McKay v Johnson

[2016] NZHC 466

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2014-404-2511 [2016] NZHC 466

UNDER

Part 19 of the High Court Rules and

section 34 of the Receivers Act 1993

IN THE MATTER

of H.B. Garments Limited (in Liquidation and in receivership) and HAD Garments Limited (in liquidation and in receivership)

BETWEEN

ANDREW JOHN MCKAY Applicant

AND

CLIVE ASHLEY JOHNSON First Respondent

GEOFFREY MARTIN SMITH Second Respondent

Hearing:	10 March 2016
Appearances:	R B Stewart QC and J Caird for the Applicant First Respondent discontinued Second Respondent in person
Reasons:	17 March 2015

REASONS FOR JUDGMENT OF MUIR J

This judgment was delivered by me on Thursday 17 March 2016 at 2.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Counsel:

R B Stewart QC, Barrister, Auckland

Solicitors:

J C Caird, Simpson Grierson, Auckland

Copy to: Second Respondent

MCKAY v JOHNSON & SMITH [2016] NZHC 466 [17 March 2015]

Introduction

[1]      On 10 March 2016 Mr Smith’s 97 page application to rescind inspection and search orders made by Brewer J on 10 December 2015 was set down before me as a preliminary matter prior to hearing the balance of Mr McKay’s substantive claims. Having heard argument I declined the application with reasons to follow.  I did so on the assumption that I would then be hearing the substantive application.   In the event, that application was adjourned part heard because of the late filing of an affidavit  from  Mr Smith  and  Mr McKay’s  requirement  to  meet  that  with  reply evidence.  The reasons for my adjourning the case part heart are set out in my oral judgment on that date.

[2]      I now give my reasons for having declined the rescission application.

Background

[3]      On 10 December 2015 Mr McKay sought and obtained orders in the form annexed to this judgment on an ex parte basis.   The operative part of the orders permitted the inspection of two identified documents, including all relevant meta data, and further authorised computer forensic expert, Mr Whale, to enter and search the premises for any computer or tablet device (“the Devices”).   Such expert was also authorised to take clones of any devices or, if unable to do so, to remove them from the premises for the purpose of cloning.  The orders also contained provision for  supervision  of  their  execution  by  an  independent  barrister  (Mr  Goodall), provision  for  a  report  by  him  and  for  involvement  by  the  Court  in  any confidentiality, privilege or other issues arising from execution of the orders.

[4]      The ex parte application arose out of claims made by Mr Smith in affidavits filed on 5 November 2015 and 3 December 2015 that he had, on 21 December 2013 served on Westpac Banking Corporation (Westpac) (on whose behalf Mr McKay had been appointed receiver), a notice under s 305 of the Companies Act 1993 requiring the election specified in s 305(1) (in default of which the security is to be taken as having  been  surrendered  under  s 305(9)).    The  affidavits  also  deposed  that  Mr McKay and his  assistant, Ms Stone, had been  advised of the s 305 notice at  a meeting on 14 August 2014 and that a letter had been sent that day to Ms Stone

confirming that advice.  Copies of the alleged notice and letter were exhibited by Mr

Smith.

[5]      In  support  of  the  without  notice  application  Mr  McKay  and  Ms  Stone deposed they had at no stage received either document.  Their evidence identified numerous bases on which they suggested that both had been created at a later time, broadly coincident with Mr Smith’s November 2015 affidavit.  They pointed out that Mr Smith had not raised the alleged s 305 notice at the time orders were made confirming Westpac’s security by Fogarty J on 23 February 2015, that Mr Smith had a history of dishonesty and, most compellingly, that a photograph exhibited by Mr Smith allegedly confirming service of the s 305 notice on 21 December 2013 had to be a reconstruction because it depicted an envelope with a “New Zealand’s longest reigning monarch” commemorative stamp which was only issued by New Zealand Post on 7 October 2015.  They also pointed out that the s 305 notice was purportedly addressed to Mr Chinniah in the Bank when his first contact with Mr Smith was not until approximately four months later in March 2014.

[6]      The affidavits and supporting memorandum explained the significance of this apparent deception in terms of claims made in Mr Smith’s November and December

2015 affidavits that, as a result of the s 305 notice:

(a)       Westpac’s   security   over   the   companies   was   “invalid”   and   its

proceedings illegal; and

(b)      the receiver’s failure to disclose service of the s 305 notice rendered

Fogarty J’s judgment of 23 February 2015 “faulty”.

