Mulholland v Levin

[2012] NZHC 1790

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-003089 [2012] NZHC 1790

IN THE MATTER OF     the Companies Act 1993

AND IN THE MATTER OF the OPUA COASTAL ESTATE LTD (IN LIQUIDATION)

BETWEEN  WILLIAM FREDERICK MULHOLLAND AND JOHN LESLIE NORTON

Plaintiffs

ANDHENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES

Defendants

Hearing:         12 July 2012

Counsel:         TJG Allan for Plaintiffs

PC Murray for Defendants

Judgment:      20 July 2012

JUDGMENT OF VENNING J

This judgment was delivered by me on Friday, 20 July 2012 at 4pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Grove Darlow & Partners, DX CP 24049, Auckland. Email:  [email protected]

Meredith Connell, DX CP24063, Auckland 1140. Email:  [email protected]

MULHOLLAND V LEVIN HC AK CIV-2012-404-003089 [20 July 2012]

Introduction

[1]      Opua Coastal Estate Ltd (“the company”) was placed into liquidation on

9 October 2009.  The defendants, Mr Levin and Ms Madsen-Ries, were appointed as liquidators.

[2]      The plaintiffs, Messrs Mulholland and Norton (“the directors”), were both directors of the company.  A number of issues have arisen between the directors and the liquidators.  The issues have led to a number of claims and applications to the Court.  In CIV-2009-404-5496, (“the liquidation proceedings”) the liquidators issued notices  to  set  aside  certain  transactions  involving the  directors  as  voidable.    In separate proceedings, CIV-2010-404-7477, the company pursues a claim against the directors alleging breach of their duties as directors of the company (“the company’s proceedings”).

[3]      In response to the company’s proceedings the directors alleged, inter alia, that the liquidators had failed to pursue a claim against a solicitor who formerly acted for the company.  The directors have advice that the solicitor was negligent and caused the company loss.  As a result, the directors purported to file an application in the company’s proceedings seeking an order reversing the liquidators’ decision not to sue the solicitor.  That application was allocated a fixture before Lang J on 16 May

2012.   On the same day, but before the hearing, the directors purported to file a further application seeking an order that the terms of the assignment of the claim against the solicitor had been settled.

[4]      In  the  circumstances  Lang  J  adjourned  the  matter  for  further  hearing  to

12 July 2012.  He directed the directors to file an amended application in the proper form in the liquidation proceedings.

[5]      The directors apparently ignored that particular direction and instead filed this fresh set of proceedings (“the directors’ proceedings”) in the form of an originating application seeking the following orders:

a)        Leave to bring the application;

b)        That the terms of the assignment of the third party claim were settled;

or alternatively

c)        That the third party claim against the solicitor be assigned to the directors; and

d)       Directing the liquidators to call a meeting of creditors.

[6]      The position then is that there are three separate sets of proceedings and various applications before the Court.  A number of the applications have been filed in incorrect proceedings and form.  The fault for that lies squarely at the feet of the directors.

[7]      Despite that, it is in the interests of both the general creditors of the company (as well as the directors who are also creditors) and the liquidators to move these various applications forward or dispose of them in one way or another.  To that end I heard from counsel as to the applications before the Court in this proceeding without prejudice to the liquidators’ proper opposition to the form of the application before the Court.

Application for leave

[8]      None  of  the  substantive  orders  sought  in  the  directors’ proceedings  are provided for in Part 19  of the  High Court Rules, which identifies the types of proceedings that are eligible to be commenced by originating application in rr 19.2 to 19.4.  Rule 19.5 provides that the Court may permit a proceeding not provided for in rr 19.2 to 19.4 to be commenced by originating application if it considers it would be in the interests of justice to do so.  Rule 19.5(3) requires the proposed originating application to be accompanied by an application for permission under r 19.5.

[9]      In Hong Kong and Shangai Banking Corp Ltd v Erceg,1 the Court considered the relevant High Court authorities on r 19.5,2  as well as number of cases in which permission to use the procedure in r 19.5 had been sought. The Court observed:3

A traverse of the cases referred to indicates that the originating application procedure is permitted for applications not specifically referred to in r 19.2, where it can be seen that there is some analogy to the permitted r 19.2 applications.  The r 19.2 applications generally involve the determination of a  specific  statutory discretion or power  (although habeas  corpus is  in  a different category).  So do most of the cases where permission was granted.

