Mulholland v Opua Coastal Estate Limited

[2013] NZHC 248

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-7477 [2013] NZHC 248

BETWEEN  WILLIAM FREDERICK MULHOLLAND First Applicant

ANDJOHN LESLIE NORTON Second Applicant

ANDOPUA COASTAL ESTATE LIMITED (IN LIQUIDATION)

First Respondent

ANDHENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES

Second Respondents

Hearing:         8 February 2013

Appearances: Ms J M Lethbridge for Applicants

Ms R Scott for Ms Stodart
Mr Malarao and Ms Quan for Liquidators

Judgment:      19 February 2013

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

19.02.13 at  4 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:

Grove Darlow & Partners, P O Box2882, Auckland - [email protected]

McElroys, P O Box 835, Auckland – [email protected]

Meredith Connell Solicitors, P O Box 2213, Auckland - [email protected]

MULHOLLAND & Anor V OPUA COASTAL ESTATE LIMITED (IN LIQUIDATION) & Ors HC AK CIV-

2010-404-7477 [19 February 2013]

[1]      This proceeding involves an application by William Mulholland and John Norton (“the applicants”) to consolidate two proceedings under rule 10.12 of the High Court Rules.  The first proceeding (“the liquidation proceeding”) is brought by Opua Coastal Estate  Limited (In  Liq) (“Opua”) and its liquidators as  plaintiffs, against the applicants, who are Opua’s directors, for breaches of director’s duties, transactions for inadequate consideration and actions under the Property Law Act. The second proceeding is brought by the applicants against Sue Stodart, alleging negligence (“the negligence proceeding”).  This claim is a claim by Opua, which was assigned to the applicants.   Opua, the liquidators and Ms Stodart oppose the application for consolidation.

Background facts

[2]      The  brief  factual  background  is  as  follows.    The  first  applicant  is  an accountant, and in the course of his practice he acted for the second applicant, who is a property developer.  The first applicant became aware of some property available in the Bay of Islands area which was in his view suitable for subdivision.  He set out to explore with the second applicant whether a financially advantageous arrangement could be entered into to buy the property.  In November 2006, a contract to acquire the first of two properties, the Kawakawa property,  referred to as the “60 acre property”, was signed.   The arrangement was unconditional and was entered into without  legal  advice.    No  valuation  of  the  property  was  obtained.    The  first agreement was between the vendors and the directors acting in person, although they had the right of nomination under the agreement.

[3]      After  signing  the  agreement,   the  applicants   retained   the  services   of Ms Stodart.   The directors give evidence that they took the first contract to the solicitor after they had signed it.  They say that they explained to the solicitor that they were interested  in  the property for the purpose of developing the land by subdividing and on-selling it.

[4]      When it became clear to the directors that they would not have sufficient time to complete the due diligence requirements under the contract, they instructed the solicitor to cancel it.  She did so on 14 December 2006.  There is a factual dispute between the parties as to whether the solicitor at any time was instructed to advise the directors on the question of whether access was available to the property.  I read the evidence as being to the effect that the solicitor denies that at any stage she was so instructed.

[5]      In December 2006, the applicants incorporated Opua Coastal Estate Limited which is now in liquidation.  They renewed their negotiations with the vendors and as a result on 16 December 2006 signed the second agreement for sale and purchase for the 60 acre property, which was between the company and the vendors (and not as between the vendors and the directors.)  The price under the second agreement was $1.5 million.  Under this contract, two deposits were due to be paid of $100,000 each.   The two applicants each advanced funds to the company to enable the first deposit to be paid.

[6]        The applicants deposed that they did not obtain further advice from the solicitor before signing the second agreement because they had already done all the due diligence that was required.  According to their account of matters, they should by then have been alerted to any difficulties about access over the property.  Whether the solicitor had been asked to advise on the matter of access, or whether such was implicit in the contract of retainer that the directors and then the company entered into with her, is not a matter that can be resolved at this stage of the proceedings. The solicitor denies having been instructed to advise on the matter of access and pleads that  this  was  a  matter that  was  within  the domain  of  the defendants  as experienced property investors/developers to check.

[7]        The applicants became aware that a further block of land, the Whangae River Property, referred to as “the bach block”, was also available for sale.  Their evidence is that they assumed that if they could acquire this property, they could access it through the 60 acre block for the purposes of developing it for sale as well.

