Lynds v Fitzherbert Rowe
[2017] NZHC 1297
•13 June 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2007-454-413 [2017] NZHC 1297
BETWEEN JEFFREY ROY LYNDS
First Plaintiff
NEWBURY RACING AND BREEDING LTD
Second Plaintiff
AND
FITZHERBERT ROWE Defendant
Hearing: 3-20 May 2016, 2 and 3 June 2016 (further memoranda
received 29 June 2016, 5 July 2016, and 5 August 2016), 29
September 2016 (further memoranda received 8 and 25
November 2016, 20 February 2017 and 8 May 2017)Appearances:
C Carruthers QC and Q Haines for the plaintiffs
L J Taylor QC and A Sherlock for the defendantJudgment:
13 June 2017
JUDGMENT OF MALLON J
Introduction ....................................................................................................................................... [1] The evidence ...................................................................................................................................... [8] The participants.............................................................................................................................. [8] The Mitchell Group needed to restructure .................................................................................... [17] The genesis of the Newbury partnership ...................................................................................... [27] Restructuring proposals continue ................................................................................................. [31]
Newbury Park discussions............................................................................................................ [35]
AMP default not remedied by six month deadline ........................................................................ [37] Newbury Park agreement resolved ............................................................................................... [39] Restructuring completed............................................................................................................... [42] Newbury Park business underway................................................................................................ [43] Restructuring leaves funding shortfall ......................................................................................... [44] Further Kairanga properties ........................................................................................................ [46] Further National Bank borrowings .............................................................................................. [48] Newbury Park lease finalised ....................................................................................................... [49] The negotiations to purchase Le Belvedere/Mitchell Group defaults ........................................... [50]
Application for funding for Stage two of Kairanga ...................................................................... [67]
LYNDS v FITZHERBERT ROWE [2017] NZHC 1297 [13 June 2017]
Partnership decides to purchase two stallions ............................................................................. [68] MCDC declines Stage two funding............................................................................................... [72] The Pegasus transaction............................................................................................................... [75] The Tui meeting on 1 June 1989 ................................................................................................... [89] Settlement of stallion purchases ................................................................................................. [103] Review of MCDC/Tui securities ................................................................................................. [107] Settlement of sale of Lynds’ property ...........................................................................................[110] Further meetings over Stage two finance ....................................................................................[111] Tui issues default notice to the Mitchell Group ...........................................................................[112] Discussions between NZRPT and Tui ......................................................................................... [123] Syndication of the stallions......................................................................................................... [127] Tui becomes mortgagee in possession ........................................................................................ [134] Mr Mitchell leaves Newbury Park .............................................................................................. [135] Mitchell Group’s court action against Tui .................................................................................. [136] Pegasus default/NRBL established ............................................................................................. [137] The Mitchell Group settle with Tui ............................................................................................. [139] Further funds for Pegasus .......................................................................................................... [141] A further proceeding against Tui is contemplated ...................................................................... [144] Mr Lynds becomes concerned about Fitzherbert Rowe.............................................................. [146]
Has the claim been brought too late? .......................................................................................... [149] Limitation Act 1950 .................................................................................................................... [149] Laches......................................................................................................................................... [156]
Is there a conflict of duty? ............................................................................................................ [160]
Submissions ................................................................................................................................ [160] The law: double employment rule .............................................................................................. [165] The law: the no inhibition rule ................................................................................................... [174] The law: actual conflict .............................................................................................................. [175] The relevant date for the double employment rule ..................................................................... [176] Fitzherbert Rowe’s potential conflict .......................................................................................... [181] My findings ................................................................................................................................. [182]
Causation ....................................................................................................................................... [200] Loss ................................................................................................................................................. [209] The law ....................................................................................................................................... [209]
Time at which loss to be assessed ............................................................................................... [214]
The expert evidence .................................................................................................................... [216] Ms Kelly’s methodology.............................................................................................................. [217] Mr Hussey’s methodology........................................................................................................... [219] Choice of methodology ............................................................................................................... [221] The assumptions ......................................................................................................................... [222] An alternative methodology........................................................................................................ [255]
Judicature Act interest .................................................................................................................. [261] Result .............................................................................................................................................. [263]
Introduction
[1] Jeffrey Lynds sues his former solicitors, Fitzherbert Rowe, for breach of fiduciary duty in relation to a partnership he entered into with Robin Mitchell and others (the Mitchell Group), for whom Fitzherbert Rowe also acted, in 1988.
[2] Mr Lynds trained race horses. Mr Mitchell was a dairy farmer. The partnership involved them combining Mr Lynds’ business with some livestock (cattle) and expanding the horse business by purchasing stallions for breeding. Mr Lynds entered the partnership and committed to borrowing funds understanding Mr Mitchell to have financial substance. In reality Mr Mitchell’s dairy business was saddled with significant debt and could not meet its obligation, without obtaining further finance. Mr Mitchell used funds from the partnership borrowings to remedy his dairy business’s defaults.
[3] The major borrowings by the partnership were from a financier (Pegasus)1 to purchase two stallions (the Pegasus transaction). The partners intended to syndicate the stallions to repay Pegasus. The syndication of the stallions was unsuccessful and the partnership was unable to meet its obligations to Pegasus. The partnership business was restructured into a company, the second plaintiff (NRBL), with Michael Lynds (the brother of Jeffrey) and Brendon Meo (a friend and substantial client of Jeffrey’s horse training business) providing funds which enabled the business to continue to operate and ultimately repay Pegasus. As part of this restructuring Mr Mitchell withdrew from the partnership. Mr Mitchell passed away in 2010. Mr Meo passed away in August 2012. NRBL did not return to solvency after the financial disaster of the Pegasus transaction was put into liquidation in
2015.
[4] Fitzherbert Rowe acted for Mr Mitchell in restructuring his dairy operations. They also acted for Mr Mitchell’s major lender (MCDC2 which later merged with Tui3) following this restructuring. They also acted for Mr Lynds, Mr Mitchell and their partnership on partnership matters. This included acting for them on the
Pegasus transaction. Mr Lynds believes that Fitzherbert Rowe was aware of
1 Pegasus Leasing Limited.
2 Manawatu Co-operative Dairy Company Ltd.
3 Tui Milk Products Ltd.
Mr Mitchell’s financial difficulties when they acted on the Pegasus transaction. He contends they breached their fiduciary duty to him by failing to advise him they had a conflict of interest and Mr Lynds needed to obtain independent advice before committing to the Pegasus transaction.
[5] Mr Lynds and NRBL4 seek to recover from Fitzherbert Rowe loss suffered as a result of the Pegasus transaction. Depending on how the assessment of loss is approached, their claim is for $4,993,000 to $5,506,000 (inclusive of interest).
[6] Fitzherbert Rowe contend that there was no actual or potential conflict when the instructions were accepted and thereafter the two partners who carried out those instructions (Mr Rowe and Mr Roche) were unaware of the full difficulties Mr Mitchell was under. They accept there was a conflict between Mr Mitchell and MCDC/Tui which eventually led to another partner (Mr Sunderland) resigning from acting for Tui, but this conflict did not impinge on their duties to Mr Lynds.
[7] They submit that if the Court finds they breached a fiduciary duty it is only the loss suffered by Mr Lynds that is recoverable. They say that this loss must then be substantially reduced for Mr Lynds’ contributory negligence in entering into the Pegasus transaction. They also contend that Mr Lynds has brought his action too late. They say he could reasonably have discovered the matters on which he now bases his claim in 1992 when Mr Mitchell was embroiled in litigation with Tui.
