Munford v M R & L E Munford Limited
[2019] NZHC 636
•1 April 2019
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV-2018-454-92
[2019] NZHC 636
BETWEEN MICHAEL RICHARD MUNFORD
Plaintiff
AND
M R & L E MUNFORD LIMITED
First Defendant
HAYDEN TRAVIS RANKIN
Second DefendantJANARA NZ LIMITED and JANARA ENTERPRISES LIMITED
Third Defendants
Hearing: 18 March 2019 Appearances:
J Mahuta-Coyle for plaintiff
J Grace for first, second and third defendants
Judgment:
1 April 2019
INTERIM JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction
[1] This is an application by the plaintiff, Mr Michael Munford, for an order preventing the second defendant, Mr Hayden Rankin, and the first defendant, M R & L E Munford Ltd, from being represented by the same solicitors and counsel in this proceeding.
[2]Both Mr Rankin and the Company oppose any such order.
MUNFORD v M R & L E MUNFORD LIMITED [2019] NZHC 636 [1 April 2019]
Background
[3]The factual background is as follows.
[4] Up until the events described below, Mr Munford, and his wife, Mrs Lorna Munford, were the shareholders and directors of the Company, which provides sandblasting services. Mr and Mrs Munford were also the registered owners of two properties at 88 and 92 Tararua Road, Levin. Mr and Mrs Munford’s family home is at 92 Tararua Road. Eighty-eight Tararua Road is where the Company carries on business. The two properties are contiguous.
[5] Mr Rankin was formerly married to Mr and Mrs Munford’s daughter. They have two teenage children who are, of course, Mr and Mrs Munford’s grandchildren. They separated in 2013 and subsequently divorced.
[6] By the end of the 2013 financial year, the Company had suffered seven successive loss-making years, accumulating losses totalling $289,435.
[7] Around September 2014, Mr and Mrs Munford and Mr Rankin entered into arrangements pursuant to which Mr Rankin became involved with the Company. The parties’ pleadings and affidavit evidence contrast starkly as to the terms of those arrangements. This is not the appropriate point in the litigation to attempt to discern what was signed. That is a matter for trial. For present purposes, it is sufficient to outline what Mr Munford says about the arrangements. His position is that he and Mrs Munford each agreed to transfer 25.5 per cent of the shares in the Company to Mr Rankin so that he would become a 51 per cent shareholder. Mr Rankin would also be appointed as a director. All of this was in consideration of Mr Rankin taking over effective responsibility for the management of the Company with a view to attempting to turn it around. He says that he and Mrs Munford were each to retain 24.5 per cent of the shareholding, so that they would benefit if the Company became profitable again. He says that it was never part of these arrangements that he and Mrs Munford would alienate their properties at 88 and 92 Tararua Road.
[8] Mr Munford says that during 2016 he was persuaded by Mr Rankin that he and Mrs Munford needed to transfer 88 Tararua Road to the Company, and that they should
execute share transfer forms in Mr Rankin’s favour for their remaining parcels of shares. He says that Mr Rankin agreed not to present any such share transfer forms for registration. He executed a share transfer form on that basis. Mrs Munford did not. Very broadly speaking, Mr Munford’s claim is that Mr Rankin took advantage of his and Mrs Munford’s age, health and close family connections, all of which meant that they were vulnerable, to induce them to agree to these things which were never part of the original arrangements. Further, he says that at Mr Rankin’s suggestion he and Mrs Munford then engaged a solicitor who had acted for Mr Rankin in the past and who acted for all parties. He says that the effect of the documentation that was prepared by this solicitor and which he and Mrs Munford signed without properly understanding was that 88 Tararua Road was transferred to the Company and 92 Tararua Road was transferred to Mr Rankin. He also says that, contrary to the arrangements relating to the remaining parcels of shares in the Company, Mr Rankin presented the share transfer form he had signed for registration. The remedies Mr Munford seeks are effectively orders that he and Mrs Munford remain the beneficial owners of the two properties and that he remains the beneficial owner of
24.5 per cent of the shares in the Company.
