Mason & Meltzer as Liquidators of Global Print Strategies Limited (in liq) v Lewis HC Auckland CIV 2010-404-008

[2010] NZHC 2342

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-008

BETWEEN  KB MASON & JP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LIMITED (IN LIQUIDATION)

Plaintiffs

ANDCONWAY LEWIS First Defendant

ANDJOHANNA LEWIS Second Defendant

ANDCONWAY & JOHANNA LEWIS AS TRUSTEES OF THE ROCK TRUST AND THE ROLL TRUST

Third Defendants

Hearing:         7 October 2010

Appearances: C A Murphy for plaintiffs

P J Davey for the defendants

Judgment:      21 December 2010

JUDGMENT OF ALLAN J

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 11 am on Tuesday 21 December 2010

Solicitors:

Shieff Angland, Auckland  ca[email protected]

P J Davey [email protected]

KB MASON & JP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LIMITED (IN LIQUIDATION) V CONWAY LEWIS AND ORS HC AK CIV 2010-404-008  21 December 2010

[1]      The defendants are former directors of Global Print Strategies Ltd (in liq) (Global).   The plaintiffs are the liquidators of Global.   In that capacity they took steps  against  the  defendants  for  reckless  trading.     After  extensive  litigation (including  two  Court  of  Appeal  hearings)  the  liquidators  were  successful  in obtaining judgment against the defendants in the sum of $560,000, together with costs and interest.

[2]      In the present proceeding the liquidators seek to set aside under s 60 of the Property Law Act 1952 a transaction entered into in October 2004, whereby the first and second defendants sold a residential property at 95 Potter Road, Coatsville, Auckland, to themselves in their capacity as trustees of family trusts.

[3]      The defendants have filed a statement of defence and counterclaim.   In the counterclaim they allege that, in breach of their duties as liquidators, the plaintiffs allowed the principal creditor to dictate and/or influence the conduct of the earlier proceedings  against  the  defendants,  for  the  benefit  of  that  creditor  and  to  the exclusion of other creditors.   By way of counterclaim they seek an injunction restraining the plaintiffs from obtaining an order setting aside the 2004.

[4]      The liquidators now apply to strike out the counterclaim, on the basis that it discloses no cause of action against the plaintiffs which  can  succeed,  and/or is untenable as a matter of law, or alternatively that it amounts to an abuse of process.

[5]      In the alternative, if the counterclaim survives, the plaintiffs seek an order for security for costs.

Procedural history

[6]      In November 1999, the defendants became shareholders and directors in a print broking company that eventually became Global.   In October 2000, Global entered into a factoring agreement with Commercial Factors Ltd (Commercial Factors).  That agreement was negotiated by a Mr Graeme Grant, who had earlier

persuaded  the  defendants  to  take  an  in  interest  Global.    Regrettably,  Mr Grant thereafter   engaged   in   a   systematic   fraud,   which   involved   false   invoicing. Commercial Factors was a victim of Mr Grant’s behaviour.   Ultimately he was prosecuted, convicted and sentenced to a term of imprisonment.

[7]      Global  was  placed  in  liquidation  on  28  February  2002  by  shareholders’

resolution.  The plaintiffs were appointed liquidators by that resolution.

[8]      The  second  defendant,  Mrs  Lewis,  had  ceased  to  be  a  director  on

10 September 2001.  Mr Lewis was still a director as at the date of liquidation.

[9]      On  10  April  2003,  the  plaintiffs  commenced  proceedings  against  the defendants, in reliance on ss 134, 194, 300 and 301 of the Companies Act 1993.  At the time of the commencement of those proceedings, the defendants were registered as proprietors of the property at No.95 Potter Road.  The title was subject to an ASB mortgage.

[10]     On 3 June 2003, Azzurro Holdings Ltd (Azzurro) registered a caveat against the title.  Azzurro is owned by a trust associated with the first defendant’s brother, Mr Gary Lewis.  He is the sole director of Azzurro.  The caveatable interest arose pursuant to an unregistered mortgage dated 9 May 2003, granted by the first and second defendants to secure moneys advanced by Azzurro for the payment of legal fees incurred by the defendants in connection with the proceedings then on foot.