The evidence
The participants
[8] Mr Lynds has been a self-employed horse trainer since 1974. He and his wife, Jan Lynds, ran the business together. In 1976 they purchased a 25 acre horse training establishment in Woodville. They started developing their business, gathering clients and, eventually, making a profit. Mr Mitchell became a client of Mr Lynds around 1978. Mr Lynds trained Zamalla, one of Mr Mitchell’s horses.
They developed an amicable relationship and began owning horses together.
4 NRBL’s liquidators consent to the proceeding.
[9] Mr Mitchell was an experienced farmer. He was a Nuffield Scholar and had won the Alec Cameron Memorial Award for excellence in farming. He was a director at MCDC, was on the New Zealand Beef Council, and was Chairman of the New Zealand Town Milk Federation. He was understood to be an accomplished businessman and successful farmer. For a number of years he was a Director of the MCDC until it merged with Tui in 1989.
[10] At the beginning of 1988 Mr and Mrs Mitchell held interests in several farming operations. These were:
(a) Kairanga: three neighbouring farm blocks (totalling 85 hectares) near
Palmerston North;5
(b) Fairview: a 126 hectare dairy farm at Dannevirke;6 and
(c) Pahau Reserve: a 387 hectare dairy farm near Culverden, in
Canterbury.7
[11] The group of entities that made up the Mitchell and Williamson interests became known as the Mitchell Group.8 At least as is relevant to this proceeding, Mr Mitchell made the Mitchell Group’s financial decisions.
[12] Michael Lynds is the brother of Jeffrey Lynds. He trained as an appraiser and a registered valuer. He was involved in rural lending initially with the Rural Bank
and later as the general manager of AMP Financial Corporation. He knew Mr
5 The land had three separate certificates of title. These were held by various entities owned by the Mitchells and the McDonnells, who began farming the property together from September
1978. The farm business was operated by the Kairanga Partnership which was equally owned by each couple. At the end of August 1987 the Mitchells purchased the McDonnell’s share. At the end of 1989 the Williamsons joined as partners.
6 The titles were all held in equal share by Mr and Mrs Mitchell’s family trusts. 385 of the stock
were owned by the Williamsons and the remaining stock, plant and equipment were owned by the Fairview Partnership (80 per cent by the Mitchells and 20 per cent by the Williamsons).
7 The Mitchell Group held a 50 per cent share in this. The other 50 per cent was owned by AMP.
This was purchased in 1983 as a joint venture between AMP and the Mitchell Group. AMP provided the required funding for the Mitchell Group to acquire their half. There was a complicated ownership structure for the half share owned by the Mitchell Group: half of its share was owned by each of the couples’ family trusts (Mitchells’ 57.2 per cent, Williamsons’
35.7 per cent and McDonnells’ 7.1 per cent). The other half was owned by the three couples, in the same proportions, in their own right. The Mitchells acquired the equity previously held by the McDonnells in August 1987.
8 They also established a specific partnership called the Mitchell Group which acted as a vehicle for certain borrowing for the group.
Mitchell through these roles. He had instigated the Mitchell Group’s involvement in Pahau Reserve, but once the project was established he did not have any active involvement in it. He left AMP in 1986 and pursued other ventures.
[13] Fitzherbert Rowe is a firm of solicitors practising in Palmerston North. At the time of these events there were 10 partners in the firm. They included Maurice Rowe, Phil Sunderland and Barry Roche.
[14] Mr Rowe was the partner who primarily acted for Mr Mitchell. Mr Mitchell was a long-standing client of the firm. Mr Rowe’s father, a partner in the predecessor firm, had first acted for Mr Mitchell. In about 1973 Mr Rowe’s father passed Mr Mitchell’s matters over to him. By this time Mr Rowe had been a partner for about six years and had been practising for about nine years.9 He acted for Mr
Mitchell on the legal aspects of his financial affairs.10
[15] MCDC was the original dairy co-operative in the Manawatu region. Its principal dairy factory operations were located close to the Mitchell Group’s Kairanga property.11 In the late 1970s and through most of the 1980s MCDC was seeking to expand and secure milk supply from the Manawatu region. It was looking to establish relationships with farmers close to MCDC’s centre of operations which would provide it with the ability to spray milk waste onto their land as a disposal measure. In accordance its expansion objectives MCDC had a policy of providing finance to some supplier members for the purpose of establishing new dairy units or
developing existing ones. During the events at issue here, MCDC merged with Tui. Tui had a different approach to finance applications than MCDC.
[16] MCDC was also a long-standing client of Fitzherbert Rowe, and its predecessor. Mr Sunderland had acted for MCDC for many years. In the 1980s a
significant part of Mr Sunderland’s fees came from MCDC work. Most of his
9 Mr Rowe joined the firm when he commenced practice in 1964. He became a partner in 1967.
He had experience in a wide range of legal work but over time focussed on commercial property, commercial transactions and resource management work.
10 He was also a professional trustee for both Mr and Mrs Mitchell’s family trusts and held a personal covenant to repay loans secured over trust property, limited to the value of the assets held within those two trusts.
11 At Longburn, five kilometres south of Palmerston North.
instructions came through the company secretary, Mr Mollett. By and large the firm
was MCDC’s only lawyers until about the middle of the 1990s.
The Mitchell Group needed to restructure
[17] Mr Mitchell and the Mitchell Group had substantial borrowings relating to its farming interests. This including borrowings from AMP, Wanganui Savings Bank12 (which later became Trustbank Central Ltd), Wrightson Farmers Finance Ltd,13
Wrightson NMA Ltd,14 and the National Bank.15 Various securities were held by
these entities.16 The AMP lending included a multi-currency loan facility to the
Mitchell Group which, as at early 1988, was drawn down to $1,230,000.
[18] As at early 1988 the substantial borrowings were causing Mr Mitchell financial strain. At this time the Mitchell Group was in default of its obligations to AMP, AMP was pressing Mr Mitchell to resolve the defaults, and Mr Rowe was aware of this.17
[19] Specifically an AMP loan for $204,000 due for repayment on 1 November
1987 had not been paid by 7 January 1988. A second AMP loan for $230,000 was due for repayment on 7 March 1988. In a letter dated 7 January 1988 AMP expressed concern that throughout the term of these loans the Mitchell Group’s payments had been late. AMP advised that it would not agree to extend the loans as had been requested. It would agree to maintain the status quo on these loans until 30
June 1988 providing it did not become aware of any erosion in its security.18
[20] Against this background Mr Mitchell embarked on a proposal to sell the
Mitchell Group’s interest in Pahau Reserve, and to develop and expand Kairanga
12 For $765,880 at the time of the Pahau Reserve sale.
13 For $147,921 at the time of the Pahau Reserve sale.
14 For $175,949 at the time of the Pahau Reserve sale.
15 Approximately $578,145 when the NZRPT transaction (referred to later) was settled.
16 For example, various AMP loans were secured over Kairanga. One AMP loan (used to purchase
Pahau Reserve) was secured over Pahau and the Wanganui Savings Bank loan was also secured over Pahau.
17 The AMP letters dated 7 January 1988 and 4 July 1988 about these defaults were addressed to
Mr Rowe.