[7]      Brewer J granted the ex parte application on the terms sought.  He said that the allegations made against Mr Smith were serious “and go to the probity of the Court’s system as it applies to this proceeding”.  He was satisfied that, on the basis of the affidavits filed in support of the application, there were good grounds for the allegations.   He considered the application went to matters in question in the proceeding  and  was  satisfied  that  the  interests  of  Mr  Smith  were  adequately

protected by the measures described in the application and contained in the draft orders.  He also noted Westpac’s undertaking as to damages.

[8]      The orders were executed on Monday 14 December 2015.  On 15 December

2015 Mr Goodall filed his report in the form of a lengthy affidavit.   He deposes arriving at the Te Kawhata home of Mr Smith at 10.45 am.  There was no one there. He telephoned Mr Smith but there was no response.   He then phoned Mr Smith’s wife who answered and said that she would shortly be returning home.  She did so at

11.10 am.   At 11.20 Mr Smith phoned Mrs Smith’s mobile at which  point  Mr Goodall had an opportunity to appraise him of what was occurring.  Mr Goodall then proceeded to explain the orders in detail to Mrs Smith.  Mrs Smith then withdrew to another room where Mr Goodall could hear her talking on the phone.  She then left the premises with a black carry bag over her shoulder which she proceeded to place in her vehicle. When challenged by Mr Goodall, he identified a black Toshiba laptop in the carry bag.   He asked Mrs Smith to return to the house with the carry bag, which she did.

[9]      At 12.10 Mr Smith arrived at the premises and the orders were explained to him.  Mr Smith then told Mr Goodall that the two documents identified in the orders had been created on one or other of two PC computers located in Pukekohe which he no longer had access to.

[10]     At 12.45 am cloning of the Toshiba laptop commenced.  Mr Whale estimated this would take approximately two hours.

[11]     Mr Goodall then deposes to a discussion with Mr Smith about whether there were further computers in the house.  Mr Smith told him that he had a desk top PC in the computer room, located off the lounge.  Mr Smith was advised that this would be cloned also. That process started at 1.10 pm.

[12]     Pursuant to order 4(b) Mr Goodall says that a search of the house was then carried out for any further devices.  Four further PC computers were located which Mr Whale suggested could be more efficiently cloned off site.  Mr Goodall deposes

that Mr Smith readily agreed to the suggestion, stating that he would collect the equipment from Mr Whale when convenient.

[13]     By 1.40 pm the cloning of the first desk top PC referred to in [11] was completed.

[14]     At  2.10  pm,  while  the  expert,  Mr  Smith  and  Mr  Goodall  were,  in  Mr Goodall’s words, “sitting around the dining table waiting for the  laptop cloning process to be completed”, discussion turned to the two documents specifically identified in the Court’s orders.   Mr Goodall deposes that Mr Smith at that stage advised that the documents could be found on the Toshiba laptop which was being cloned.  He said that they had been transferred on to the laptop from the Pukekohe PCs he had previously referred to.  He said that they had been “scanned” on to the laptop using a “printer” at his house but that that printer was no longer in his possession.

[15]     At 2.40 pm the laptop cloning was complete.

[16]   Mr Goodall took contemporaneous notes and completed his affidavit immediately he returned to his office.

Mr Smith’s submissions

[17]     Mr  Smith’s  very  extensive  application  (and  shorter  supporting  affidavit) allege mala fides and non disclosure on the part of Mr McKay in seeking the orders. He submits that the orders were, for these and other reasons, unlawfully obtained.

[18]     In the course of oral argument the essential complaints were distilled as follows:

(a)      First, in his affidavit in support of the application Mr Whale had deposed that the forensic exercise which he was being asked to undertake “should not destroy or harm this property” and “should confirm the date the documents were created” whereas, Mr Smith submitted, he should have deposed to the significant risks of damage

to the computer from the cloning process and the fact that, in respect of some programmes, the creation date of a particular document, as opposed to the file creation date, will not be able to be established.

(b)Second, and with greater emphasis, Mr Smith claimed that the orders were  applied  for  under  r 9.34,  which  relates  to  inspection  of  any property, but that they included orders for the premises to be searched “for any devices”.

[19]     In respect of this second argument Mr Smith submitted:

(a)       Applications under r 9.34 are for the inspection of “the property”.

(b)In this case the property identified in the application and orders were the two documents referred to.

(c)      Although, pursuant to r 9.34 the Court could authorise a person “to do anything else for the purpose of getting access to the property” (in this case the documents) and although this could include searching premises for any computer device or searching a computer device once located, nothing in the Rule empowered a general search for such  devices.    In  short,  the  argument  was  that  the  only  search permitted was that necessary to facilitate inspection.