[11]     On 27 October 2004, the second defendant sold the property for $575,000 to two mirror trusts of which they are the trustees.   A month later, on 25 November

2004, Salmon J delivered a judgment dismissing the plaintiffs’ claim against the defendants.[1]   In December 2004, the plaintiffs appealed to the Court of Appeal.

[1] Re (Global Print Strategies (in liq) 2 NZCCLR 236 (HC).

[12]     On  17  March  2005,  the  first  and  second  defendants  registered  a  further transfer of the Potter Road property, with the result that separate one-half shares were thereafter owned by the defendants in their capacity as trustees of the separate mirror trusts.  For that purpose the ASB mortgage was discharged, and the Azzurro

caveat withdrawn.  Subsequently a new mortgage to the ASB was registered and a second caveat was lodged by Azzurro.

[13]     On 30 March 2006, the Court of Appeal delivered a judgment[2] reversing the decision of Salmon J and holding the defendants liable under s 135 and 194 of the Companies Act 1993 in respect of reckless trading and failure to keep accounts.  The Court of Appeal remitted the matter back to this Court to determine quantum questions under ss 300 and 301.

[2] Mason v Lewis [2006] 3 NZLR 225 (CA).

[14]     The quantum hearing took place before Stevens J who, on 1 October 2008, gave judgment against the first and second defendants in the sum of $1,261,330[3].

[3] Re Global Print Strategies (in liq) HC Auckland CIV-2003-404-936, 1 October 2008.

[15]     The first and second defendants appealed to the Court of Appeal against that judgment.  Pending appeal, the plaintiffs registered a final charging order against the property.

[16]     On  20  July  2009,  the  Court  of  Appeal  largely  upheld  the  decision  of

Stevens J, but reduced the quantum of the judgment to $560,000.[4]

[4] Lewis v Mason [2009] NZCA 306.

[17]     On 14 October 2009 the Supreme Court rejected the defendants’ application for leave to appeal to that Court.[5]

[5] Lewis v Mason [2009] NZSC 103.

[18]     This present proceeding was commenced on 23 December 2009.

Strike out principles

[19]     The principles applicable to strike out applications are well established and require little analysis.   They are summarised in Attorney-General v Prince.[6]    The jurisdiction to strike out is to be exercised sparingly and only in clear cases.  The causes of action must be clearly untenable before an order striking out the pleading will be justified.  Moreover, pleaded facts (whether admitted or not) are assumed to

be   true   unless   the   pleaded   allegations   are   plainly  speculative   and   without foundation.[7]

[6] Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.

[7] Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.

[20]     In the present case the liquidators have filed affidavits in which some aspects of the history of the litigation are set out, with particular reference to the alleged breaches of liquidator’s duties upon which the defendants rely.  Ordinarily the Court will not receive affidavit evidence on a striking out application, because the Court is unable to resolve in that context genuinely disputed issues of fact.  But evidence of undisputed matters is acceptable.   In the present instance the facts themselves are largely undisputed.   It is the inferences to be drawn from those facts upon which counsel differ.

[21]     In my view, given that the argument depended largely upon documentary material, this Court is in as good a position on the present strike out application to determine whether certain inferences might be available, as would the Court at trial.

A tenable cause of action?

[22]     Ms Murphy argues both that the defendants’ allegations of breach of duty on the part of the liquidators are speculative and lack any proper foundation, and that the counterclaim discloses no arguable cause of action and is untenable as a matter of law.

[23]     The particulars of the defendants’ counterclaim as they appear at paragraph

43 of the statement of defence read as follows:

42.The plaintiffs as liquidators owe duties to act and to appear to act independently, impartially and in the interests of the whole body of shareholders and creditors of Global Print.

Particulars

42.1The plaintiffs owe a duty not to act or appear to act in favour of one particular creditor in the exercise of their powers as liquidators:

42.2The plaintiffs owe a duty not to allow themselves to be dictated to by a particular creditor in the exercise of their powers as liquidators;

42.3The duties are inherent in the office of a liquidator of a company and arise as a matter of law.

43.      In breach of those duties:

43.1the plaintiffs have allowed the secured creditor, Commercial Factors Limited to dictate and/or influence the conduct of proceedings brought by them against the defendants;

43.2the plaintiffs have pursued proceedings against the defendants for the sole benefit of the secured creditor, Commercial Factors Limited.

