Meltzer v Pounamu International Limited
[2016] NZHC 1065
•20 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-1516 [2016] NZHC 1065
BETWEEN JEFFREY PHILIP MELTZER and
MICHAEL LAMACRAFT as liquidators of LOWIE RECRUITMENT LIMITED (in Liquidation)
Applicants
AND
POUNAMU INTERNATIONAL LIMITED
First Respondent
ANDREW DAVID KENNETH CHALMERS
Second Respondent
Hearing: 10 May 2016 Appearances:
Mr R B Hucker and Mr J E Tomlinson for applicants
Ms C A Murphy for the respondentJudgment:
20 May 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
20.05.16 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
MELTZER & ANOR as liquidators of LOWIE RECRUITMENT LIMITED (in Liquidation) v POUNAMU INTERNATIONAL LIMITED & Anor [2016] NZHC 1065 [20 May 2016]
[1] The plaintiffs are attempting to set aside transactions that occurred in and around October 2014. It would appear that the dispute between the parties, which concerns alleged voidable transactions, arises out of the following circumstances which are described very much in summarised form.
[2] The plaintiffs allege that in October 2015 the first plaintiff (“Lowie”) paid the sum of approximately $1 million into the bank account of the first defendant. That same month, the first defendant purported to act under a General Security Agreement (“GSA”) to take possession of the accounts receivable and assets of Lowie. The plaintiffs allege that the assets seized had a value of approximately $1.8 million. Further it is alleged that Lowie was indebted to the first defendant in the sum of approximately $800,000 as at September 2014 and $1 million as at the date on which Lowie ceased trading, 25 October 2014. It is alleged that Lowie went into
liquidation pursuant to a shareholder’s resolution on 22 December 2014.1 It is also
alleged that the payments just referred to enabled the first defendant to receive more towards the payment of its debt than it would have received on the liquidation of Lowie.2 It is further alleged that when the first defendant exercised its powers under the GSA, it became a mortgagee in possession of the company in exercising its purported rights. The plaintiffs assert that as a result the first defendant assumed an obligation to first pay all preferential creditors under s Schedule 7 to the Companies
Act 1993 and to ensure that all preferential payments were made to those parties prior to any of the assets and/or funds being applied against the indebtedness of itself as the GSA holder. It is alleged that the first defendant did not account accordingly.
[3] It is further alleged that the first defendant in execution of the powers of sale
contained in the GSA “repossessed” assets with a value of approximately
$1.8 million.3 This is contrasted with the indebtedness of either $840,000 approximately or $1 million referred to above.
[4] The position which the defendants take is that in October 2014 the first defendant advanced the sum of $1 million to Lowie and that Lowie repaid a sum of
1 Statement of claim at [24].
2 The statement of claim at [24] refers to “the first plaintiff” but this would seem to be an error.
3 Statement of claim at [21].
approximately $840,000 to the first defendant.4 It denies that the first defendant took possession only of the accounts receivable and assets of Lowie instead stating that the position was that the first defendant seized control of the business of Lowie.5
As to the mortgagee in possession including, the defendants say that s 108 of the Personal Property Securities Act 1999 entitled the first defendant to recover the sums it had advanced to the first plaintiff.
[5] The plaintiffs now seek a very wide range of additional discovery orders by way of the particular discovery. These include evidence of a $200,000 payment which the first defendant is alleged to have made to a non-party, HPPL, as consideration for the assignment of the GSA referred to earlier in this judgment, which assignment is alleged by the defendants to have passed the GSA from HPPL to the first defendant.
[6] I queried Mr Hucker about the relevance of that evidence because if the parties to the transaction actually cooperated in the assignment of the GSA from one to the other, issues about consideration would seem to be of no relevance to the present proceeding.
[7] There are also widely drawn requirements for additional discovery.
[8] All defendants, including two non-party respondents, are required to discover the financial statements for Lowie for the year ended 31 March 2014. It might be expected that the second defendant, who was a director of Lowie, might be amenable to an order of this kind because as a director he must have had knowledge of any accounts for that period. Prima facie, it seems likely that the company would have prepared financial statements for the financial year before it went into liquidation. But how the applicants can establish that there is reason to suppose that the other respondents had custody, control or possession of those accounts and may still have
them is not clear.
4 Statement of defence at [19].
5 Statement of defence at [20].
[9] The defendants also take the position that in any case the documents are not relevant to the dispute between the parties.
[10] I will attempt to deal with some of these categories. I accept that there has been limited argument about them. It may be necessary to schedule a further hearing on this matter to dispose of all the categories of discovery that are disputed. However there must be a limit to the amount of time and expense that the parties are required to invest in this exercise and the time that the court makes available to investigate various exhaustive claims for additional discovery.
