Nathans Finance New Zealand Ltd (in rec) v AIG Insurance New Zealand Ltd
[2013] NZHC 3137
•27 November 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
COMMERCIAL LIST
CIV-2013-404-2315 [2013] NZHC 3137
BETWEEN NATHANS FINANCE NEW ZEALAND LIMITED (IN RECEIVERSHIP)
First Plaintiff
ANDMERVYN IAN DOOLAN Second Plaintiff
ANDKENNETH ROGER MOSES Third Plaintiff
ANDDONALD MENZIES YOUNG Fourth Plaintiff
AND JOHN LAURENCE HOTCHIN Fifth Plaintiff
ANDAIG INSURANCE NEW ZEALAND LIMITED
First Defendant
ANDACE INSURANCE LIMITED Second Defendant
Hearing: 13 September 2013
Appearances: M Tingey & T Fitzgerald for Plaintiffs
A Challis for First Defendant
A Holden & C Bunn for Second Defendant
Judgment: 27 November 2013
JUDGMENT OF WINKELMANN J
This judgment was delivered by me on 27 November 2013 at 10 am pursuant to
Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
NATHANS FINANCE NEW ZEALAND LIMITED (IN RECEIVERSHIP) & ORS v AIG & ACE INSURANCE LTD [2013] NZHC 3137 [27 November 2013]
Introduction
[1] In April 2010 Nathans New Zealand Finance Limited (in receivership) (Nathans) issued proceedings against its auditors and four former Nathans’ directors (the Nathans proceeding). Nathans alleged that the directors had breached their statutory and common law duties to the company, and also alleged breach of contract and negligence against the auditors. These proceedings are a sequel to the Nathans proceeding.
[2] The defendants in this proceeding are the directors’ Directors and Officers Liability insurers. AIG Insurance New Zealand Ltd (AIG) was the principal insurer, and ACE Insurance Ltd (ACE) was the excess layer insurer. The directors made a claim on their policy in respect of the Nathans proceeding. For approximately two years, AIG paid their costs of defending those proceedings, but in February 2012 it declined the claim and stopped paying defence costs. This declinature followed the directors’ convictions in criminal proceedings for offences under the Securities Act
1978.
[3] In late 2012, Nathans, the directors and the auditors settled the Nathans proceeding. The directors accepted joint and several liability to pay Nathans $30 million by way of admission of claim, and judgment was entered for that amount. The $30 million represented approximately one quarter of the amount claimed in the Nathans proceeding, before interest and costs.
[4] In this proceeding the directors pursue the indemnity to which they say they are entitled for their liability under the settlement. They say that, following the declinature, they were entitled to enter into a reasonable settlement of the Nathans proceeding and now to be indemnified by the insurers for their liability under that settlement. Nathans claims that it has a charge over any amount payable to the directors by AIG and ACE pursuant to s 9 of the Law Reform Act 1936.
[5] The insurers deny an obligation to indemnify. They say that cover was rightly declined because of the directors’ criminal convictions. They also say that the settlement was not a reasonable one.
[6] AIG and ACE now apply for:
(a) Further particulars of the plaintiffs’ allegations at paragraph 39 of its statement of claim that the directors each acted reasonably by entering into the settlement;
(b)Further particulars of Nathans’ allegation at paragraph 41 of its statement of claim that it is entitled to a charge over any insurance amount payable by the insurers to the directors; and
(c) Orders that the plaintiffs provide discovery of certain categories of documents.
[7] AIG and ACE do not pursue their application for particulars in respect of paragraph 37 of the statement of claim.
[8] The plaintiffs oppose the applications for particulars on the basis that their claims are adequately pleaded (especially taking into account the further particulars provided in the draft amended statement of claim filed with their notice of opposition). They oppose the application for discovery orders on the ground that the categories of documents the insurers seek discovery of are not relevant. They say that the discovery proposed amounts to nothing more than a fishing expedition, and if ordered, would be disproportionate to the subject matter of the proceeding.
