McCullagh v Robt Jones Holdings Ltd
[2015] NZHC 1462
•26 June 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-3475 [2015] NZHC 1462
IN THE MATTER OF the liquidation of NORTHERN CREST
INVESTMENTS LIMITED (IN LIQ)
BETWEEN
ANTHONY JOHN MCCULLAGH AND STEPHEN MARK LAWRENCE Applicants
AND
ROBT. JONES HOLDINGS LIMITED Respondent
Hearing: 19 February 2015 Appearances:
D Chesterman for the Respondent
B P Keene QC and L Van for the ApplicantsJudgment:
26 June 2015
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 26 June 2015 at 4:00pm
Pursuant to Rule 11.5 of the High Court Rules
………………………………………….
Registrar/Deputy Registrar
Solicitors:
Anthony Harper, Auckland, for Applicants
Gillespie Young Watson, Lower Hutt, for Respondent
Counsel:
Brian Keene QC, Auckland, for Applicants
Damian G Chesterman, Auckland, for Respondent
MCCULLAGH AND LAWRENCE v ROBT. JONES HOLDINGS LIMITED [2015] NZHC 1462 [26 June
2015]
[1] The respondent applies for discovery orders:
(a) For particular discovery of documents under r 8.19 of the High Court
Rules; and
(b) Setting aside the applicants’ claim to privilege under r 8.25.
[2] This is a voidable transaction proceeding. The liquidators of Northern Crest Investments Ltd, ordered into liquidation on 2 June 2011, apply to set aside payments made to Robt. Jones Holdings Ltd between 22 January 2010 and
5 November 2010 totalling $751,941.12. So far, the liquidators have provided two affidavits of documents. The first one, sworn on 16 April 2014, runs for 40 pages. A supplementary affidavit sworn on 28 May 2014 runs for 10 pages. The liquidators say that they have disclosed over 1400 pages of documents. Notwithstanding that, Robt. Jones says that discovery is incomplete and the liquidators have made an invalid claim to privilege.
Discovery in voidable transaction cases
[3] Discovery orders are not standard in voidable transaction proceedings. That is because voidable transaction claims must be brought by originating application.1
Unlike general proceedings brought by notice of proceeding and statement of claim, discovery is not available as of right in an originating application. In a general proceeding a judge must make a discovery order unless satisfied that the proceeding can be justly disposed of without any discovery.2 Part 19, which deals with originating applications, is directed at providing a speedy and inexpensive mechanism. On an application for directions the court may in its discretion order
discovery.3
1 High Court Rules, r 19.2(c).
2 Rule r 8.5.
3 Rules 7.43A and 19.11.
[4] In Katavich v Meltzer4 Duffy J held that there is a reluctance to order discovery, except in a narrow band of marginal cases where the court has genuine difficulty in determining whether a party has made out its case, and where there is substantial reason to believe that discovery would or might well assist that determination. The judgment referred to summary judgment cases and applications under s 290 of the Companies Act to set aside statutory demands. In those cases, the court is typically concerned only with whether the plaintiff has established that the defendant has no defence, or whether a debt is subjected to substantial dispute. In such cases, the court is not required to make a final determination of the merits. Accordingly, discovery is rarely required.
[5] In voidable transaction cases, however, there may be a wider need for discovery, particularly in cases where the liquidator, with control of the company and access to its records, will have inside knowledge of a company’s accounts, which may not be available to a creditor who dealt with the company at arm’s length. When the company’s ability to pay its debts is in issue, there may be good reason for taking a wider approach to discovery than indicated in Katavich v Meltzer. I do not intend to deal with the discovery questions in this case on the basis that discovery should be available only in a narrow band of marginal cases.
[6] In originating applications, the party seeking discovery must show that discovery is necessary. The objective of securing the just, speedy and inexpensive determination of the proceeding will guide the discretion. Not only relevance, but also proportionality will come into consideration. This approach will also come into play when further discovery orders are sought – for variations under r 8.17 and orders for particular discovery under r 8.19.
[7] On applications under r 8.19, the starting position is a presumption that the affidavits of documents already filed are conclusive.5 The party seeking further
discovery has to establish that the existing affidavit of documents is incomplete.
4 Katavich v Meltzer HC Auckland CIV-2006-404-5968, 29 May 2009 at [15].
5 Jones v The Monte Video Gas Co (1880) 5 QBD 556 (CA).
The substantive proceeding
Background
[8] Northern Crest was part of the group of associated companies called Blue Chip. Its earlier names include the New Zealand Salmon Company Ltd, Newcall Group Ltd, Blue Chip New Zealand Ltd and Blue Chip Financial Solutions Ltd. It promoted property investments. While it was always incorporated under the New Zealand Companies Act 1993, in its later years it was based in Sydney, New South Wales.
[9] While it was still operating in New Zealand, Northern Crest leased the
12th floor of 191 Queen Street, Auckland, plus car parks, from Robt. Jones. Other Blue Chip companies also leased premises in the same building. In 2008 Northern Crest fell behind in paying rent and rates. Robt. Jones served statutory demands and notices to cancel the lease. Defaults under two notices were remedied, but a final notice of 8 August 2008 resulted in Northern Crest abandoning the premises. Robt. Jones re-entered on 25 August 2008. In September 2008 Robt. Jones served a statutory demand for unpaid rent and rates. Northern Crest paid $28,544 on
16 October 2008 and the outstanding balance on 10 November 2008. Robt. Jones served a further statutory demand for further amounts claimed for rent and rates. Northern Crest applied to set aside the demand. The statutory demand was upheld only to the extent of $1,125.56.6 The balance was held to be a claim in damages, not a debt. Robt. Jones began a proceeding in May 2009, claiming damages arising from Northern Crest's breach of the lease. It applied for summary judgment.7
Robt. Jones obtained judgment for $285,132.07 with directions for a hearing to determine further damages claimed. In a settlement agreement of 15 October 2009 relating to payment of the judgment debt of $285,132.07 and a proposed counterclaim, Northern Crest agreed to pay Robt. Jones $285,132.07 by 30 October
2009, and a further $120,000 by 30 November 2009.
6 Northern Crest Investments Ltd v Robt. Jones Holdings Ltd (2009) 19 PRNZ 258 (HC).
7 Robt. Jones Holdings Ltd v Northern Crest Investments Ltd (2009) 11 NZCPR 206(HC).
[10] Northern Crest did not pay the instalment due on 30 October 2009. In November 2009 Robt. Jones entered an appearance in a liquidation proceeding brought by Minter Ellison Rudd Watts as creditor against Northern Crest. Robt. Jones was added as a second plaintiff.8 In its statement of claim in that proceeding Robt. Jones pleaded that Northern Crest Investments Ltd was unable to pay its debts as they fell due, relying on non-compliance with a statutory demand and on Northern
Crest's failure to make payments under the settlement agreement.
[11] The liquidation proceeding was later withdrawn. The liquidators put in evidence board documents recording a settlement. Northern Crest Investments Ltd paid Robt. Jones the $285,132.07 by one payment of $150,000 on 22 January 2010 and a second payment of $135,133.07 on 24 February 2010. These payments are the first of the payments challenged by the liquidators. The $120,000 also payable under the October settlement agreement remained unpaid.