(d)Therefore submitted Mr Smith, a search for any devices other than the laptop device on which the relevant document was located was unauthorised.

(e)      What Mr McKay was in fact seeking was a search order under part 33 of the High Court Rules or a hybrid inspection and search order and that, in either case, the order was inappropriately made on an application which relied on r 9.34 exclusively.

[20]     He submitted that it was Mr McKay’s intention all along to conduct a search of the property but that this was packaged in the more benign form of an application for inspection orders. As such he submitted that the orders should be rescinded.

Mr McKay’s submissions

[21]     On  behalf  of  the  receiver  Mr  Stewart  QC  rejected  any  suggestion  of impropriety in relation to the application or execution of the subsequent order.  He referred to the memorandum filed in support of the application, which I accept is very comprehensive, and to the terms of the proposed draft order.  He said that the application, memorandum and draft order all recognised a requirement to search the premises for devices, that this would be potentially invasive and that, as a result, exactly the same protections were proposed as would typically occur in the context of a Part 33 application for search orders.

[22]     He said that what was appropriately sought was an inspection order but that searching was a necessary and ancillary part of executing such order and that authority for that was therefore sought and obtained.  He emphasised Mr Goodall’s report which he said confirmed execution of the order in the terms granted.

[23]     He further submitted that, even if Mr Smith was correct that the application should have been identified as made both under r 9.34 and Part 33, no prejudice had been shown because all of the protections typical in the Part 33 context had been imported into the application and draft order.

Inspection orders

[24]     These are available under r 9.34 which provides:

9.34     Order for inspection, etc

(1)       The court may, for the purpose of enabling the proper determination of any matter in question in a proceeding, make orders, on terms, for—

(a)      the inspection of any property:

(b)      the taking of samples of any property:

(c)      the observation of any property:

(d)      the measuring, weighing, or photographing of any property: (e)     the conduct of an experiment on or with any property:

(f)       the observation of a process.

(2)      An order may authorise a person to enter any land or do anything else for the purpose of getting access to the property.

(3)      In this rule, property includes any land and any document or other chattel, whether in the control of a party or not.

[25]     Orders may only be made where necessary to enable proper determination of any question in the proceeding.   However, beyond that jurisdictional requirement, the power is discretionary.

[26]     The commentary in McGechan on Procedure recognises that:

An order under this rule has the potential to be as invasive as a search order (see Part 33).  In situations where this is likely, especially where an order is made without notice, the Court will require the same undertakings and precautions as it would when making a search order: Overseas Containers Ltd v Geo H Scales Ltd HC Wellington CP395/86, 22 September 1986.1

[27]     In  the  Overseas  Containers  decision  McGechan  J  said  in  respect  of  the former r 33.1:2

It was submitted that the orders sought were under r 33.1 which was seen as having additional advantage to the applicant in not prescribing the more astringent requirement for an Anton Pillar order [now a search order under Part 33].  I consider orders of the type sought are open in appropriate cases under r 33.1 as a matter of plain wording interpreted in the light of r 4 but at this  early  stage  in  consideration  of  r 33.1  I  do  not  propose  to  be  so adventurous as to rule that where rights of entry, search and removal are conferred the Court should adopt any lower standard than that required from an Anton Pillar order.  I consider also that orders of the type concerned need not be made solely under r 33.1 but can also be made under the Court’s inherent jurisdiction…

[28]     I adopt that statement, as did counsel for McKay in their memorandum in support of the application.

Jurisdiction to rescind orders

[29]     Rule 7.49 provides that a party affected by an interlocutory order may apply to the Court to rescind that order.   Strict time limits are imposed.   In relation to interlocutory orders made without notice, applications typically arise in the context of alleged absence of full disclosure or material misstatement in the application. Although earlier cases reflected a strict approach to the consequences of any material

misstatement,3  recent authority indicates a more liberal approach based on the fact

that review of a without notice order is to be regarded as a hearing de novo in the presence of the other party.4

[30]     In the rare case of misstatement or omission with deliberate intent to mislead the Court, rescission will almost inevitably be granted.

Discussion

[31]     I do not accept Mr Smith’s submissions.

[32]     In relation to the point referred to in [18(a)], there is no evidence before the Court to support Mr Smith’s claims of significant risk of damage and Mr Whale’s ultimate report, in which he confidently claimed to have been able to establish the relevant document creation date, supports his statement at the time that he “should” be able to do so.  Whether his ultimate conclusions are correct is a trial issue but is not a basis for criticism of the initial claim.

[33]     In relation to Mr Smith’s substantive argument, my reasons for rejecting it are threefold.