Application for further and better particulars
Relevant principles
[9] The principles which determine this application are not in dispute. They begin with r 5.26 of the High Court Rules which states:
The statement of claim—
(a) must show the general nature of the plaintiff's claim to the relief sought; and
(b) must give sufficient particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances to
inform the court and the party or parties against whom relief is sought of the plaintiff's cause of action; and
(c) must state specifically the basis of any claim for interest and the rate at which interest is claimed; and
(d) in a proceeding against the Crown that is instituted against the Attorney-General, must give particulars of the government department or officer or employee of the Crown concerned.
[10] In Commissioner of Inland Revenue v Chesterfield Preschools Ltd the Court of Appeal said that “sufficient particulars must be given to enable the defendant to be fairly informed of the case to be met”, and “while adequate particulars are required, the statement of claim must not stray into setting up the evidence relied upon”.1
[11] In Price Waterhouse v Fortex Group Ltd the Court of Appeal said:2
What we are saying is that both the Court and the opposite parties are entitled to be advised of the essential basis of a claim or defence, and all necessary ingredients of it, so that the subsequent processes in the trial itself can be conducted against recognisable boundaries.
[12] Ms Challis for AIG correctly submits that the function of particulars is to ensure that litigation is conducted fairly, openly, and without surprises, with the happy by-product of reduced costs.3 Particulars should be provided where they will promote the just, speedy and inexpensive determination of any proceeding.
Paragraph 39
[13] The plaintiffs allege that the settlement for each director was reasonable. Paragraph 39 of the current statement of claim puts the allegation as follows:
The Directors each acted reasonably by entering into the Settlement. Particulars
(a) The Settlement was reasonable taking into account in respect of each
Director:
(i) Nathans’ prospects of success against each of the Directors in the Proceedings;
1 Commissioner of Inland Revenue v Chesterfield Preschools Ltd [2013] NZCA 53, [2013] 2
NZLR 679 at [84].
2 Price Waterhouse v Fortex Group Ltd CA179/98, 30 November 1998 at 18.
3 Commerce Commission v Qantas Airways Ltd [1992] 5 PRNZ 227 (HC) at 230.
(ii) The quantum of the likely judgment against each of the
Directors;
(iii) The likely cost to the Directors of defending the Proceedings, including any costs award that may be awarded by the Court;
(iv) The Obligation to act with utmost good faith towards
Nathans Insurers;
(v) The fact that the Directors had an in-depth knowledge of the circumstances relevant to the claim (having been personally involved in each of them), which allowed them to make an informed assessment of the matters listed in (a)(i) – (a)(iv) above.
(vi) The fact that the Directors took legal advice and considered that the Settlement was reasonable taking into account only the factors listed at (a)(i) – (a)(iv) above (as recorded in clause 1.3 of the Settlement).
(b) Staples Rodway agreed to pay (and did pay) the Staples Rodway
Settlement Sum.
[14] In their draft amended statement of claim the plaintiffs propose additional particulars to the initial pleading. Paragraph 35 of the draft amended statement of claim attached to the notice of opposition reads as follows:
The Directors each acted reasonably by entering into the Settlement. Particulars
(a) In respect of each Director, the Settlement was reasonable taking into account that Director’s understanding at the time of the Settlement of:
(i) Nathans’ prospects of success against that Director in the Proceedings. Each Director formed the view that Nathans was likely to succeed in the Proceedings, based on his personal knowledge of the facts giving rise to the Proceedings and his earlier participation in the Securities Act proceedings, including:
(A) The pleadings in the Proceeding.
(B) Evidence in the trial of the Securities Act Claim.
(C) The decision of Heath J in the Securities Act Claim dated 8 July 2011.
(ii) The quantum of the likely judgment against that Director.
Each Director formed the view that Nathans had strong prospects of obtaining judgment for at least $30 million,
based on the quantum of the Nathans Claim (which was for approximately $75 million, plus additional losses of approximately $50 million).
(iii) The likely cost of defending the Proceedings, including any costs award that may be awarded by the Court. Each Director was advised that the likely cost of defending the Proceedings would exceed his personal net assets.
(b) Each of the Directors received legal advice in relation to the reasonableness of the Settlement Agreement and reasonably relied on that advice in entering into the Settlement Agreement. The legal advice received by the directors was to the effect that:
(i) A finding that the Directors were negligent in respect of the inter-company lending to VTL and related entities was almost inevitable.
