Managh v Britton
[2012] NZHC 2949
•13 November 2012
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2011-441-678 [2012] NZHC 2949
UNDER s 301 of the Companies Act 1993
IN THE MATTER OF BRITTON BUILT LIMITED (IN LIQUIDATION)
BETWEEN JOHN FRANCIS MANAGH Plaintiff
ANDARTHUR ERNEST BRITTON AND WILHELMINA CHARLOTTA GREVILLE
Defendants
ANDBRUCE BRADFORD GREVILLE Third Party
Hearing: 18 October 2012 (Heard at Napier)
Counsel: M.E.M. MacFarlane - Counsel for the Plaintiff
G.W. Calver for the Defendants
J.L. Bates for the Third Party
Judgment: 13 November 2012
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
Under r 11.5 of the High Court Rules I direct the Registrar to deliver this judgment at 3.30 pm on 13 November 2012.
Solicitors: Sainsbury Logan & Williams, Solicitors, PO Box 41, Napier
Scannell Hardy & Co, Solicitors, PO Box 219, Hastings 4156
Gresson Grayson, Solicitors, PO Box 1045, Hastings
JF MANAGH V AE BRITTON AND WC GREVILLE HC NAP CIV-2011-441-678 [13 November 2012]
Introduction
[1] These proceedings involve the liquidation of a company, Britton Built Limited (the Company), which carried on business constructing generally transportable residential homes using a range of pre-designed plans. After a series of financial difficulties, the Company was placed into voluntary liquidation on 14 April
2008 and the plaintiff John Francis Managh (Mr Managh) was appointed liquidator. Mr Managh as liquidator brought the present proceeding against the two directors of the company, Arthur Ernest Britton (Mr Britton) and his wife Wilhelmina Charlotta Greville (Ms Greville) as defendants for breach of their duties as directors. They in turn have joined Ms Greville’s son Bruce Bradford Greville (Mr Bruce Greville) as a third party for what they allege were his contributions to the Company’s overall failure.
[2] The present matters before this Court comprise two interlocutory applications. The first is an application by Mr Bruce Greville to have the defendants’ (Mr Britton and Ms Greville) cause of action against him struck out. The second is an application by the defendants (Mr Britton and Ms Greville) for further and better discovery from the plaintiff (Mr Managh).
Background
[3] The Company was incorporated on 21 December 2004 and began trading the following year. Its operations involved entering into contracts for the construction of generally transportable residential homes on leased premises, building and transporting the completed homes to customers’ properties and installing them there. Mr Britton and Ms Greville were the sole shareholders and named directors of the Company. They provided approximately $300,000 in start up equity capital for the Company, and later a further $200,000 in loan capital. They employed Ms Greville’s son, Mr Bruce Greville as General Manager of the Company. He was responsible for the entire day to day running of the company, whilst at the same time it appears he was involved in running his own building company, Stress Less Buildings Limited (Stress Less).
[4] In carrying out his functions as General Manager of the Company, Mr Bruce Greville oversaw most of the building work. He was responsible for purchasing building materials from trade suppliers and employing subcontractors to complete plumbing, electrical and other work on the houses. The defendants Mr Britton and Ms Greville were not involved in day to day management but they attended monthly Company meetings and had ultimate control over the Company’s finances.
[5] The Company it seems traded at a loss for most of its time in operation, relying on credit from its bank, the directors’ personal funds, and credit from unpaid trade suppliers.
[6] Finally, on 14 April 2008 a shareholders’ resolution was passed by the defendants Mr Britton and Ms Greville putting the company into voluntary liquidation and appointing the plaintiff Mr Managh as liquidator. At this point, it appears trading debts of the Company amounted to $437,164.25.
[7] In 2009, Mr Managh, the liquidator brought a proceeding under CIV-2009-
441-179 against Mr Bruce Greville as defendant under s 301 of the Companies Act
1993 for his role in managing the Company. It was claimed that Mr Bruce Greville, although not a named director of the Company, was nevertheless a director in terms of s 126 Companies Act 1993 as someone who had “full control over the company’s affairs in terms of incurring debts as well as deciding whose debts would be paid, and further alleging that he exercised all the authority that a named director customarily would”. In this proceeding Mr Managh made a range of allegations against Mr Bruce Greville including claims of equitable fraud, breach of duty, breach of trust, breach of directors’ duties generally and reckless trading. That proceeding however was settled on 11 March 2010. A settlement agreement was entered into between Mr Managh and Mr Bruce Greville. Clause 1.2 of that settlement agreement provided that, upon receipt of an agreed settlement sum, over 18 months later, that proceeding CIV-2009-441-179 would be discontinued with no issue as to costs.