This assumption was mistaken, of course, as access was not available.  In January

2007, the directors signed an unconditional agreement to purchase the bach block for

$586,500.   Before entering this contract, they received a letter from Ms Stodart reporting on the transaction and the property.

[8]        The applicants say that in March 2007 they discovered for the first time that there was no road access to the 60 acre block.  The problem was that road access would have to cross a railway line/tunnel.  The applicants claim that without access, the development of the properties was not feasible.  They claim they would not have purchased the bach block if they had known they would not have had access.  At the point of realising the problem with access, the applicants attempted to extricate themselves from the agreement to purchase the 60 acres.   At this point they had already paid a deposit of $100,000.

[9]        On 15 March 2007, Opua received a payment from the IRD of $167,192.40, representing a refund of the GST component on the sale price which had been paid for the 60 acre property.  This was used to pay the second instalment of the deposit of $100,000 on the 60 acre property.   The second instalment was only paid after receiving a warning in April 2007 that if the deposit was not paid the vendors would cancel the contract.  An earlier proposal which Ms Stodart had sent to the vendors that the two deposits would be held in trust pending resolution of the access problem was rebuffed by the vendors.

[10]      On 17 December 2007, Opua purported to cancel the 60 acre contract, alleging that the property had been misrepresented to them.  The response from the vendors was to advise that they regarded this step by the applicants as being a repudiation, justifying them cancelling the contract.

[11]      The applicants later transferred the bach block to themselves personally. No purchase price was paid.

[12]     On  9  October  2009,  Opua  was  placed  in  liquidation  and  the  second respondents were appointed liquidators.  The following year the liquidators brought proceedings against the two applicants alleging that they had breached their duties as directors of the company in several respects.

[13]      In 2012, the applicants were successful in obtaining an assignment to them of the company’s causes of action against the solicitor, Ms Stodart.  They have sued on those causes of action and the proceedings are the subject matter of CIV-2012-

404-4747.   Those proceedings  are  based  upon  allegations that the solicitor was negligent in the advice that she gave, in particular about access to the property. While this is not the place to discuss the claims and counterclaims in the negligence proceedings, it should be noted that the solicitor denies that she was instructed to give advice on this matter.  The applicants claim that the solicitor acted  negligently, not only in failing to check whether there was access available to the property, but also by failing to preserve the rights of the applicants/Opua so that they would not be viewed as having affirmed the contract notwithstanding an allegation of misrepresentations on the part of the vendor.

[14]      Importantly  for  the  present  proceedings,  one  of  the  answers  that  the applicants advanced to the claims of mis-governance of the company is that they acted in reliance upon the advice that they received from the solicitor.  An important issue when considering the application for consolidation is whether in fact the claim that the directors were acting on the advice of the solicitor would have any impact upon the reckless trading claims brought by the liquidators.

[15]     Counsel  for  the  liquidators,  Mr  Malarao,  said  the  liquidators  base  their claims, which are claims that are brought on behalf of the company and not against the company, on the failed purchase of the 60 acre property by the Company in 2006 and 2007.  The liquidators argue that the applicants as directors breached their duties to Opua under the Companies Act 1993 ( “the Act”).  It is claimed that the directors caused Opua as purchaser to enter into an unconditional agreement for sale and purchase (the “Kawakawa Agreement”).   Based on Opua’s financial records, the

liquidators consider Opua was never in  a position to settle the purchase of the Kawakawa Property from the date the Kawakawa Agreement had first been entered into.   Opua was insolvent from the date the directors caused it to enter into the unconditional Kawakawa Agreement.  In the circumstances, the liquidators consider the actions of the directors caused the company’s creditors to be exposed to an unreasonable risk of loss.   The liquidators claim that the directors breached their obligations under s 137 of the Act by failing to exercise the care, diligence and skill expected of a reasonable director in the circumstances.

[16]     Alternative grounds upon which the claim is based are the entering into the purchase of the 60 acre property without obtaining appropriate professional advice and doing so without having first arranged finance.