[10]     The Court held that, while the procedure is not limited to applications where there is no opposing party, it is nevertheless, in relation to contested proceedings not listed in r 19.2, an exceptional procedure.  Therefore, it should be limited to cases where it is not necessary in the interests of justice for there to be the usual particularised pleadings, or interlocutory steps such as discovery, for proper determination of the issues.  A party should not be permitted to treat an originating

application solely as a short cut for urgent cases.4

[11]     The  plaintiffs’ notice  of  originating  application  seeks  leave  to  bring  the proceeding by way of originating application.  I am satisfied, in the circumstances, that the interests of justice require a grant of leave to the directors to bring the application to deal with the particular issue of the claim against the solicitor, which is currently  holding  up  the  progress  of  the  liquidation  and  is  at  risk  of  facing  a limitation defence.  However, for the reasons that follow I decline leave in relation to the application as it relates to the other orders sought, namely that the terms of the assignment of the third party claim are settled, and in relation to the application to call a meeting of creditors.  I turn to deal with the substantive orders sought by the

directors in this proceeding.

1      Hong Kong and Shangai Banking Corp Ltd v Erceg HC Auckland CIV-2010-404-2835, 23 July

2010.

2    Jones v H W Broe Ltd (1989) 5 PRNZ 206 (HC); Commissioner of Inland Revenue v McIlraith

(2003) 21 NZTC 18,112 (HC).

3 At [22].

4 At [26].

The application for an order that the terms of the assignment of the third party claim are settled

[12]     Mr Murray properly takes objection to the form of the application insofar as it seeks orders that the terms of the assignment of the claim against the solicitor are settled.   He correctly identifies that is effectively an argument based on contract which, if it is sought to be enforced should be by way of statement of claim with proper pleadings and, in due course, evidence.   Quite apart from the procedural objection  to  the form  of the orders,  however,  for the reasons  that  follow  I am satisfied that the order sought is misconceived in any event.

[13]     The directors have put the documents they rely on to support their argument the terms of the assignment have been settled and agreed before the Court.   On

8 December  2011  the  liquidators’  solicitors  wrote  to  the  directors’  solicitors addressing a number of issues arising in the course of the liquidation.  In the course of that letter the liquidators’ solicitor proposed an assignment of the proposed cause of action against the solicitor to the directors on the following terms:

(a)       Your clients provide such information as is reasonably necessary for the liquidators to evaluate both the strength of the claim and its likely result, in accordance with the requirements of Re Callis.

(b)       Once satisfied with the merits of the claim, the liquidators assign the company’s negligence claim against Ms Stoddart to your clients.

(c)       Your  clients  would  advance  the  negligence  claim.    Your  clients would bring the claim in separate proceedings, not in the current proceedings.  Your clients would not take any steps to further delay the current proceeding on the basis of the assignment.

(d)       In  consideration for the assignment, after  payment of reasonable legal costs incurred by your client, your clients pay to the liquidators

50 per cent of funds recovered under the claim.

(e)       If:

(i)       your   clients   had   not   commenced   proceedings   against

Ms Stoddart within one month of the assignment; or

(ii)      the proceeding came to an end for any reason without a settlement  or  recovery,  the  claim would  automatically be assigned back to the liquidators.

(f)       The liquidators would provide reasonable assistance to your clients for the purposes of progressing the claim, including providing access

to documents.   Your clients would meet the  liquidators’ costs to provide  such  assistance,  including  liquidators’  fees  and solicitor/client costs.

(g)       Your clients would indemnify the liquidators against any loss or damage arising from the assignment of the claim.

The letter concluded by inviting a response and advising that if the directors were willing to proceed on that basis the liquidators would consult with other creditors.

[14]     Further  discussions  followed.     The  directors’  solicitors  then  formally responded on 13 April 2012 as follows:

We refer to paragraph 9 of your letter of 8 December 2011.

Our clients would accept an assignment of the claim against Sue Stoddart on the following terms:

(a)       Our clients provides such information as is reasonably necessary for the liquidators to evaluate both the strength of the claim and its likely result, in accordance with the requirements of Re Callis.

(b)       Once satisfied of the merits of the claim, the liquidators assign the company’s negligence claim against Ms Stoddart to our clients.

