McCulloch v Quinn
[2012] NZHC 2469
•24 September 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-003508 [2012] NZHC 2469
BETWEEN DONALD ASPINALL MCCULLOCH, NOLA EVANS AND PETER GLYN EVANS AS TRUSTEES OF TOTARA TRUST
Plaintiffs
ANDBERNARD PAUL QUINN First Defendant
ANDNGATI AWA ASSET HOLDINGS LIMITED
Second Defendant
ANDALAN PATRICK PETERS Third Defendant
ANDPETERS CAPITAL LIMITED Fourth Defendant
ANDWILLIAM NORMAN BIRNIE Fifth Defendant
ANDSTEPHEN ROBERT NORRIE Sixth Defendant
ANDBIRNIE CAPITAL PROPERTY PARTNERSHIP LIMITED Seventh Defendant
ANDPICASSO NOMINEES LIMITED Eighth Defendant
ANDWILLIAM NORMAN BIRNIE, STEPHEN ROBERT NORRIE AND RICHARD JAMES O'BRYEN HOARE AS
TRUSTEES OF THE PAONEONE SETTLEMENT TRUST NO. 5
Ninth Defendant
ANDBJF PROPERTIES LIMITED Tenth Defendant
MCCULLOCH & ORS V QUINN & ORS HC AK CIV-2011-404-003508 [24 September 2012]
Hearing: 21 September 2012
Appearances: G Turkington and K L J Simcock for Plaintiffs/Applicants
Z Kennedy and M Clark for First, Second, Third and Fourth
Defendants/Respondents
A J B Holmes for Fifth, Sixth, Eighth and Ninth
Defendants/Respondents
Judgment: 24 September 2012
JUDGMENT OF VENNING J
on application for leave to appeal
This judgment was delivered by me on 24 September 2012 at 4.00 p.m., pursuant to Rule 11.5 of the
High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Izard Weston, Wellington
Lee Salmon Long, Auckland
Minter Ellison Rudd Watts, AucklandBell Gully, Wellington
Copy to: G L Turkington, Wellington
A J B Holmes
Introduction
[1] This is an application for leave to appeal the judgment of Allan J1 dismissing the plaintiffs’ application for an order requiring the first to fourth defendants to produce for inspection all documents relating to the settlement of the associated derivative proceedings.
[2] It is unnecessary to rehearse the background. It is set out fully in both the earlier judgment of this Court in McCulloch v Quinn2 and the judgment of Allan J.
Allan J’s judgment
[3] Allan J identified the issue for determination before him as follows:
[20] In an affidavit of documents sworn on 12 July 2012, Mr Peters claims litigation privilege on behalf of the first to fourth defendants for certain documents listed in part two to the schedule of the affidavit. In respect of seven documents, dated between 18 January 2011 and 18 February
2011, Mr Peters claims privilege on the basis that they consist of:
...without prejudice email correspondence about the possibility of an agreed resolution of the share sale.
[21] In respect of certain further documents, dated between 25 February
2011 and 9 Mary 2011, litigation privilege is claimed on the ground that the documents consist of:
... without prejudice email correspondence regarding the preparation of the share sale and purchase agreement, and related security and other documentation.
[22] The plaintiffs do not accept the claim to litigation privilege to have been validly made and seek an order directing that the documents concerned be produced for inspection by the plaintiffs. Essentially, the plaintiffs’ argument is that any privilege the communications in question might enjoy under s 57(2) of the Evidence Act 2006 is “trumped” by s 168 of the Act. Mr Turkington argues that the Court in its supervisory role under s 168 is entitled to know the basis upon which a settlement or compromise was reached. The situation is analogous, he argues, to the acknowledged exceptions to privilege entitlements and that as a matter of public policy, the first to fourth defendants ought not to be entitled to maintain their claimed privilege in the documents concerned.
1 McCulloch v Quinn [2012] NZHC 1850.
2 McCulloch v Quinn [2012] NZHC 16.
[4] Allan J first rejected the applicants’ submission that, on public policy grounds, the Court ought to be provided with every document that might bear upon the exercise of its jurisdiction under s 168 of the Companies Act 1993. He did not consider a case had been made out for the production of the disputed documents on that basis.
[5] Next, Allan J rejected the submission that the privilege was that of the company BCPP and not that of the first to fourth defendants. He noted that the settlement agreement did not involve BCPP as a party. The settlement concerned the separate interests of certain shareholders in BCPP. The Judge noted that while the first and third defendants may have had obligations in respect of the conduct of the derivative proceedings, that was a quite different matter from the issue of the litigation privilege in respect of an agreement affecting shareholder rights and relationships, which did not directly touch upon the rights of BCPP.
[6] The fifth, sixth, eighth and ninth defendants supported the application before Allan J (as they support this application for leave). They confirmed that they waived their privilege in the relevant documents. As Allan J noted, however, the privilege concerned is that of all parties to the negotiation. It could only be waived if the first to fourth defendants agreed to waive it.