[8] Subsequently, on 20 October 2011, Mr Managh the plaintiff brought the present proceeding against the defendants Mr Britton and Ms Greville for their roles as directors of the company. In this proceeding, he claims that from at least 1 April
2007, the Company was engaged in business for which its financial resources were inadequate, and Mr Britton and Ms Greville as directors caused and allowed the Company to trade in a manner that was likely to create a substantial risk of loss to creditors. As a result, he contends they breached their duties under s 135(b) Companies Act 1993. Mr Managh also claims that Mr Britton and Ms Greville the defendants breached their duties of care to the Company.
[9] In response, the defendants Mr Britton and Ms Greville filed a statement of defence and, in addition, they issued a statement of claim against Mr Bruce Greville, joining him as a third party to the present proceeding. In this they claim Mr Bruce Greville should be treated as a director of the Company pursuant to s 126 Companies Act 1993, and that he also breached s 301 by entering into contracts with his own company Stress Less for his own personal benefit. Essentially, the defendants contend that Mr Bruce Greville, as the General Manager, is responsible for any liability they might incur in respect of the operation of the Company, and that he should provide an indemnity in respect of any judgment which the plaintiff Mr Managh might obtain against them.
Application to strike out
[10] The first application before the Court is one brought by Mr Bruce Greville to strike-out the claims by the defendants against him as a third party. Rule 15.1(1) High Court Rules deals with strike-out applications and provides that this Court may strike out all or part of a pleading if it—
(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b) is likely to cause prejudice or delay; or
(c) is frivolous or vexatious; or
(d) is otherwise an abuse of the process of the court.
[11] The authors of McGechan on Procedure provide the following helpful summary of the principles relevant to r 15.1(1):[1]
[1] Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at [HR15.1. 02(1)]
The established criteria for striking out was summarised by the Court of Appeal in A-G v Prince [1998] 1 NZLR 262, (1997) 16 FRNZ 258, [1998] NZFLR 145 (CA) at 267, and endorsed by the Supreme Court in Couch v A-G [2008] NZSC 45 at [33], per Elias CJ and Anderson J:
(a) Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation.
(b) The cause of action for defence must be clearly untenable. In Couch Elias CJ and Anderson J, at [33], said: “It is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed.”
(c) The jurisdiction is to be exercised sparingly, and only in clear cases. This
reflects the Court’s reluctance to terminate a claim or defence short of trial.
(d) The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.
(e) The Court should be particularly slow to strike out a claim in any developing area of the law, perhaps particularly where a duty of care is alleged in a new situation. In Couch, at [33], Elias CJ and Anderson J said: “Particular care is required in areas where the law is confused or developing.” There is considerable authority that developments in negligence need to be based on proved rather than hypothetical facts.
[12] Mr Bruce Greville, seeks to have the causes of action pleaded against him in the defendants’ statement of claim struck out. This would effectively remove him as a party to these proceedings. He claims that the causes of action against him cannot possibly succeed because:
(a) He settled the liquidators claim against him, which absolved him of any further liability he may have had with respect to the Company; and
(b)It is an abuse of process to undermine the settlement agreement by allowing the defendants to pursue essentially the same cause of action
against him.
[13] It is not really contested here that Mr Bruce Greville could be considered a de-facto or deemed director pursuant to s 126(1)(b)(iii) Companies Act 1993, if he is found to have exercised powers akin to those of the directors of the Company, even if that was not provided for in the Company’s constitution. If that is shown to be the position, as I see it the defendants have a possibly arguable case that his conduct caused a substantial risk of loss to the Company’s creditors, in breach of the duty contained in s 135 Companies Act 1993, and the Company is entitled to restitutionary relief under s 301.
[14] However, Mr Bruce Greville as the third party contends this cause of action is untenable, as the obligations under those sections are owed to the Company, and not to the directors in their personal capacity, and only the Company is entitled to restitutionary relief. He claims the cause of action is only arguable in respect of the Company, and the settlement agreement he signed with the plaintiff Mr Managh as liquidator effectively bars any further proceedings against him.
