those allegations have been addressed in three ways:
1.Accessory liability i.e. by aiding or abetting the provision of bad financial advice.
2. Dishonestly assisting in the provision of that advice.
3. Negligence.
[95] Mr Jackson and Mr Swain assumed positions as board members in the outcome of the acquisition by Northplan of an interest in companies with which they were connected. Both were board members of Northplan for a relatively brief period but at a time of significant economic reversal and when the operations of some finance companies failed. Northplan‟s July 2006 board meeting agenda discloses that 42.64 per cent of investor funds had been invested in debentures/mortgage trusts offered by some nine finance companies. The plaintiffs state that 82.5 per cent of their funds were placed by the first defendant into those same types of fixed interest investment.
[96] The plaintiffs have obtained discovery of Northplan‟s documents. In support of their summary judgment/strike out applications Mr Jackson and Mr Swain have provided significant detail about their business experience and their connection to Northplan. Mr Luscombe by his evidence and Ms Hughes by her submissions have endeavoured to discredit claims about a lack of investment experience. That evidence and those submissions incline to the proposition of dishonest motive.
[97] Ms Hughes submits that against a background of conflict in the respective parties‟ position this matter should head to trial so that this conflict can be resolved. She has indicated further discovery will be sought. She said trial analysis will be assisted by the opportunity to obtain testimony from experts.
[98] An analysis of the facts needs to be made in connection with the claims against Mr Jackson and Mr Swain.
Mr Jackson
[99] Mr Jackson did not personally receive directors‟ fees. Instead those amounting to $30,000 per year, were paid to St Laurence Private Limited as the manager of the private equity funds which Mr Jackson represented. Investment recommendation reports were included as part of the board‟s material for review as part of a cross checks on the investment committee‟s recommendations.
[100] It is correct that the board report of 31 March 2006 revealed that Mr Price, a member of the investment committee, had expressed his concerns with regard to Boston, one of those fixed interest finance company investments on Northplan‟s register. It appears to this Court that the Board minute record shows that the investment committee was following a correct process by referring it for further consideration by the Board as did the Board by its consideration of same.
[101] The plaintiffs assume that in the absence of minutes of the investment committee meetings Mr Jackson only had access to details of the asset allocations the reports addressed to board meetings. But is clear Mr Jackson was also aware of the qualifications of the persons on the investment committee. I have already made mention of those. Although $240M to $270M was invested on fixed interest in finance companies Board reports provided no information at all about the makeup of individual portfolios.
[102] Whilst the plaintiffs suggest the Board had or should have had information with which to oversee its investment committee recommendations it is clear Mr Jackson had no involvement with decisions about recommended portfolios, or specific client advice. He said he was concerned to ensure there was a process followed by the investment committee and that it was staffed appropriately.
[103] Although Mr Jackson was a director of and had interests in St Laurence Private Limited, St Laurence Private No.1 Fund Limited and St Laurence Private No.2 Fund Limited, no private investor money went into those private equity funds. They are not the St Laurence products that were being offered by Northplan.
[104] Mr Jackson was not on the investment committee and was not privy to discussions that may have occurred on that committee at the time when the plaintiffs say the media had highlighted problems with Bridgecorp‟s exposure to failed developments. Mr Jackson was on the board at a time when Mr Syms was a board member. Mr Syms was also on the board of directors of Boston Finance and Best Securities Limited. However Mr Syms‟ interests were disclosed in the Interests Register but Northplan itself had no interest in those companies. The plaintiffs made no investment in Boston during the period of Mr Jackson‟s directorship.
[105] It is not correct that a majority of Northplan‟s client money was invested in the finance companies. Arguably also it is wrong that conservative portfolios recommended by Northplan were not adequate diversified. The question is whether Mr Jackson had any basis to think that the investment committee‟s recommendations were incorrect. He was not a qualified financial advisor and had no involvement with investment decisions or particular portfolios. He was satisfied that the investment committee were staffed with appropriate persons and followed appropriate processes. He did not nor did Mr Swain assert they did not understand the fundamentals of Northplan‟s business and did not claim they lacked financial literacy.