(ii) There was a good prospect that the Court would find that the Directors were in breach of their duties from earlier than June 2006.
(iii) The settlement figure of $30 million was reasonable having regard to the poor prospects of successfully defending the claim on liability, and that there was a good chance that the quantum of the Directors’ liability would significantly exceed $30 million.
(c) The legal advice received by the Directors was:
(i) In the case of Mr Hotchin given orally on numerous occasions during 2012 by Bruce Stewart QC and Stephen Hunter as summarised in a letter from Mr Hunter to Mr Hotchin dated 28 March 2013.
(ii) In the case of Mr Young and Mr Moses given by David Jones QC and/or Chris Morris during a number of meetings and in telephone discussions in 2012, culminating with a meeting on 24 September 2012 attended by David Jones QC and Chris Morris.
(iii) In the case of Mr Doolan, given orally by his advisers during the course of the Securities Act proceedings.
(d) The Directors were aware of and had regard to their obligation to act with utmost good faith towards the Nathans Insurers.
(e) The Directors were aware that Staples Rodway had agreed to pay
(and did pay) the Staples Rodway Settlement Sum.
[15] AIG and ACE say that the proposed amended pleading remains inadequately pleaded. They persist with their existing application for particulars as follows:
In alleging that the settlement was reasonable, identify what matters the plaintiffs have taken into account in respect of each director in relation to the following factors:
Paragraph 39(a)(i)
(1) Nathans’ prospects of success against him in the proceedings, by reference to the facts and legal principles material to establishing his liability under each alleged cause of action.
Paragraph 39(1)(ii)
(2) The quantum of the likely judgment against him under each alleged cause of action.
(3) The facts and legal principles material to establishing the quantum in
(2) under each alleged cause of action.
Paragraph 39(a)(iii)
(4) The likely costs of defending the proceedings. (5) The likely costs awards.
Paragraph 39(a)(v)
(6) The circumstances of the claim in which he had in-depth knowledge.
Paragraph 39(a)(vi)
(7) The date(s) on which he took legal advice.
(8) The person(s) from whom he took legal advice. (9) Whether the legal advice was written or oral. (10) If written, the relevant writing.
(11) If oral, the material elements of the advice.
(12) The matters he took into account in respect of the factors listed in paragraph 39(a)(i) – (iv) in concluding that the settlement was reasonable.
[16] Ms Challis for AIG says that the directors must establish that the settlement relates to a liability which is covered by the policy, that it was bona fide and reasonable. The scant detail provided in paragraph 35 of the draft amended statement of claim is insufficient to properly inform the insurers, and the Court, of the basis of the decision to settle at a figure of $30 million. This is a very significant sum of money, and the insurers say, perhaps not coincidentally an amount which would generally encompass the moneys available under the two insurance policies.
[17] I am satisfied that the particulars provided in paragraph 35 of the draft amended statement of claim do provide a full and fair account of the basis upon which the plaintiffs allege that the directors acted reasonably and bona fide in entering into the settlement. They detail the matters the directors say they took into account in deciding to settle, including legal advice. Ms Challis seeks an order which in essence requires that the plaintiffs provide a detailed break down of their decision making on a cause of action by cause of action basis, including an account of how they factored into this:
(a) Any exposure for costs – both the costs of defending the claim and potential costs awards; and
(b) The relevant legal principles, identifying those relied upon.
The difficulty with this request is that it assumes the directors approached their decision making in this way. In light of the detailed pleading of how the directors say they acted, whether or not the directors conducted their pre-settlement monetary calculations on a defendant by defendant, or cause of action by cause of action basis, and whether or not they applied the correct, or any, legal principle, are matters to be explored in evidence. Whether they did take those matters into account, and whether they should have, may well be a determining consideration in this case, but these are matters of evidence, not pleading.
[18] The legal advice the plaintiffs have pleaded they relied upon will need to be disclosed, and will provide still more detail of the decision making process. I understand from the parties that copies of the relevant legal advice are to be provided to the defendants.
