McCullagh v Robt. Jones Holdings Limited
[2017] NZHC 1704
•21 July 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-3475 [2017] NZHC 1704
UNDER Sections 292, 294 and 295 of the
Companies Act 1993
IN THE MATTER
of the liquidation of Northern Crest
Investments Limited (In liquidation)BETWEEN
ANTHONY JOHN MCCULLAGH AND STEPHEN MARK LAWRENCE Applicants
AND
ROBT. JONES HOLDINGS LIMITED Respondent
Hearing: 19 - 20 June 2017 Appearances:
B P Keene QC and L M Van for the applicants
D G Chesterman for the RespondentRuling:
20 June 2017
Reasons:
21 July 2017
REASONSFOR RULING OF GORDON J [Cross-examination]
This judgment was delivered by me on 21 July 2017 at 3.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors: Anthony Harper, Auckland
Gillespie Young Watson, Lower Hutt
Counsel: B Keene QC, Auckland
D Chesterman, Auckland
MCCULLAGH v ROBT. JONES HOLDINGS LTD [2017] NZHC 1704 [20 June 2017]
[1] Northern Crest Investments Ltd (in liquidation) was put into liquidation by order of this Court on 2 June 2011.1 The applicants in this proceeding, Messrs McCullagh and Lawrence, were appointed liquidators.
[2] The liquidators have made an application under s 294 of the Companies Act
1993 (CA93) to set aside payments received by the respondent company as voidable payments under s 292 of the CA93.
[3] In the course of cross-examining Mr Lawrence, Mr Chesterman sought to question him regarding a conversation which he had with a Mr Michael Reeves. That conversation was apparently secretly recorded by Mr Reeves and a transcript of the recording also made.
[4] Mr Keene QC objected to the proposed cross-examination.
[5] After hearing argument I ruled that Mr Chesterman could not cross-examine on this issue. These are the reasons for my ruling. But first some background is required. There are three previous judgments that I need to refer to.
[6] In December 2011 Heath J heard an application by Manifest Capital Management Pty Ltd challenging the liquidators’ rejection of its proof of debt in the Northern Crest liquidation.
[7] Manifest also applied to remove Messrs McCullagh and Lawrence as liquidators of Northern Crest. In support of that application it filed an affidavit of Mr Reeves. The liquidators sought an order that his affidavit be ruled inadmissible on the grounds that it referred, improperly, to without prejudice communications between Mr Reeves and Mr Lawrence.
[8] It is the aspect of the judgment of Heath J relating to that affidavit and the issue of privilege that is relevant here. The following paragraphs of the judgment set
out the background and the legal issue:2
1 Northern Crest Investments Ltd v Haywood HC Auckland CIV-2010-404-774, 2 June 2011.
2 Manifest Capital Management Ptd Ltd v Lawrence HC Auckland CIV-2010-404-7741,
20 December 2011.
[48] Mr Reeves is a company director who lives in Wellington. He deposes that, before its liquidation, he had provided advice on corporate governance and structuring issues to directors of Northern Crest. Since the liquidation, he has been involved in correspondence and discussions with the liquidators of Northern Crest, particularly Mr Lawrence.
[49] Mr Reeves has filed an affidavit in support of Manifest’s application to remove the liquidators. In it, he gives evidence of the content of discussions with Mr Lawrence, even though he accepts that they took place, by agreement, on a “without prejudice” basis.
[50] Ordinarily, such communications are privileged and cannot be used in subsequent proceedings3 against a person who makes an admission contrary to his or her own interest. However, the privilege may be overridden if a prima facie case were established that the communication was made or received “for a dishonest purpose”.4
…
[55] During the course of his closing submissions, Mr Stewart disclosed that Mr Reeves had made a contemporaneous audio recording of his discussions with Mr Lawrence and that it had been transcribed. No mention of this recording is made in Mr Reeves’ affidavit.
…
[64] It is unnecessary to set out Mr Reeves’ allegations in detail. I characterise his evidence as seeking to demonstrate that, during the course of the discussions, Mr Lawrence was prepared to act in a manner inconsistent with his duties to creditors and the Court by seeking a payment of money ($850,000) in return for not proceeding with any investigation.