[12] In April 2010, Robt. Jones and Northern Crest agreed to settle Robt. Jones’
damages claim arising from the cancellation of the lease. Northern Crest was to pay
$450,000 to Robt. Jones by payments of $100,000 each on 21 April, 31 May, 30 June and 30 July 2010 with a final payment of $50,000 on 20 August 2010. Northern Crest signed an admission of claim for $450,000. Northern Crest made the first two payments under the April settlement agreement but defaulted on the payment for June 2010. On that default Robt. Jones applied for judgment for $250,000 (in terms of the admission of claim). Judgment was granted on 14 July 2010. Robt. Jones served a statutory demand on Northern Crest on 15 July 2010. On 6 August 2010 it
began a liquidation proceeding against Northern Crest9 relying on the non-
compliance with the statutory demand to prove inability to pay debts.
[13] In August 2010, Northern Crest and Robt. Jones entered into a further settlement agreement, under which the July judgment debt plus interest were to be paid with the last payment due on 5 November 2010. Northern Crest paid under this
agreement.
8 Minter Ellison Rudd Watts v Northern Crest Investments Ltd HC Wellington, CIV-2009-485-197.
9 CIV-2010-485-1438.
[14] On 25 November 2010 Northern Crest filed an application under s 290 of the Companies Act to set aside a statutory demand served on it by Mr Ross Hayward, demanding payment of the sum of $142,049.78 owed under a deed of settlement in which Northern Crest had guaranteed payment by Maine Sheldon Holdings Pty Ltd. Associate Judge Christiansen heard the application on 2 June 2011. He dismissed the setting-aside application and made an immediate order for liquidation under s 291(1)(b) of the Companies Act. He held that Northern Crest was hopelessly insolvent: from the material available to the court it was clear that for the six months ending September 2010 Northern Crest Investments Ltd traded at a net loss of about
NZ$3,000,000 and had negative equity of about NZ$7,7000,000.10
[15] The liquidators say that the unsecured creditors in the liquidation come to
$10,165,612.77. That does not include Blue Chip investors, who have claimed as contingent creditors. They are about $36,000,000. The liquidators have not to date accepted their claims.
The challenged transactions
[16] The payments the liquidators wish to set aside are:
Date
Source of the payment
Amount
$
22/01/2010
Columbus Property Marketing Pty Ltd
$150,000.00
24/02/2010
Columbus Property Marketing Pty Ltd
$135,133.07
02/03/2010
Columbus Property Marketing Pty Ltd
$4,000.00
20/04/2010
Columbus Property Marketing Pty Ltd
$100,025.00
28/05/2010
Columbus Property Marketing Pty Ltd
$100,025.00
07/09/2010
MSH No.2 Pty Ltd
$38,000.00
10 Northern Crest Investments Ltd v Hayward HC Auckland CIV-2010-404-7741 at [10].
14/09/2010 MSH No.2 Pty Ltd
$26,000.00
15/09/2010
MSH No.2 Pty Ltd
$24,000.00
16/09/2010
MSH No.2 Pty Ltd
$27,000.00
14/10/2010
MSH No.2 Pty Ltd
$25,000.00
27/10/2010
MSH No.2 Pty Ltd
$30,000.00
04/11/2010
MSH No.2 Pty Ltd
$98,000.00
05/11/2010
MSH No.2 Pty Ltd
$4,758.05
Total
$751,941.12
It is not in dispute that all the payments were made within the specified period under s 292(5) of the Companies Act.
The sources of the funds
[17] Northern Crest did not pay Robt. Jones directly. Instead, the funds for the first five payments came from Columbus Marketing Property Pty Ltd, and for the other eight payments from MSH No.2 Pty Ltd. The liquidators’ case is that Columbus, an entity independent of Northern Crest, was required to pay fees to Northern Crest under a licensing agreement, and that Northern Crest arranged for those payments to go to Robt. Jones to reduce to Robt. Jones. It is common ground that Robt. Jones was never a creditor of Columbus.
[18] The liquidators say that MSH No.2 Pty Ltd was a subsidiary of Northern Crest and was treasurer to it and other Northern Crest companies. As treasurer, the payments it made to Robt. Jones were advances to Northern Crest.
Robt. Jones’ grounds of opposition
[19] Robt. Jones’ notice of opposition gives 14 grounds for opposing the liquidators’ applications under ss 294 and 295. Some of them do not require serious consideration. For example, one defence is that the payments were made in the ordinary course of business. Before the Companies Amendment Act 2006, a transaction could not be set aside if it was made in the ordinary course of business. But that was repealed with effect from 1 November 2007.11 As all the payments in this case were made in 2010, that defence is not available. Robt. Jones is also running a defence under s 296(3) claiming that it both gave value for the payment
and also that it altered its position in reliance upon the payments.
[20] For this discovery application, it is necessary to consider only two grounds of opposition:
(a) The payments Robt. Jones received were not made by Northern Crest, but by Columbus or by MSH No.2 Pty Ltd.
(b)The liquidators have not shown that at the times of the payments, Northern Crest was unable to pay its due debts.
[21] While the liquidators have filed affidavits in support of the substantive application, Robt. Jones has not yet filed evidence in opposition.
The application for further discovery
[22] Robt. Jones has asked for discovery of particular classes of documents. They are considered later. Before that, I consider some general aspects of these two
grounds of opposition.
11 Companies Amendment Act 2006, s 27.
Payments by Columbus
[23] As already mentioned, the liquidators’ case is that payments Columbus made to Northern Crest under a licence agreement were transactions under s 292(2) and (3)(e) of the Companies Act. They have put in evidence a license agreement between Northern Crest and Columbus dated 26 November 2009. The agreement ran for five years unless renewed or terminated. Northern Crest gave Columbus a licence to use intellectual property including business secrets, software, formulae, data, know-how, techniques, designs, plans, confidential information, images, get- ups, logos, drawings, copyright, trade names and trade marks. Columbus was required to pay a licence fees calculated in a schedule to the agreement. The agreement required Columbus to pay a minimum annual fee of $3.500,000 by
31 March 2010. The liquidators’ evidence given so far shows that Columbus made
the first five payments in this case under the licence agreement. They say that in
2009-2010 Northern Crest depended for its cash-flow on licence fees from the
Columbus agreement.
[24] Robt. Jones wants to deal with the licence agreement in different ways:
(a) On the question of transaction under s 292(3), it wants to show that the licence agreement cannot be taken seriously.
(b)On the question of insolvency, it accepts that the licence agreement can be taken seriously, because it generated significant income to be taken into account in assessing Northern Crest‘s ability to pay its debts.
[25] First, I deal with the transaction aspect. I use “not to be taken seriously” loosely. Robt. Jones’ case is that the licence agreement was a sham, meaningless, and had no commercial effect. It relies on certain factors as grounds to throw doubt on the licence:
(a) It was not listed as an asset in Northern Crest's financial statements.