[15] However, I do not see the settlement agreement providing such wide protection. It does protect Mr Bruce Greville from further proceedings by Mr Managh as liquidator the plaintiff, as he undertook to discontinue those other proceedings in consideration for payment of the settlement sum. Therefore it precludes any cause of action for relief that only the Company, or the liquidator on behalf of the Company, is entitled to claim. The settlement agreement also precludes a cause of action based on a duty that Mr Bruce Greville may have owed to the Company but not to the defendants in their personal capacity.
[16] Although director’s duties are owed to the Company itself, s 301 allows both liquidators and shareholders to apply to the Court for orders that money or property be repaid or restored to the Company. As shareholders, the defendants Mr Britton and Ms Greville have standing under s 301 Companies Act 1993 to bring a claim against the third party for his role in managing the Company.
[17] The defendants were not parties to the settlement agreement and did not provide any undertakings of forbearance. The settlement agreement in my view does not protect the third party from additional and distinct causes of action vis-a-vis the
defendants. The prospect of Mr Bruce Greville remaining liable to the defendants in their personal capacity and in their capacity as shareholders cannot be ruled out here as wholly untenable. It would be improper to deny the defendants any relief they might be entitled to from Mr Bruce Greville on the basis of a settlement agreement to which they were not parties. Therefore, the causes of action in the defendants’ third party claim against Mr Bruce Greville must remain.
[18] Mr Bruce Greville’s strike-out application therefore fails and it is now dismissed.
[19] Costs on this application are awarded to the successful defendants Mr Britton and Ms Greville against Mr Bruce Greville on a category 2B basis together with disbursements (if any) as approved by the Registrar.
Application for further discovery
[20] In this application, the defendants Mr Britton and Ms Greville seek orders under r 8.19 of the High Court Rules that the following documents are discoverable and should be made available by the plaintiff Mr Managh for their inspection:
(a) The plaintiff’s time records, in order to ascertain the liquidation fees
charged in respect of the Company;
(b) All bank statements of the plaintiff’s trust account showing payments
received or made in the course of the liquidation;
(c) Documents on the files of two barristers (Mr Brooke Gibson and Mr Kevin Sullivan) who acted for the plaintiff in the 2009 proceedings against Mr Bruce Greville;
(d)Documents held in the file of the accountants to the Company, Shepherd Hensman.
[21] The defendants rely on the former Rule 8.24 High Court Rules on the basis that they say this is a matter which is to be dealt with under the old discovery rules. On this r 8.24 states:
8.24 Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a) to file an affidavit stating—
(i) whether the documents are or have been in the party's control; and
(ii) if they have been but are no longer in the party's control, the party's best knowledge and belief as to when the documents ceased to be in the party's control, and who now has control of them; and
(b) to serve the affidavit on any other party.
[22] The defendants must establish a belief that the party is in possession of a document or class of documents that relate to any matter in the proceeding. The test under the old rule for whether a document is relevant, in that it relates to a question in the proceeding, is set out in Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co:[2]
It seems to me that every document relates to matters in question in the action which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may — not which must — either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words ‘either directly or indirectly’ because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary if it is a document which may fairly lead him to a train of inquiry which may have either of those two consequences.
[2] (1882) 11 QBD 55 at 63.
[23] The concept of relevance is more expansive under the former discovery rules, in that a document will be discoverable if it may be relevant to any matter in question in the proceeding or which would commence a chain of enquiry leading to advancing a party’s own case or damaging the case of the other party. The recent amendments to the High Court Rules, which applied as at 1 February 2012 and
thereafter, changed the standard for discovery orders from the Peruvian Guano
approach however to a direct relevance test. The four categories of documents that are now discoverable under Rule 8.7 of the High Court Rules are:
(a) Documents on which the party relies;
(b) Documents that adversely affect that party’s own case; (c) Documents that adversely affect another party’s case; (d) Documents that support another party’s case.
[24] If proceedings are filed and discovery orders are in place before 1 February
2012, when the new rules took effect, discovery continues in accordance with the existing discovery order. However, if one of the parties wishes to amend an existing order, the Court can determine the application in accordance with the new discovery rules. Discovery in the present case commenced after 2nd December 2011 when a case management conference was held. Both parties then filed affidavits of documents on 30th January 2012, again before the commencement date for the High
Court Amendment Rules introducing the new test.[3] However, the present application
before me, as I see it, seeks to amend the existing discovery orders and thus it is to be determined according to the discovery rules currently in force.