18 The letter provided details of the quarterly interest payments to be made and that a default rate of
28.5 per cent would apply if they were not paid on time.
into a large scale and intensive dairy that would hold 970 cows. Michael Lynds had some knowledge of this proposed restructuring.19
[21] As part of this restructuring, an agreement was reached with the New Zealand Rural Property Trust (NZRPT). This agreement involved a complicated structure by which Mr Mitchell would undertake the Kairanga development. Mr Rowe was aware of the details of this agreement and provided Mr Mitchell with legal assistance relating to it.20
[22] Under this agreement the Mitchell Group would sell its three principal Kairanga farm blocks to NZRPT at 80 per cent of the land’s agreed market value. NZRPT would then lease that land, plus a neighbouring block to be purchased (the Mildon Block), back to the Mitchell Group. At a later stage further neighbouring blocks would be purchased (the Robert and Hollows blocks). The lease would be on a term of three years with a right of renewal for another 15 years. The Mitchell Group would also have a right of first refusal if NZRPT decided to sell the land at the end of the initial 15 year period.
[23] To counter-balance the discount in the purchase price the annual rental was 5 per cent (as opposed to the market rental of 8 per cent) for the first six years. Additionally, the Mitchell Group was required to purchase vendor units in the NZRPT to the value of 60 per cent of the amount NZRPT paid for the Kairanga land. After five years the Mitchell Group was entitled to sell up to 20 per cent of its unit holding. The purpose of these units was to offset the disadvantage of having a leasehold farm rather than a freehold farm, as the lease holder effectively became a shareholder in NZRPT and therefore would benefit if the value of the farmland increased.
[24] The NZRPT also agreed to reimburse the Mitchell Group for 80 per cent of the work the Mitchell Group planned to develop the farm. However, they would
19 A handwritten letter (undated) shows notes he made for Mr Rowe setting out Mr Mitchell’s financial position and proposing that an application be made for finance from the Rural Bank for
$200,000 to repay the National Bank lending. Michael Lynds said in cross examination he prepared this note in early January 1988.
20 The detail of the extensive assistance required of Mr Rowe is set out in his invoice to Mr Mitchell provided on 2 March 1989. Mr Rowe’s knowledge of the NZRPT transaction is set out in a memorandum from him to Mr Sunderland dated 22 April 1988.
require the Mitchell Group to purchase additional vendor units of 60 per cent of that value and annual rents would increase to include 5 per cent of the amount spent on development costs.
[25] Substantial funding was needed by the Mitchell Group to complete this proposal. It was proposed this would be obtained from MCDC. At a meeting on 16
March 1988, at a time when Mr Mitchell was a director on the MCDC Board, it resolved to support in principle the policy of being involved in arranging finance for new suppliers or existing suppliers who desired to increase their production. This was to be addressed by the Suppliers Finance Committee with urgency and a special Board meeting would take place once arrangements were at an advanced stage. This resolution was made specifically as a result of Mr Mitchell’s proposed plans for
Kairanga.21
[26] Following advice from its accountants (Touche Ross),22 a report from Mr Mitchell’s accountants (Mr Fenwick of Arthur Young),23 and advice from Mr Sunderland24 it appears that by 22 April 1988 MCDC had approved in principle the facility which at that stage was for $1.4 million.25
The genesis of the Newbury partnership
[27] While Mr Mitchell was working on this restructuring of his farming operations, in around April 1988, Mr Mitchell proposed to Mr Lynds that they
21 As is apparent from the recommendation to the Board on 15 March 1988 to approve in principle the Mitchell Group proposal for which a borrowing facility to a maximum of $1.9 million was sought.
22 Touche Ross (accountants) reported to MCDC on Mr Mitchell’s financial proposal on 22 March
1988. They considered the farming operation at Kairanga was viable subject to debt servicing and investment income. The debt servicing was dependent on the dividends to be received from the vendor units and there were a number of unknown factors relating to them. They concluded this relied too heavily on the performance of NZRPT and as such it involved a “high level of risk” for the MCDC. They said they could not recommend the proposal in its current form.
23 Mr Mitchell engaged Arthur Young (Mr Fenwick) to write to MCDC about the financial viability of the proposal. It did so sometime in March 1988.
24 In April 1988 Mr Sunderland provided advice to MCDC about the financial viability of the Kairanga proposal, which at this point was for a facility of $1.4 million. Mr Sunderland advised that, based on the various reports and discussions, the proposal did appear to be financially
viable. He also provided advice on the security for the proposed facility. This included
obtaining a mortgage on the lease. He regarded this as the prime security because, in the event of default, MCDC could acquire the Mitchell Group’s interest under the lease and operate the farm as tenant.
25 On that date Wrightson NMA Ltd was advised by Mr Sunderland that MCDC had approved sufficient funds to enable the purchase by NZRPT to proceed.
establish a partnership to purchase a property known as Newbury Park, a 320 acre multi-purpose horse stud and training facility located on the outskirts of Palmerston North.26 No written partnership agreement was entered into. However the intention was that Mr Lynds would transfer his horse training business to this property and Mr Mitchell would bring cattle to the property for later sale by the partnership.27
[28] As a result of these discussions, in May 1988 Mr Lynds negotiated an agreement to purchase Newbury Park on behalf of the partnership for $1.6 million. Mr Lynds instructed Wellington solicitors to act for him on this transaction. Mr Mitchell provided the deposit of $100,000. Settlement was to occur on 30 June 1988 (which was also when Mr Mitchell was required to meet his obligations to AMP and was intending to do so through the restructuring plans). Mr Lynds says that Mr Mitchell was to get bridging finance for the rest of the purchase price until he had settled the Pahau Reserve sale with AMP. He also says Mr Mitchell told him of his involvement in a major dairy development at Kairanga and that funding had been
approved for this by MCDC.28
[29] In fact there would have been insufficient funds from this sale to pay the balance of the purchase price. It is therefore unclear how Mr Mitchell envisaged the balance of the purchase price would be funded. Mr Lynds did not have the ability to do so. If Mr Mitchell intended to proceed with settling this purchase, he must have envisaged the $1.5 million would be borrowed but it is unclear whom that borrowing would be from. However, as matters transpired, it became unnecessary to settle the purchase.
[30] On 17 June 1988 Mr Lynds and Mr Mitchell became aware there were complications with settlement of the Newbury Park purchase. The vendors, Blessed Investments,29 had earlier entered into an agreement to sell Newbury Park to a Mr
Carpenter. Blessed Investments believed this contract had been brought to an end
26 It is not necessary to distinguish between Mr Mitchell and the Mitchell Group in relation to the
Newbury Park partnership. This makes no difference to the outcome.
27 A dispute later arose about whether they intended the cattle were to be funded by the partnership or Mr Mitchell as his capital contribution.
28 This is consistent with Mr Sunderland’s advice to the NZRPT on 22 April 1988.
29 Blessed Investment Ltd.
when it entered the contract with Mr Lynds. Mr Carpenter disputed this. He lodged a caveat to prevent Blessed Investments settling with Mr Lynds.
Restructuring proposals continue
[31] On 21 June 1988 Mr Sunderland provided further advice to MCDC on the Mitchell Group Kairanga funding proposal. This advice was based on the details of the arrangement that Mr Rowe had provided to Mr Sunderland. Despite Mr Sunderland’s advice to MCDC in April 1988, at this time Mr Sunderland advised that Fitzherbert Rowe could not advise on the financial aspects of the Mitchell Group as “we are not familiar” with this and did not have the financial knowledge to provide an assessment. It is apparent this comment was based on what Mr Rowe
thought Mr Sunderland should say.30 At this point Fitzherbert Rowe had a potential
conflict of interest as between its two clients (MCDC and Mr Mitchell), but this is simply background insofar as Mr Lynds’ claim is concerned.