(b)It was sold for only $2000, which belies its income-producing potential.
(c) There is confusion whether the licence really belongs to Northern
Crest or to MSH No.2 Pty Ltd.
(d) There are various versions of the licence.
(e) By April 2010, Columbus was using a licence granted by MSH No.2
Pty Ltd.
[26] Robt. Jones’ case is that if the licence agreement was without effect, then the payments to Northern Crest could not be payments under s 292(3) of the Companies Act. Before dealing directly with that argument, it is helpful to consider the position if the licence agreement is in fact sound. A number of cases have recognised that when a company arranges for one of its debtors to pay a debt by sending the funds to a creditor, the company’s indebtedness to the creditor is reduced by the amount of
the payment and the transaction is a payment under s 292.12 While a payment must
be made by the company, it need not come from the company’s property. In such cases the debtor discharges its indebtedness to the company at the same time that the company reduces its debt to its creditor. In these cases the source of the payment does not matter to the creditor: it applies the payment towards the company’s debt. Robt. Jones accepts that if the licence agreement is valid, the payments Robt. Jones received from Columbus were payments by Northern Crest under s 292(3). Instead Robt. Jones says that the position is different if the licence agreement has no effect.
[27] The liquidators have put in evidence records of Northern Crest recognising that the licence agreement was a genuine transaction. They have also put in correspondence from Wellington solicitors instructed on behalf of Columbus to make
payment to Robt. Jones’ lawyers by way of reductions of Northern Crest‘s debt to
12 Examples of cases are Westpac Banking Corporation v Nangeela Properties Ltd (in liq)
[1986] 2 NZLR 1 (CA); Chilton Saint James School v Gray (1996) 7 NZCLC 261,119 (HC) (although the payment was not made to a creditor of the company in that case); Levin v Market Square Trust [2007] NZC 135, [2007] 3 NZLR 591; Anzani Investments Ltd v Official Assignee [2008] NZCA 144 at [22]-[24].
Robt. Jones. There is accordingly an initial implausibility about this aspect of Robt. Jones’ case. For this decision, I set aside those doubts. I assume for the purpose of argument that the licence agreement was without legal effect and that Columbus paid under a mistake, under a void transaction or for a total absence of consideration. Notwithstanding that, it is clear that Northern Crest and Columbus were dealing with each other in a commercial relationship. Given that, it is fanciful to suggest that Columbus was gratuitously discharging Northern Crest’s liability to Robt. Jones. Instead, if Columbus paid under a mistake, under a void transaction or for a total absence of consideration, Northern Crest would come under a restitutionary obligation to repay Columbus. The position would be little different from Columbus lending the funds to Northern Crest. An obligation to repay would apply in both cases, one arising by agreement, the other by operation of law. The effect would be that Columbus would be substituted for Robt. Jones as Northern Crest's creditor to the extent of the payments made. Payments made under an allegedly ineffective transaction would still be payments by Northern Crest under s 292(3)(e) of the Companies Act.
[28] While Columbus would be substituted as creditor for Robt. Jones to the extent of those payments, no question of prejudice to other creditors arises. The fact that other assets of the company remain unchanged is irrelevant. The key point under s 292(2)(b) will be that however the payments are characterised, Robt. Jones would have received more than it would in the liquidation.13
[29] As an aside, MSH No.2 Pty Ltd, the company with the treasury function, will be treated in the same way.
[30] For the above reasons discovery of documents to establish the authenticity or otherwise of the licence agreement will not make any difference to the position that
the money Robt. Jones received from Columbus was payments by Northern Crest.
13 Levin v Market Square Trust above n 11, at [34]-[43].
Ability to pay due debts
The restricted period
[31] The parties disagree whether the payments are inside the restricted period under s 292(6). Under s 292(4A), there is a presumption that a company is unable to pay its debts for transactions during the restricted period. Section 292(6) says:
(6) For the purposes of subsection (4A), restricted period means—
(a) the period of 6 months before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and
(b) in the case of a company that was put into liquidation by the court, the period of 6 months before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date on which, and at the time at which, the order of the court was made; and
(c) if—
(i) an application was made to the court to put a company into liquidation; and
(ii) After the making of the application to the court a liquidator was appointed under paragraph (a) or paragraph (b) of section 241(2),—
the period of 6 months before the making of the application to the court together with the period commencing on the date of the making of that application and ending on the date and at the time of the commencement of the liquidation.
[32] The question is: was the application under s 290 of the Companies Act to set aside the statutory demand an application to the Court under s 292(6)(b)? If it is, the six months began on 25 May 2010, so that all but four of the payments are inside the restricted period. If it is not, the restricted period began on 2 December 2010, six months before the liquidation order. In that case all the payments are outside the restricted period.
[33] On Robt. Jones’ submission, the case comes within s 292(6)(a) because (b)
and (c) apply only to applications to put a company into liquidation. Applications to
set aside statutory demands are directed at avoiding liquidation by challenging demands under s 289, even if unsuccessful applications might result in liquidation. I disagree on that interpretation of s 292(6)(b) because:
(a) Whereas s 292(6)(c)(i) expressly refers to an application to put a company into liquidation, s 292(6)(b) is not so limited. While the Court will make a liquidation order only on application, the subclause does not require that to be a liquidation application. On the wording, “application” includes an application under s 290.
(b)It is consistent with the legislative purpose of creating a presumption of insolvency in the period before the start of the proceeding that results in a liquidation order. If the presumption applies in the six months before a creditor begins a successful liquidation application (for example, relying on non-compliance with a statutory demand), it is also appropriate to apply the same presumption if the company unsuccessfully applies to set aside a statutory demand and the court is satisfied on dismissing the application that the company should go into liquidation forthwith, by-passing the normal steps of a liquidation
application.14
[34] Accordingly, only the first four payments are outside the restricted period. For all the others, there is a presumption that at the time of payment, Northern Crest was unable to pay its debts as they fell due. Robt. Jones has the burden of proving ability to pay due debts during the restricted period. To oppose the substantive proceeding on this question, for the first four payments, Robt. Jones may do no more than test the adequacy of the liquidators’ evidence. On the other hand, where it has to prove ability to pay debts, it may become more important to require the liquidators
to disclose relevant documents in their control.
14 See 329 Queen Street Developments Ltd v Watts & Hughes Construction Ltd [2012] NZHC 1791 for the approach under s 291(1)(b).
The test for ability to pay due debts
[35] In its submissions, Robt. Jones relied on my statement of the solvency test in
Levin v Titan Cranes Ltd.15 That included the following:
The words “as they become due” mean as the debts become legally due. However, if it is established that an unsecured creditor is not making demand for his debt and does not intend to demand repayment in the immediate future, the debt to that creditor should not be regarded as due and payable.
I was recording a submission by the creditor. The case did not turn on the absence of demand by an unsecured creditor, so the point was immaterial. The second sentence is not however correct. That is apparent from the judgment of Richardson J in Re Northridge Properties Ltd.16
As they become due means as they become legally due. [Counsel] submitted, without being able to cite authority for the proposition, that cognizance must be taken of trade practice in that debts become “due” when a creditor is pressing for payment and the debtor is unable to make payment. There is no justification in authority for this gloss on the section. As a matter of principle, it would not be proper to read it in this way. However, to do so would introduce further uncertainty and confusion in the application of an already uncertain provision.