Particulars

(a)      Global  Print  was  placed  into  liquidation  on  28 February

2002 and by letter of the same date, Commercial Factors Limited advised the plaintiffs that they would contact them to   initiate   proceedings   against   the   first   and   second defendants for reckless trading as it saw that as being the best chance of recovery of money due to it by Global Print;

(b)Commercial Factors Limited advised the plaintiffs to use its own solicitors, Grove Darlow to pursue proceedings against the first and second defendants;

(c)       As a result of the matters referred to in paragraphs (a) and (b) above, the plaintiffs instructed Grove Darlow to commence proceedings against the first and second defendants  for  reckless  trading  in  the  High  Court  at Auckland (CIV-2003-404-936) (the Proceedings);

(d)The   plaintiffs   took   little   part   in   the   conduct   of   the proceedings against the first and second defendants.

Particulars

The proceedings were filed on 10 April 2003 and the trial of those   proceedings   commenced   on   3   November   2004. Between those dates the plaintiffs themselves spent no time in  conducting the litigation  and  wrongfully delegated  the conduct of the proceedings to their employee, Lloyd Hayward, who himself spent only approximately 33 hours over that period in attending to the litigation.

(e)The plaintiffs, as appellants, took little part in the conduct of the  first  appeal  to  the  Court  of  Appeal  and  allowed  the appeal to be pursued for the sole benefit of Commercial Factors Limited.

Particulars

Commercial Factors insisted that new evidence be presented for the first appeal to the Court of Appeal against the advice of counsel for the plaintiffs, and that evidence was presented to the Court of Appeal;

Counsel for the plaintiffs sought an order from the Court of Appeal at the first appeal hearing that an appropriate sum for compensation against the defendants was $560,000, which meant  that  Commercial  Factors  Limited  was  the  only creditor likely to benefit from any order that was made.

(f)       As a result of the first appeal, the Court of Appeal ordered that the proceeding be referred back to the High Court to determine the quantum of the claim against the defendants up to a maximum sum of $560,000.   As at 30 June 2008

Commercial Factors Limited claimed that it was owed approximately  $1.15  million  in  the  liquidation  of  Global Print.  On or about 1 October 2008 the High Court made an order that the first defendant pay the sum of approximately

$1.2  million  and  the  second  defendant  pay  the  sum  of

$983,100 to the assets of Global Print.   The defendants appealed that judgment and the Court of Appeal made an order on 20 July 2009 that the defendants contribute the sum of $560,000 to the assets of Global Print.   As a result, the plaintiffs  are  limited  to  claiming  the  sum  of  $560,000 against the defendants, which is less than half the sum claimed   by   the   secured   creditor,   Commercial   Factors Limited as at 30 June 2008 and it is the only creditor that will benefit from any order that is made in this proceeding.

[24]     The duties pleaded in paragraph 42 of the amended statement of defence and counterclaim are said to be owed to the shareholders and creditors of Global.  There is  no  allegation  that  the  plaintiffs  owed  a  similar  duty to  the  directors  of  that company.  During the course of argument, Mr Davey was inclined to contend for a duty on the part of a liquidator that extended to directors as well as shareholders and creditors.  For that proposition he relied upon a passage in Re Contract Corporation

(Gooch’s Case):[8]

[8] Re Contract Corporation, (Gooch’s Case) (1872) 7 Ch App 207, at 211.

In truth, it is of the utmost importance that the liquidator should, as the officer of the Court, maintain an even and impartial hand between all the individuals whose interests are involved in the winding-up.  He should have no leaning for or against any individual whatever.  It is his duty to the whole body of shareholders, and to the whole body of creditors, and to the Court, to make himself thoroughly acquainted with the affairs of the company;  and to suppress nothing, and to conceal nothing, which has come to his knowledge

in the course of his investigation, which is material to ascertain the exact truth in every case before the Court.

[25]     As I understand his argument, Mr Davey places reliance upon a reference in that passage to an obligation to maintain “ …an even and impartial hand between all the individuals whose interests are involved in the winding-up”.

[26]     Mr Davey argues that that passage is wide enough to include a director.  It serves as a somewhat fragile foundation for the argument, and it is difficult to see how the pleaded duties might arise in respect of directors in a case such as this.