[9] At [73] to [79] of the judgment there is a detailed analysis of the law and discussion of whether, on Mr Reeves’ affidavit,5 Mr Lawrence acted for a dishonest purpose, in terms of s 67(1) of the Evidence Act 2006.
[10] Heath J held that whether the test of “conscious deception or sharp practice” or the test of “fraud, sham or trickery” was adopted, Mr Reeves’ affidavit did not go far enough to demonstrate either. Accordingly privilege was not overridden and the liquidators’ application to rule Mr Reeves’ affidavit inadmissible was granted.
[11] The second judgment I mention is that of Associate Judge Bell in McCullagh v Robt. Jones Holdings Ltd.6 Notwithstanding the fact that discovery is not available
3 Evidence Act 2006, s 57(1).
4 Ibid, s 67(1).
5 Heath J did not consider the recording or the transcript of the recording.
6 McCullagh v Robt. Jones Holdings Ltd [2015] NZHC 1462, (2015) 22 PRNZ 615.
as of right in an originating application, the liquidators had apparently disclosed over
1400 pages of documents.7 The respondent however sought further documents including all documents from the Manifest proceeding in the liquidators’ control including the affidavit of Mr Reeves. The application was refused.
[12] The respondent appealed. It is apparent from the decision of Downs J on appeal that the respondent was also seeking discovery of the recorded conversation between Mr Reeves and Mr Lawrence and the related transcript.8 Downs J recorded the respondents contention that the credibility of the liquidators was relevant to the determination of the case (the abuse of process argument).
[13] In determining that Associate Judge Bell did not err, Downs J said:
[55] I am satisfied the Judge did not err:
(a) There is a clear line of authority (sic) discovery directed exclusively at witness credibility is impermissible.
(b) While it is true Associate Judge Matthews in Domenico Trustee Ltd v Tower Insurance Ltd concluded otherwise, Mander J has subsequently described that decision as involving “highly unusual and rare” facts. Moreover, discovery applications framed in connection with witness credibility may often be speculative and oppressive. So, assuming without deciding Domenico Trustee Ltd represents an accurate statement of the law, there is a need to keep this doctrine firmly in check.
(c) The term “credibility” is not recognised by the Evidence Act. This is not to assert evidence in relation to credibility is not admissible under the Act, but rather to be mindful of the conceptual basis upon which it is admitted. Evidence a witness has been dishonest in connection with their testimony is of course relevant and admissible in terms of s 7 of the Evidence Act. But a contention a witness has a disposition to be dishonest constitutes veracity evidence pursuant to s 37 of that Act. And, such evidence must be substantially helpful in order to be admissible. Different again are challenges to witness reliability.
(d) The contention Mr Lawrence has given unreliable expert opinion evidence is a distinct proposition from the proposition he has a tendency to be dishonest. The former may be assessed by conventional challenge in terms of cross-examination or contrary expert evidence, a point the
7 At [2].
Associate Judge made. But as observed, veracity evidence must be substantially helpful in order to be admissible. And, the greater the likelihood such evidence would entail a trial within a trial, the greater the likelihood the evidence will not be substantially helpful.
(e) While these considerations are directed at admissibility rather than the antecedent question of discovery, materiality must be assessed in part by the likelihood admissible evidence will result.
(f) Added to these difficulties is the fact Heath J concluded the conversation between Mr Lawrence and Mr Reeves was privileged, and not in the advancement of a dishonest purpose. Consequently, RJH is seeking discovery of material in relation to which a Judge of this Court has concluded is privileged.
(g) And if this were not enough, the relevance of this chapter is at best peripheral.
(citations omitted)
[14] To try and get over the difficulties that these decisions pose in relation to cross-examination on the conversation, Mr Chesterman relied on a passage in Heath J’s decision as follows:9
… It is possible that, at trial, cross-examination of Mr Lawrence (in the light of full contextual information) might extract evidence that would meet the statutory threshold. It would then be open for the cross-examiner to pursue the issue with Mr Lawrence and for Mr Reeves to be called by way of rebuttal, if there were differences of fact as to what was said.