[36] Rather than go by my statement in Levin v Titan Cranes Ltd, it is safer to follow the summary given by Davison CJ in Re Universal Management Ltd (in liquidation):17
(a) The expression covering the ability to pay debts is concerned with the position of the debtor at the time when the charge or payment is made or other specified act takes place. The concern is with the present, but in considering the present position regard may properly be had to recent past – whether the debtor has in recent weeks been unable to pay debts as they become due.
(b) In determining ability to meet debts as they become due, account must be taken of outstanding debts.
(c) The words “as they become due” mean, as they become legally due.
(d) The reference to payment “from his own money” has not been interpreted strictly to require a debtor to keep sufficient cash on hand at all times for that purpose. It is a matter of striking a balance. It is not a matter simply of measuring assets against liabilities, and it is
15 Levin v Titan Cranes Ltd [2013] NZHC 2628 at [11].
16 Re Northridge Properties Ltd (In Liq) SC Auckland, M46/75, 13 December 1977 at [26].
17 Re Universal Management Ltd (In Liq) (1991) 1 NZCLC 95-026 (HC) at 98,246.
not a matter of whether if given sufficient time assets could be realised and debts paid. The section is concerned with solvency so that there must be a substantial element of immediacy in the ability to provide cash from non cash assets.
(e) If, as is well established, convertibility of non cash assets on hand may be taken into account in determining solvency, so too must debts becoming due while that conversion takes place. Moreover the words “as they become due” involve consideration of a debtor’s position over a period not in an instant of time.
(f) The test of solvency is an objective one.
[37] Part of Robt. Jones’ case on insolvency will be that Northern Crest had
licence income, which at relevant times enabled it to pay debts as they fell due.
[38] The liquidators’ evidence filed so far goes to prove insolvency in a number
of ways:
(a) Solvency was in issue as early as July 2009 when Columbus provided a letter of comfort about to cash flow support for Northern Crest.
(b)The liquidators analysed and reconstructed Northern Crest‘s accounting records, with adjustments made, so as to show month-by- month consolidated balance sheets during the period of the challenged payments. These show consistent working capital deficits and negative equity.
(c) Northern Crest’s record of September 2009 of aged payables over
90 days old of approximately $1.390,000.
(d) Legal proceedings by creditors, including Robt. Jones.
(e) Northern Crest financial management reports of January 2010, March
2010, September 2010.
(f) Associate Judge Christiansen’s liquidation decision in June 2011.
[39] While that evidence shows a strong case for Northern Crest’s insolvency during the relevant period, much of it is potentially contestable. In particular, it is conceivable that another accountant might take issue with the liquidators’ reconstruction of Northern Crest’s balance sheets.
[40] There is, however, one strand of the liquidators’ evidence which Robt. Jones cannot take issue with. That is Robt. Jones’ own efforts to recover payment from Northern Crest starting from the abandonment of the premises in 2008. Robt. Jones’ efforts included the following:
(a) Four statutory demands: 5 September 2008, 20 November 2008 (only partly upheld), 25 September 2009 and 15 July 2010.
(b)Two summary judgment applications, both successful, one resulting in the judgment of 23 September 2009 and the second on 14 July 2010.
(c) Three settlements: October 2009, April 2010 and August 2010.
Northern Crest defaulted under each.
(d) Two liquidation proceedings filed on 23 November 2009 and
6 August 2010, both withdrawn after payment or settlement.
[41] The abandonment of the lease points to insolvency. After receiving notice of non-payment of rent, Northern Crest simply left the premises without notice and without making any orderly arrangements to terminate the lease, including paying outstanding rent to Robt. Jones. From that time on, Robt. Jones had two years of debt-collecting efforts to recover payments due. It is particularly telling that Northern Crest entered into settlement agreements under which it was allowed time in which to pay, yet under each settlement agreement, it failed to pay on time. The explanation is obvious. Northern Crest did not have the funds to pay Robt. Jones.
[42] Robt. Jones recognised this all too clearly. On 3 September 2010 counsel for
Robt. Jones wrote to counsel for Northern Crest rejecting a settlement offer:
…because it has no faith in NCIL‘s intention or ability to comply with the offer. There is a documented trail of failed settlement agreements between the parties. Every failed settlement has been caused by NCIL’s failure to make payments as promised.
[43] Similarly, in an email of 19 October 2010, Robt. Jones’ counsel advised counsel for Northern Crest how it intended to prove that Northern Crest was insolvent. As well as relying on the statutory presumptions arising from failure to comply with statutory demands, the evidence was to include:
1 Failure of NCIL to pay its judgment debt for six months, resulting in
a previous liquidation proceeding …
2Failure of NCIL to abide by the settlement agreement, resulting in filing of an admission of claim, being the basis for the judgment debt in the present proceeding …
[44] Given this indisputable evidence as to Northern Crest’s inability to pay its debts to Robt. Jones during 2010, I can see no useful purpose in Robt. Jones trying to prove solvency or to resist the liquidators’ claim that during 2010 Northern Crest was unable to pay its debts as they fell due. Requiring discovery of further documents might show that other aspects of the liquidator’s evidence on insolvency, such as the reconstruction of accounts, are subject to challenge, but it could not alter the fact that Robt. Jones’ own dealings with Northern Crest show that the company was insolvent.
The particular documents sought by Robt. Jones
Licence agreement between Northern Crest Investments Ltd and Rutherford
Franchising Pty Ltd or any other company related to Rutherford
[45] Robt. Jones says that in late 2010 Rutherford apparently replaced Columbus as primary licensee. Robt. Jones seeks disclosure of the Rutherford licence for two purposes:
(a) To cast light on the validity of the Columbus licence;
(b)To show that Northern Crest was solvent, as cash flow from licence payments would allow Northern Crest to pay its debts.
[46] The liquidators say that they have not sighted a copy of a licence agreement between Rutherford and Northern Crest.18 Robt. Jones has not shown why that statement cannot be accepted.
[47] It may be arguable for Robt. Jones that there is a lack of clarity over intellectual property licences. Robt. Jones points to apparently inconsistent statements made by a director of Northern Crest, and by a lawyer who acted for Northern Crest. Notwithstanding that, it is clear that the source of the first five payments in issue was Columbus. Whether or not there was a licence agreement with Rutherford will not alter the source or the nature of those payments. Whether Columbus’ payments were for licence fees or were made under an abortive transaction will make no difference to the fact that, as between Northern Crest and Robt. Jones, these were transactions by Northern Crest under s 292(3). Any licensing agreement with Rutherford cannot change that position.
