McMillan v McMaster
[2021] NZHC 300
•26 February 2021
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2020-485-345
[2021] NZHC 300
UNDER Section 284 of the Companies Act 1993 IN THE MATTER
of MARLBOROUGH COUNTRY LIMITED (IN LIQUIDATION)
BETWEEN
MARCUS JAMES McMILLAN and JOHN
HOWARD ROSS FISK, as liquidators of Marlborough Country Limited (in
liquidation) Applicants
AND
GARY RICHARD McMASTER, JAYNE MARIE GALE, PETER SCOTT MURPHY and STEPHEN JOHN GALE
First Respondents
AND
VUELTA INVESTMENTS LIMITED
Second Respondent
continued ……2
Hearing: 15 February 2021 (By AVL) Appearances:
S A Barker and B J Maltby for the First, Second, Third and Fourth Respondents
M V Robinson for the Fifth Respondent
Judgment:
26 February 2021
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 26 February 2021 at 3.15 pm
pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 26 February 2021
McMILLAN v McMASTER [2021] NZHC 300 [26 February 2021]
AND
AND AND
ANNIE CHAN and JACK CHAN
Third Respondents
H HAHN LIMITED
Fourth RespondentFREDERICK PAUL PEREIRA
Fifth RespondentAND AND AND AND AND AND
AND
DOMINIC CHANDRAN
Sixth Respondent
YOU SEO LIAN
Seventh RespondentCHUAH KIM SENG
Eighth RespondentSONIA JANE PEREIRA
Ninth RespondentMARCUS PAUL PEREIRA
Tenth RespondentYONG SIEW LENG
Eleventh RespondentFRANCIS BRIGGED
Twelfth Respondent
[1] This proceeding commenced as an originating application by the liquidators of Marlborough Country Limited (in liquidation) (MCL) seeking directions under S 284(1) of the Companies Act 1993 as to the distribution of the surplus funds in the liquidation. As the proceeding has developed, the liquidators have taken a back seat, essentially leaving it to the competing groups of shareholders to bring their respective claims before the Court.
[2] Recognising that the contest would be advanced by the competing shareholders, Associate Judge Johnston on 25 August 2020 made directions which, in effect, permitted the competing shareholders to advance their respective positions through the notices of opposition to be filed to the liquidators’ application. Accordingly, the document by which the group of shareholders, whom I refer to as the
“Wellington shareholders” (being the first to fourth respondents), set out their claim against the other shareholders is their “Notice of Opposition”. That document is in substance a claim that the Wellington shareholders are entitled to all the funds to be distributed by the liquidators.
[3] The remaining shareholders represent the majority of shares in the company. The Wellington shareholders see the majority as aligned with the fifth respondent, Mr Frederick Pereira.
[4] The Wellington shareholders advance a claim to all of the proceeds on three grounds.
[5] Firstly, that Mr Pereira obtained their investment in MCL without a prospectus, meaning the Wellington shareholders are entitled to the funds by virtue of a statutory trust under the Securities Act 1978 which applied when the Wellington shareholders invested in MCL.
[6] Secondly, the Wellington shareholders allege that the other shareholders did not pay fair value for their shares and therefore do not qualify to share in the distribution of the funds held by the liquidators.
[7] Thirdly, it is alleged that the Wellington shareholders’ investments in MCL were obtained by a fraud/unlawful means conspiracy perpetrated by the fifth respondent. This last claim raised issues as to this proceeding continuing as an originating application.
The interim decision
[8] Prior to the hearing of the liquidators’ application set down for 23 November 2020, an issue arose as to whether the Wellington shareholders could rely on an affidavit filed between the same parties (other than the liquidators) in an earlier proceeding – that is, the Wellington shareholders’ application to have MCL placed into liquidation. That evidentiary issue came before me via telephone conference on 19 November 2020. As a result of the telephone conference, I issued an
interim judgment,1 which directed that the liquidation would come to an end, the surplus funds would be held by a stakeholder, the Wellington shareholders would issue a statement of claim in the ordinary way properly particularising their fraud allegations, and the matter would proceed accordingly. I had raised this possibility with all counsel during the telephone conference and it was supported by all counsel other than Mr Barker for the Wellington shareholders.
[9] On behalf of the Wellington shareholders, Mr Barker has filed an application seeking that I review that interim judgment pursuant to r 7.49 of the High Court Rules 2016 (the Rules) or, in the alternative, that I recall the interim judgment under r 11.9.