[32] Mr Sunderland’s advice to MCDC at this time went on to say the proposal “would not under any circumstances find favour” with the Rural Bank. This was because the proposed security was significantly less than what it would have accepted. Further, the security did not necessarily provide MCDC with the ability to realise its security and immediately recoup its investment. Fitzherbert Rowe’s conflict at this stage was recognised, with Mr Sunderland concluding his advice by saying “because of our close relationship with both parties we must leave the final decision to you”.
[33] The sale of Pahau Reserve and the NZRPT transaction for Kairanga with financing from MCDC was not going to be sufficient to clear Mr Mitchell’s total
AMP lending. It was, however, envisaged that the two outstanding AMP loans
30 Mr Sunderland’s advice to MCDC essentially copied what Mr Rowe had said about this in a memorandum to him written at about the same time. This comment was relied on by Mr Rowe to seek to show that he did not have a complete picture of Mr Mitchell’s financial position, and that therefore the restructuring was not material information that ought to have been disclosed to Mr Lynds when acting for him on some of the partnership matters. In my view this comment does not mean that Mr Rowe did not have material information as to the financial strain Mr Mitchell was under, that he was restructuring his affairs in the face of pressure from AMP, and that he needed to obtain substantial financing for what was proposed. The detailed narration on his invoice to Mr Mitchell dated 2 March 1989, which is set out later, makes it clear he did have knowledge of those matters.
would be cleared and the AMP multi-currency loan could be reduced.31 Mr Mitchell was also looking to obtain further funds from other sources. Amongst these efforts, he had in mind borrowing money from the National Bank which would be secured by mortgages over his residential property (although Mr Mitchell was intending to sell this) and another property at Pukawa.32 He also decided to increase the facility sought from MCDC from $1.4 million to $1.5 million and to add a further $350,000 to the loan to acquire 640 cows over which MCDC would have security.33
[34] While the restructuring was being organised the AMP quarterly payments on the two loans which had matured (the $204,000 and $230,000 loans), were not paid on their due dates.34
Newbury Park discussions
[35] Mr Mitchell and Mr Lynds had discussed that Mr and Mrs Mitchell would sell their residential property and move on to Newbury Park. When it became apparent there was a potential problem with settling the Newbury Park purchase, Mr Mitchell engaged Mr Rowe to assist. On 21, 23 and 28 June 1988 the respective lawyers for Mr Lynds and Mr Mitchell corresponded about a proposed response to the vendor’s solicitors in which they would insist that settlement proceed. Despite the uncertainty about whether that would happen, on 25 June 1988 Mr and Mrs Mitchell entered into an agreement to sell their residential property for $180,000.
[36] At the same time Mr Mitchell was working with Mr Needham, the principal of Blessed Investments, to resolve the matter. This involved extracting some benefits for his proposed partnership with Mr Lynds and leasing the Newbury Park property from Mr Carpenter. On 29 June 1988 Mr Rowe received by fax a letter
confirming a conversation which had taken place between Mr Mitchell and
31 On 21 June 1988 Mr Rowe sought AMP’s agreement to release its securities over some of the Mitchell properties (including their residential property) in return for reducing the $1,230,000 sum owing under the multi-currency facility to $700,000.
32 This is mentioned in a report from Arthur Young provided to National Bank on 22 June 1988 on Mr Mitchell’s instructions. This report advised the Mitchell Group’s net asset position after the restructuring would be $521,000 plus an assessed value of the proposed Kairanga leases from NZRPT of $1,720,800. It is not, however, clear how accurate the $521,000 assessment was. For
example the amounts owing to AMP do not appear to coincide with the proposal made to reduce
the multi-currency facility to $700,000.33 This was noted at a MCDC meeting (attended by Mr Mitchell) on 29 June 1988.
34 The payment due on 1 February 1988 was paid on 19 February, the payment due on 7 March
1988 was paid on 20 April, the payment due on 1 May 1988 was paid on 13 June 1988, and the payment due on 7 June 1988 remained unpaid as at 4 July 1988.
Mr Needham.35 This involved Mr Mitchell/Mr Lynds withdrawing from the purchase of Newbury Park in exchange for a return of the deposit and some other arrangements.36 On 30 June 1998 a file note indicates that Mr Mitchell (and possibly Mr Lynds) discussed with Mr Rowe the possibility of a lease from Mr Carpenter for Newbury Park.
AMP default not remedied by six month deadline
[37] By 30 June 1988 the Mitchell Group sale of Kairanga to NZRPT had not settled, which also meant that the Mitchell Group had not repaid the two AMP loans within the six month period of extension earlier granted by AMP.37 On 4 July 1988
AMP wrote to Mr Rowe expressing its “considerable concern and disappointment” that the two outstanding AMP loans had not been repaid within the six month extension.38 AMP advised that the penalty interest provisions would apply and legal steps would be taken to realise its securities.
[38] Mr Rowe was working to stave off AMP enforcement action. Settlement of the NZRPT proposal, with funding from MCDC, was necessary for this.39 On 15
July 1988 AMP advised Mr Rowe that it was commencing recovery action.
Newbury Park agreement resolved
[39] On the same day that AMP advised it was commencing recovery action (15
July 1988), Mr Rowe wrote to Mr Lynds’ solicitors, on behalf of Mr Mitchell and Mr
35 The date this was received by Mr Rowe is referred to in a letter from Mr Rowe to Gault Mitchell dated 15 July 1988.
36 “Pompeii Court” access as further described in a 19 May 1988 agreement, Mr Lynds training
horses on behalf of Waikato Stud Ltd on usual arrangements, and Blessed Investments providing all reasonable assistance on Mr Mitchell’s behalf to acquire a stallion. In fact, as is discussed later, Mr Mitchell later made arrangements for the partnership to buy Le Belvedere from Blessed Investments’ financier (Esanda Finance Corporation Ltd (Esanda)) when Blessed Investments was in default to Esanda.
37 As at this date the Mitchell Group’s borrowings under the AMP multi-currency loan facility stood at $1,328,167.97 although there is no suggestion AMP was seeking repayment of this at
this time. The loan had an unrealised loss of $94,582.39 (the difference in the value of the
currencies when the loan was drawn down a year earlier) and no principal reductions had been made during that period.
38 This letter also set out details of the late quarterly payments referred to above.
39 On 5 July 1988 Mr Rowe wrote to National Bank advising that Mr Mitchell would be seeking a
release of the bank’s security over some livestock because MCDC required this security for its
lending. On the same day Mr Rowe wrote to AMP seeking a deferral of recovery action. On 8
July 1988 AMP advised it would agree to defer recovery action if the Mitchell Group had paid an interest sum of $25,512.77 within seven days. AMP advised that recovery action would be taken without further notice if this payment was not made in this timeframe. Despite this further extension, however, this sum was not paid.
Lynds, setting out the agreement which had been reached with Blessed Investment. In addition to the matters agreed on 29 June 1988, it had also been agreed that Blessed Investments would pay compensation of $50,000.40 Blessed Investments had also agreed to obtain an agreement with Mr Carpenter pursuant to which he would give Mr Mitchell and Mr Lynds a right of first refusal to purchase or lease the property. Mr Rowe acknowledges he was acting for Mr Lynds as well as Mr Mitchell at this point. In accepting instructions to act for Mr Lynds, Mr Rowe appears not to have appreciated that his knowledge of Mr Mitchell’s financial
difficulties might be of real interest to Mr Lynds in decisions about how the Newbury Park dispute should be resolved. Mr Rowe’s evidence is that he understood the financial difficulties were temporary and would be resolved once the restructuring was implemented.