[3] As noted, the relevant rules came into force on 1 February 2012. In respect of proceedings where discovery orders were in place before the commencement date, the Peruvian Guano standard continues to apply: see GDF I LLP v Melview (Kawarau Falls Station) Investments Ltd (in Rec) [2012] NZHC 1432.
[25] Turning now to the present discovery application itself, the defendants submit that all of the documents listed at [20] above have direct relevance to the issues to be decided at trial. In response, the plaintiff says he considers the documents sought to be entirely irrelevant to the issues in dispute he having already deposed that all relevant documents have been listed in his affidavit of documents.
[26] I will now turn to consider each of the four categories of documents sought by the defendants as outlined at [20] above.
Item one: records showing liquidator’s fees
[27] The defendants claim they are entitled to inspect documents that would reveal the liquidation fees that Mr Managh has charged the Company since it was put into liquidation. They say these ought to be discovered as they may be adverse to the plaintiff’s case, as they could show he has overcharged the Company for his services in conducting the liquidation. That finding could adversely affect his credibility and reliability, and would affect the quantum of damages he would be entitled to in the substantive proceedings.
[28] The defendants go on to contend that the time records may be relevant to the conversations that they had with the plaintiff subsequent to him being appointed liquidator, but before these proceedings were filed. The defendants are concerned they may have made admissions or disclosed information in those conversations that will have a bearing on their liability in these proceedings. They allege that the plaintiff’s time records would show the date and duration of the meetings and telephone calls that the plaintiff had with the defendants, and that information could adversely affect their case.
[29] In response, the plaintiff submits that the level of his fees as liquidator is simply irrelevant to a claim for breach of director’s duties under s 301 of the Companies Act, or a defence to that claim. The plaintiff characterises this request as a collateral attack on the liquidator’s fees, as it is suggested they “appear extraordinarily high”. He submits that any adverse affect on his credibility as liquidator is not relevant to the test for discoverable documents, which requires a connection between the discoverable documents and a matter in the pleadings.
[30] I do not consider the liquidator’s fees or time sheets to be directly relevant to a claim under s 301 of the Companies Act, unless it is alleged that the liquidator is in breach of his duty in conducting the liquidation.[4] However, that is not what the defendants are claiming here. They are simply relying on the possibility that the
plaintiff may have overcharged the company as relevant to the other issues in
dispute. If that is concerning the defendants, their remedy lies in s 284 Companies Act 1993, which allows a director, with leave of the Court, to apply to have the liquidator’s remuneration reviewed or fixed at a reasonable level.[5] If the Court decides that the level of remuneration paid to the plaintiff is unreasonable, it may order a refund.[6] However, the defendants are not pursuing a complaint under s 284 of over-charging here, but simply, it appears, want this category of discovery to undermine the plaintiff’s case generally. For that reason, I do not see these records as directly relevant to the issues in dispute, as they are unlikely either to be adverse to the liquidator’s claims against the defendants, or to bolster any defence they could be relying on.
[4] For example in failing to recognise debts owed by the company before distribution (Brown v Cowan (1912) 31 NZLR 1219) or in paying out a monetary obligation that was not legally enforceable (Re Home and Colonial Insurance Co Ltd [1930] 1 Ch 102).
[5] Companies Act 1993, s 284(1)(e).
[6] Section 284(1)(f).
[31] With regard to the defendant’s second submission, I accept that the contents of the phone conversations and meetings may have some relevance to the issues in dispute here, as information that the defendants disclosed about the Company before proceedings were instituted, presumably not anticipating that this would occur, may adversely affect the defendant’s case. However, I do not consider the liquidator’s time sheets as relevant to the content of these exchanges. All they might disclose is the date and possibly the duration of the discussions. The defendants as parties to those discussions must already know that they occurred, and as there are no notes or minutes of such meetings (that have so far been discovered), as I see the position, the time records will add nothing that would adversely affect or assist their case.
[32] There is to be no order made for discovery of the liquidator’s time records.
Item two: bank records of plaintiff ’s trust account
[33] The plaintiff has already discovered some bank records of his trust account, annexed to his affidavit dated 29 June 2012. The plaintiff it seems operated one trust account in respect of all liquidations he was managing, and did not open a separate trust account in respect of the Company’s liquidation. The discovered bank statements to date are an extract compiled by Mr Managh’s bankers, ASB Bank to
show only transactions relevant to the Company in that account. The defendants
request inspection of all bank records of the plaintiff’s trust account, as they say they are entitled to do their own reconciliation of payments made and received in the course of liquidation.