[7] Allan J then dismissed the submission, made in reliance on Cas Nominees Ltd v Nottingham Forest PLC,3 to the effect that shareholders were entitled to see legal advice the board of the company had obtained when the company was a defendant in a proceeding only in a nominal capacity so that it would be bound by Court orders made. Allan J rejected the argument that, by analogy, the plaintiffs should have access to the relevant documents in the present case. He held Cas Nominees was not
authority for the proposition that, as a general rule, shareholders ought to be able to see documents notwithstanding a privilege enjoyed by the company itself.
[8] Finally Allan J rejected the submission that there had been a waiver of privilege by the first to fourth defendants because they had put the information contained in the disputed emails in issue in the proceeding because of the way they
had portrayed the offer to purchase their shares as wholly unrelated to, and separate from, attempts to settle the derivative proceeding. The Judge considered that counsel’s summary of the subject matter of the emails was not sufficient to amount to a waiver in the circumstances.
Proposed appeal
[9] The applicants wish to argue on appeal that Allan J was wrong to conclude that “public policy considerations” did not engage the Court under s 168 of the Companies Act to order production of the documents in question in the circumstances of this case.
[10] The application is advanced on the grounds:
(a) the issue of whether s 168 of the Companies Act defeats litigation privilege is an important question of law and a question of public importance;
(b)the effect of the judgment will be to prohibit evidence being led (and substantially circumscribe the plaintiffs’ conduct of their case) as to why the fifth to tenth defendants preferred a financial settlement with the second to fourth defendants’ interests instead of BCPP and so there will be real prejudice to the plaintiffs.
The approach to applications for leave
[11] This is an application for leave to appeal pursuant to s 24G of the Judicature Act 1908. The principles to be applied in relation to such an application for leave are settled: Clear Communications Ltd v Attorney-General.4 They are:
(a) a high threshold for granting leave exists as the Commercial List is designed to secure the expeditious completion of the interlocutory stages of a case and so minimise delays in its ultimate disposition;
(b)leave will only be granted where circumstances warrant further delay, and in particular the further delay associated with an appeal being incurred;
(c) an error of fact or law is generally insufficient: the error must be such as to create real detriment if not corrected, relate to an important question of law or touch upon a matter of general or public importance; and
(d)challenges to discretionary orders made by a Commercial List Judge will not lightly be initiated or should not be lightly entertained.
[12] As noted, the applicants’ argument in the present case is essentially that the proposed appeal raises an important question of law and that, without access to the documents they will suffer real detriment.
Decision
[13] This application must be considered against the above principles and in the context of the current pleading. No party chose to take up the derivative proceedings. As a result, those proceedings have been struck out. The plaintiffs’ claim is limited to the allegations made in their amended statement of claim of 2
February 2012. Relevantly, for present purposes the plaintiffs seek relief under s 174 of the Companies Act. The plaintiffs allege breach of duty by the first and third defendants by preferring the interests of the second and fourth defendants in taking the opportunity of the use of the derivative proceedings in the name of BCCP to sell their shares to BJF Properties without seeking the Court’s approval under s 168 of the Companies Act, by denying the plaintiffs the opportunity to share in the fruits of the derivative proceedings, and by failing to disclose to the Court the full terms of the settlement and otherwise generally departing from the fair standards of dealing.
[14] Similar allegations are pleaded to support an alternative cause of action for breach of fiduciary duty. A tracing cause of action is pleaded against the second and fourth defendants.
[15] As Allan J noted, the terms of the settlement in issue have now been disclosed. The settlement agreement itself has been disclosed. It was provided to the Court as an annexure to an affidavit in the strike-out proceedings.
[16] It is inevitable that if leave is granted any appeal will delay the ultimate disposition of this proceeding. As Mr Kennedy noted, an application for summary judgment against Mr Birnie for the fruits of the settlement has already been stayed once. It is re-listed for hearing in October this year. If this application for leave is granted it may be that application for summary judgment will be further adjourned. That would not be in the interests of the plaintiffs nor the first to fourth defendants.
[17] I return to the issue of whether there is an important question of law or whether there will be real detriment to the plaintiffs if leave is not granted so as to overcome the prejudice arising from the inevitable delay associated with an appeal.
Important question of law
[18] Mr Turkington identified the important question of law as:
Whether the exceptions to privilege mentioned by the Court of Appeal in Sheppard Industries Ltd v Specialized Bicycle Components Inc5 should include an abuse of statute in circumstances such as these.
[19] Mr Turkington submitted that privilege should not apply if the settlement was made in the abuse of a statutory supervisory provision such as s 168. He referred to the majority decision of the High Court of Australia in Attorney-General for the Northern Territory v Kearney.6 In that case the majority held that an exception, based on public interest, existed where a communication existed that was made for the purpose of frustrating the process of the law itself, even though no crime or fraud was contemplated. An initial issue is whether it can be said that, accepting the first
to fourth defendants took advantage of the derivative proceedings to sell their own
5 Sheppard Industries Ltd v Specialized Bicycle Components Inc [2011] 3 NZLR 620 (CA).
6 Attorney-General for the Northern Territory v Kearney (1985) 158 CLR 500; 61 ALR 55 (HCA).
shares, that can be said to amount to frustrating the process of the law itself sufficient to defeat privilege.