[17]     The foregoing claims are linked to further allegations that the conduct of the directors breached s 135 of the Act by causing or allowing the business of the company to be carried on in a manner likely to cause serious loss to its creditors. Further claims are made under s 136 of the Act arising out of the circumstance that allegedly  the  directors  ought  not  to  have  permitted  the  company  to  incur  an obligation unless the directors believed at the time on reasonable grounds that the company would be able to perform the obligation when it was required to do so.

[18]     The second claim arises out of the transfer of the Whangae River Property (the bach block) from Opua to the directors in 2009.  The causes of action assert that breaches were committed because no provision was made for the company to pay GST on the transfer of the property to the directors.   The liquidators also say the directors did not pay a purchase price for the  property and preferred their own interests in the transaction.   The statement of claim therefore includes causes of action under s 348 of the Property Law Act 2007 (intention to prejudice creditors) and s 298 of the Act (transaction at undervalue).

[19]      The relief sought includes declarations and orders that the directors  pay amounts equivalent to the debts owed to the Commissioner of Inland  Revenue. Orders are also sought requiring the directors to pay the sums which are necessary, in effect, to indemnify the company against amounts allegedly owed by it to the

directors.   The liquidators also claim in relation to the transfer of the bach block property by the directors to themselves that the directors pay the equivalent amount of proper consideration for such transfer.

[20]     The applicants now seek an order consolidating the negligence proceedings which have been assigned to them with the proceedings which the liquidators have brought against them for alleged breaches of their obligations under the Companies Act.

The rule and decided authorities

[21]     Rule 10.12 provides as follows:[1]

[1] High Court Rules, r 10.12.

10.12   When order may be made

The court may order that 2 or more proceedings be consolidated on terms it thinks  just,  or  may  order  them  to  be  tried  at  the  same  time  or  one immediately after another, or may order any of them to be stayed until after the determination of any other of them, if the court is satisfied—

(a)       that some common question of law or fact arises in both or all of them; or

(b)      that the rights to relief claimed therein are in respect of or arise out of—

(i)       the same event; or

(ii)      the same transaction; or

(iii)     the same event and the same transaction; or

(iv)     the same series of events; or

(v)      the same series of transactions; or

(vi)     the same  series  of  events and the same  series  of transactions; or

(c)       that for some other reason it is desirable to make an order under this rule.

[22]     Counsel drew the Court's attention to a number of authorities. I propose to make brief reference to them.   The first of these is the statement contained in the

Court of Appeal judgment in Amalgamated Finance Ltd v Wyness:[2]

Where common questions of law or fact arise, or claims arise from the same event and/or transaction, it may well be appropriate that proceedings be heard together. That course will be expeditious and economical in that it will avoid a need for repetition of hearings and evidence on common points, and for repetitious legal submissions.  That course often may also be just, in that it will reduce the risk of inconsistent decisions through separate hearings. However, as with all shortcuts, the Court must take care to see that consolidation in this way will not in the end result in confusion through multiplicity of parties and issues, and will not in the end cause injustice by comparison with separate hearings.

[2] Amalgamated Finance Ltd v Wyness HC Wellington CP156/86, 19 February 1987.

[23]     The second reference is to Hunter Grain Ltd v Price,[3] a decision of Asher J. The Court held that the starting point was whether the Court is satisfied of the matters referred to in rule 10.12(a) or (b); i.e. was there a common question of law or fact and rights of relief relating to the same events and transactions.  However, the mere existence of a common question of law or fact is not in itself enough.  After referring to Amalgamated Finance, Asher J held that the Court has an overriding

[3] Hunter Grain Ltd v Price HC Tauranga CIV-2008-470-192, 11 August 2010.

discretion  whether  to  grant  such  an  application  in  the  interests  of  justice:[4]

[4] At [10] (emphasis added).

If there are common issues, particularly common issues of fact, it will generally be the case that there will be a time and cost saving for the parties looked at as a whole if there is a single proceeding.   There will not be repeated evidence or repeated legal submissions.   There will be a more efficient use of Court and judicial resources.  Another significant advantage is that the risk of inconsistent findings will be reduced.  However, there are factors that must be balanced against this.   The exact extent of the time saving needs to be evaluated.  Amalgamated proceedings can add to the cost of proceedings for particular parties that may be obliged to attend a long hearing rather than a short hearing.   Proceedings that involve too many parties and issues can become difficult to manage.   Care must be taken to ensure that a consolidation issue does not for any practical reasons (which can include timing or location), unfairly prejudice one of the parties.