[40] Settlement of Mr Carpenter’s purchase of Newbury Park took place on
28 July 1988. On that day Blessed Investments’ solicitors paid $150,000 (the refunded deposit and the agreed compensation) into Fitzherbert Rowe’s trust account.41 In anticipation of entering a lease with Mr Carpenter, on Friday 29 July
1988 at 5.10 pm, Mr Rowe confirmed an agreement reached with Mr Carpenter’s solicitor that Mr and Mrs Mitchell would occupy the house on Newbury Park the next day, as licensee, and the occupancy could be terminated by Mr Carpenter on 14 days notice.
[41] On the same day as these last minute arrangements were being made, AMP
issued Property Law Act notices to Mr and Mrs Mitchell and Mr Rowe. These
40 Reflecting expenses incurred and that Mr Mitchell had sold his house with the intention of occupying the house on Newbury Park.
41 The $150,000 received from Blessed Investments was utilised as follows: (a) on about 2 August
1988 Mr Rowe had paid $14,000 to a Timaru creditor of Mr Mitchell’s. This payment was made on Mr Mitchell’s instructions and Mr Rowe had confirmed this with Mr Lynds (the instructions and confirmation are recorded in letters from Mr Rowe to Mr Mitchell and Mr Lynds dated 2
August 1988); (b) on about 11 August 1988, on the instructions of Mr Mitchell and Mr Lynds (see telephone note dated 9 August 1988 and letters from Mr Rowe to Mr Mitchell and Mr Lynds on 11 August 1988), Mr Rowe paid $100,000 to the Mitchell Group partnership account which had been opened at the National Bank (being a refund on the deposit Mr Mitchell had paid) and
$25,000 was paid to Michael Lynds (this was recorded in Fitzherbert Rowe’s trust account as paid to Jeffrey Lynds. In fact it was a payment to Michael Lynds relating to a bailment that
Michael Lynds was arranging for Robin Mitchell for the Mitchell Group. However this did not proceed because MCDC considered a bailment would leave it with insufficient security); (c) the balance ($11,000) was used for disbursements incurred by Fitzherbert Rowe in settling the Newbury Park matter. The payments of $14,000 and $25,000 were intended to be repaid in October 1988 once the MCDC financing was obtained and the NZRPT transaction settled.
notices required that the Mitchell Group remedy the failure to repay the loans of
$134,000 and $70,000 (the defaults) by paying those sums by 4 September 1988,42 failing which AMP would exercise its rights under two mortgages. Neither Mr Rowe nor Mr Mitchell told Mr Lynds about these notices.
Restructuring completed
[42] On 11 August 1988 Mr Sunderland, for MCDC, forwarded to Mr Rowe, for Mr Mitchell, a facility agreement, mortgage of lease, mortgage of the vendor units and instrument by way of security (IWS) for execution. Mr Rowe was continuing to correspond with AMP on the terms on which it would release its securities.43 The MCDC funds were made available to the Mitchell Group on 31 August 1988. Some earlier advances on those funds had also been paid.44 The NZRPT transaction was also settled around this time.
Newbury Park business underway
[43] The lease payments for Newbury Park commenced in September 1988 although the lease was not yet finalised and Mr Rowe and/or Mr Mitchell were in contact with Mr Carpenter about this.45 As mentioned, it was envisaged the partnership between Mr Mitchell and Mr Lynds would involve cattle, horse training and a horse stud business. By this time Mr Mitchell had moved 1,100 cattle on to Newbury Park. It was intended this stock, once grown, would be sold with the
profits going to the partnership. In about October 1988 Mr Lynds transferred his horse training business to Newbury Park. He said he did so at Mr Mitchell’s request.
At this stage he still owned his Woodville property. There was a surge in business
42 These amounts related to the loan for $204,000.
43 On 4 August 1988 AMP advised it would discharge mortgage 678587.1 on payment of not less than $130,000 but the money would be received without prejudice to its rights under the Property Law Act notices. On 18 August 1988 Mr Rowe wrote to AMP about the terms on which AMP would release its securities and withdraw caveats to enable the sale of Kairanga to
NZRPT to settle. On 25 August 1988 AMP advised Mr Rowe that the amounts owing under the
two outstanding AMP loans now totalled $350,181.79 (an amount of $345,226 was referred to in the letter but a handwritten amendment was made because an additional sum of $4,955.79 was owing). It also appears that no reduction of the multi-currency facility had occurred, although it was intended that $450,000 would be paid in reduction of that facility. There are various handwritten notes of Mr Rowe, some of which appear to relate to this period, with how proceeds from the sale to NZRPT will be applied.
44 It appears that MCDC understood the earlier advances were to be held in Fitzherbert Rowe’s trust account and interest payments deducted from those funds. See MCDC letter to Mr Mitchell dated 22 December 1988.
45 The terms of the lease were finalised in December 1988.
from his clients over the next few months which covered the Newbury Park partnership expenses.
Restructuring leaves funding shortfall
[44] On 4 October 1988 Mr Mitchell wrote to Mr Rowe advising he had prepared, on a preliminary basis, statements relating to: the MCDC advance, NZRPT, the Pahau Reserve sale46, and a “statement of further funds required”. In this letter Mr Rowe:
(a) Referred to instructions from Mr Mitchell to pay $30,000 to the Mitchell Group partnership account with National Bank, and to pay from that account $14,920 to Elders Pastoral Ltd, $39,000 to the Newbury Park partnership,47 $20,000 for legal costs, and the balance to Wanganui Savings Bank.
(b) Said there was a “difficulty” with these instructions because
Fitzherbert Rowe had undertaken to repay Wrightson NMA Ltd
$205,000 out of the proceeds from the Pahau Reserve and Kairanga transactions and there was “already a shortfall of funds” of $11,347.06 to meet this.
(c) Noted that Mr Mitchell intended to obtain further funds from National Bank to meet the shortfall, but considered that, because of the undertaking, it could not distribute the funds it held until a definite arrangement was in place with the National Bank.
(d)Advised that it should apply all the moneys it held to the reduction of the Wrightson account, and the further money the Mitchell Group required (for the matters referred to in (a) above and for the NZRPT development units) should be met from the further funding to be
obtained from the National Bank.
46 From this sale, there were funds of $937,750 for the land, $347,500 for the plant and machinery and $6,922 in accrued interest.
47 The $39,000 payment was intended to be a refund of the $14,000 and $25,000 payments earlier made from the $150,000 Blessed Investment funds: see the narration on the statement of further funds required.
(e) Calculated that the further funds required by Mr Mitchell was
$331,669.06.48 This included provision for the NZRPT development units.
(f) Noted the Mitchell Group already had an existing obligation to pay
$108,960 to NZRPT for the development units, having already received $227,000 from NZRPT for improvements; and this would increase to $201,600 because of the expected cost of the total improvements.49
(g)Noted the Mitchell Group may have paid these development costs from funds other than those received from NZRPT but Mr Rowe was “unaware of this” and so had included the funding of the development units in the statement of “further funds required”.
[45] This letter confirms that the restructuring did not clear the Mitchell Group’s existing liabilities50 and significant further funding was needed ($331,669.06), assuming there was no existing source of funding for the Kairanga development units and Mr Rowe was not aware of any such source. Additionally the Mitchell Group had borrowed $1.85 million from MCDC with MCDC holding securities over the Kairanga operation. At this point Mr Mitchell’s principal assets appear to have been the Kairanga operation, the Mitchell Group’s interest in Fairview,51 a smaller Kairanga property52 (the AMP multi-currency loan was secured against these two properties), and his interest in the Newbury Park partnership. Mr and Mrs Mitchell
were living in the house on Newbury Park pursuant to a licence, and the Newbury
Park partnership was about to enter a lease over the property.