[20] Privilege will not, for example, be defeated even where the purpose of the communication was to breach a contract or to further a conspiracy to breach a contract: Crescent Farms (Sitcup) Sports Ltd v Sterling Offices Ltd.7
[21] However, putting that issue to one side, the starting point for New Zealand must be the provisions of the Evidence Act 2006. Section 57(2) provides for privilege in respect of a confidential document that the person has prepared, in connection with an attempt to negotiate a settlement of the dispute. The communications in issue in this case prima facie fall into that category. Section
67(1) provides for the circumstances that are required before that privilege will be lost. A Judge must disallow a claim of privilege where there is a prima facie case the communication was prepared for a dishonest purpose or was made to enable the commission of an offence.
[22] I accept Mr Kennedy’s submission that that requirement for a prima facie case of dishonest purpose or that the communication was made to enable the commission of an offence each contemplate a much higher test than that adopted by the High Court of Australia in Kearney.
[23] I note the Evidence Act does not define a “dishonest purpose”. The authors of The Evidence Act 2006, Act & Analysis suggest that privilege will not be destroyed merely because the purpose amounted to a civil wrong and that the wording does not support the view of the High Court of Australia that an intentional abuse of a statutory power is a sufficiently improper purpose to destroy privilege.8
[24] The same point is made by the authors of Adams on Criminal Law at
ED20.09(11).9
7 Crescent Farms (Sitcup) Sports Ltd v Sterling Offices Ltd [1972] Ch 553; [1972] 2 WLR 91.
8 Richard Mahoney and others The Evidence Act 2006: Act & Analysis (2nd ed, Brookers, Wellington, 2010) at EV67.02.
9 Bruce Robertson (ed) Adams on Criminal Law (looseleaf ed, Brookers) at [ED20.09(11)].
[25] The Court of Appeal considered the extent and limitations of privilege in Sheppard Industries Ltd v Specialized Bicycle Components Inc.10 The Court of Appeal held that such communications would lose privilege if it was necessary to show a settlement should be set aside for misrepresentation, fraud or undue influence (or breach of the Fair Trading Act) or where exclusion would act as a cloak for perjury, blackmail or other serious impropriety. Other than those factors (which do
not apply here), the Court did not suggest what else might be sufficient “serious”
impropriety.
[26] Kós J did, however, consider the issue directly in Rollex Group (2010) Ltd & Anor v Chaffers Group Ltd & Ors.11 Kós J referred to s 67 of the Evidence Act and reaffirmed that:
[35] Only exceptionally, where the right of access is abused so as to assist in an act of dishonesty, will the privilege [solicitor/client privilege] be set aside.
[27] In dealing with this issue, and considering whether the actions of the first to fourth defendants can be said to amount to “serious impropriety” Allan J noted that counsel for the first to fourth defendants and the Birnie related parties advised the Court of the settlement and drew the Court’s attention to s 168 but submitted that it was not engaged. Further, part of the excessive consideration paid was related in part to the value of the derivative proceedings which at that time remained available to another shareholder to pursue. For their own reasons, the parties chose not to pursue them.
[28] Next, as Mr Kennedy submitted, the agreement related to the sale of the second and fourth defendants’ shares, which they were entitled to sell.
[29] Despite Mr Turkington’s submissions, and even accepting the Court might conclude the first to fourth defendants have acted unfairly towards the interests of BCPP (and its other shareholders), the facts of this case do not support an argument
that s 67(1) is engaged, or that the categories referred to by the Court of Appeal in
10 Sheppard Industries Ltd v Specialized Bicycle Components Inc above n 5.
11 Rollex Group (2010) Ltd & Anor v Chaffers Group Ltd & Ors [2012] NZAR 746.
Sheppard Industries should be extended, even to a settlement made in breach of s 168.
Is there real detriment?
[30] The plaintiffs say it is necessary for them to access the privileged communications to determine why the agreement was structured in the way it was. The short answer to that point, however, is that why it was structured that way cannot be relevant to the relief sought under s 174 of the Companies Act or for breach of fiduciary duty. The important fact is that the agreement (in disclosed terms) was concluded in the context of the derivative proceedings.
[31] The issue is whether the first and third defendants breached the obligations they owed to the company in entering the settlement agreement in relation to the sale of the second and fourth defendants’ shares. The present claims before the Court based on breach of s 174 and breach of fiduciary duty will primarily be determined by the Courts’ attitude to the first to fourth defendants’ act of settling in the terms they did and whether the resolution of the proceedings breached the obligations that the first to fourth defendants owed to the plaintiffs. To determine that issue it should not be necessary for the plaintiffs to access the negotiations which ultimately led to the settlement agreement which is before the Court.
[32] The plaintiffs do not make out a case for real detriment if the privilege is maintained.
Result
[33] The application for leave to appeal is declined. Costs should follow the event, but I reserve the issue of costs in case counsel are unable to agree.
Venning J
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