Category 1(a)(i)
[11] Some discovery has already been “referenced” by Mr Chalmers in his affidavit of documents. Mr Chalmers says in effect that he has already given discovery of these items. There would be no justification for particular discovery in this category.
Category 1(a)(ii)
[12] I have already made reference to the fact that the only possible issue that arises about the assignment is whether it actually occurred. The question of whether there was consideration for carrying out the assignment is not relevant to the dispute.
Category 1(a)(iii)
[13] The issue which is taken here is that Mr Chalmers says that all “existing” financial statements for Lowie have already been provided. That does not address directly the obligation of Mr Chalmers to not only depose to possession of existing financial statements but to make clear whether there have been any other financial statements in the category that were in his custody, control or possession but are no longer.
[14] Similar comments apply to the application for disclosure of financial statements for the first defendant for the financial years ending 31 March 2013, 2014 and 2015 respectively. Mr Chalmers was a director of the first plaintiff and may
reasonably be supposed to have or have had possession of documents of the class described.
Category 1(a)(iv)
[15] The notice of opposition sets out that the first defendant has already:
Disclosed financial material which demonstrates that at the relevant times (a) it relied upon HPPL for its funding; and (b) HPPL was an entity with significant assets.
[16] It would seem that the key dispute concerns whether there was a proper justification for seizing assets to the extent that the first defendant did from Lowie. The plaintiffs say that these assets were of a total value of $1.8 million. This payment could be a preferential payment unless it is saved by a transaction which shows that it was nothing more than the exercise of a valid security. On such a hypothesis, the first defendant by receiving the payment would not have received more than it would have been entitled to in the liquidation in terms of s 292 of the Companies Act.
[17] The plaintiffs would be able to negative the legitimacy of such an arrangement by showing that there was no debt or that the first defendant did not hold a valid security which it was entitled to execute. There would also be a partial answer available to the claim of legitimacy if the first defendant, while entitled to claim a debt and to exercise a security, rendered excessive execution or alternatively did not account to Lowie for any surplus over and above what Lowie owed to the first defendant.
[18] The notice of opposition and the affidavit which the first defendant has filed, that is the deposition of Mr Andrew Chalmers, does not address in detail the above points of relevance.
[19] Analysis of the documents which are sought in this category demonstrates that, at the very least, the accounts for 2015 would be relevant because it was in that financial year that the first defendant asserted the position of creditor to Lowie and enforced its debt by means of the security which it had acquired by purchase or
assignment from HPPL. The deposition which Mr Chalmers has given does not explicitly confront the question of whether he has or had control of the relevant documents.6 As a director of the company it may be supposed that at some point he did.
Category 1(a)(v)
[20] The central assertion that the plaintiffs make concerning this category of documents is that:
The financial statements of LRIL are discoverable as it is pleaded that Lowie’s business and assets were sold to LRIL. The relevance of LRIL’s financial statements are to evidence the financial position of LRIL prior to and after purchasing Lowie’s business, and in the event LRIL did not have funds to purchase Lowie’s business, the source of the funding for the purported purchase. Further notwithstanding LRIL being a third (but related) party to these proceedings, those documents are or have been in the control of Mr Chalmers who was a director of LRIL from the date of incorporation until 31st of July 2015 and remains a shareholder of the company. It is noted that LRIL was incorporated on 15 January 2015 and it purchased Lowie’s business and assets on or about 28 February 2015. Accordingly the financial statements sought are for the period from 15
January 2015 to 31 March 2015
[21] LRIL is not a party to the proceeding. Discovery is sought from it as a non- party. The only relevance that documents belonging to LRIL could conceivably have to the proceeding is to cast light upon whether the first defendant actually acquired the security pursuant to which it contends that it was acting when, as the plaintiffs contend, it seized the business or became a mortgagee in possession with regard to it. The last propositions are the subject of denials from the first defendant, it apparently contending that it was a purchaser of Lowie’s business only. It is possible that there were some associated accounting records evidencing the conferment on the first defendant of the security which is arguably an item of value. Conceivably, and depending upon the quality and nature of those documents, they could advance the claim of the plaintiffs that the first defendant was a mortgagee in possession (in distinction to a purchaser) of the Lowie business. But there is no basis on the evidence before the court and any legitimate inferences that the court
would be entitled to draw that there are such documents in the control of LRIL.
6 Throughout this judgment I will use this term as shorthand to describe the concept of “control”
as referred to in, amongst others, rr 2 and 8.16 of the High Court Rules.