[48] Robt. Jones’s reliance on any Rutherford licensing agreement to show potential cash-flow will also not change the position that, throughout the period that Northern Crest paid Robt. Jones, Northern Crest was unable to pay all its debts as they fell due. Certainly it cannot be relevant to the payments between January and May 2010 sourced from Columbus. That was before any arrangements with Rutherford might have replaced the Columbus agreement. But even afterwards, later in 2010, Northern Crest was clearly not able to pay its debts in full to Robt. Jones on time. Arrangements to pay by instalments over time were required because of lack of funds. By November 2010 Northern Crest had filed its unsuccessful application to set aside the statutory demand of Ross Hayward for $142,049.78.
Correspondence from the liquidators to Sekel Oshry seeking disclosure of company records
[49] Robt. Jones says that Mr David Sekel is a Sydney solicitor in the firm Sekel Oshry. He was also a director of Northern Crest. Sekel Oshry did legal work for Northern Crest, in particular drafting intellectual property licences. Robt. Jones says that because Sekel Oshry drafted the licences and because there are questions as to
the validity of the licences, then all correspondence between the liquidators and the
18 Lawrence affidavit of 31 October 2014 at [13].
lawyers must be relevant. The correspondence may potentially contain relevant background allowing Robt. Jones to challenge the validity of the licences and the claims of insolvency. Robt. Jones seeks disclosure of documents in the liquidators’ control, because it cannot compel Sekel Oshry to disclose them. There would be lawyer-client privilege and besides, discovery cannot be the subject of an application
for interim relief under the Trans-Tasman Proceedings Act 2010.19
[50] The liquidators have already disclosed notes from a meeting with Mr Sekel, plus correspondence with him, but they resist providing correspondence with Sekel Oshry seeking disclosure of the company records as the liquidators do not consider them to be relevant.
[51] As with the Rutherford licence, it is pointless to enquire into the validity of licence agreements and their provisions. They cannot alter the fact that the payments from Columbus were Northern Crest transactions under s 292 and that Northern Crest was unable to pay its due debts.
Documents in Manifest Capital Management Pty Ltd v Lawrence20
[52] In this proceeding, Manifest Capital Management Pty Ltd successfully applied to reverse the liquidators’ rejection of its claim to be a creditor of Northern Crest for AUD$3,000,000 based on an underwriting agreement of March 2008, a variation of the underwriting agreement of April 2008 and a declaration of trust. It also applied to remove Messrs Lawrence and McCullagh as liquidators.
[53] Robt. Jones seeks discovery of all documents for that proceeding in the liquidators’ control but refers in particular to a letter from the liquidators’ solicitors of 20 September 2011, an affidavit by a Mr Reeves and the underwriting agreement.
[54] Robt. Jones has also applied for access to the file in the Manifest proceeding under Part 3 subpart 2 of the High Court Rules. In a minute of 12 March 2015,
Heath J stood over that application to await my decision in this matter. Discovery
19 Trans-Tasman Proceedings Act 2010, s 31.
20 Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV-2010-404-7741,
20 December 2011.
and access to court documents involve different questions. I deal with the matter
only as part of Robt. Jones’ discovery application.
[55] In his decision of 20 December 2011, Heath J found that Manifest had proved that it had lent Northern Crest AUD$3,000,000 in 2008 to use as working capital. I do not understand Robt. Jones to contend that Manifest was not a creditor of Northern Crest. It says that because Manifest left the money in - interest-free, and apparently did not press for repayment - that may have a bearing on the question of insolvency. For the reasons I gave in correcting the formulation set out in Levin v
Titan Cranes Ltd,21 the failure of an overdue creditor to press for payment is not
relevant to assessing a company’s ability to pay due debts.
[56] Robt. Jones says, however, that it wants access to the Manifest documents so that it can attack the credibility and integrity of the liquidators. I understand that that will be part of its challenge to the liquidators’ reconstruction of the Northern Crest balance sheets during 2010. The usual way to attack the reconstruction of accounts is to call an expert forensic accountant to present an alternative reconstruction, showing why the liquidators’ adjustments and assumptions cannot be supported.
[57] Robt. Jones also wishes to attack the credibility or integrity of the liquidators: first, because the liquidators’ lawyers said (in a letter of 20 September 2011 to Manifest’s lawyers) that they had doubts as to Northern Crest’s accounts; and second, because of an alleged statement made by one of the liquidators in a “without prejudice” discussion with a Mr Reeves. Heath J quoted the 20 September 2011
letter in his judgment.22 The context of that letter was that the liquidators had
rejected Manifest’s claim and were putting Manifest to proof. They maintained that something more was required than simply referring to Northern Crest‘s own financial statements, notwithstanding that they had been audited.
[58] Heath J found that the Reeves affidavit was not admissible, because it
disclosed “without prejudice” communications. He rejected Manifest’s argument
that the privilege was overridden by a dishonest purpose. The same rules against
21 Levin v Titan Cranes Ltd, above, n 15.
22 Manifest Capital Management Pty Ltd, above n 20 at [14].
admitting the affidavit will apply here. In this proceeding the liquidators are entitled to make the same privilege claim.
[59] Discovery of the Manifest documents is not required to deal with the insolvency issue. Whatever those documents say, they cannot alter the fact that in
2010 Northern Crest could not pay all its debts as they fell due. I see no purpose in requiring discovery for the purpose of attacking the liquidators’ credibility and integrity. Discovery is not normally ordered for that purpose.23 In this case it would be disproportionate. The parties should not spend extra time and effort pursuing peripheral matters.
Documents relating to the $500,000 owed by the Department of Inland Revenue to
Northern Crest
[60] The liquidators have declined to disclose documents relating to $500,000 alleged to be owed by the Commissioner of Inland Revenue. Robt. Jones argues that a sizeable amount of cash is relevant to the insolvency issue.
[61] The liquidators’ reconstituted balance sheets for 22 January 2010,
24 February 2010, 22 March 2010, 20 April 2010 and 28 May 2010 all show entries for a current asset described as “tax paid” or “deferred tax asset”. It does not appear in later balance sheets. The earlier balance sheets all show working capital deficits and negative equity notwithstanding the credit for tax paid. For the later balance sheets, there will still be a working capital deficit, even if the tax asset has been wrongly omitted. Disclosure of documents relating to this tax asset will not alter the position that during 2010 Northern Crest was not able to pay its debts as they fell due, as shown by its ongoing defaults in paying Robt. Jones and will not assist in resolving issues in this case.
Documents relating to the liquidators’ total fees, costs and disbursements including
legal fees and professional fees
[62] Robt. Jones takes the point that any recovery in this proceeding is likely to go first to the liquidators, ahead of any payments to creditors. It believes it can
23 Thorpe v Chief Constable of the Greater Manchester Police [1989] 1 WLR 665 (CA), West
Harbour Holdings Ltd (in liq) v Tamihere [2014] NZHC 716.
construct an abuse of process argument by reason of the funds being used for
liquidators’ fees.