[27]     For the purposes of the present application I assume however in favour of the defendants that a separate duty may be owed by the liquidators to the directors of Global.  The liquidators certainly owe a duty to shareholders and creditors and also to the Court to act impartially and independently.   The character of that duty was usefully summarised in Re Allebart Pty Ltd (in liq).[9]   There, Street J said:

[9] Re Allebart Pty Ltd (in liq) [1971] 1 NSWLR (NSWSC) 24 at 28.

Moreover, I see no reason to criticize on the grounds of propriety the arrangement under which a creditor provides money or indemnity to cover the expenses of a specific step in the winding up, such as the bringing of named   proceedings   or   the   carrying   out   of   named   examinations. Arrangements such as these are commonplace, and, if anything, they are to be encouraged, as very frequently some such arrangement enables the liquidator to carry out his duties more thoroughly or comprehensively than would otherwise be the case (cf. Companies Act, 1961, s. 292 (10)).

I have already stated my view that in no degree or in no respect is the conduct  of  the  petitioner in  the  present  windings  up  open  to  legitimate criticism. It has, quite justifiably, urged on the official liquidator and made funds available to him. This involves, however, the ever-present risk that the liquidator may either yield or appear to yield to partisan considerations in submitting  to  the  urgings  of  a  creditor  in  conjunction  with  accepting financial assistance from a creditor. A liquidator is bound to be on guard lest he compromise his position of independence and impartiality in all respects in the discharge of his functions as an officer of the Court administering the winding up of a company. Not only is it his prerogative to decide what steps should be taken, but it is his duty to exercise himself, according to the dictates of his own opinions, what should and what should not be done in the course of any given winding up. It is for him to decide what steps are to be taken, and when, how and by what means such steps are to be taken. Where he draws upon financial assistance from a creditor, it is incumbent upon him to  ensure  that  he  does  not  place  in  jeopardy  his  independence  in  the discharge of his duties. It is indispensable that in point of substance the liquidator's independence should be preserved; and it is undesirable that a liquidator should permit a situation to develop in which it might appear that

he has yielded up in any degree whatever his exclusive independent control in the decision-making processes and administration of a winding up.

[28]     A liquidator must both be in fact and appear to be independent and impartial, and must avoid appearing to act as the mouthpiece of a particular creditor;[10].

[10] Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488 at 491-492.

[29]     In Leucadia National Corp v Wilson Neill Ltd,[11] Fisher J, citing the foregoing authorities,  confirmed  that  the liquidator’s  duty is  to  act  impartially and  in  the interests of the whole body of shareholders, and the whole body of creditors.

[11] Leucadia National Corp v Wilson Neill Ltd HC Auckland CP365/94, 12 July 1996 at 18.

[30]     I turn to the separate allegations.  First the defendants complain that on the very date of liquidation, 28 February 2002, Commercial Factors contacted the liquidators with respect to the institution of proceedings against the first and second defendants for reckless trading.  The letter reads as follows:

Re Global Print Strategies Limited

Dear Lloyd

Following  on  from  our  telephone  conversation  please  find  enclosed  the information you require:

1.        Debt Factoring Facility Agreement

2.        All Obligation Debenture

3.        The balance outstanding in the debtors’ ledger is $406,778.06.  ATB

enclosed.

4.We are holding in retention a sum of $166,039.74 which can be offset against the above less any interest or cost incurred from the

1.02.2022 by us.

5.You are aware of the circumstances surrounding this company and the  issuing  of  fraudulent  invoices  to  us  to  the  tune  of  some

$397,975.69.  We are victims of a conspiracy to defraud as not only

were the fraudulent invoices issued by GPS but confirmed as valid and owing by the directors of Partner Print Limited.  Collusion being evident and confirmed.

However, we see the best chance of recovering the moneys due to us being a “reckless trading” case against the directors and more particularly Mr Conway Lewis and his wife Joanna.  Joanna Lewis was a director up to late last year.   The company is/was insolvent

and had been trading as such with the knowledge of the directors for some time.

According to Grove Darlow after reviewing various documents in our possession and taking consideration of the recent trend in case law on this subject our chances are good.

I will contact you next week as we are keen to get the ball rolling on this matter.  As mentioned to you we wish to use Grove Darlow for not only are they our normal solicitors but [they] are pursuing a similar case at present which could save in research time and cost etc.