[34] In response, Mr Managh says that no trust account records are relevant to this litigation, and he simply provided the extract as an act of cooperation. I agree. Some records have been provided in any event. And, the relevance of these records, either under the old Peruvian Guano test or the new discovery test, is quite unclear here. In addition, records relating to the liquidation of other entities must be entirely irrelevant to this proceeding.
[35] There is to be no order made for discovery of these bank records.
Discussion
Item three: Records held by the defendants’ accountant in respect of the Company
[36] The accountants Shepherd Hensman acted for the Company and the defendants as its directors before the plaintiff was appointed as liquidator. They continue to act for the defendants. Both the defendants and the liquidator have inspected the records the accountants hold with respect to the Company. However, the defendants now seek orders that the liquidator takes those documents from the Shepherd Hensman offices and lists them all in a supplementary affidavit of documents. They say that the documents on file are of relevance to the issues in these proceedings, and as the plaintiff is legal custodian of them under ss 248 and
261 Companies Act 1993, he is required to list them.
[37] In reply, the plaintiff says that the order is unnecessary as the documents are available for inspection to both parties, and in fact they have already been inspected. The plaintiff claims that this particular request is simply an attempt by the defendants to add to the liquidator’s time and cost expended on discovery.
[38] Having considered all the submissions advanced to me by counsel for these parties here, I am not prepared to make any order for discovery of these records.
Inspection by both parties of the Shepherd Hensman documents as I understand it, has already occurred. To require simply for administrative purposes a full listing of all the Shepherd Hensman documents and files, which both parties have already seen, in my view is simply costly, wasteful and unnecessary. No order for discovery is to be made of these accountants’ records.
Item four: barrister’s files
[39] The final item is a request for the files of the barristers engaged in the plaintiff’s earlier proceedings against Mr Greville, which ultimately settled. Initially the plaintiff instructed Mr Gibson who, after being appointed to the District Court bench, passed the file to Mr Sullivan. All documents on both barrister’s files have been sent to the plaintiff from Wellington for review, and the plaintiff deposes that all relevant documents have already been discovered, including the solicitor’s file, the Court documents, Mr Greville’s brief of evidence, and the settlement deed. The defendants are now pursuing orders for discovery they say as they want to know which documents are held on the file, even if they ultimately will not be able to see the contents of the file due to legal privilege.
[40] It is possible that there might be documents on the plaintiff ’s file in respect of the 2009 litigation that may adversely affect or bolster the case of either party. However, the duty on the plaintiff as the maker of the list is to review the documents on file for the purposes of assessing relevance. Once he has listed those that are relevant and deposed to the completeness of the list, he has complied with his discovery obligations. The list is treated as conclusive unless there is evidence to show error or omission. Here it seems, Mr Managh has undertaken that review, and nothing by way of error or omission is put up by the defendants to require an order except that “the defendants are not prepared to simply accept Mr Managh’s word”. That has never been enough for a further discovery order to be made.
[41] For these reasons the application for discovery in respect of the plaintiff ’s file
is also refused.
Costs
[42] The successful plaintiff here seeks an order for increased costs on this discovery application on the basis he says that the defendants’ conduct in pursuing this application should attract an uplift from ordinary scale costs. As to this, any uplift on the standard rates of recovery needs to be justified under r 14.6(3)(b) of the High Court Rules which provides for orders of increased costs to be made if:
(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
(i) failing to comply with these rules or with a direction of the court;
or
(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or
(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or
(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or
(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding;
[43] The defendants’ application sought discovery of documents that were said to be either irrelevant to the central issues in the proceedings, or which had already been inspected by the defendants, or which may possibly have been legally privileged. The plaintiff has suggested (but there is no real evidence as to this before me) that at least in a major part the discovery application was designed to add to his discovery task, compounding the delay and the time and expense already incurred in these proceedings, and in the liquidation of the Company generally. In these circumstances he seeks an uplift of 25% on 2B costs here.
[44] By a reasonably fine margin however, I take the view here that this is not a case which justifies an uplift on standard scale costs to be awarded. I cannot say here that the defendants have failed to act reasonably in relation to this proceeding in pursuing this discovery application.
[45] Costs are therefore awarded to the plaintiff against the defendants on this discovery application on a category 2B basis together with disbursements (if any) as approved by the Registrar.
‘Associate Judge D.I. Gendall’
1