[10] The interim judgment was driven by my conclusion that the fraud aspect of the Wellington shareholders’ claim should be pleaded with the normal rigour of a fraud allegation.2 My conclusion is that issue remains intact.
[11] The Wellington shareholders complain that the interim judgment was a result of a 20 minute telephone conference where they did not have a proper opportunity to be heard. They claim that they had adopted the method of advancing their claim as directed by the Court and their first two claims are not dependent on establishing fraud.
Principles relating to review and recall
[12] Mr Barker submitted that review under r 7.49 was available as the interim judgment came out of the interlocutory application concerning the admissibility of evidence from the earlier hearing. In the alternative, he submitted recall was available.
[13]Rule 7.49 provides:
(1)A party affected by an interlocutory order … or by a decision given on an interlocutory application may, instead of appealing against the order or decision, apply to the court to vary or rescind the order or decision, if that party considers that the order or decision is wrong.
1 McMillan v McMaster [2020] NZHC 3065.
2 Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].
[14] Section (6) then says the Judge may vary or rescind the order or decision, or transfer the application to the Court of Appeal.
[15]In relation to recall, Mr Barker referred to Horowhenua County v Nash (No 2)
where Wild CJ said:3
Generally speaking, a judgment once delivered must stand for better or worse subject, of course, to appeal. Were it otherwise there would be great inconvenience and uncertainty. There are, I think, three categories of cases in which a judgment not perfected may be recalled – first, where since the hearing there has been an amendment to a relevant statute or regulation or a new judicial decision of relevance and high authority: secondly, where counsel have failed to direct the Court’s attention to a legislative provision or authorative decision of plain relevance; and thirdly, where for some other very special reason justice requires that the judgment be recalled.
The fraud pleading
[16] The pleading of fraud contained in the Wellington shareholders’ Notice of Opposition is as follows:
(a)The Minority Shareholders’ investments into MCL were obtained by a fraud/unlawful means conspiracy perpetuated by Frederick Pereira, who is one of the Majority Shareholders, and other persons, whose identities are unknown to the Minority Shareholders. Pursuant to this fraudulent scheme Mr Pereira:
(i)Raised capital from the Minority Shareholders based on certain misrepresentations and without a prospectus;
(ii)Arranged for the purchase of the land at Port Underwood from its then owner through an intermediate company Port Underwood Hills Ltd (PUHL) for $800,000 and then arranged for PUHL to sell the same land to MCL 9 days later for in excess of $1.3 million;
(iii)Is the one and the same person as the incorporator of PUHL, Mr Sennacy;
(iv)Allocated shares to family and friends/associates for no or significantly less consideration tha[n] that paid by the Minority Shareholders;
(v)Procured the purchase of a 10% holding in MCL in 2016 from other disgruntled minority shareholders, to settle a liquidation application of MCL; and
3 Horowhenua County v Nash (No 2) [1968] NZLR 632 at 633 (SC).
(vi)Mismanaged MCL’s affairs until its liquidation by the High Court in May 2017.
(b)Consequently, the Proceeds are held on trust for the Minority Shareholders and ought to be distributed accordingly. In addition, the Majority Shareholders were either involved in the fraud and/or are related parties to those who were involved in the fraud, and should not therefore profit or benefit financially from the unlawful circumstances in which they acquired their shares.
[17] It is fair to say the submissions focused on the issue of the fraud pleading. While Mr Barker emphasised the first two limbs of his clients’ case did not depend on fraud, I do not consider that relevant while the fraud claim is maintained. I put to Mr Robinson that if the fraud pleading were not present most of his grounds of opposition to this application would fall away. Without entirely conceding the point, Mr Robinson essentially accepted that the primary objection to the Wellington shareholders’ claim proceeding in the current form is the fraud allegation.
[18] It was the framing of the fraud claim that led to my interim judgment. During the telephone conference I told the parties there would be no substantive hearing without full particulars of fraud being provided.
[19] As I have said, the telephone conference was to address the Wellington shareholders’ application that affidavits from the earlier proceeding be read and that the fifth respondent be summonsed to appear before the Court for cross-examination. The Wellington shareholders recognised that if the evidence from the earlier hearing came in then the hearing of the application for directions would have to be adjourned.