[106] The plaintiffs claim Mr Jackson aided and abetted the actions of the first defendant. But, that claim is not supported by reference to any pleaded particulars. No particulars are pleaded of alleged representations made by the first defendant to the plaintiffs or about how Mr Jackson is said to have known of such or about how it said that he intentionally assisted any such alleged representation.
[107] The plaintiffs assert that Northplan had a policy which limited the first defendant in the investment options that could be recommended to conservative investors being spread among nine finance companies. But there is no evidence of any enforced policy. The evidence is that advisors like the first defendant had a discretion to vary the recommended portfolios. There was no evidence that the plaintiffs in fact used one of the recommended portfolios. Besides, the plaintiffs refused to delegate any authority to Northplan to make investments on their behalf.
[108] The plaintiffs assert that as a board member Mr Jackson knew clients were making investment decisions in reliance on advice from their advisor; that as a board member Mr Jackson dishonestly assisted the practice which permitted conservative investors to invest in finance companies; and that he failed to address the lack of diversification of fixed interest investments within Northplan‟s recommended products. That allegation assumes Mr Jackson had knowledge of discussions between the first defendants and the plaintiffs. It assumes he was involved in putting together recommended portfolios; that he had a basis from which to assume the investment committee‟s recommendations were incorrect. There is no evidence from
which assumptions of those kinds by the plaintiffs can be proved much less that there was any element of dishonest assistance of a breach of fiduciary duty involved. Such cannot be assumed even if he had knowledge of the media reports to which the plaintiffs refer. It was a matter for the investment committee‟s consideration if it needed consideration at all. Mr Jackson‟s involvement as a board member was limited to ensuring the investment committee contained suitably qualified persons and that they were following appropriate processes.
[109] The plaintiffs claim Mr Jackson was negligent and owed the plaintiffs a duty of care about how Northplan was governed. The plaintiffs say Mr Jackson was obliged to adhere to the standard of an ordinary skilled company director in carrying out his responsibilities.
[110] Mr Jackson‟s position is that whatever duties and responsibilities he had were owed not the plaintiffs but to Northplan.
Mr Swain
[111] The plaintiffs claim that as early as April 2004 Mr Swain had been copied into emails which reveal that Northplan had lost confidence with Bridgecorp. Mr Swain did receive a copy of that email but in his capacity as an employee of Swain Investments and because Swain Investments purchased recommendations from Northplan‟s investment committee. Mr Swain was not a director or employee of Northplan at the time. He notes that the plaintiffs did not make any investments in Bridgecorp during the period of his directorship of Northplan. Mr Swain was not privy to what Northplan‟s directors knew or did prior to him becoming a director.
[112] The plaintiffs claim Mr Swain was responsible for, among other things, building relationships with clients, overseeing marketing and providing mentorship and guidance to senior management and advisors. The available evidence suggests this assumption is incorrect. During the period of his tenure as a director Mr Swain continued to be based in Queenstown. He had no involvement with marketing and was never asked to approve any marketing material and nor was he consulted on a marketing strategy.
[113] The plaintiffs assert Mr Swain knew that all fixed interest investments in Northplan‟s recommended portfolio mix was spread among only nine finance companies which did not allow for adequate diversification. That claim is based on an assumption. Mr Swain‟s evidence suggests it is an incorrect assumption. He was not involved in putting together recommended portfolios or providing or reviewing investment advice for specific clients. He had no knowledge of discussions between the first defendant and the plaintiffs or of any specific advice or information provided to the plaintiffs. He had no basis to think the investment committee‟s recommendations were incorrect. There is no evidence that the plaintiffs in fact used one of the recommended portfolios.