(c)       In consideration of the assignment, after payment of reasonable legal costs and disbursements incurred by our clients, our clients will pay the liquidators 25 per cent of the funds recovered under the claim. If:

(i)        our clients have not commenced the proceedings within two months of the assignment, or

(ii)      the proceedings have come to an end for any reason without a settlement or recovery the claim is automatically assigned back to the liquidators.

(d)       Our clients are given a credit for the 25 per cent recovery if the plaintiffs make any recovery from our clients in the current proceeding.   For instance hypothetically speaking, say the 25 per cent share of the recovery payable to the liquidators was $50,000 and the liquidators obtain judgment for $50,000 against our clients, no additional monies would be payable by our clients.

(e)       Our clients will indemnify the liquidators for loss or damages arising directly from the assignment of the claim.

[15]     The liquidators were prepared to accept the credit be 25 per cent and decided to seek the views of the company’s creditors.  After obtaining the directors’ approval as to the form of the letter, the liquidators then wrote to all creditors of the company

addressing  the  issue  of  the  proposed  assignment.    The  liquidators  advised  the creditors (including the directors) that “subject to your views, the liquidators are willing to assign a negligence claim to the directors”.  In the course of that letter the liquidators also stated:

Our views:

The  potential  negligence  claim  against  Ms  Stoddart  must  be  dealt  with quickly or not at all because of Limitations Act issues. The liquidation is without funds to progress the claim and it is our experience that claims against solicitors are expensive and risky.   Therefore if the claim is not assigned (and if no creditor provides significant funding for the liquidators to take it), it is likely to be valueless.

Your views:

The liquidators seek your views as a creditor of the company regarding the assignment of the negligence claim against Sue Stoddart to the directors of the company. We would appreciate your views by 4 May 2012.

The liquidators’ letter attached a copy of the directors’ solicitor’s letter of 13 April

2012.

[16]     The directors’ solicitor advised that both directors (as creditors) agreed to the claim being assigned.

[17]     It is on the basis of the above that the directors argue the liquidators have agreed to assign the claim to them and are bound to do so without insisting, as they do, on a condition that the directors will not apply to consolidate the claim against the solicitor with the company’s  claim (the non-consolidation condition).   They presented a deed to the liquidators.  The liquidators do not accept that there has been a settlement and note that the deed does not comply with the previous terms of the offer  of  8  December  2011  particularly  in  respect  of,  but  not  limited  to,  the liquidators’ requirement that the claim be advanced in separate proceedings.

[18]     The letter of 8 December 2011 was an offer by the liquidators to assign on certain terms.  The letter by the directors’ solicitor of 13 April 2012 was a counter- offer.  The essence of the directors’ argument must either be that, by writing to the creditors in the way they did, the liquidators confirmed their acceptance of that

counter-offer or, by the letter to the creditors, made an offer which the directors accepted. This highlights the difficulty caused by a lack of pleading.

[19]     The directors’ argument that there is a binding agreement is misconceived for two principal reasons.   First, in writing to the creditors, the liquidators were not confirming an agreement with the directors on the terms proposed by the directors, but rather were seeking the views of all creditors in relation to the assignment.  In seeking these views the liquidators were not committing themselves to accepting the counter-offer.   Ultimately, the decision whether to accept the counter-offer by the directors was a matter for the liquidators, rather than the creditors, albeit that the liquidators wished to take the views of the creditors into account before making that decision.

[20]     Second,  and  fundamentally,  the  directors’  argument  that  the  liquidators agreed to an assignment without a condition that the proceedings against the solicitor were to be brought in separate proceedings overlooks the fact that the letter to the creditors, upon which the directors rely as establishing the liquidators acceptance of the counter-offer, or as evidence of a further offer on terms accepted by the directors, actually records the liquidators’ condition that:

This negligence claim is to be brought in separate proceedings and will not be combined with the current proceedings against the directors for their breaches of duties. The directors are to indemnify the liquidators against any loss or damage arising from the assignment of the claim ...

[21]     For the above reasons there was no settled or binding agreement committing the liquidators to agree to the assignment of the cause of action.   Not only is the proceeding in the current application in the wrong form insofar as it seeks such an order, there is no prospect of that application succeeding.  I decline leave and dismiss that aspect of the application.