[63] There is an established order of priority for preferential claims under Schedule 7 and s 312 of the Companies Act. Liquidators’ fees and expenses come first. The fact and amount of any preference Robt. Jones received from the challenged payments are not going to turn on the amount of the liquidators’ remuneration. Whatever the amounts of preferential claims, if Robt Jones received more than other unsecured creditors will in the liquidation, it has been preferred under s 292(2)(b). There are some voidable transaction cases where the amount of
the liquidators’ remuneration is an issue.24 In Horton v Cowley the preference was
cured in part by requiring those preferred to pay the liquidator’s remuneration and expenses. That was because there were no external creditors. The shareholders were the only creditors. Because there are other creditors in this liquidation, curing the preference will require more than paying the liquidators’ remuneration. An inquiry into the liquidators’ remuneration is not required for this case.
[64] If Robt. Jones is ordered to pay an amount to the liquidators, it will also become a creditor in the liquidation. Unless the liquidators accept the Official Assignee’s rates of remuneration, the court will need to approve their remuneration.25 With leave, creditors may be heard on applications to fix liquidators’ remuneration.26 Robt. Jones may be given standing. In a contested
application to fix a liquidator’s remuneration disclosure of the liquidators’ relevant
records may be appropriate. Directions for discovery might be appropriate then.
[65] Like many respondents to voidable transaction applications, Robt. Jones may be aggrieved that any money it might be ordered to pay to redress a preference will go first to the liquidators ahead of any creditors. It might argue along the lines that the justification for voidable transactions is to ensure equality of distribution among creditors, and that will not achieved in this case because of the liquidators’ priority.
That argument would invoke the court’s discretion under s 295. It might also argue
24 See Horton v Cowley [2012] NZHC 3089; Horton v Cowley [2014] NZHC 20.
25 Companies Act, ss 276(2) and 277, Companies Act 1993 Liquidation Regulations 1994, reg 28.
26 Creditors can apply with leave under s 284 of the Companies Act. The Court’s supervision of
liquidators includes their remuneration: s 284(1)(e) and (f).
in favour of security of completed transactions. Whatever the merits of those arguments, it will be able to present them without requiring the court to examine in depth the amounts the liquidators claim for their fees and expenses.
[66] Discovery of documents relating to the liquidators’ fees and expenses is not required.
Documents from Northern Crest Limited’s accountants, WWP Accounting
[67] Robt. Jones says that WWP Accounting carried out accounting work for Northern Crest. WWP’s owner, Mr Mark Wilson, is said to have been a director of Northern Crest. Robt. Jones therefore suggests that WWP Accounting may hold documents relevant to solvency and licence payments.
[68] The liquidators say that WWP Accounting is in the Australian Capital Territory. The documents held by WWP Accounting are not in the control of the liquidators. All the accounting materials of Northern Crest that they have obtained were prepared by board members, in particular a Mr Robertson, an independent contractor, and audited by Hall Chadwick, a New South Wales auditing practice. They have discovered all those accounting records.
[69] The suggestion that WWP Accounting may have further documents relevant to this proceeding is speculative only. Robt. Jones has not overcome the presumption in favour of the conclusiveness of the affidavits of documents.
[70] Robt. Jones hopes that something might turn up if documents held by WWP Accounting were made available for inspection. That hope is forlorn. Robt. Jones will not be able to get over the plain facts that its own dealings with Northern Crest during 2010 show that company’s inability to pay its debts on time. Nothing can be gained by requiring the liquidators to obtain documents from WWP Accounting.
All Northern Crest Investments Ltd reports, correspondence and updates to
Australian Securities and Stock Exchange during 2010-2011
[71] Northern Crest had applied to the Australian Securities and Stock Exchange for relisting. A hearing was set for 15 June 2011. That did not take place because this court ordered the company into liquidation on 2 June. Robt. Jones says that but for that order, the company would have been relisted and it would then have received a cash injection. That aspect goes to its defence on ability to pay due debts.
[72] The liquidators say that all relevant Northern Crest reports, correspondence and updates to the ASX during 2010/2011 have been disclosed.27 Robt. Jones has not given reason to believe, in terms of r 8.19, that the liquidators have not disclosed the requested reports and updates to the ASX.
[73] In any event, any documents that might show that after June 2011 Northern Crest would receive a cash injection will not change the fact that during 2010 it could not pay all its creditors on time. Under s 292(2)(a) the test is ability to pay due debts at the time of the transaction, not some time in the future.
Northern Crest's September 2010 half-yearly financial review
[74] The liquidators point out that that document is attached to Mr McCullagh’s
affidavit at page 306. It has already been disclosed. No order is required.
Any audio recording of interviews of Northern Crest directors, contractors or professional service providers carried out by Daniel Hughes, Stephen Lawrence or anyone else on behalf of the liquidators
[75] The liquidators say that written notes recording meetings with contractors and professional service providers have been disclosed.28 There are no audio recordings. Robt. Jones has not shown why that cannot be accepted. No order is
required.
27 Lawrence affidavit, above n 18 at [13(c)].
28 At [13(d)].
Documents relating to Hudson Red Investments Ltd and its licence arrangements with Northern Crest
[76] Robt. Jones says that in 2010 Hudson Red was a Northern Crest licensee, from which it apparently obtained licence fee income. It therefore seeks documents relating to Hudson Red and its payments. It says that they go to the question of solvency.
[77] Mr Lawrence says that the liquidators have not sighted a licence agreement between Hudson Red Investments Ltd and Northern Crest.29
[78] This is another case where the pursuit of documents will not alter the facts that in 2010 Northern Crest could not pay all its due debts. Even if a licence agreement could be found and it provided for payment of licence fees, what counts is Northern Crest’s ability to pay all its due debts from its resources. Requiring the liquidators to carry out further searches for licence agreements with Hudson Red would not serve any useful purpose.
Columbus bank accounts and financial statements for the period September 2009 to
September 2011
[79] Robt. Jones seeks access to these records to probe the issue whether the licensing arrangements were valid, and to find out the source of Columbus’ funds to make the first five payments in issue in this proceeding.
[80] The liquidators point out that Columbus is an independent entity and that they do not hold the bank accounts or any financial statements of Columbus.
[81] I accept that the documents are not in the liquidators’ control and are therefore not discoverable. The suggestion that any records of Columbus may be relevant to the legitimacy of the licence agreement or to the insolvency question is
no more than speculative. No order is required.
29 At [13 (e)].
All correspondence and meeting file notes between liquidator (and his solicitors and advisers, and Jirsch Sutherland, administrator for MSH No.2 Pty Ltd) in particular relating to the intellectual property licence
[82] The liquidators say that relevant correspondence and/or meeting notes between the liquidators and Jirsch Sutherland, specifically material in relation to intellectual property, has already been provided.30 I see no reason to query that.
Unredacted versions of bank statements for Northern Crest, MSH No.2 Pty Ltd and any related companies during the period 2010 to 2011
[83] While Robt. Jones sought discovery of these documents in its submissions, they are not referred to in Robt. Jones’ application. I do not need to deal with them. I also note that MSH No 2 Pty Ltd is an Australian company in administration. The liquidators of Northern Crest, a New Zealand company, will not have control of MSH’s documents.