[9] For completeness I record that Mr Rankin’s case is that the transfer of the properties and the complete alienation by Mr and Mrs Munford of their shareholding in the Company to him were agreed as part of the original arrangements. Consistently with that contention, Mr Rankin has counterclaimed against Mrs Munford for an order for the transfer of her remaining shares to him. He has also counterclaimed seeking an order for the removal of a caveat registered by Mr and Mrs Munford over 92 Tararua Road.
The parties’ contentions
[10] Both Mr Mahuta-Coyle for Mr Munford and Mr Grace for the defendants developed their submissions on the basis that this application engaged the professional obligations of lawyers as set out in the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (the Conduct and Client Care Rules).
[11] So for example, Mr Mahuta-Coyle referred me to r 6.1 of the Conduct and Client Care Rules, which provides that a lawyer may not accept instructions to act for
more than one party in circumstances where the interests of those parties conflict. In reply, one of the points made by Mr Grace was that there is an exception to that rule where the parties concerned give fully informed consent (r 6.1.1).
[12] I am not convinced that that is the correct starting point, or whether it is necessary or even especially helpful to begin by analysing the professional obligations owed to Mr Rankin and the Company by their solicitors and counsel. Different considerations apply when a conflict of interest arises in the context of litigation. The consent of the parties is less relevant when the Court is involved, as is recognised by r 13.6 of the Conduct and Client Care Rules.
[13] In my view, the appropriate starting point is r 1.20(2) of the High Court Rules 2016. The focus of this rule is the obligations that lawyers owe in their capacities as officers of the court.
[14]Rule 1.20(2) provides:
A lawyer who acts for a party to a proceeding, or is a party to any proceeding, must not, without the leave of the court, act for any other party to the proceeding who does not have the same interest in the subject matter of the proceeding.
[15] The rationale behind the rule is that the Court is entitled to expect solicitors and counsel engaged in litigation before it to be entirely free from any compromising obligations that could prevent them from discharging the obligations they owe as officers of the Court.1
[16] On that basis, the issue for determination resolves itself into whether Mr Rankin and the Company have the same interests in this proceeding. If not, then r 1.20(2) applies, and their solicitors and counsel may not act for them both without the Court’s leave. Against that background, it is necessary to analyse Mr Munford’s causes of action as pleaded in his statement of claim dated 19 September 2018.
1 See Black v Taylor [1993] 3 NZLR 403 (CA).
Pleadings
[17] The first and second causes of action, pleaded only against Mr Rankin, are in the alternative and can be dealt with together. In these causes of action (to which I will refer as the first limb of the claim) Mr Munford challenges the legitimacy of the transfers of the properties and seeks an order that they are held on constructive trusts for him and Mrs Munford who remain the beneficial owners.
[18] Mr Munford’s third cause of action, pleaded against Mr Rankin and the Company (the second limb of the claim), challenges the legitimacy of the transfer to Mr Rankin of Mr Munford’s 24.5 per cent shareholding in the Company.
[19] Mr Grace’s submission was that, in relation to those two limbs of the claim at least, there is no obvious conflict between the interests of Mr Rankin and the Company. Mr Mahuta-Coyle did not really contend otherwise. I agree. The Company has no interest in the claim relating to 88 Tararua Road. Obviously, Mr Rankin (as a shareholder of the Company) and the Company itself are both interested in defending the claim that the Company is not the beneficial owner of 92 Tararua Road. Insofar as Mr Munford’s shares are concerned, the relative shareholding entitlements of Mr Munford and Mr Rankin are not of interest to the Company.
[20] That brings me to the last cause of action (the third limb of the claim), which Mr Munford pleads against all defendants (including the third defendants, companies wholly owned by Mr Rankin).