The application for an order assigning the claim

[22]     The plaintiff’s application for an order assigning the third party claim against the solicitor to the directors is, in fact, an application by the directors for directions in relation to a matter arising in connection with the liquidation, and/or reversing or

modifying a decision of the liquidators. The decision in issue is the liquidators’ refusal to assign the claim without imposing the non-consolidation condition. As such it must be treated as an application under s 284 of the Companies Act 1993 (the Act), and r 31.35(1)(b) of the High Court Rules applies. The application should have been filed in the course of the original liquidation proceedings, just as Lang J directed on 16 May 2012. However, for the reasons set out at [8] above, I grant leave to bring this aspect of the application by way of originating application.

[23]     The principles in relation to applications under s 284 are relatively settled.  In Trinity Foundation (Services No 1) Ltd v Downey5  the Court of Appeal confirmed that substantive relief should only be granted if the decision of the liquidator in issue can be shown to have been wrong or unreasonable.  The onus is on the applicant to do so.6

[24]     In Commissioner of Inland Revenue v Hulst7 the Court confirmed:

... the Court will not interfere with matters of day to day administration or with the exercise in good faith of the liquidator's discretionary powers, or hold a liquidator accountable for an error of judgement.

... the question for the Court's decision is not whether the Assignee was right or wrong in reaching his decision on the material available to him. Rather the Court's function is to consider what in its view is the correct order to make on the material before the Court as measured by the standard of reasonableness.

[25]     Mr Murray submitted that the decision regarding the assignment and the terms of the assignment was a decision made in the day to day administration of the liquidation and, absent fraud, the Court should not interfere.

[26]     I do not necessarily accept the submission that a decision whether to assign a potentially significant claim against a solicitor of professional negligence is one made in the course of the day to day administration of the liquidation.  But in any event, it is clear such a decision can be reviewed on the grounds it is unreasonable.

In Re Callis8 the issue the Court of Appeal determined was whether the liquidator’s

5      Trinity Foundation (Services No 1) Ltd v Downey CA193/05, 15 November 2006.

6      Commissioner of Inland Revenue v Hulst (2000) 8 NZCLC 262,266.

7      Ibid.

8      Re Callis (1996) 7 NZCLC 260,953.

decision assigning the cause of action in the circumstances of that case was unreasonable.

[27]     A decision may be made in good faith but still be unreasonable: Consolidated

Technologies Development (NZ) Ltd v McCullagh.9

[28]     The issue in this case is  whether the directors  can satisfy the Court the decision was an unreasonable one, even if made in good faith.

[29]     The liquidators agree to an assignment of the claim, provided the directors agree to a non-consolidation clause.   Mr Allan, for the directors, confirmed they would agree to an assignment on the basis they would issue separate proceedings against the solicitor, but they wished to reserve their right to apply for consolidation, leaving determination of that issue to the Court, should the need arise.

[30]     In the rather unusual and particular circumstances of this case, I consider that the liquidators’ current stance can be said to be unreasonable.  It is understandable that the liquidators are concerned to ensure the company’s proceedings against the directors are not unduly delayed by any claim brought against the solicitor. However, as matters have developed, and given the settled positions of the parties, I consider it is unreasonable for the liquidators to still insist on a non-consolidation condition, for the reasons that follow.

[31]     The initial letter of offer from the liquidators providing for the terms upon which they would agree to an assignment did not expressly include such a condition. The letter stated:

Your clients would bring the claim in separate proceedings, not in the current proceeding.   Your clients would not take any steps to further delay the current proceeding on the basis of the assignment.

[32]     While there was a rather veiled reference to delay, the letter did not expressly seek to exclude the possibility of an application for consolidation in the future.

9      Consolidated Technologies Development (NZ) Ltd v McCullagh HC Auckland CIV-2005-404-

6454 and CIV-2005-404-6112, 15 May 2006.

[33]     There are other more significant points.  The liquidators apparently have no current intention to pursue the proceeding themselves.   Importantly, unless the proceedings against the solicitor are commenced shortly, there is a real risk (recognised  by  the  liquidators)  that  they  will  be  barred  by  limitation  defences, thereby negating any possibility of recovery either by way of settlement or judgment. That would not be in the interests of any of the creditors.