[34]     Firstly, r 9.34(2) clearly and predictably envisages that collateral orders may be made in support of the inspection order contemplated by subsection (1)(a).  Such orders may include search orders to the extent necessary to get access to the property which it is intended to inspect.   In the present case that “property” comprised documents and their meta data.   To that end the order permitted a search of the

premises for “Devices” on which the “property” might be located.  There is nothing objectionable in such collateral order having been sought or made.

[35]     In  terms of execution  of the order,  it occurred exactly as  envisaged.   A Toshiba laptop was the first “Device” to be identified and at 12.45 pm the process of cloning it commenced.  At that time the only advice which Mr Goodall had received as to the origin of the documents referred to in the order was that they had been created on two PCs located in Pukekohe.

[36]     It was entirely appropriate therefore that, both in terms of the order and r 9.34(2), the search should continue for other devices located at the premises which may provide access to the documents sought.  That is what occurred.  So, in addition to the PC which Mr Smith himself identified in the “computer room”, four other desk top PCs were located.

[37]     It was not until after this search had occurred and at approximately 2.10 pm that Mr Smith told Mr Whale that the documents referred to in the order were to be found on the Toshiba laptop.   It cannot be said therefore that the search sought, authorised and undertaken, was for any purpose other than gaining access to “the property” within the terms of r 9.34(2).

[38]     Even if Mr Smith’s advice as to the location of the documents had been earlier given I would have come to the same conclusion.   That advice was to the effect that the documents on the laptop had been transferred there from the Pukekohe PC’s via a printer no longer in Mr Smith’ possession.  It would, in my view, have been consistent with the order to continue to search for devices at the Te Kawhata address from which such transfer could have occurred.

[39]     I reject therefore the proposition that a search could only be authorised under r 9.34  insofar  as  it  led  to  the  device  which,  as  a  matter  of  fact,  contained  the “property” which it was intended to inspect.  Nor do I accept the proposition that the order was executed other than in its terms.

[40]     Secondly, in the context of Mr McKay’s application, the annexed draft order and  counsel’s  memorandum,  I regard  Mr  Smith’s  argument  that  the  application should  have  proceeded,  at  least  in  part  under  r 33.2,  as  a  sterile  one.    The memorandum  on  its  face  recorded  that  the  orders  sought  “are  by  their  nature invasive” and that because they were, in fact, every bit as invasive as “a search order under  Part  33  of  the  High  Court  Rules”  exactly  the  same  protections  were appropriate, including the appointment of independent counsel and a requirement that he report to the Court.   The relevant authority in that regard was identified,

being  Overseas  Containers  Limited.5    To  suggest  that  the  Court  was  being

manipulated to grant a search order under the guise of something more benign simply has no basis in fact therefore.

[41]     Against that background, Mr Smith’s criticisms really reduce to an alleged failure on the part of Mr McKay to identify, on the cover page or in paragraph 3 of his application, a secondary basis for it, albeit that the criteria for such secondary basis were addressed and satisfied and that no prejudice therefore resulted.  I do not agree that the receiver was obliged, in the context of what he was seeking, to also rely on Part 33.  Searching to the extent required (and in this case undertaken) could be authorised as ancillary to the inspection order.   But even if I had come to a contrary view on that issue, the case would have fallen well short of the level of impropriety necessary to justify a rescission order.  Indeed, as I have indicated, on the facts of this case the whole argument becomes rather arid.

[42]     Finally,  even  assuming  (albeit  that  I  have  rejected)  some  impropriety  in relation to order 1(b) I would not have been minded to rescind the whole order but only that part impugned.  Had that occurred it is possible that a court might entertain an objection to the admissibility of the evidence obtained as a result of a search for which there was no ultimate authority.   But the evidence which Mr Whale in this case advances derives from his inspection of the Toshiba laptop which was not the fruit of any such search.  Rather, it was handed to Mr Goodall when he identified it in Mrs Smith’s carry bag as she endeavoured to leave the property.  Moreover, as the

laptop was the device on which the documents were in fact located even Mr Smith

5      Overseas Containers Ltd v Geo H Scales Ltd HC Wellington CP395/86, 22 September 1986, above at [25].

would, consistent with his previous arguments, be obliged to concede that the search for it or of it was capable of being authorised under r 9.34(2).

[43]     Accordingly, even if I had been minded to make an order for part rescission

(which I am not), it would have had no practical outcome in the context of this case.

Result

[44]     I decline Mr Smith’s application.

[45]     I award costs on the application on a 2B basis in favour of Mr McKay.

Muir J

Annexure