[15] Mr Chesterman made his case on the basis of the summary of the affidavit of Mr Reeves’ evidence in the judgment of Heath J.10 He submitted that he had laid the necessary foundation for a dishonest purpose to enable him to open this issue in cross-examination. He said that Mr Lawrence had conceded under cross- examination that he suspected that the directors and/or management of Northern Crest were responsible for the destruction of company records. He also said it was apparent from the cross-examination that Mr Lawrence suspected that at least Mr
Eakin, Executive Director of Northern Crest, may have been responsible for providing false information. Mr Chesterman also said that Mr Lawrence referred to
the potential for the records having been altered.
9 Manifest Capital Management Ptd Ltd v Lawrence, above n 2, at [80].
[16] Mr Chesterman referred to the following provisions in the CA93: s 377 (false statements); s 378 (fraudulent use of destruction of property); s 379 (falsifying records); s 380 (conduct which relates to carrying on a business fraudulently or dishonestly incurring debt). All these sections are listed under s 373 which refers to offences and penalties. He then referred to the duties of a liquidator under s 258A of the CA93 to report suspected offences. That section provides:
258A Duty to report suspected offences
(1) A liquidator of a company who considers that an offence that is material to the liquidation has been committed by the company or any director of the company against this Act or any of the following Acts must report that fact to the Registrar:
…
(5) A liquidator who fails to comply with subsection (1) or (3) commits an offence and is liable on conviction to the penalty set out in section
373(2).
[17] I respectfully adopt the analysis by Heath J of the law and tests in relation to
setting aside privilege on ‘dishonest purpose’ grounds as set out in his judgment:
[73] Before the Evidence Act codified the circumstances in which a prejudice privilege might be overridden on the grounds of “dishonest purpose”, the object of the exception had been examined by both this Court and the Court of Appeal, in Gemini Personnel Ltd v Morgan and Banks Ltd. While Gemini concerned legal professional privilege, s 67(1) extends both to that and the without prejudice privilege. The principles relating to “dishonest purpose” remain the same, whichever privilege is in issue. I examined the ambit of the exception in Fullerton-Smith v Fullerton-Smith and much of what follows, by way of legal analysis, is taken from that judgment.
[74] At first instance, in Gemini, Laurenson J attempted to identify the ambit of the “fraud” exception to privilege. While the cases that precede the Act speak of “fraud” rather than “dishonest purpose”, nothing turns on that, for present purposes. Laurenson J said:
[68] The question is therefore, to determine, within the area of non-criminal fraud, the nature of the fraud which is sufficient to warrant removal of the protection of privilege. As I have already indicated, in my view, the answer to this is supplied by a consideration of whether or not the fraudulent conduct, eg breach of a fiduciary duty, is attended by dishonesty, ie conscious deception or sharp practice. In other words three elements are required before privilege can be excluded:
(a) The conduct must be prejudicial to the interests of another; and
(b) Sufficient to attract a civil remedy; and
(c) Be attended by dishonesty, ie conscious deception or sharp practice.
[69] On my analysis such a definition would not remove the protection of privilege in any case where a client quite legitimately sought advice in relation to breaching a contract or even committing a tort, even if the advice if acted upon, subsequently proved to be incorrect.
[75] On appeal, the Court of Appeal took, as its definition, a passage from O’Rourke v Darbishire cited with approval in Matua Finance Ltd v Equiticorp Industries Group Ltd, in which Viscount Finlay said:
This is clear law, and, if such guilty purpose was in the client's mind when he sought the solicitor's advice, professional privilege is out of the question. But it is not enough to allege fraud. If the communications to the solicitor were for the purpose of obtaining professional advice, there must be, in order to get rid of privilege, not merely an allegation that they were made for the purpose of getting advice for the commission of a fraud, but there must be something to give colour to the charge. The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact. It is with reference to cases of this kind that it can be correctly said that the Court has a discretion as to ordering inspection of documents. It is obvious that it would be absurd to say that the privilege could be got rid of merely by making a charge of fraud. The Court will exercise its discretion, not merely as to the terms in which the allegation is made, but also as to the surrounding circumstances, for the purpose of seeing whether the charge is made honestly and with sufficient probability of its truth to make it right to disallow the privilege of professional communications. In the present case it seems to me clear that the appellant has not shown such a prima facie case as would make it right to treat the claim of professional privilege as unfounded. (my emphasis)
[76] The issue was re-considered by Kós J, in Red Bull GMBH v Manhass Industries Ltd. In that case, the plaintiffs suspected that two representatives of the defendants were (as Kós J put it) “collectively cooking up a new revocation application” in direct breach of an obligation under a settlement agreement in respect of a disputed trademark. The Judge referred to the “very limited exception” where a communication is made or received “for a dishonest purpose”. Referring to Laurenson J’s articulation of the test in Gemini as “perhaps less stringent”, Kós J suggested that “fraud, sham or trickery” was required to defeat the privilege. I tend to agree with Kós J’s formulation, which appears more nearly to capture the sentiments expressed by Viscount Finlay that were cited with approval by the Court of Appeal in Gemini.