Further Kairanga properties
[46] Meanwhile NZRPT was continuing with its part in the development of
Kairanga. This was going to require further funding from MCDC within a few short
48 Note that, in addition to this shortfall, the AMP multi-currency facility was only to be reduced by
$450,000 which would leave a significant amount owing under that facility (it appears this was around $880,000), and the Mitchell Group would also owe $1,850,000 to MCDC.
49 The actual amount of this obligation became $252,000 possibly because of cost overruns in completing the cow shed.
50 In particular it did not clear the AMP multi-currency facility.
51 Fairview (valued at $885,000).
52 Owned by Robgarry Farms Ltd. On 21 July 1989 this was sold to an independent purchaser (Patan Investments Ltd) for $215,000. Most of the sale proceeds went towards repaying the AMP multi-currency loan.
months of the original facility. On 18 November 1988, as had been envisaged as part of the Kairanga development, NZRPT commenced arrangements for the purchase of
38 hectares which adjoined the Kairanga property (the Robert block) which would be structured along similar lines as the existing arrangement between NZRPT and the Mitchell Group.53
[47] The close off date for applications to MCDC for finance in the following year was 30 November 1988. Mr Mitchell did not, however, raise with MCDC the need for financing to continue with the Kairanga development by this date.54 Why he did not do so is unknown. What is known is that on 30 November 1988 the first instalment under the MCDC loan was due (an amount of $94,608.88) and the Mitchell Group failed to meet it. Mr Mitchell apparently had no way of meeting this first instalment except by way of further borrowing.
Further National Bank borrowings
[48] Mr Mitchell approached the National Bank for funds with the support of MCDC. Specifically MCDC was willing to guarantee a Mitchell Group overdraft with the National Bank of up to $200,000 until 1 July 1989 (at which time this would be added to the loan to MCDC), to enable the Mitchell Group to meet the first
instalment of the MCDC loan which had been due on 30 November 1988.55 On 14
December 1988 the National Bank advised Mr Rowe that it had agreed to provide the Kairanga partnership an overdraft facility of $150,000. Mr Mitchell had offered security over stock (an IWS). The bank asked Mr Rowe to attend to completion of the security. Although the security over the stock had not been put in place at this stage, it seems that the overdraft facility was put in place which enabled the Mitchell
Group to pay the outstanding first loan instalment to MCDC on 28 December 1988.
53 NZRPT was to pay 90 per cent of the current market value (90 per cent of $330,000) and the Mitchell Group was to pay the balance. The Mitchell Group was also to take up vendor units and pay the real estate fee. The Mitchell Group was to lease this property.
54 On 24 November 1988 Arthur Young advised MCDC that the value of the Mitchell Group’s assets which had been provided as security to MCDC (the lease of the Kairanga from NZRPT, plant and livestock and the NZRPT units) was $2,096,933. This is prior to the intended acquisition of the Hollows and Robert blocks.
55 See MCDC letters dated 5 and 22 December 1988. The 22 December 1988 letter to Mr Mitchell recording its understanding that Mr Mitchell was intending to obtain finance of $200,000 to
meet the outstanding first loan instalment (which facility MCDC had agreed to guarantee) and requesting that Mr Mitchell arrange this finance urgently which was due on 30 November 1988 and that default interest was to be charged. MCDC also asked for confirmation that Fitzherbert Rowe had deducted MCDC interest from the advances made before 31 August 1988 and advised that default interest was being charged on the outstanding first instalment.
Newbury Park lease finalised
[49] Alongside these events, on 6 December 1988 the lease from Mr Carpenter for Newbury Park was entered into. Mr Rowe paid $111,000 on behalf of Mr Mitchell and Mr Lynds to complete this settlement. The funds for this payment came from a payment of $20,000 from Mr Lynds (a further $20,000 was to be paid for his 50 per cent interest in the partnership once he had sold his residential property), a payment made by the Mitchell Group of $78,163 and other funds held by Fitzherbert Rowe.
Mr and Mrs Lynds were also making arrangements to sell their Woodville property.56
The negotiations to purchase Le Belvedere/Mitchell Group defaults
[50] Undeterred by his 1988 financial issues, in January 1989 Mr Mitchell was looking into purchasing a stallion, Le Belvedere. The stallion was owned by Blessed Investments (the vendor of Newbury Park) and was being trained by Mr Lynds at Newbury Park from October 1988.57 Blessed Investments was in default of its obligations to its lender (Esanda) which held security over the horse.
[51] Mr Mitchell was apparently also intent on continuing with the Kairanga development – or at least had not indicated otherwise to NZRPT. On 13 January
1989 NZRPT’s solicitors advised Mr Rowe that, after some delay, the agreement to purchase the Robert block had been entered into. The agreement to purchase the Robert block was conditional on the lease agreement being entered into. An agreement for the Mitchell Group to lease the property was provided and the obligation on the Mitchell Group to contribute to the purchase price was noted.
[52] At this time the Mitchell Group was required to make payment to NZRPT for development units but was unable to do so.58 On 14 January 1989 Mr Mitchell sent NZRPT a National Bank (Mitchell Group Farm account) cheque post-dated 3
February 1989 for $252,000. The post-dating was said to be “to allow for
56 It is not clear whether an agreement to sell their property was entered into at this time.
Mr Lynds says he entered a contract to sell this property in December 1988. However, in a fax to Mr Rowe on 30 May 1989, Mrs Lynds provides details of the purchase agreement indicating it was not entered into until this later stage. Mr Rowe acted for Mr and Mrs Lynds on settlement of this agreement.
57 As mentioned earlier, as part of the settling the Newbury Park dispute, Blessed Investments Ltd had agreed to assist in finding a stallion for the partnership.
58 This was the $252,000 for units for development costs relating to $420,000 which NZRPT had spent on the cow shed.
documentation”. However on 3 February 1989 Mr Mitchell telephoned NZRPT to tell them he had not yet organised financing, and if the post-dated cheque was banked it would “bounce”. NZRPT was “getting seriously concerned” by this. On
8 February 1989 NZRPT was also pressing Mr Rowe for a response regarding the lease for the Robert block.
[53] From 6 February 1989 to 14 April 1989 Mr Rowe was on sabbatical overseas. Before leaving, he dictated notes to Mr Roche providing information on work Mr Roche was to take over during his absence. This included obtaining the Mitchell Group’s and the Lynds’ signatures on the Newbury Park lease, and working with NZRPT on the lease of the Robert block. There was also a handwritten note from Mr Rowe to Mr Roche about the IWS for the National Bank (presumably referring to the 14 December 1988 National Bank letter). He said Mr Roche would need to check who owned the stock and chattels and “this matter is fairly urgent.”