[22] Any further or additional alleged relevance of the LRIL documents would seem to be tenuous. The plaintiffs rely here upon the contention that it is relevant to the question of whether there was a valid security and valid exercise of same, to enquire about the entitlements of the first defendant to exercise the rights in question. I should mention a further possible basis upon which the first defendant may be able to justify its position and that is that it was LRIL that was the creditor of Lowie; that the first defendant paid out LRIL and by the process of subrogation became entitled to securities held by LRIL by way of security for the debt.
[23] As the validity of the exercise of the security, and indeed whether there was any right to exercise the security, are both in issue, the question of whether the first defendant was entitled to act as a subrogated creditor in place of LRIL is an issue which will be contested in the proceedings and will need to be resolved. If there were entries in the accounts of LRIL which bore upon that issue, and if those contents of the accounts had the potential to support the case of the plaintiffs or were adverse to the case which the first defendant puts forward, then they would need to be discovered for that reason. On the other hand, there may be material in the accounts which relates to this subject but does not have either of the effects that are required to be demonstrated before a document can be deemed discoverable pursuant to r 8.7 of the High Court Rules. As a matter of inference, there being no explicit evidence on the point, I would not be prepared to conclude that the requirements of the rule have been satisfied. No order for particular discovery is justified.
Category 1(a)(vi)
[24] Before considering the merits of this application, I express my agreement with the position that is taken by the first defendant that an application that includes “… all ledgers showing related party transactions for the period between 1 April
2013 to 31 March 2015” evokes an initial response that the request is too wide in its
ambit.
[25] I have already discussed where LRIL was positioned in the structure of the transactions which gave rise to the first defendant acquiring the assets or business of Lowie, which at least arguably appears to have involved the first defendant exercising the powers contained in the GSA. It could be argued that documents in
the control of LRIL which had relevance, as that term is deployed in r 8.7 of the High Court Rules, might bear upon the question of whether there was in fact a debt owing from Lowie to LRIL from which an accrued right of execution under the GSA may have been derived. Similarly, receipt of payment of the debt as a basis for subrogation, which is an issue in the proceedings, can give rise to accounting documents of LRIL being discoverable. The problem again though is with the issue of relevance. It is going to be difficult for the applicants to contend that there must be grounds for supposing that there are relevant documents. There may in fact be financial records which are relevant in a non-technical sense, but which support the case of the first defendant rather than being adverse to it. The position is inconclusive and accordingly I am not able to understand how an order for particular discovery could be justified.
Category 1(a)(vii)
[26] This category gives rise to the same considerations as those that I have discussed in relation to Category 1(a)(vi).
Category 1(a)(viii), (ix)-(xii)
[27] This category relates to the allegation which the plaintiffs make that the first defendant in carrying on the business (assuming that it is not disputed or can be established that that is what happened) rendered itself liable to meet the claims of the preferred creditors as defined in sch 7 to the Companies Act. Such preferred claims would include items such as PAYE payments which are one of the categories of documents which the plaintiffs assert that the first defendant has not made adequate discovery of.
[28] The plaintiffs confront the same difficulty in regard to this category of documents as they do to most of the others, namely, that there is no rational basis upon which the court is able to come to the opinion that the defendants have failed to disclose documents which they would be required to on the basis of the adverse documents test. It is a different test from that which was previously applicable,
namely the Peruvian Guano test which was described by Brett LJ in the following terms:7
It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may - not which must - either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words “either directly or indirectly,” because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences[.]
[29] Chilwell J made reference to the Peruvian Guano cases in his judgment in Australian Mutual Provident Society v Architectural Windows Limited which reveals just how broad the test is, with the Judge holding:8
From the nature and circumstances of the case I conclude that information which may indirectly or indirectly enable the plaintiff to advance its case or damage the case of the defendants in that area of circumstantial evidence is discoverable.
[30] It is my view that the application in the present case is so wide that it is likely that the plaintiffs are proceeding on the assumption that it is still possible under the standard discovery test to require an opposing party to provide categories of documents which have the breadth of those previously required to be discovered pursuant to the Peruvian Guano test.
[31] The documents which are sought in the succeeding paragraphs of the application are similarly not categories in regard to which a particular discovery order ought to be made. Specifically, the documents described in “(ix)”, “(x)”- “(xii)” are no doubt documents that an accountant attempting to assess the position would regard as being useful if not indispensable. They are not however documents which the plaintiffs can require the first defendant to provide particular discovery in
relation to.
7 Compagnie Financiere du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 at 63.
8 Australian Mutual Provident Society v Architectural Windows Limited [1986] 2 NZLR 190 (HC)
at 202.