[19] For these reasons the defendants’ application for further particulars of paragraph 39 of the statement of claim is declined.
Paragraph 41 (paragraph 42 of draft amended statement of claim)
[20] Nathans alleges that it has a charge over any insurance monies payable to the directors pursuant to s 9 of the Law Reform Act. The statutory charge arises by virtue of s 9(1) which provides:
(1) If any person (hereinafter in this Part of this Act referred to as the insured) has, whether before or after the passing of this Act, entered into a contract of insurance by which he is indemnified against liability to pay any damages or compensation, the amount of his liability shall, on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance money that is or may become payable in respect of that liability.
[21] In paragraph 41 of the statement of claim the plaintiffs allege “pursuant to s 9 of the Law Reform Act 1936, Nathans has a charge over insurance moneys payable by AIG to the directors in respect of Nathans’ claim.” AIG seeks particulars of the event which gives rise to the charge for the purposes of s 9.
[22] Mr Tingey for the plaintiffs has agreed to amend to make plain that the events alleged to give rise to the charge are the “facts and circumstances alleged against the directors in the Nathans proceeding”. However, the plaintiffs should go further than this and should identify the allegations against the directors (by paragraph number will be adequate) in the Nathans proceeding which it alleges are events for which AIG and ACE are liable to indemnify the directors. It may be that it is all of the allegations, but not necessarily so. The plaintiffs should take some care over this to ensure that they do not incorporate by reference events the directors could not or do not claim indemnity for. To do so would likely be wasteful of the defendants’ and Court’s time and may have costs implications down the line for the plaintiffs.
[23] AIG also seeks particulars of the amount of the claim for damages or compensation to which the charge is alleged to extend. Those particulars, I imagine, can also be provided by reference to the amounts claimed in the Nathans proceeding.
Discovery application
[24] In June, Rodney Hansen J made orders that the parties were to discuss and to endeavour to agree on an appropriate order for tailored discovery. The parties have not reached agreement. The insurers have identified 63 discrete document categories they seek discovery of. During the course of discussion it became clear that the discovery sought by the insurers roughly equates to the documents catalogued in Nathans’ and the directors’ lists of documents in the Nathans proceeding.
[25] It is common ground that one of the critical issues at trial will be whether the settlement reached by the directors was reasonable and bona fide. Although the current pleadings rely upon the reasonableness of the settlement rather than independent proof of the directors’ liability to Nathans, the insurers say that the two cannot be divorced. The insurers say that in determining the proper extent of discovery it is relevant that there is authority for the proposition that the following categories of documents are admissible on the question of reasonableness:
(a) Records and evidence in the underlying claim (citing Edwards v Insurance Office of Australia Ltd4 and Gray v Solicitors Liability Committee.)5
(b)The nature of the case and the evidence likely to be called against the directors (citing Gray).
(c) Evidence as to what evidence would have been available to the underlying claimant (citing Biggin & Co LD v Permanite LD).6
[26] AIG and ACE say that to independently test the reasonableness of the settlement, AIG and ACE must have access to the documents relevant to the Nathans proceeding. To assess the reasonableness and proportionality of the settlement they will need to test the strength of the claims and potential defences. The receivers of
Nathans will have the majority, if not all, of the documents in the categories which
4 Edwards v Insurance Office of Australia Ltd (1934) 34 SR (NSW) 88 at 95.
5 Gray v Solicitors Liability Committee FCA FED No 698/96, 9 August 1996 at [19].
6 Biggin & Co LD v Permanite LD [1951] 2 KB 314 (CA).
the insurers seek. The insurers do not have access to, or the ability to get access to, the documents sought.
[27] The plaintiffs resist providing discovery on this basis. They say that the documents sought comprise all or almost all of the discovery provided by all parties in the Nathans proceeding. Discovery in those proceedings was provided under the pre-amendment High Court Rules, utilising the Peruvian Guano chain of inquiry test, and was voluminous.7 Well in excess of 50,000 documents were listed by the parties.