[54] Mr Rowe had also dictated a letter, statements and an invoice for the dissolution of the Pahau Reserve partnership and the NZRPT transactions. These were sent to Mr Mitchell on 2 March 1989. The cover letter noted that most of the work had been completed but there remained outstanding matters regarding “the vendor’s units and the development aspects”. The invoice for NZRPT provides a
detailed narration of the work carried out by Mr Rowe.59
59 Amongst other things, it describes “attendances with Messrs Williams, of [NZRPT], and [Michael] Lynds in May 1988 concerning proposals and financial structure thereof relating to ratio of cash payment and issue of vendor units, … lengthy attendances and consultations with [Mr Mitchell] concerning overall financial position and proposed financial structure, … subsequent attendances concerning certain financial aspects of Agreements relative to vendor units, extensive attendances and communications in respect thereof, … consultations concerning existing AMP Financial Corporation facility over Kairanga farm properties and other properties, attendances on receiving instructions as to proposed partial reduction and reduced security formulating proposal to AMP, … receiving communications from AMP Finance NZ Limited concerning outstanding loans, numerous and lengthy attendances in respect thereof, communications to defer enforcement action, receiving various repayment statements and demands, receiving communications and numerous enquiries from Wrightson NMA Limited concerning payment of outstanding account, … lengthy attendances on analysing needs for Application of proceeds in relation to existing securities, consultations concerning possible payment from Pahau property, various communications with Wrightsons and advising as to progress of transactions, … receiving Property Law Act Notice from AMP Finance NZ Limited and further attendances concerning same, … [and] lengthy attendances on computing vendor units to be provided as part of consideration.”
[55] On 2 March 1989 the next MCDC loan instalment was due and was not paid.60 Nor had the $252,000 owing to NZRPT for the development units been paid. On this date Mr Mitchell discussed with NZRPT that he would obtain funding from MCDC to enable NZRPT to present the post-dated cheque which it still held. NZRPT also sought further information about this from Mr Mitchell.61
[56] Despite the MCDC and NZRPT defaults Mr Mitchell was continuing his negotiations for the purchase of Le Belvedere. On 5 March 1989 he flew to Melbourne to discuss this purchase with Esanda.62 Esanda wanted NZD625,000 for the horse. Mr Lynds’ evidence was that he did not want to buy Le Belvedere. He had been training Le Belvedere for some time and knew the horse very well. His view was that Le Belvedere was not a racing horse. He considered the price was too expensive. He was also aware, as was Mr Mitchell, that there had been previous
unsuccessful attempts to syndicate the horse.
[57] On 7 March 1989 a MCDC meeting took place. Mr Mitchell’s apology was recorded. At this meeting the MCDC Directors resolved to sign the heads of agreement for the proposed merger with Tui. They also resolved that the acceptable ratio of loan amount to security value would reduce from 66 per cent to 60 per cent in line with Tui’s lending policies. Three applications for advances from 1 June
1989 totalling $1,340,000 had been received. This included an application from the Mitchell Group. It was resolved that these applications “be approved subject to security being put in place.”
[58] Mr Mitchell had returned from Melbourne late in the evening on 7 March
1989. On 8 March 1989 Mr and Mrs Mitchell went to the accountants at 1.30 pm “to sign some papers”. Mr Mitchell spent the afternoon (at the races) and evening (dinner) with Mr Lynds and others.63 At some point around this time Mr Mitchell
had approached the National Bank for an overdraft for Newbury Park. Mr Lynds
60 See MCDC letter to Mr Mitchell dated 22 March 1989.
61 On 3 March 1989 NZRPT asked Mr Mitchell to obtain a letter from MCDC confirming the availability of funds to enable him to purchase 178,200 vendor units for the Robert block and a
further $64,800 to take up units in the Hollows block (another adjoining property intended to be
occupied as part of Stage two of the development). The letter also noted that NZRPT had agreed to pay up to $420,000 for the dairy shed. It was still to distribute $40,000 and this would occur once the $252,000 cheque from Mr Mitchell had cleared.
62 Mrs Mitchell notes in her diary that Mr Mitchell left for Australia that afternoon.
63 As noted in Mrs Mitchell’s diary note.
says this arrangement was made without his knowledge.64 It seems Mr Mitchell arranged the overdraft so he could use it to meet outstanding Mitchell Group obligations.65
[59] On 8 March 1989 Mr Roche received a letter from the National Bank notifying him that the bank had agreed to provide the Newbury Park partnership with a $200,000 overdraft. The bank noted the Newbury Park partnership had offered as security a First Charge Registered IWS over stock on two pieces of land which Mr Mitchell would describe to Mr Roche.
[246] Consistent with this arrangement, Capivich, continued to show as a current
asset “Advance – Newbury Park”. This was consistently shown as an amount of
$325,783 between 2007 and 2012. Why this was not for $390,000 is not clear. The amount shown in Capivich’s accounts was then reduced to $227,464 in 2013, again for reasons which are unclear (by this stage Mr Meo had died). However, regardless of the reasons for the particular amount shown in the accounts over this period, the
entries are consistent with there having been an assurance from Mr Lynds to Mr Meo about repayment if he was ever able to recover some damages from Fitzherbert Rowe. John Meo was executor of Brendan Meo’s estate at this time. He was aware of the assurance and the court proceeding.
[247] On 30 March 2015 a Deed of Agreement between NRBL, Jeffrey Lynds, Andrew Lynds (who is Jeffrey’s son), Charew212 (an entity associated with Andrew) and John Meo was entered into. Following this a Deed of Assignment of Debt and Security from the estate of Brendan Meo to Charew was entered into on 10 April
2015. These provided that:
(a) Mr Meo’s estate assigned the estate’s interests under its loans to
NRBL to Charew;
(b)in return Mr Meo’s estate was entitled to receive an amount if the claim against Fitzherbert Rowe was successful, the amount payable depending on the amount of damages; and
(c) Jeffrey Lynds was released from his personal guarantee if the Meo estate received the agreed proceeds from a successful damages claim against Fitzherbert Rowe.
[248] In light of all this, Fitzherbert Rowe first submit the loan for $390,000 was statute barred. Although the submissions did not elaborate on this, I understand this to be on the basis that the loan was restructured in 1997 so that it became a loan from Mr Meo to Mr Lynds. I also understand the argument to be that time began to run when the advance was made because there was no time specified for repayment. Fitzherbert Rowe contend that, if the loan is not recoverable against Mr Lynds because it is statute barred, then Mr Lynds has not suffered any loss from the loan and it cannot form part of his compensation. The submissions for Mr Lynds did not
address this in any substantive way.
212 Charew Holdings Ltd.
[249] As discussed above my view is that the loan was always a loan from Mr Meo to NRBL. Mr Meo’s rights under that loan were assigned to Charew. Fitzherbert Rowe did not owe any fiduciary duty to NRBL. Mr Lynds can recover only to the extent that NRBL’s losses from the Pegasus transaction flow to him. Mr Meo has never sought to enforce repayment of the $390,000 from Mr Lynds pursuant to the guarantee. Compensation should not be assessed on the basis of a contingent loss which is unlikely to materialise. If Mr Lynds chooses to pay any compensation he is awarded to Mr Meo, that is a matter for him. Any amount paid to the Meo estate under the 2015 agreement by Charew arises from an arrangement entered into many years after Fitzherbert Rowe’s breach of duty. Fitzherbert Rowe had no control over that arrangement. It materially altered the terms on which the Meo debt would be repaid. In my view there is not a direct link between Fitzherbert Rowe’s breach and any payment that might be made to the Meo estate from this litigation.
[250] In short, I consider the calculation of the loss suffered by Mr Lynds should not include the loan from Mr Meo to NRBL of $390,000.
Assumption K
[251] Assumption K concerns whether Mr Lynds’ loss should include the interest NRBL paid to Mr Meo. This was paid as “consultancy fees” to Capivich. There was also a contra of training and agistment fees which Mr Meo owed to NRBL over the relevant period. This arrangement was set up at Mr Meo’s request. Fitzherbert Rowe contend these sums cannot form part of Mr Lynds’ compensation because the arrangement amounted to tax evasion and was therefore the arrangement was not enforceable.