Summary on particular discovery
[84] I am not satisfied that the liquidators are required to give a further affidavit of documents on any of the classes of documents for which Robt. Jones seeks discovery under r 8.19. I do not regard discovery directed at showing the alleged illegitimacy of any licence agreement or at testing the ability of Northern Crest to pay its due debts as serving any useful purpose. The legitimacy or otherwise of any licence agreement is irrelevant. Payments by Columbus were applied to reduce Northern Crest’s debts to Robt. Jones. That will not change if the licence agreement were shown to be a sham or otherwise ineffective.
[85] Similarly, Robt. Jones cannot seriously argue that Northern Crest was solvent at relevant times, given that its own dealings show unmistakeably that the company could not pay all its due debts. The pursuit of documents to probe the solvency of Northern Crest is a barren exercise.
[86] For the above reasons, the application for particular discovery fails.
30 At [13(f)].
Application under r 8.25 to set aside a claim to privilege
[87] Part 2 of the liquidators’ affidavit of documents lists those documents for which the liquidators claim privilege. Most of the privilege claims are under s 54 of the Evidence Act 2006 – communications with legal advisers. There are also a smaller number where privilege is claimed under s 56 – communications prepared for the dominant purpose of litigation privilege.
[88] Here are the sections:
54 Privilege for communications with legal advisers
(1) A person who obtains professional legal services from a legal adviser has a privilege in respect of any communication between the person and the legal adviser if the communication was—
(a) intended to be confidential; and
(b) made in the course of and for the purpose of—
(i) the person obtaining professional legal services from the legal adviser; or
(ii) the legal adviser giving such services to the person.
(2) In this section, professional legal services means, in the case of a registered patent attorney or an overseas practitioner whose functions wholly or partly correspond to those of a registered patent attorney, obtaining or giving information or advice concerning intellectual property.
(2) In subsection (2), intellectual property means one or more of the following matters:
(a) literary, artistic, and scientific works, and copyright:
(b) performances of performing artists, phonograms, and broadcasts:
(c) inventions in all fields of human endeavour:
(d) scientific discoveries:
(e) geographical indications:
(f) patents, plant varieties, registered designs, registered and unregistered trade marks, service marks, commercial names and designations, and industrial designs:
(g) protection against unfair competition:
(h) circuit layouts and semi-conductor chip products: (i) confidential information:
(j) all other rights resulting from intellectual activity in the industrial, scientific, literary, or artistic fields.
56 Privilege for preparatory materials for proceedings
(1) Subsection (2) applies to a communication or information only if the communication or information is made, received, compiled, or prepared for the dominant purpose of preparing for a proceeding or an apprehended proceeding (the proceeding).
(2) A person (the party) who is, or on reasonable grounds contemplates becoming, a party to the proceeding has a privilege in respect of—
(a) a communication between the party and any other person:
(b) a communication between the party’s legal adviser and any
other person:
(c) information compiled or prepared by the party or the party’s
legal adviser:
(d) information compiled or prepared at the request of the party,
or the party’s legal adviser, by any other person.
…
[89] The documents in Part 2 run from November 2009 to April 2011. They are communications between Northern Crest and its lawyers. It is accepted that when they were made Northern Crest could claim privilege for them. When the company went into liquidation, control passed to the liquidators. They are entitled to continue claiming privilege. They may also waive privilege.
[90] Robt. Jones says that the liquidators have lost privilege in all the documents in Part 2 of the affidavit of documents because of waiver under s 65(2) and (3)(a) of the Evidence Act:
65 Waiver
(1) A person who has a privilege conferred by any of sections 54 to 60 and 64 may waive that privilege either expressly or impliedly.
(2) A person who has a privilege waives the privilege if that person, or anyone with the authority of that person, voluntarily produces or discloses, or consents to the production or disclosure of, any significant part of the privileged communication, information, opinion, or document in circumstances that are inconsistent with a claim of confidentiality.
(3) A person who has a privilege waives the privilege if the person—
(a) acts so as to put the privileged communication, information, opinion, or document in issue in a proceeding; or
(b) institutes a civil proceeding against a person who is in possession of the privileged communication, information, opinion, or document the effect of which is to put the privileged matter in issue in the proceeding.
[91] In their evidence, the liquidators have disclosed communications between Northern Crest and its lawyers. As an example, I set out below the text of an email of 8 September 2010 by Mr L Eakin, Northern Crest‘s executive director, to Northern Crest’s counsel:
Dear Terry,
To address the main point of your communication, the draft letter to
Mr Chesterman is acceptable to us, thank you.
In respect of the other matters you have raised, my comments are as follows: MSH No.2 Pty Ltd is a wholly-owned subsidiary company of Northern
Crest. Most of the payments to RJHL that have not been made directly by Columbus have been paid by MSH No.2. It is not providing the funds to NCIL but merely providing the banking service as an operating subsidiary.
In respect of the payments made by Columbus on behalf of Northern Crest to RJHL, this was done merely to shortcut the process. The payments made by Columbus represent monies that are owed by Columbus to Northern Crest under the licensing agreement between both parties. They are not loans by Columbus to Northern Crest. We have approximately $A2 million in licence fees still outstanding from Columbus as at 31 March 2010, and a minimum of a further $A2.1 million under the licence agreement for the period from
1/4/10 to 31/3/11.
If you believe the point is worth addressing (given that it is likely to be of academic interest to Northern Crest should we reach that point), then I would be grateful if you would confirm, at your convenience, whether your view on comments by Columbus and MSH No.2 remains as indicated below.
In respect of a payment to you this week, regretfully I believe it is unlikely at this stage. Should that situation change, I will advise you immediately.
With best regards
Laurie Eakin
[92] As an example of a communication going the other way, on 27 August 2010
Northern Crest’s counsel emailed Mr Eakin:
Dear Laurie
This is simply not good enough, given paragraph 4 of NCIL’s statement of
defence (copy attached) which was filed and served with your approval and
authority, and is completely contrary to our recent communications and your assurances.
Please advise Columbus and the NCIL board that if NCIL is not able to comply with paragraph 4 of its pleading in all respects by 3 September 2010 and pay my unpaid fees and disbursements by that date, then it should arrange for another solicitor and counsel to represent NCIL in the RJHL and Ingleson matters.
Yours sincerely.
Waiver under s 65(2)
[93] Robt. Jones says that because lawyer-client communications such as these have been disclosed, the liquidators have waived privilege in all communications between Northern Crest and its lawyers. It would now be unfair for the liquidators to claim privilege in other materials, after having disclosed some of the communications. Robt. Jones also contends that using these communications the liquidators have put all the privileged material in issue in this proceeding.
[94] But for the waiver question, privilege continues to attach to the documents, even if the litigation for which the documents were prepared has now passed, or the matters for which advice was sought are now a matter of history. It is not necessary to enquire into the relevance of the privileged documents. By including the documents in their discovery affidavit, the liquidators have accepted their relevance to the proceeding.
[95] The liquidators accept that by putting documents in evidence, they have waived privilege in those documents, but deny that they have waived privilege in other communications.