[77] Does Mr Reeves’ affidavit go far enough either to demonstrate “conscious deception or sharp practice” (Laurenson J’s approach in Gemini) or “fraud, sham or trickery” (Kós J’s approach)? In this case, nothing turns on the precise test because I am satisfied that Mr Reeves’ evidence does not meet either. Although his evidence is uncontradicted by a sworn statement from Mr Lawrence, I need to be satisfied that it provides a plausible foundation for a claim of “dishonest purpose” before I can act on it. I am not so satisfied. In my view, when viewed critically, there is much scope for doubt about the nature and extent of Mr Reeves’ assertions of what was said between Mr Lawrence and himself.
[78] My main concerns stem from what Mr Reeves has omitted from his affidavit, rather than what is actually in it. Necessarily, an affidavit dealing with discussions of this type is selective in nature. I am concerned that Mr Reeves did not disclose his covert recording of the meeting, or the consequent preparation of a transcript. It would have been easy for the transcript to have been exhibited to Mr Reeves’ affidavit. That would have provided (subject to any disputes Mr Lawrence may have raised about its accuracy) a full record of the meeting. Its absence leads me to infer that the content of the affidavit is unlikely to provide sufficient contextual information to ascertain the true nature of Mr Lawrence’s comments.
[79] An illustration of my concern is the discussion about the Deed of Company Arrangement. Termination of the liquidation is a consequence of execution of a Deed of Company Arrangement. There could be nothing improper in a liquidator identifying an amount that would be required to be paid to meet the costs and expenses of the liquidation (including his or her own fees) as part of the process of determining whether to proceed in that way. While the amount allegedly mentioned by Mr Lawrence is very high, by then there had been work undertaken in Australia and three hearings in the Federal Court of Australia, as well as the liquidators’ activities in New Zealand. These concerns reflect the observations of Viscount Finlay, in O’Rourke v Darbishire, as approved by the Court of Appeal in Gemini. I cannot rule out the possibility, even on Mr Reeves’ evidence, that the discussions took place in that context. In that situation, I am not prepared to act on Mr Reeves’ affidavit to find that Mr Lawrence acted for a “dishonest purpose”, in terms of s 67(1) of the Evidence Act.
(citations omitted)
[18] In my view the evidence referred to in [15] above falls well short of establishing either “conscious deception or sharp practice” or “fraud, sham or trickery” on the part of Mr Lawrence so as to enable a without prejudice privilege to be overridden. The necessary foundation has not been laid.
[19] To bolster his argument Mr Chesterman referred to the point that had been made on behalf of the liquidators that the respondent’s defence of the application had prevented any ability for the liquidators to be able to make a distribution to creditors in the liquidation. He went on to say the voidable claim against the respondent was
filed in July 2011, and the meeting between Mr Lawrence and Mr Reeves was in September 2011. The judgment of Heath J indicates that most of the $850,000 had already been incurred in fees by that date. Mr Chesterman says that is relevant because even if the respondent had paid the full $751,941.52 claimed as voidable payments back in 2011, it would not have been distributed to creditors in any event.
[20] That is a make-weight argument which does not assist on the issue of privilege, and is a submission that can be made without cross-examination on the conversation with Mr Reeves.
Conclusion
[21] The necessary foundation to override the ‘without prejudice’ privilege had not been laid..
Gordon J
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