If you require further information please call.

[31]     Of itself that letter is both unexceptional and unexceptionable.  A creditor is entitled to communicate with the liquidators for the purpose of pressing upon them the desirability of pursuing the directors.

[32]     Complaint is also made of the fact that the liquidators took up the suggestion of Commercial Factors that they ought to instruct Grove Darlow, already acting for Commercial Factors in other similar proceedings.   The liquidators have given evidence that the ultimate use of Grove Darlow was their choice and that they themselves had used Grove Darlow on unrelated matters.  It is interesting to note in passing that the mere fact that the liquidator and the petitioning creditors had the same solicitors was described in Re Allebart Pty Ltd as “innocuous and indeed,

commonplace”.[12]    Again, the fact that the liquidators did instruct Grove Darlow

could not of itself amount to a breach of any duty owed by the liquidators to the defendants in their capacity as directors.   Neither can the fact that Grove Darlow, instructed  by  the  plaintiffs,  did  commence  proceedings  (ultimately  successful) against the defendants for reckless trading.

[12] Re Allebart Pty Ltd (in liq) at 29.

[33]     Next there is a complaint that the plaintiffs took little part in the conduct of the proceedings against the first and second defendants.  Particular reliance is placed by the defendants on the fact that the plaintiffs themselves recorded very little time for their professional work in the liquidation, and that only approximately 33 hours was recorded by an employee who had the day to day carriage of the liquidation.

[34]     The liquidators have filed affidavits in which they confirm that they retained personal responsibility for the conduct of the proceedings against the defendants at all stages.   They point out that this was a liquidation without funds, Commercial Factors being responsible for the payment of legal costs as they arose.  There was no proper economic basis upon which the liquidators personally could be justified in spending a great deal of time on the liquidation or the proceedings.   They had delegated to their employee, Mr Hayward, a great deal of the liaison work, but for the most part they were content to rely upon their solicitors who were experienced in litigation of this type.

[35]     In my opinion, the defendants’ complaint about the relative inactivity of the liquidators themselves is groundless, there being no assets in the liquidation, and having regard to the character of the proceedings, it is not tenable to suggest that the plaintiffs may have been in breach of their duty to be impartial simply by permitting the solicitors to undertake the work without constant supervision.

[36]     The defendants next complain that the plaintiffs as appellants took little part in the conduct of the first appeal to the Court of Appeal, and allowed the appeal to be pursued for the sole benefit of Commercial Factors.  They plead also that Mr Haydon of Commercial Factors sought to present evidence at the time of the hearing of the first appeal to the Court of Appeal.   Mr Meltzer says that the evidence concerned was not filed in the Court of Appeal, but was first presented at the second (quantum) hearing in the High Court before Stevens J, who preferred the  evidence of Mr Haydon to that of the defendants on the specific issues addressed.

[37]     The mere  fact  that  a  creditor (even  a principal  creditor)  takes an  active interest in the conduct of the proceedings and seeks to adduce evidence which would be of assistance to the liquidator’s case, could not possibly justify a finding that the plaintiffs had improperly ceded the carriage of the proceedings to Commercial Factors.   A reading of the pleadings and judgments indicates that Mr Haydon’s evidence was simply a minor (but useful) contribution to the case advanced by the plaintiffs.

[38]     The duty resting on the liquidators is to exercise an independent mind in relation to the conduct of the proceedings and to act impartially.  That duty could not tenably be argued to preclude them from reliance upon creditor evidence, where appropriate.

[39]     Finally, the defendants complain that during the course of the first appeal the Court  of  Appeal  referred  the  proceeding  back  to  the  High  Court  for  the determination of quantum questions, but imposed a cap of $560,000 upon the defendants’ liability.   As at 30 June 2008, Commercial Factors was owed approximately $1.15 million in the liquidation of Global.

[40]     Although Stevens J directed the first defendant to contribute approximately

$1.2 million and the second defendant to contribute approximately $983,000 to the assets of Global, that judgment was reversed on appeal, the Court of Appeal determining that the cap of $560,000 imposed at the first hearing before the Court of Appeal constituted a continuing cap upon the liability of the first and second defendants.