[28] Although lists of documents were exchanged in the Nathans proceeding, the directors did not inspect Nathans’ documents before settling. They elected not to do so as they did not have the resources to pay for that step prior to settlement. Although lists of documents have been prepared by the company and the directors, so that most of the work to provide discovery has been done, costs for the plaintiffs will still be oppressive as the plaintiffs would have to inspect the documents if ACE and AIG are to do so. Discovery of these documents is only relevant if the insurers are to effectively try the Nathans proceeding. They should not be permitted to do this.
[29] The plaintiffs say that discovery should be limited to the following:
(a) The policies and any endorsements.
(b)Documents relating to the notification of claims under the policies (including any internal or external correspondence concerning the declinature).
(c) The pleadings in the Nathans proceeding (including all particulars, applications, affidavits and orders).
7 Compagnie Financieré et Commerciale du Pacifique v Peruvian Guano Co (1883) 11 QBD 55 (CA).
(d)The informations laid in the Securities Act proceeding (which are the documents needed to assess whether the two claims were “related” in terms of the Policy), the judgments and sentencing notes.
(e) Correspondence between Nathans and the defendants in the Nathans proceeding concerning settlement.
(f) The settlement agreement, signed by all parties to the Nathans proceeding.
To this I assume can be added the correspondence relating to the advice relied upon by the directors (including the letters of advice).
Relevant principles
[30] Rule 8.8 provides:
Tailored discovery must be ordered when the interests of justice require an order involving more or less discovery than standard discovery would involve.
[31] Rule 8.9 sets out those situations in which a presumption as to tailored discovery applies:
It is to be presumed, unless the Judge is satisfied to the contrary, that the interests of justice require tailored discovery in proceedings—
(a) where the costs of standard discovery would be disproportionately high in comparison with the matters at issue in the proceeding; or
(b) that are on the commercial list; or
(c) that involve 1 or more allegations of fraud or dishonesty; or
(d) in which the total of the sums in issue exceeds $2,500,000; or
(e) in which the total value of any assets in issue exceeds $2,500,000; or
(f) in which the parties agree that there should be tailored discovery.
[32] The notion of proportionality underlies the new discovery regime. The first obligation imposed upon the parties by sch 9, r 1 is that they must assess the proportionality of the proposed discovery. The concept of proportionality applies
equally to tailored and standard discovery. It is for this reason that one of the categories of cases in which the presumption of tailored discovery applies is where “the costs of standard discovery would be disproportionately high in comparison with the matters at issue in the proceeding.”8 However in some cases, such as those involving fraud or dishonesty, the principle of proportionality gives way to the need for a full and frank exchange of information. One of the other categories where the
presumption in favour of tailored discovery applies is likely to be complex cases, where the parties can be expected to understand the issues sufficiently that they are able to take a surgical approach to discovery.
[33] It is also relevant to have regard to the requirements of standard discovery. Standard discovery requires that each party:9
… disclose the documents that are or have been in that party’s control and
that are –
(a) documents on which the party relies; or
(b) documents that adversely affect that party’s own case; or (c) documents that adversely affect another party’s case; or (d) documents that support another party’s case.
[34] Tailored discovery does not license discovery beyond what is relevant to the matters at issue. For that reason some exploration of the principles applied to determine what is a reasonable and bona fide settlement where the insurer has repudiated liability is necessary:
(a) Proof of a reasonable settlement is sufficient – it is not necessary to prove the underlying liability.10
(b)Having repudiated liability in breach of contract, the insurer cannot later challenge a settlement arrived at by the insured acting reasonably
by seeking to show that if the liability had not been repudiated by the
8 High Court Rules, r 8.9(a).
9 High Court Rules, r 8.7.
10 Edwards, above n 4, at 98.
insured, litigating would have succeeded in restricting the liability to a lesser sum.11
(c) The question of whether the settlement was reasonable must be judged by reference to the material the parties had available to them at the time the compromise was reached. In Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd Hayne J said of the question whether the settlement was reasonable: 12
Often that will require consideration of whether the party that later seeks to say that the settlement was reasonable had made sufficient inquiries and had sufficient information available to it to warrant reaching a compromise. In turn that may invite attention to whether the cost of seeking further information would outweigh the benefit that it was reasonable to expect may be obtained from doing so …
Analysis
[35] It follows that the directors should provide discovery of those documents in their lists of documents in the Nathans proceeding which bear upon their potential liability in that proceeding, including anything relevant to available defences. This is information they had available to them.