[96] In Houghton v Saunders, French J stated the general approach on waiver under s 65(2):31
It is possible to distil the principles from the case law:
31 Houghton v Saunders (2009) 19 PRNZ 476 (HC) at [55].
(i) Where a party’s use of privileged material destroys its confidentiality, the privilege will be treated as impliedly waived, even if that was not the party’s actual intention.
(ii) Waiver can occur pre trial.
(iii) Whether “a significant part” of privileged material has been disclosed as required by s 65(2) will depend on the substance rather than the quantity of privileged material that is disclosed.
(iv) Disclosure of the existence of a privileged document as distinct from
its contents will not normally amount to implied waiver. …
(v) Deliberate disclosure of a complete copy of the privileged document will amount to waiver.
(vi) Deliberate disclosure of some of the content of the privileged document will not necessarily amount to an implied waiver but may do so.
(vii) The test to be applied is whether, in all the circumstances, the conduct is inconsistent with maintaining the confidentiality of the privileged material in a way that could lead to injustice if the privilege is upheld. This test although enunciated in a pre-Evidence Act decision, is still applicable to a consideration of both s 65(2) and s 65(3)(a).
(citations omitted).
[97] Here the question is whether privilege has been lost in all associated materials as well as the particular documents attached to the liquidators’ affidavits. In Pacific Pine Products Ltd v KRTA Ltd, Master Kennedy-Grant said: 32
The authorities to which I have referred agree that waiver of privilege in respect of a particular document (“the principal document”) extends to connected documents but appear to differ as to whether the connection must be to the particular transaction to which the principal document relates or can be to any of the issues in the case referred to in the principal document.
…
The transaction test for connection is favoured by Phipson, following Tanter and approved by Konigsberg. The subject matter or issues test is favoured by Doland, Nia Karteria v Lillicrap. The two tests are irreconcilable, although the result of their application may be the same in some cases, e.g. where the issue is what was said on a particular occasion or what instructions were given to a solicitor in relation to a particular transaction or a particular phase of a transaction.
As a matter of principle – and the matter is not settled as one of precedent, on the authorities to which I have been referred – it seems to me that the issues test is one that should be adopted. I am of this view because the
32 Pacific Pine Products Ltd v KRTA Ltd HC Gisborne CP34/89, 24 June 1993 at 29-30.
issues test is directed to the real purpose of litigation – the determination of issues – and is thus more likely to achieve justice than the transaction test. If the issues are properly identified, the scope of the extended waiver can easily be determined and there is little risk of unfair discovery.
That justice and its concomitant fairness, is the ultimate test of what is proper in this field is clear from the above cases …
[98] In McGuire v Wellington Standards Committee (No 1), Kós J said:33
The following points are, I think, relevant to a consideration of the extent to which other parties are entitled to reach when there has been a partial waiver of privilege. The issue will normally apply in an application for further and better discovery. Or it may arise where pre-emptive orders are sought for the admission of proposed evidence. The first question concerns relevance
… The second question concerns consequence. Assuming relevance, what injustice may arise if the remaining privilege is preserved, and the further
material is not produced or adduced? Only by weighing those two questions in the entire context of the proceeding can the Court decide whether it is
necessary in the interests of justice to direct that further material be produced, and be admissible at trial. Because only if it is necessary to avoid real injustice should privilege beyond what has already been disclosed be
held to have been waived. And then, the extent of production or admission will be restricted to what is necessary adequately to ameliorate that injustice.
[99] By way of explaining that injustice, Panckhurst J said in AstraZeneca Ltd v
Commerce Commission:34
The mere relevance of a privileged communication to an issue in the case provides no basis for waiver. Even a party’s asserted reliance upon a privileged communication is generally insufficient. Waiver occurs where a party both asserts reliance upon privileged communication and also seeks to inject the substance of the communication in evidence. At that point an abuse of the privilege exists. The claimant cannot have the benefit of reliance upon the substance of the advice and still seek to shield that advice from disclosure to the other side. To permit this would give rise to unfairness in the required sense, in that the party’s conduct would be offensive to the trial process.
[100] In this case, the communications between lawyer and client were at particular stages in legal proceedings where instructions and advice were given to deal with the particular circumstances at the time of a communication. Each can be read and understood on their own, without reference to other privileged material. Because advice and instructions were given episodically at particular stages of litigation and
without any reference to any wider litigation strategy, there is no unfairness to Robt.
33 McGuire v Wellington Standards Committee (No1) [2014] NZHC 1159 at [27].
34 AstraZeneca Ltd v Commerce Commission (2008) 12 TCLR 116 (HC) at [39].
Jones in its not knowing the contents of other advice given at other stages in the proceedings. Under either the transaction test or the issues test Master Kennedy- Grant referred to in Pacific Pine Ltd v KRTA Ltd,35 other communications passing between Northern Crest and its lawyers at other stages in the litigation are not associated materials. In putting some communications in evidence, the liquidators have not lost the right to continue claiming privilege in others. In finding that the liquidators have not waived privilege, I do not consider that there is any unfairness of the sort described in McGuire v Wellington Standards Committee (No1) and
AstraZeneca Ltd v Commerce Commission.
[101] I accordingly find that there has been no waiver under s 65(2).
Waiver under s 65(3)(a)
[102] The approach under s 65(3)(a) is similar. A typical situation for waiver under s 65(3)(a) is when a party to a proceeding justifies a course of conduct by saying that they had legal advice. They have then put that advice in issue. They cannot resist disclosing that advice. This is not that sort of case. While the liquidators have relied on communications between Northern Crest and its lawyers to show Northern Crest‘s inability to pay its debts (for example, instructing the lawyers to seek more time for payment), they have not put the content of the legal advice in issue in this proceeding. Northern Crest did receive legal advice, but the content of that advice is irrelevant to the issues in this proceeding. There has accordingly been no waiver under s 65(3)(a).
[103] Robt. Jones’ waiver challenge accordingly fails.
Outcome
[104] Both discovery applications are unsuccessful. Robt. Jones should now give its evidence to the voidable transaction proceeding. Directions for a hearing will be
given once evidence on the substantive issues has been exchanged.
35 Pacific Pine Ltd, above 32, at 29-30.
[105] I make these orders:
(a) Robt. Jones’ application for further discovery and to challenge privilege is dismissed;
(b) Robt Jones is to file and serve its affidavits in opposition to the
liquidators’ voidable transaction proceeding by 14 August 2015;
(c) The liquidators are to file and serve their evidence in reply by
4 September 2015;
(d)The proceeding is to be called in the miscellaneous companies list on Friday 11 September 2015 at 11.45 am for directions to be given for hearing. For that call, the parties should advise how many, if any, witnesses are likely to be cross-examined and how much time will be required for hearing.
(e) Robt. Jones will pay the liquidators costs on the discovery application.
I invite the parties to confer as to costs. If they cannot agree on costs on this application, memoranda may be filed. The liquidators should file and serve any memorandum no later than 3 July 2015. Robt. Jones should file and serve any memorandum in response by 10 July
2015. I will decide costs on the papers unless I see any special need otherwise.
(f) Leave is reserved to apply for further directions.
Associate Judge R M Bell
45
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