[41]     These circumstances gave rise to two separate arguments at the hearing of the strike out application.  First, Mr Davey contends that there is no evidence that the liquidators  themselves  approved  the  voluntary  cap,  accepted  by counsel  for  the present plaintiffs in the Court of Appeal.  Second, he points out that the effect of the cap is to preclude any creditor, save for Commercial Factors, from taking any benefit from the fruits of the judgment obtained by the plaintiffs.

[42]     The result of the cap is accordingly, Mr Davey contends, that the liquidators have failed to act impartially, in that they have preferred the interests of Commercial Factors (a secured creditor) to those of unsecured creditors.

[43]     It must be said that it is a somewhat remarkable proposition on behalf of the defendant  directors,  that  the  liquidators  are  in  breach  of  a  duty owed  to  those directors by limiting the amount of their claim against the directors.  Presumably the contention is that, had the liquidators complied with their duty, they would have secured judgment against the first and second defendants for a significantly greater

sum.  But of course the true position is as outlined by O’Regan J, during the course of the second appeal, where he said:[13]

[101] It may well be that Commercial Factors is the only creditor which benefits from the proceeding. But if that is the case, it will be because of the operation of the rules applying to distributions from companies in liquidations, which require that debts owed to secured parties be paid in priority to those owed to unsecured creditors rather than because the Court makes an order in its favour. As noted at [4], the order made by the Court under s 301 should be an order to contribute a sum to the assets of the company, reflecting the fact that the director has breached a duty owed to the company.  In  this  case,  Global  Print is  the  beneficiary of  the  order: the creditors benefit indirectly in accordance with the rights they have as creditors. We therefore do not attach the same significance to the fact that Commercial Factors will, as a matter of practicality, be the only party which receives a payment from the company as a result of the litigation, as Mr Davey asks us to.

[13] Lewis v Mason [2009] NZCA 306 at [101].

[44]     In my view, it is impossible to identify from the pleaded particulars, taken either singly or together, a tenable case for breach by the liquidators of their duties. The evidence suggests that, throughout, Commercial Factors took a continuing interest  in  the  conduct  of  the  proceedings  and  provided  a  certain  amount  of assistance as required.  But this case falls well short of reaching the threshold of an arguable case.

[45]     Moreover, there is no discernible financial loss to the defendants as a result of what occurred.  To be fair to Mr Davey, he does not rely upon the existence of conventional losses.   Rather, his argument is that this Court, in its inherent jurisdiction, ought to be astute to control its own processes, and that it may do so by adopting an approach which resembles the administration of the Court’s jurisdiction to punish for contempt.

[46]     In other words, the defendants do not have to show causation and loss.  The duty is fiduciary in nature and if there is a breach, the Court is at liberty to fashion a remedy that meets the case.

[47]     In  most instances of a  proved breach,  an immediate remedy will be the removal of the liquidators concerned.[14]

[14] Re Allebart Pty Ltd (in liq) at 30-31

[48]     Mr Davey contends that it would be open to the Court at trial to determine that there had been a breach of the liquidator’s duties, and that the appropriate sanction would be the grant of the injunction sought by the defendants (effectively a stay) so preventing the liquidators from attempting to enforce their judgment against the defendants.

[49]     I reject that argument.  I assume for the time being that the defendants may be able to construct a separate duty owed by the liquidators to them as directors, as distinct from their acknowledged duty to shareholders and creditors.  But the alleged breaches of duty, all of which are in my view unarguable, are breaches of duty owed to the creditors.

[50]     There is no arguable basis upon which it would be proper to permit the defendants to contend at trial that, despite the ultimate findings against them, they should nevertheless escape the consequences of the judgment of the Court of Appeal, because the liquidators are in breach of a duty owed to creditors, being the very persons intended take the benefit of the judgment.   The fact that in this case Commercial Factors may be the only creditor to take the benefit is, in my view, beside the point.

[51]     Moreover, I reject the analogy Mr Davey draws with the law relating to contempt.  To adopt the approach for which he contends would be to impose upon liquidators a burden that would be intolerable at a practical level, and which is simply unnecessary from the point of view of legal principle.

[52]     In my opinion, the argument mounted by the defendants is untenable, and the counterclaim must be struck out.