Submissions

Applicants

[24]     Ms  Lethbridge  submits  that  the  same  factual  issues  arise  in  the  two proceedings and the basis for relief in both proceedings arises from the same series of events.   Also one defence to the claims brought by the liquidators is that the

applicants relied on negligent advice in entering into the transactions which are the

subject of the second proceeding.   And, as I have noted, whether the advice was negligent is the focus of the negligence proceeding.  The claim for damages in the second proceeding will be affected by the outcome of the negligence claim against a solicitor.

[25]   Ms Lethbridge submits that consolidation will not cause delay as both proceedings are at a similar stage and there is an overlap in discovery for both proceedings.  A hearing date has not been set for either proceeding so it cannot be argued that either proceeding would be held up by consolidation. Although there are some factual and legal issues arising in the liquidiation proceeding that do not arise in the negligence proceeding, these are not so significant as to unduly add to the trial time for the negligence proceeding.  The time and cost savings of consolidating the two proceedings will be significant.

Respondents

[26]     In overview, Mr Malarao made the following points.  The liquidators bring claims  which  relate  to  mis-governance  of  the  company.    The  character  of  the breaches of proper governance and directors duties is focused upon the obligations of the directors to see to it that the company properly complied with the tax laws, that  it  acted  prudently  in  entering  into  the  transactions  by ensuring  that  it  had funding arranged and in other ways.  None of the matters which are the subject of specific allegations by the liquidators, he said, was the subject of advice which the directors sought from Ms Stodart, the solicitor.   By contrast, the claims that are brought against Ms Stodart derive from the alleged negligent advice that she gave concerning conveyancing aspects of the transaction for the purchase of the 60 acre block and in particular the absence of access to that property.   The legal advice which she provided was also said to be deficient in that she did not properly advise the directors about how they might have more favourably extricated themselves from the contract to purchase the 60 acres.  There is therefore no commonality between the subject matter of the two different types of advice.   While it is true that the purchase of the 60 acres was a matter that was part of the background to both sets of claims, it is no more than that.  Mr Malarao submitted the elements of the two types

of claims that will be in dispute at the trial and the legal arguments and evidence that will need to be advanced in support of them are quite different.

Defendant

[27]     Counsel for Ms Stodart, Ms Scott, submits that there is some commonality between the two proceedings, however, the principal questions of law and fact that are in issue in each proceeding are very different.   The issues in the liquidation proceeding are distinct from the issues in the negligence proceeding.  Aspects of the liquidation proceedings concern the applicants’ actions before Ms Stodart was instructed.   Other aspects relate to the applicants’ actions after Ms Stodart ceased acting for them. As the focus of the two proceedings is quite different, consolidation will not avoid repetitious submissions or save time or cost.  Time and cost involved on behalf of Ms Stodart would be increased by consolidation as there are issues in the liquidation proceeding which are unrelated to her.  The outcome of consolidation would be prejudice and injustice to Ms Stodart.

Reasons for decision

[28]     It cannot be disputed that there is there is some overlap between the two claims.  However, it is not sufficient in my view for the party which is seeking to have the proceeding consolidated to demonstrate that there is an issue of commonality.  The key question is what is the extent of the overlap between the two proceedings and whether trying them separately would lead to a substantial duplication of evidence.

Comparison of the two claims

[29]     Both sets of proceedings have as their background the purchase of the two properties.  It is correct that the solicitor against whom negligence is pleaded acted for the principals of the company on the transactions.  It is not disputed that she gave advice.  It is correct that the claim against the directors raises the question of their prudence and their lack of care and asserts that they did not obtain the necessary advice that they ought to have before making the contract unconditional.  There are

other significant and alternative elements to the claim which the liquidators bring. An example of one of the other strands in the liquidators’ claims is the assertion that the want of care on the part of the directors included entering into the contracts when they knew that the company did not have adequate funding.  As I understand it, the directors do not attempt to defend that aspect of the claim on the basis that it was for the solicitor to advise them about the adequacy of their funding arrangements.  The same can be said of the assertion that the liquidators make to the effect that the directors  ought  to  have  obtained  valuation  reports  so  that  they  were  properly informed about the price which was being sought for the two blocks of land.   A further claim which raises an alleged lack of good faith on the part of the directors arises from the circumstance that the directors arranged for the transfer to themselves of the bach block without payment of consideration.  That particular claim does not seem to have any connection with the alleged deficient advice that the solicitor gave about access to the 60 acre block property.   Another example is based upon the alleged breach of duty to comply with the GST legislation.  It is difficult to see that any alleged failure to meet their obligations under that legislation had anything to do with the subject matter of the negligence claims against the solicitor.   It has not, apparently, been having suggested that the directors sought her advice on the issue.