[20] On the basis that the fraud allegations needed to be fully pleaded, and that some delay was inevitable, I issued the interim judgment permitting Mr Barker time to file substantive proceedings properly setting out the fraud allegation. The funds in issue could be secured. The liquidators would be out of the picture.
Conflicting interests
[21] The intention behind my admittedly pragmatic interim judgment was to bring the liquidation to an end and stop costs accruing at that end, to allow the necessary
formal pleading of the fraud claim, and to give the parties and the court the assistance that clear pleading would bring while the funds in issue were secured.
[22] While the Wellington shareholders wish to maintain their fraud-based claim, the need for that claim to be properly pleaded remains.
[23] I accept Mr Robinson’s submission that the objective of the High Court Rules to secure the just, speedy and inexpensive determination of a proceeding4 is secondary to the right of a party facing an allegation of dishonesty or fraud to have those allegations pleaded in accordance with the normal rigour such allegations attract.
[24] On the other hand, there was no intention that any of the parties’ rights in respect of the matters in issue would be adversely affected. Mr Barker, during oral argument, raised the prospect that if his clients had to start afresh with a statement of claim under pt 5 of the Rules, his clients might face limitation arguments that were not presently available. Mr Robinson thought such was unlikely but was not prepared to confirm his clients would not take any limitation point that arose solely as a result of my requiring the Wellington shareholders to replead.
[25] The interim judgment driven by pragmatic consideration should not have the potential to adversely impact the Wellington shareholders’ rights. I do not accept Mr Barker’s submission that the effect of the interim judgment was to strike-out his clients’ claim. The Wellington shareholders remained able to pursue their claim, albeit through a statement of claim rather than in the course of the liquidators’ application.
[26] My approach in the interim judgment is not justified, however, if it has the unforeseen result of possibly creating a limitation issue for the Wellington shareholders where previously there was none. The presence of a limitation factor was not raised at the telephone conference when I suggested the outcome recorded in the interim judgment. But then again, counsel did not have prior notice that I was considering that approach. The possibility of a limitation defence is a new matter that warrants a variation of the interim decision under r 7.49.
4 High Court Rules 2016, r 1.2.
[27]In the absence of a concession by the other parties to not take a limitation point
– and not all parties were represented at the recall judgment hearing - it is not appropriate to determine whether limitation issues would arise.
[28] However, the need to properly plead the fraud allegations remains. In the interim judgment I said it was not for the respondents to sift through the documentation to understand the fraud allegations.5 I remain of that view and, in fairness to which Mr Barker, he acknowledged that if he were pleading the Notice of Opposition again (which contains what amounts to a cross-claim between shareholders) he would do so differently.
[29] I accept the fraud allegations were only part of the Wellington shareholders’ case, but it is those allegations creating the pleading difficulties.
[30] As I have noted, the issue discussed at the telephone conference that led to the interim judgment was whether affidavits from an earlier proceeding should be read in this proceeding. An affidavit had been sworn in this proceeding in September 2020 formally producing those earlier affidavits. When I asked Mr Barker where the detail of the fraudulent allegations could be found in the papers, he referred to an amended statement of claim in the earlier liquidation proceeding as containing some of the detail. That affidavit is not formally part of the record as leave has not yet been given for it to be read in this proceeding. I see that as an example of the fifth respondent having to have recourse to other than a clear pleading against him to try and understand what the allegations may be advanced against him. It is for the Wellington shareholders to prepare a proper pleading setting out, with the requisite precision, the allegations of dishonest and fraudulent conduct that are relied on in this proceeding. Such needs to be exhaustively stated.
[31] These allegations should be pleaded in a manner similar to a statement of claim to enable a paragraph-by-paragraph response in the amended notice of opposition/counterclaim. It is not uncommon for the body of an originating application to have a pleading format similar to that of a statement of claim. Again, such will allow the respondents to respond on a paragraph-by-paragraph basis.
5 McMillan v McMaster, above n 1, at [12].
[32] While Mr Barker submitted his clients’ claims were against a company in liquidation, in substance they are allegations against the majority shareholders. The fraud allegation is squarely against the fifth respondent. Given Mr Barker was critical of what he described as the reticence, indeed refusal, over time of the fifth respondent to confront or respond to the Wellington shareholders’ allegations, I would have thought that adopting a pleading style that required the fifth and other respondents to respond to precise and specific pleadings would be welcomed.