[114] The plaintiffs claim Mr Swain received a copy of a set of Key Messages from the CEO which offered a guide in communications about investments. Clearly Mr Swain did receive that but it has not been claimed by the plaintiffs they had any discussion regarding that document or that they were ever given any of the answers that appear in the document. Mr Swain denies having any involvement in its creation or approval of it. There is no evidence to the contrary.
[115] The plaintiffs claim that Northplan had been sending messages to investors encouraging them to have faith in Northplan because of its experience and policy of diversification. They say Mr Swain also knew about marketing material being sent indicating Northplan knew nothing about Bridgecorp‟s troubles until it went into receivership. Again the plaintiffs rely upon an assumption. The evidence is Mr Swain was aware the company sent out marketing material but had no involvement in its drafting review or distribution. Moreover, as earlier noted, the plaintiffs did not make any investments in Bridgecorp during the period of Mr Swain‟s directorship.
[116] Claims that Mr Swain aided and abetted the first defendant‟s actions; failed to effectively monitor the investment committee; that Northplan enforced an internal policy which limited investment options available through the first defendant; that Mr Swain failed to ensure the investment options available to the first defendant for a recommendation of conservative investors was suitably diversified, are all incorrect for those same reasons identified on behalf of Mr Jackson.
[117] Likewise there is reason to question the evidence the plaintiffs says exists to
link Mr Swain‟s actions to breach his fiduciary duty or to claims of negligence.
Overview
[118] The evidence linking the actions of the board and Mr Jackson and Mr Swain in particular is largely assumptive. Whilst neither accepts the first defendant gave negligent advice to the plaintiffs, for present purposes the Court must assume the plaintiffs are capable of proving that. But the plaintiffs‟ case is not aided by the lack of particulars linking their actions to advice given in circumstances where the plaintiffs have not delegated to Northplan the responsibility for making investments on their behalf.
[119] As I observed in the course of my review of the evidence there was a dearth of particulars at all to support claims of knowledge or action by Mr Jackson and Mr Swain. Rather the case has been brought on the basis that as directors of Northplan they knew or ought to have known or were in a position to control matters in order to prevent any losses from occurring.
[120] The evidence does not support that basis of a claim – setting aside for the moment any consideration of whether or not Mr Swain or Mr Jackson assumed responsibilities to anyone at all other than to Northplan.
[121] Mr Swain and Mr Jackson had been sued because in the course of the plaintiffs‟ investigations it was learned that at the time when the plaintiffs say losses of $330,000 were incurred, Mr Swain and Mr Jackson, along with other named defendants, were board directors.
[122] Ms Hughes submits the opportunity for a trial will enable further discovery to be made. In that process there is the expectation that even more information will be unearthed linking claims of knowledge and control over the processes which the plaintiffs say were responsible for their losses. But full discovery was completed in October in 2010. None has further been applied for. The fact is except for the
assumptions drawn regarding the content of board papers there is scant evidentiary basis for a claim of accessory liability.
[123] This case is not about a small company. It is about a moderately large company through which (as at June 2006) a total sum of $626.340M was invested. It is a company which had several layers of management between the board and the individual investment advisor. The question is whether at law members of the board can be personally responsible for the advice given by its investment advisor.
[124] The plaintiffs say that board directors can at law be required to assume responsibility for bad advice given to a client who seeks investment guidance. Ms Hughes submits case authority supports a board director being held personally liable. She submits even if there is an absence of direct authority on a point it is at least arguable directors can be found to be personally liable. She says this claim is brought at a time where the issue of director liability is developing against a background of significant investment failure. I have referred to cases that Ms Hughes has cited in support of the plaintiffs claims that personal responsibility exists. I will refer again to some of those, but before then I should highlight what the plaintiffs‟ case needs to prove.
[125] To prove a case of accessory liability it is clear the plaintiffs must show Mr
Jackson and Mr Swain performed acts of:
1. “Aiding and abetting, counselling or procuring” deliberately
2.Had knowledge of the essential factual features of the allegation between the plaintiffs and the first defendant.