[21] This is an unusual pleading. In it, Mr Munford asserts that Mr Rankin has managed the Company’s affairs to its disadvantage and the corresponding advantage of the third defendants. He seeks orders pursuant to s 174 of the Companies Act 1993 compensating the Company. I describe this pleading as odd because, as Mr Grace submitted, it is really in the nature of a derivative action but pleaded as an action for oppression of Mr Munford in his capacity as a minority shareholder.
[22] Whatever the shortcomings of the current pleading, it does, as Mr Grace conceded in argument, give rise to a divergence of interests between Mr Rankin on the one hand and the Company on the other. If Mr Munford is successful in this aspect of
his claim, then the net result will be a transfer of value to the Company from the third defendants. Mr Munford says that Mr Rankin is a 51 per cent shareholder in the Company. He owns 100 per cent of the shares in the third defendants. Of course, Mr Rankin’s case is that he is beneficially entitled to 100 per cent of the shares in the Company, but that issue is yet to be resolved. Thus, on Mr Munford’s case, it would be in Mr Rankin’s interests for this cause of action to fail and the disputed value to remain with the third defendants. In contrast, it would be in the Company’s interests to retain this value.
Conclusion on conflicts
[23] In summary then, the position is that Mr Rankin’s interests and those of the Company are consistent insofar as the first and second limbs of the claim are concerned, but divergent insofar as the third limb is concerned.
[24] Thus, on the basis already described, Mr Rankin and the Company would require leave to be represented by the same solicitors and counsel in this proceeding.
A practical solution
[25] In the course of argument both Mr Mahuta-Coyle and Mr Grace raised an issue concerning costs. Both made the point — although from different perspectives — that if I were to conclude that Mr Rankin and the Company could not be represented by the same solicitors and counsel, and that the Company required representation, that would add an additional layer of costs. Indeed, Mr Mahuta-Coyle went so far as to say that Mr Munford was only interested in obtaining the prohibitive order sought if I also concluded that the Company did not require separate representation.
[26] On the view I take of the case, in relation to the first two limbs of the claim, there is no reason why Mr Rankin and the Company cannot be represented by the same solicitors and counsel. However, I would be prepared to make the order sought by Mr Munford because of the conflict (not only as between Mr Rankin and the Company, but also in relation to the third defendants) and as I do not think that solicitors and counsel engaged to act for all three defendants would be able properly to discharge their obligations to the Court.
[27] That said, such an order does not seem to me to be the most practical approach here. Given the parties’ legitimate concerns about costs, an obvious option is an order pursuant to r 10.4 severing the first and second limbs of the claim from the third, and for the first two to proceed to trial. As I say, I see no difficulty with J H West and Mr Grace acting for both Mr Rankin and the Company in relation to those limbs of the claim. Once they are resolved it may be that the third limb of the claim will fall away.
[28] Mr Mahuta-Coyle was frank in saying that the rationale for this application is, as he put it, to “level the playing field” between the parties. What he meant by that, as I understood him, was that whilst Mr Munford is having to fund the litigation himself, Mr Rankin has the benefit of being able to employ company resources to defend both his own interests and those of the Company. The Court’s expectation — subject to hearing counsel on the point — is that Company resources should only be expended in the defence of these aspects of the claim which affect it. Costs may need to be taxed so as to ensure that the Company’s resources have not been inappropriately expended.
Conclusion
[29] Given that the parties have not had an opportunity to make submissions on the approach set out above, I issue this judgment on an interim basis.
[30] I invite counsel to file and serve brief written submissions in response both to the approach I am considering taking and in relation to costs. For the plaintiff, Mr Mahuta-Coyle is to do so within fifteen working days. For the defendants, Mr Grace is to respond within a further fifteen working days. On receipt of submissions I will consider the same and finalise my judgment.
Associate Judge Johnston
Solicitors:
Integra Law Ltd, Paraparaumu for the plaintiff
J H West, Paraparaumu for the first, second and third defendants
Thomas Dewar Sziranyi Letts, Lower Hutt for the counterclaim defendant
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