[252] The tax effects of this arrangement were explained by Ms Kelly whose clear and comprehensive evidence about this I accept. NRBL claimed a GST input credit which it would not have been entitled to if the payments were for interest (which is GST zero rated). However the effect on the Inland Revenue would be neutral because Capivich would have paid GST on these amounts. She accepts there may
have been a small timing issue.213 Resident Withholding Tax (RWT) would have
213 Between when the GST was claimed and when it was paid.
been payable by Capivich on interest received. However this would depend on whether Capivich had an exemption on the basis that the Meo interests were making losses. On the face of the material before the Court the Meo interests would have qualified for an exemption and NRBL would have had no corresponding obligation to deduct RWT. Further, as Ms Kelly stated, RWT is a provisional tax paid during the year. This would not affect the total tax liability at the end of the year which would be payable on income (including income that may have been liable for RWT), only the timing of payments. Ms Kelly responded on all the matters Mr Hussey raised to suggest there may have been a benefit to Mr Meo in the arrangement.
[253] The parties referred to Patel v Mirza.214 In that case Mr Patel paid money to Mr Mirza to buy shares using insider information which Mr Mirza expected to obtain from his contacts. The insider information did not materialise and the money remained in Mr Mirza’s account. Mr Patel was successful in recovering the money. The UK Supreme Court held that a plaintiff who satisfies the ordinary requirements of a claim for unjust enrichment is not debarred from enforcing his claim by reason only of the fact that the money he seeks to recover was paid for an unlawful purpose.215 It was necessary to consider whether the public interest would be harmed if recovery were granted.
[254] If Mr Lynds’ loss was to be calculated beyond 30 June 1992, I consider the proper approach would have been to treat the sums paid as consultancy fees,216 which were interest payments, as interest payments with a deduction for the GST credits claimed. This calculation would need to take into account that NRBL has accumulated unpaid GST. This is not about enforcing an illegal contract (even if that were established), but about restoring Mr Lynds to the position in which he would
have been if the Pegasus transaction had not succeeded. Absent evidence of loss to Inland Revenue and proof that Mr Lynds intended this, the public interest does not require that Fitzherbert Rowe be excused from compensating Mr Lynds for the loss
actually suffered.
214 Patel v Mirza [2016] 3 WLR 399 (SC).
215 At [121].
216 There was evidence that some consultancy services were provided.
An alternative methodology
[255] In my view, however, the difficulties surrounding the assumptions show that it is wrong to attempt to assess Mr Lynds’ loss from the Pegasus transactions beyond
30 June 1992. NRBL was formed because Mr Lynds was unable to pay his debts, in particular he was unable to repay Pegasus under the agreed terms. At that point it was possible to calculate the loss to Mr Lynds from the Pegasus transaction. Had he known of Fitzherbert Rowe’s breach of duty at this time, his compensation claim would have been able to be determined in this way. Thereafter, he entered into arrangements which enabled him to continue to operate, but which materially altered the structure of the Pegasus transaction and the associated liabilities. These were business decisions out of Fitzherbert Rowe’s control. There is a more attenuated link between the breach of fiduciary duty and Mr Lynds’ losses as calculated under the NRBL structure. Compensation on this basis risks determining an amount that is out of kilter with the loss that is properly attributable to Fitzherbert Rowe’s actions. Equitable compensation must be an amount that is fair and just in the circumstances.
[256] If the losses were calculated as at 30 June 1992 a more straightforward methodology is potentially available. As at that date the partnership was unable to repay Pegasus. Mr Lynds was jointly and severally liable for the full amount of the loan and the full amount of the unpaid interest. Mr Mitchell, who had withdrawn from the partnership, was unable to make any payment to Pegasus. The liability stood to fall entirely on Mr Lynds. Offsetting his liability to Pegasus, he had two stallions and the income he earned from them.
[257] In rough terms it appears that the loss to Mr Lynds at 30 June 1992 might be something between $1 million and $1.5 million. I have derived this guesstimate from the following:
(a) As at 30 June 1992 the principal owing was $1.35 million.
(b)The total interest owing under the loan was approximately $800,000 (written off by Pegasus in 1993).
(c) The stallions were sold to NRBL for $460,937. The $2.15 million Pegasus liability was offset by this asset so that, before taking into account net income earned on the stallions, the loss was approximately $1.7 million.
(d)As at 30 June 1992 the stallion income (the shares sold, service fees, and savings from their progeny) had exceeded their costs (not including the Pegasus liability). Using Ms Kelly’s figures it appears the net income may have been around $400,000. The net income would also offset the loss.
[258] An award of equitable compensation is to reflect that which the justice of the case requires.217 Standing back from the detail, an award around the $1.3 million level (before interest and costs) seems to me to:
(a) fairly restore Mr Lynds for the losses from the Pegasus transaction, entered into when Fitzherbert Rowe failed to have regard to his interests when they were in breach of the double employment rule; and
(b) bear an appropriate relationship or link to Fitzherbert Rowe’s breach
of duty.
[259] I would not consider it appropriate to reduce this sum on a contributory negligence (if appropriate to apply this by analogy) or equitable abatement basis. Those matters might come more into play if the loss were to be calculated through NRBL’s operation and if that calculation produced a much higher sum than my guesstimate of the losses at 30 June 1992.
[260] Neither party contended this was the appropriate time to assess loss, although Fitzherbert Rowe floated the possibility. As a result I do not have submissions from them as to whether I have overlooked something that makes this timing
inappropriate or have erroneously put together the guesstimate. It is therefore
217 Day v Mead above n 195 at 462; see also Smith v Walker above n 161 at [61].
appropriate that I allow the parties the opportunity to make further submissions about this if they wish to do so. However I hope that the parties are able to reach a settlement on the basis of this judgment. This has been a long road for Mr Lynds and, no doubt to some extent, for Fitzherbert Rowe. Closure of the matter is desirable.
Judicature Act interest
[261] Judicature Act interest is discretionary, to be exercised as the justice of the case requires. Its purpose is to enable the Court properly to compensate a successful party for its loss.218 In this case it would be unjust to allow interest from 1992 to the date of judgment. That period is simply too long, even though Mr Lynds must have faced challenges in bringing his proceeding in light of the financial strain he was under.
[262] I consider that interest at the prescribed rate for five years is appropriate. That period is closer to the time which a proceeding of this nature might ordinarily take from commencement to judgment. The prescribed rate should be at the rate which applied for the five year period from when the proceeding was commenced (that is, five years from 11 June 2007). In addition, he is entitled to interest at the prescribed rate from the date of this judgment until payment of the compensation ultimately agreed or determined by the Court.
Result
[263] Mr Lynds has established that:
(a) Fitzherbert Rowe breached their fiduciary duty to him; (b) he suffered loss as a result; and
(c) his claim is not barred by the Limitation Act or the doctrine of laches.
218 Day v Mead above n 195 at 463.
[264] He is entitled to compensation. My preliminary assessment of this is that an amount between $1 million and $1.5 million (possibly around $1.3 million) is appropriate. The parties may make further submissions about my methodology and calculations if they wish to do so. They may agree a timetable for doing so.
[265] In addition to this compensation Mr Lynds is entitled to interest on the compensation at the prescribed rate under the Judicature Act for five years from
11 June 2007. He is also entitled to interest at the prescribed rate from the date of this judgment until payment of the compensation ultimately agreed or determined by the Court.
[266] The parties have leave to file (brief) submissions on issue as to costs if they are unable to resolve by agreement. They have three months from the date of this judgment to do so (or such further period as may be granted).
Mallon J
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