Effect on trial duration

[30]     The next issue concerns the elongation of the negligence trial which would follow from consolidating that proceeding with the claims which the liquidators make.  This is not a question upon which definitive evidence could be expected.  It is a matter that the Court can take its own view on having regard to the fact that judges are repeatedly required to settle estimates of trial duration as part of their work.

[31]     Taking a broad view of matters, it would be my judgment that a consolidated trial would take six or seven days.   If the negligence proceeding went ahead as a stand-alone action, it might take three days to hear.  Conversely, if the liquidators’ claim went ahead on its own it might take four days to hear.   The reason for this conclusion  is  that  the  common  background  features  to  the  transactions  do  not amount to a complicated narrative and the evidence describing the series of transactions that the directors/company entered into would not take a great deal of

time.  In fact, many of the factual background issues could sensibly be put before the

Court by way of an agreed statement of facts.

[32]   The bulk of the liquidators’ proceedings would be concerned with an examination of the conduct of the directors on the incompetent/reckless trading claims.  It is correct that the question of whether or not they asked the solicitor to give them advice about the transaction and only made it unconditional after she had given advice would be common question to both proceedings.   In the liquidation proceedings, that would be relevant to whether there had been a want of care on the part of the directors; and in the professional negligence proceedings it would bear upon the question of whether actions on the part of the solicitor actually caused loss to  the  company.    The  proceedings  would  also  be  concerned  with  whether  the directors acted in such a way as to prefer their own interests or acted with the intention of prejudicing creditors which would have little to do with the question of the quality of the advice which the solicitor gave.

[33]     From the Court's perspective, the total time which would have to be made available for a full hearing of these claims might possibly be slightly reduced in the event of a consolidation order being made.   On the other hand, the liquidation proceeding on a consolidated basis might involve the liquidators being in court for an additional two days.  I consider that the concern of the liquidator, Mr Levin, that the liquidators might have to incur an additional $50,000 if the proceedings to be consolidated is probably about right.

Delays until trial

[34]     The  next  issue  concerns  delays  until  trial.    I accept  that  the  liquidation proceeding is now, or shortly will be, in a position where it can be set down for trial. Based on current information, I would expect that trial date could be allocated before the end of the year.   On the other hand, a consolidated proceeding, being slightly longer in duration, would not be expected to come to trial before the first or second quarter of 2014 - probably the former.  The liquidators’ proceedings commenced in

2010.  They are overdue for trial and any factor leading to a deferment of trial date is to be avoided. The claim against the solicitor, on the other hand was filed in 2012.

Hardship

[35]     I also do not consider that the prospect of inconsistent verdicts in the two proceedings, which is the ground that is sometimes advanced as justifying a consolidation order, is of any practical importance in the context of the present cases.

[36]     One of the other factors that the authorities have identified as being relevant is whether an order for consolidation would result in a proliferation of issues which would have the effect of an undue complication leading to difficulties in the trial and judgment.   I do not consider that that is a negative factor weighing against consolidation in the circumstances of this case.

Outcome

[37]     Taking all the above considerations into account, I am of the view that a consolidation order would not be justified in the circumstances of this case.   The application for consolidation order ought to be dismissed and I order accordingly. The parties should confer on the question of costs and if they are not able to agree should file memoranda not exceeding four pages on each side within 10 working days of the date of this judgment.

[38]     I am advised that a conference has been allocated for the 2012 negligence matter and is scheduled for 19th  March.   No further direction is required in that proceeding.  The registrar is to allocate a case management conference for the 2010 liquidation matter so that a trial date can be allocated and any remaining matters

attended to.

J.P. Doogue

Associate Judge