[33] I have not lost sight of Mr Robinson’s submission that the fraud allegations mean his client should have the benefit of discovery and other interlocutory processes. The fifth respondent, and any other respondent against whom fraud is asserted, should not be prejudiced in their ability to respond to such serious allegations because of the form of procedure adopted.
[34] Rule 19.5A of the Rules provides: “A Judge may, by interlocutory order, on the Judge’s own initiative direct the parties to file a statement of claim and a statement of defence respectively.” It would be possible to convert the existing proceeding to one where a statement of claim is filed so that no limitation issue would arise. However, the application before the Court is that of the liquidators – the Wellington shareholders’ “cross-claim” is set out in the Notice of Opposition. At the end of the day, the Wellington shareholders have complied with the procedural directions made to date. The issue is the clarity of the pleading, not the label on the document containing the pleadings.
[35] As to the availability of discovery, this is discussed in McGechan on Procedure.6 I am going to continue to case manage this proceeding and, will do so on the basis that neither party should be prejudiced through the form of procedure adopted.
[36]Accordingly, I make the following orders:
(1)The interim judgment of 19 November 2020 is varied as set out below.
6 Andrew Beck and others (eds) McGechan on Procedure (online ed, Thomson Reuters) at [HR19.19.04A].
(2)The application that the affidavit dated 16 September 2020 producing the affidavits from the earlier proceeding be read, is granted. Mr Robinson noted that that affidavit was prepared for a different proceeding which raised different issues, but ultimately it is for the Wellington shareholders to elect what evidence they wish to rely on. There is no point, as Mr Barker submitted, in the deponent simply changing the cover sheet and re-swearing the earlier affidavit.
(3)Leave is reserved to the respondents to file affidavits in reply. Such are to be filed within 20 working days of receipt of the amended notice of opposition on behalf of the Wellington shareholders, directed below. This leave to reply is given as until now the earlier affidavits were not admitted. I have not lost sight of Mr Barker’s submission that the September 2020 affidavit not only produced the earlier affidavits of the deponent, but also provided further evidence. However, evidence such evidence was at a high level of generality. Until the pleading is provided which states precisely what is said to amount to fraudulent conduct, the allegations would in all likelihood be met with bare denials.
(4)The Wellington shareholders are to replead their notice of opposition. They are to divide their argument into the three heads outlined at the review/recall hearing and remove the reference to s 174 of the Companies Act 1993 (which Mr Barker accepted was required). As indicated above, to the extent that the Wellington shareholders wish to pursue their cause of action based on dishonesty, it is to be pleaded with the rigour required in Schmidt. The notice of opposition shall be called “Notice of opposition to liquidators’ application and cross-claim against majority shareholders”. Such is to be filed within 20 working days.
(5)Any of the majority shareholders who wish to oppose the cross-claim against them are to file a notice of opposition to the cross-claim with their reply affidavits, if any.
(6)The application that Mr Frederick Pereira attend the hearing and be cross-examined is adjourned. Once the pleadings and any evidence filed on behalf of the majority shareholders are in, such can be reviewed.
Conclusion
[37] There will be a further telephone conference with me on Wednesday 12 May 2021 at 9.00 am.
[38] At the risk of being criticised for again adopting a pragmatic approach, the review of my interim judgment is intended to ensure there is no prejudice to the rights of the Wellington shareholders, given the possibility of a limitation issue. However, it is intended to recognise the right of defendants against whom allegations of fraud are made to have those allegations fully particularised. It is not ideal that the proceeding continues as an originating application, but such reflects the directions made at the outset as to how the case was to be dealt with. The current format to some extent recognises that the claims made by the Wellington shareholders are in form against the company, save for the fraud claim. At the same time, the above directions recognise that, in reality, that contest (as recognised by the liquidators) is between the shareholders.
[39] The Wellington shareholders will have to be precise as to their fraud allegation and the defendants will have to respond to each pleading. The evidence the Wellington shareholders sought to rely on is in but can be replied to in opposition. If not replied to, it will stand uncontradicted.
[40] Leave is reserved to seek a telephone conference should the need arise. Costs are reserved.
Associate Judge Lester
Solicitors:
Buddle Findlay, Wellington
Clifford James Lawyers, Auckland
Copy to counsel: M V Robinson, Barrister, Mills Lane Chambers
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