[34]     The directors are prepared to agree that they will issue separate proceedings, but merely want to reserve the right to apply for consolidation and have that issue determined by the Court.  The Court will determine the issue of consolidation on the merits.  The concerns the liquidators have as to delay and additional trial time (and consequent costs) are proper concerns, but they will be considered by the Court on any such application, and the Court, as an independent arbiter, can rule on those concerns.  If they are of sufficient moment, they may lead to the application being dismissed.

[35]     Next, even if the directors agreed not to seek consolidation the defendant solicitor could seek consolidation.  The directors cannot bind her in relation to the issue.

[36]     Finally, the liquidators have not, themselves, made any independent attempt to assess the merits of the proposed claim.  The liquidators have not yet sought any advice from their solicitors on the merits of the claim.  They consider the time and cost of the advice should only be incurred after the assignment was complete, which is a rather unusual proposition.  At this stage, the liquidators do not appear to have evaluated the strength of the claim and its likely outcome, yet have felt able to agree on the value to be placed on any recovery at 25 per cent.  Against that, the directors have gone to the trouble and expense of obtaining an opinion.

[37]     I accept the liquidators have acted in good faith and are motivated by the desire to pursue the company’s proceedings for the benefit of creditors.  However, in the circumstances, I consider their refusal to agree to the assignment of the claim against Ms Stoddart to the directors unless the directors agree to the non- consolidation clause, is unreasonable.

[38]     I direct that the liquidators assign the company’s claim against Ms Stoddart to the directors on the following terms:

a)       The liquidators assign to the directors the benefit of any cause of action against Ms Stoddart in respect of the legal advice provided by her to the company in relation to the purchase of two properties in Northland, including any damages, compensation, interest and legal costs awarded against Ms Stoddart.

b)If the directors do not commence proceedings within two months of this order or the proceedings have come to an end for any reason without a settlement or recovery, the claim against Ms Stoddart will automatically be assigned back to the liquidators.

c)       In consideration of the assignment, after payment of reasonable legal costs and disbursements incurred by the directors, the directors will hold for the liquidators on trust and for the benefit of the liquidators

25 per cent of the funds recovered under the claim.

d)The directors will be given a credit for such 25 per cent recovery in the  proceeding  the  company  has  taken  against  the  directors  in CIV-2010-404-7477.

e)       The directors will indemnify the liquidators for any loss or damages or costs arising as a consequence of the assignment and the proceedings including any costs that may awarded in the proceedings.

The application that the liquidators be required to call a meeting

[39]     Mr Allan submitted that the application for an order requiring the liquidators to call a meeting should be adjourned.  I agree the application cannot be pursued in these proceedings.  However, I am not prepared to grant leave for this application, which should not have been brought within an originating application, to be maintained in its current form. An application for a direction that the liquidators call

a meeting must be an application under s 286 of the Act seeking an order to enforce the liquidators’ duties, including the duty to have regard to the views of creditors and shareholders and to call meetings as provided for in s 258.  Any such application must be made within the liquidation proceedings, not by separate originating application.

[40]     I therefore dismiss that aspect of the application.   In doing so, however, I reserve leave to the directors to bring an interlocutory application seeking such orders in proper form in the liquidation proceedings.   I make no comment as to whether or not any such application has merit in the present case.

Result

[41]     I grant leave to bring the application directing an assignment of the proposed claim  against  the  solicitor  by  way  of  originating  application  and  make  orders directing the liquidators to assign the claim as above.

[42]     I decline the  application  to  bring the proceedings  by way of originating application insofar as it seeks orders that terms of the assignment are settled or that the liquidators be directed to call a meeting.  I dismiss those particular applications. The end result is that this proceeding, the directors’ proceeding, is now at an end.

[43]     For  the  avoidance  of  doubt  I also  dismiss  the  other  existing  and  extant applications by the directors before the Court and which purport to seek an order reversing the liquidators’ decision not to sue Ms Stoddart, and orders that the terms of the assignment to the third party claim are settled.

[44]     As a result, the only remaining substantive proceedings before the Court are the liquidation proceedings and the company’s proceedings.

Costs

[45]     Although the directors have succeeded to the extent that they have obtained orders from the Court directing the liquidators to assign the proceedings to them,

they have failed on other applications and have added to the cost and expense of the proceeding by their misconceived applications.   In the circumstances I make no order as to costs.

……………………………..

Venning J