[36] The advice they received from legal advisors in connection with settlement is also obviously relevant, particularly given the way in which the directors make their case that it was a reasonable settlement. As noted at [20] above, this is to be provided to the defendants.
[37] That leaves the documents listed by Nathans in the company’s list of documents. The directors elected to forego their right to inspect those documents, and settle before inspection and thus avoid cost. Whether that was a reasonable decision will be at issue at hearing, but the contents of the documents listed will not
assist the Court in considering the issue. Judging the reasonableness of that
11 Royal Insurance Fire and General (NZ) Ltd v Mainfreight Transport Ltd (1993) 7 ANZ Insurance Cases 77,792 (CA).
12 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38, (1998) 192 CLR 603 at 653.
approach by an assessment of what the directors would have discovered involves the application of hindsight. For these reasons, I do not consider that the insurers are entitled to discovery of those documents tabulated in Nathans’ list of documents in the Nathans proceeding. But that is subject to two provisos. First, the insurers should be provided with a copy of Nathans’ list, as that is something the directors and their counsel had access to, and most likely considered before deciding to settle. The second proviso is that the other documents to be discovered, and in particular those from the criminal proceeding and the directors’ legal advice, may demonstrate that the directors were aware of the content of Nathans’ documents that are relevant to the issue of settlement. If so, the insurers have leave to renew their application. This is limited to those documents the evidence suggests the directors were aware of and which are also relevant to the merits of the settlement.
Result
[38] The application for further particulars of the plaintiffs’ allegations that the directors each acted reasonably by entering into the settlement is declined, as adequate particulars will be provided at paragraph 35 of the draft amended statement of claim.
[39] However, the application for further particulars of the allegation that Nathans has a charge over any insurance monies payable to the directors pursuant to s 9 of the Law Reform Act is allowed. The plaintiffs must file an amended statement of claim which, as well as incorporating paragraph 35 of the current draft, identifies the allegations in the Nathans proceeding which it says are events for which the defendants are liable to indemnify the directors. The plaintiffs must also particularise the amount of the claim for damages or compensation to which the charge extends. These particulars may be provided by referring to paragraph numbers or amounts claimed in the statement of claim filed in the Nathans proceeding.
[40] Finally, I order that the insurers are entitled to discovery of the following documents:
(a) The policies and any endorsements.
(b)Documents relating to the notification of claims under the policies (including any internal or external correspondence concerning the declinature).
(c) The pleadings in the Nathans proceeding (including all particulars, applications, affidavits and orders).
(d)The informations laid in the Securities Act proceeding (which are the documents needed to assess whether the two claims were “related” in terms of the Policy), the judgments and sentencing notes.
(e) Correspondence between Nathans and the defendants in the Nathans proceeding concerning settlement.
(f) The settlement agreement, signed by all parties to the Nathans proceeding.
(g)All documents relating to advice relied upon by the directors in deciding to settle the claims.
(h)Documents listed by the directors in their lists of documents in the Nathans proceeding which are documents upon which the directors rely:
(i) that adversely affect their case; or
(ii) that adversely affect the insurers’ case; or
(iii) that support the insurers’ case, in connection with the
reasonableness and bona fides of the settlement. (i) Nathans’ list of documents in the Nathans proceeding.
[41] If this discovery demonstrates that the directors were aware of the content of the documents described in the Nathans’ list, leave is reserved for the insurers to renew their discovery application. Leave is reserved only in respect of those documents which the evidence suggests the directors were aware of and which are relevant to the reasonableness of the settlement.
[42] I anticipate that the parties will be able to agree the costs of this application given that they have each enjoyed a measure of success. If, however, the parties are unable to reach agreement, I reserve leave for the parties to file memoranda.
[43] Any application for costs should be made by memorandum to be filed and served within 15 working days of the date of this judgment. Any memoranda in reply should be filed and served within a further 10 working days.
Winkelmann J
Solicitors:
Bell Gully, Auckland
McElroys, Auckland
DAC Beachcroft New Zealand
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