Paragraphs 1(b) – 1(e)
[32] The remaining sub-paragraphs of para 1 have to do with inconsequential orders that would be made if the court were to determine that particular discovery or non-party discovery was appropriate and do not call for further comment.
The pleadings
[33] At the hearing on 10 May 2016 there was some discussion about the state of the parties’ pleadings. Some of that discussion was concerned with issues such as where the burden of proof lay in regard to particular issues that arose under the existing pleadings. In retrospect, it is not clear that such a discussion has any real relevance to the question of discovery. The parties are obliged to approach discovery in a way that measures relevance not just in relation to their particular view of the case. They are obliged to consider what the opposing party is alleging, and tailor discovery accordingly so that any contested issue is covered off in the affidavits of documents.
[34] As a minimum, the plaintiffs will need to file and serve a notice in answering the allegations in the statement of defence. Against the possibility that wider amendments are required the following timetable is directed:
a) any amended statement of claim to be filed and served within 10 working days;
b)statement of defence to any amended statement of claim to be filed and served 10 working days thereafter;
c) plaintiffs’ answer to statement of defence to be filed and served five
working days thereafter.
Tailored discovery?
[35] The problems which stand in the way of the plaintiffs successfully arguing that there has been non-compliance with a standard discovery order raise the question of whether the plaintiffs might not have a reasonable entitlement to tailored
discovery of a limited range and number of documents which common sense suggests both the first defendant and LRIL might have under their control and which relate to the question of the existence of the initial debt allegedly owed by Lowie to LRIL, the payment of that debt and the resulting entitlement to subrogation.
[36] I consider that, following the issue of this interim judgment, the hearing of this matter ought to be resumed at a further fixture with one half day being required. At that hearing I will consider whether any amendments to the existing discovery arrangements ought to be permitted. To start the process, it would seem sensible for the plaintiffs, if they want to avail themselves of the opportunity for a supplementary tailored discovery order, to formulate a list of categories of documents that ought to be subject to an additional discovery order. It will be necessary for the plaintiffs to exercise restraint when doing so. The object is not to provide a complete set of all financial documents that might enable the plaintiffs to, essentially, audit the financial positions of the defendants and non-parties. Rather, the objective is to have regard to the requirements for proportionality that Part 8 of the High Court Rules requires and to specify a key group of documents in regard to which discovery on a tailored basis may be justified. This will need to be undertaken promptly and the plaintiffs, if they wish to avail themselves of this opportunity, should take this step in the next seven working days. The defendant is to have seven working days to respond and the parties must then confer and attempt to settle the description of tailored documents which are to be sought. I understand that there is no issue of the defendants claiming that there has been an adequate discovery. Therefore the process that I am outlining would be concerned with defining the additional documents that the defendant is required to give discovery of. The discussion in this judgment about the relevant issues that are going to require resolution at fixture should provide some guidance to the parties. I emphasise that it will be necessary for the plaintiffs to exercise some restraint in calling for documents but at the same time it will be necessary for the defendants to be realistic about what is fair and reasonable discovery required within the limits of what is proportionate to the litigation.
[37] In the absence of agreement, the parties are to file memoranda setting out the areas of disagreement and concise statements of the grounds upon which each side
justifies its position. They are to do so within a further seven working days from when the defendants are required to respond in terms of [36].
[38] I will thereafter review the position in the Chambers list on 10 June 2016. On that date directions for resuming the hearing of the application will be considered.
[39] The parties should be aware that when the court is invited to make orders for costs in relation to the discovery applications, the primary matter to which regard will be had will be the reasonableness or otherwise of the stance that each party has taken when it comes to settling the issue of discovery. For example, the plaintiffs consider that the first defendant as a mortgagee in possession has a responsibility in regard to the preferred creditors which include the Commissioner of Inland Revenue as to PAYE. A summary of the PAYE position, perhaps taken from annual financial statements, showing the position in regard to the business acquired from Lowie ought to be sufficient and there should be no need for the source documents to be called for in discovery. The liquidators will of course appreciate that they can carry out comparisons between the figures applicable to the period when the business was actually being run by Lowie and the claimed position when it was subsequently functioning for a short period under the control of the first or one of the other defendants. There will also be an opportunity to cross-examine at the trial.
[40] If there is any complaint of excessive discovery being required, the parties should be in a position to advise the court of the estimated cost that will be incurred in complying with the particular aspect of discovery in question.
[41] As experienced lawyers, both of the counsel engaged in this proceeding will appreciate that the court takes the obligation of cooperation in r 8.2 of the High Court Rules seriously.
[42] Consideration of the question of costs is deferred until the conclusion of the discovery phase.
J.P. Doogue
Associate Judge
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