3.Intended to assist the first defendant to perform the misleading conduct; and knew that the first defendant‟s conduct was deceptive.
[126] In the Court‟s view the case based on accessory liability fails because there is
nothing alleged that, if proved, would make Mr Jackson or Mr Swain accessories to
the advice given to the plaintiffs as they did not know what the plaintiffs‟ needs were. They gave no help to the first defendant so they cannot be liable as accessories for whatever advice the plaintiffs got. The case fails because there is no dispute on the facts that they did not participate in recommending portfolio or specific investments and they had nothing to do with any particular advice given to the plaintiffs.
[127] Likewise the claim of dishonest assistance in breach of a fiduciary duty should fail. An allegation of dishonesty requires to be pleaded in clear and precise terms. There should be particulars of time, place, names of persons, nature and dates of instruments and other circumstances. In this case there is no such pleading. Rather, and in overview whilst the pleadings have been dressed as breaches of the Fair Trading Act and of a breach of fiduciary duty, the allegations are really more in the nature of negligence claims. The negligence claim is an allegation that directors owed duties to third parties to govern companies properly.
[128] Ms Hughes referred me to the Armitage case. In that an investment advisor resisted a claim of personal liability for investment advice given on behalf of a company. The claims succeeded against her as well as her company. In that case the Court held it was appropriate to attribute personal liability to her because she was the principal point of contact and it was the essence of a personal relationship between advisor and client; that it must have been her, rather than any other personal manifestation of her company, who ought to have appreciated the reliance that was being placed on the expertise being applied for, and that expertise was essentially personal to her.
[129] That case is different than our present one. The advisor was held liable for the giving of negligent advice. She was a director and could not in the circumstances hide behind the corporate shield. In our case there was no question that Mr Maxwell and Mr Swain provided investment advice, much less did they do so directly.
[130] The case of Cameron concerned a strike out application by two investment advisors who it was alleged were negligent, had breached the Fair Trading Act, and
had breach a fiduciary duty. They claimed they were engaged by their company and that the plaintiffs were at all times advised by that company. The strike out application failed as well because the Court did not have “any kind of clear picture of all of the actual facts”.
[131] That situation does not apply to this case. Discovery has been completed. This Court does have a clear picture of the facts of the case.
[132] In leaky homes cases before this Court it has been common practice to join directors as well as their companies as defendants, in particular where a director has taken actual control over a building services process or a part thereof.
[133] Mr Hughes referred me to the decision of mine in Sale 33 Limited v Wells & Ors 11. The directors of the service contract company applied for summary judgment against the plaintiff on the basis that the plaintiff could not prove the directors had assumed personal responsibility for their companies‟ actions. I held that the acceptable evidence was that the director did not personally recommend the use of the product which was supplied. Nor was he onsite supervising its application. In that case also I noted that discovery had been completed and that no more evidence could be expected. I also noted that the plaintiffs‟ pleading included a claim of
failure to advise of an omission to perform, but that those were more about claims of what was not done rather than what was done.
[134] That case failed because there was no proof of an assumption of responsibility by a director to any greater extent than his company had agreed to provide.
[135] That judgment does not assist the plaintiff. This case too is more about claims of what was not done than what was done. That case was based on assumptions about the extent of administrative duties carried out by the director. In this case the plaintiffs claim is very much about assumptions being made.
[136] The case of Specialised Livestock Imports Ltd v Borrie 12 concerned contracts to buy live ostriches and ostrich eggs. The goods were never supplied and the purchasers sued the supply company as well as its directors. The Supreme Court held that the finding that some of the directors did not personally make representations to purchasers required the Court to consider whether they were nevertheless liable as secondary parties for the wrongful conduct of the director who did make those representations. The Court considered s 43 of the Fair Trading Act in connection with a claim of accessory liability. The Court held there was no evidence to demonstrate any actual acts of participation by the directors concerned in the making of representations; there was nothing that could be characterised as “help” or participation by them in the specific contravening conduct of the director who did make those representations.