Abuse of process

[53]     Ms Murphy argues that the counterclaim is not only untenable, but it also amounts to an abuse of process, in that the matters pleaded in the counterclaim were known to the defendants during the course of the earlier litigation, and they ought to have been raised at that time.  It is well settled that where issues are so clearly part of

the subject matter of earlier litigation, that they could and ought to have been raised at that time, it will be an abuse of process to raise such issues for the first time in a new proceeding.[15]

[15] Fraser v Robertson [1991] 3 NZLR 257 (CA) at 260; Yat Tung Investments Co ltd v Dao Heng Bank Ltd [1975] AC 581; Shiels v Blakeley [1986] 2 NZLR (CA) 262 at 270; Reid v New Zealand Trotting Conference [1984] 1 NZLR 8 (CA) at 13.

[54]     The principle is related to, but not identical with, the prohibition against collateral challenges to an earlier judgment of the Court,[16]  and a challenge to a subsisting criminal conviction, which will ordinarily be prohibited by reason of the risk  of  inconsistent  determinations  as  to  guilt,  which  would  in  turn  destroy confidence in the criminal justice system.

[16] Hunter v Chief Constable of the West Midlands Police [1982] AC 529.

[55]     Collateral challenges to civil proceedings will not always be abusive;   the different systems of error correction provided for in civil and criminal proceedings mean that it may often not be an abuse of process to impugn a result in earlier civil proceedings.[17]

[17] Lai v Chamberlains [2007] 2 NZLR 7 (SC) at [70]-[71].

[56]     Here it is a matter of record that:

a)       The defendants knew that Commercial Factors wished to pursue the defendants for breaches of directors’ duties from as early as April

2002;

b)The defendants became aware of the 28 February 2002 Commercial Factors’ letter to the liquidators in August 2007 (so the matter could have been raised before Stevens J);

c)       Counsel for the defendants cross-examined Mr Meltzer during the June 2008 quantum hearing as to the time spent on the liquidation, and in particular upon the influence of Commercial Factors on the conduct of the proceeding by the liquidators;

d)       The defendants knew from 2002 that Grove Darlow had acted for

Commercial Factors as well as the liquidators;

e)       The defendants knew since at least November 2004 that Commercial Factors may be the only recipient of a damages award, because they asserted at the first Court of Appeal hearing that that fact was relevant to their liability;

f)         The defendants knew from an early time that there was a funding agreement between Commercial Factors and the liquidators.   They made two unsuccessful applications for discovery of the funding agreement;

g)       Counsel for the defendants cross-examined Mr Meltzer in respect of the funding agreement during the first trial;

h)Counsel for the defendants was given access to a full copy of the funding agreement on 24 May 2007, and was expressly invited to raise any concerns arising from that inspection.  None were so raised, nor were any raised with the Court;

i)Counsel   for   the   defendants   cross-examined   Mr   Meltzer   and Mr Haydon of Commercial Factors in respect of issues concerning funding and the control of the proceeding during the June 2008 quantum hearing.   Both Mr Meltzer and Mr Haydon independently rejected allegations of control or influence by Commercial Factors over the liquidators.

[57]     It is plain, in my view, that the alleged breaches of duty now relied upon by the defendants are based on matters of fact known to the defendants at various stages of the earlier proceedings, in time for the allegations now made to have been raised in those proceedings.   Indeed, as appears from the list set out above, most of the present contentions were in fact raised in those proceedings, and some were the subject of cross-examination.

[58]   Accordingly, the defendants were in a position to mount in the earlier proceedings the claim now made in the present counterclaim.   The fact that the hearing before Stevens J was a quantum hearing could not possibly have precluded the defendants from raising their present argument if (as the defendants contend) the conduct of the liquidators amounted to an abuse of process deserving the imposition of sanctions equivalent to those available for contempt.

[59]     In other words the present counterclaim, or something equivalent to it, could and should have been raised earlier.  It is, in my view, an abuse of process to raise it now.

[60]     For that separate reason, I conclude that the counterclaim must be struck out.

Security for costs

[61]    The plaintiffs seek an order fixing security for costs on the defendants’ counterclaim, but only if it should survive the present strike out application.   It is accordingly unnecessary to consider the alternative application for security.

Conclusion

[62]     For   the   foregoing  reasons   the   plaintiffs’   application   succeeds.     The defendants’ counterclaim is struck out.  The plaintiffs are entitled to costs.  Counsel may file memoranda if they are unable to agree.

C J Allan J