[137] Ms Hughes submits our case is different because of the involvement that the directors had and because of their knowledge of the manner in which the investment committee operated. I think that submission underplays the Supreme Court‟s decision. Clearly that case is saying it is not enough to allege knowledge of the general operations of a company. To attract liability a director must be involved in the representations that are being complained of.
[138] Contrary to Ms Hughes‟ submission I consider the authorities of ASIC v Healey and R v Moses are of limited assistance. Those cases concern claims brought under a statutory regime that made directors personally liable. Statutory defences were available under those and one defence provided for reasonable reliance upon the advice of others.
[139] I agree those cases are testing the boundaries of what reasonable reliance is for the purposes of the Securities Act 1978. It is clear from those decisions that directors cannot blindly rely upon advisors. That is how it should be. Our present case is in a different sphere. Securities Act cases are not about the assumption of liability to the outside world – rather to obligations imposed by the Securities Act.
Summary
[140] This case is not about Mr Jackson and Mr Swain saying they relied on the advice of others. This case is about whether or not there is an assumption by them of personal responsibility to the plaintiffs. The Companies Act 1993 and the common law require directors to accept responsibility for their decisions. Our present case does not identify any decision for which they are responsible. There is not one document that links Mr Jackson and Mr Swain to claims of them having inserted themselves in a manner by which they have assumed responsibility for the actions of another.
[141] There is more to the plaintiffs‟ claim than a failing to read and understand financial statements and the way in which assets and liabilities are classified.
[142] The statement of claim is replete with examples of allegations imputing responsibility to Mr Jackson and Mr Swain. Clearly those all boil down to an allegation of negligence that a director has for unexplained reasons caused $333,000 of losses when there is nothing connecting those persons to the plaintiffs specifically.
[143] I agreed with Mr Ross that it not enough to say the plaintiffs might have received alternative investment advice. The plaintiffs assert the Board enforced the investment committee‟s recommendation. But, there is no evidence they did that.
[144] Directors do not in the ordinary course owe duties to anyone other than their company.
[145] I agree with Mr Ross that to impose personal liability upon directors on the basis that they should have known about the quality of investment advice being given by one of its advisors, is a charter for indeterminate liability.
[146] The plaintiffs were entitled to expect that Northplan‟s directors were financially literate and competent. A director can be liable for failing to discharge his duties to manage the company. There is nothing new in these factors. But those duties are owed to the company and not to third persons ordinarily. Where the
plaintiffs‟ claim fails is its inability to say something about what Mr Jackson and Mr Swain themselves did to inveigle a duty of care. The plaintiffs have repleaded their claim three times. Still there is an absence of reference to relevant particulars. This does not reflect on the quality of the pleading but upon the fact that the Court accepts it has before it all the information from which a claim could be pleaded and there is clearly insufficient in that to found a case for personal responsibility to the plaintiffs.
[147] A director may be liable where he steps outside of his or her role as a director; where he/her engaged in some kind of conduct which results in an assumption of liability to a particular third party. But the director has to do something in order to attract that kind of liability. Mr Ross is correct when he submits that if a director is simply discharging his or her responsibilities as a director, making decisions in board meetings and supervising the management of the company, he/she cannot be liable to the outside world.
[148] The plaintiffs claim indeed invites the Court to determine that directors have exposed themselves to a liability to the plaintiffs without having done anything other than being a director and made decisions in that capacity.
Result
[149] There is no arguable case to sustain the plaintiffs‟ claims again Mr Jackson
and Mr Swain. Accordingly their applications for summary judgment are granted.
[150] Costs are fixed on a category 2B basis together with disbursements as approved by the Registrar.
Associate Judge Christiansen
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