Neil's Auto Centre Limited v Bowman

[2019] NZHC 220

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-1679

[2019] NZHC 220

BETWEEN

NEIL’S AUTO CENTRE LIMITED

First Plaintiff

NEIL JOHN CATHCART
Second Plaintiff

AND

GENEVIEVE ELIZABETH BOWMAN

Defendant

Hearing:	13 February 2019
Appearances:	A M Gold for the Plaintiffs M Ryan for the Defendant
Judgment:	13 February 2019

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Gold Legal Ltd (A M Gold), Waiuku, for the Plaintiffs

Nicholls Law Ltd (Aaron Nicholls), Auckland, for the Defendant

Copy for:

Mark Ryan, Vulcan Chambers, Auckland, for the Defendant

NEIL’S AUTO CENTRE LIMITED v BOWMAN [2019] NZHC 220 [13 February 2019]

[1]    Neil’s Auto Centre Ltd, the first plaintiff, runs a mechanical workshop in Waiuku. The director and shareholder of the company is Mr Neil Cathcart, the second plaintiff. He is a mechanic. The defendant, Ms Bowman, worked for the company from 2010 till 2018. She did the office work. Everyone else worked in the workshop.

[2]    In late 2017, the Inland Revenue Department took proceedings against the company for non-payment of taxes. Neil’s Auto Centre says that Ms Bowman was responsible for seeing that the company paid its taxes on time. In April 2018, it settled the Inland Revenue claim, but it had to pay very significant interest and penalties in addition to the core taxes that had fallen due. At the same time it also came to light that Ms Bowman had been stealing money from the company.

[3]    In this proceeding, the company sues Ms Bowman for $301,535.24 for breach of contract. It claims $142, 965.29 for the money she took, plus $122,000 for penalties and interest that had to be paid to the Inland Revenue, and legal costs and accounting costs of $36,000 incurred in dealing with the Inland Revenue proceeding. That is the first cause of action. In a second cause of action the company relies on an admission of liability that Ms Bowman made in April 2018.

[4]    Mr Cathcart also sues Ms Bowman in deceit. The deceit cause of action alleges that she intentionally misappropriated company funds, she intentionally did not pay the company’s taxes to the Inland Revenue, she intentionally hid or destroyed any communications from the Inland Revenue to do with taxes, and she intentionally represented to Mr Cathcart that the company’s taxes had all been paid in full and on time. Mr Cathcart relied on those representations, to his detriment, and it was reasonable for him to do so.

[5]    Mr Cathcart injected funds into the company. He did that by selling up his property at Pukekohe. That raised about $300,000. He also obtained a short-term loan to pay the full amount to settle with the Inland Revenue, which was $517,784.07. The security for his short-term loan was his property at Cable Bay in Northland. He then sold that property. He says that he suffered a total loss of $520,388.63. This is the sum

of the amount paid to the Inland Revenue, $517,784, and the legal costs from selling the Pukekohe and Cable Bay properties, which are $2,604.56.

[6]    Mr Cathcart has applied for summary judgment on his deceit cause of action. It is helpful to bear in mind the principles on which the courts decide summary judgment applications. The Court of Appeal restated them in Krukziener v Hanover Finance Ltd:1

[26]      The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. … The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. … The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. … In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it. …

[27]      Under r 141A, the defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.

(Citations omitted)

[7]    It is also necessary to bear in mind that this is a claim in deceit, where allegations of actual dishonesty are made. The Court of Appeal has spoken about the requirements when such proceedings are brought. These apply to civil proceedings generally and do not apply only in the context of summary judgment applications. In Schmidt v Pepper New Zealand (Custodians) Ltd the Court of Appeal said:2

Allegations of fraud or dishonesty are very serious. They must be pleaded with care and particularity. As the authors of Bullen & Leake & Jacobs in Precedents of Pleadings³ emphasise, counsel must not draft any originating process of pleading containing an allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the

1      Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26]..

2      Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].

3      Bullen & Leake & Jacobs Precedents of Pleadings (16th ed, Sweet & Maxwell, London, 2008) vol 2 at [49-02].

conclusion that serious allegations could properly be based upon it. Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved. General allegations, however strong the words may appear to be, are insufficient to amount to a proper allegation of fraud.

(Emphasis added)

[8]    Mr Cathcart and Ms Bowman have both given affidavits. Mr Cathcart says that this company was incorporated in March 2014. Before that there was another company called Neil Management Ltd. For this decision nothing turns on the fact that one company replaced the other. He says that business remained constant throughout. Ms Bowman began working as an office manager in the business in October 2010. There is apparently no written employment agreement. He says that her role was to run the business by dealing with customers, paper work and accounts. He worked on the trade side of the business and in the work shop as he is a mechanic. She, on the other hand, dealt with customers, suppliers, invoices, accounting and tax. He says that the terms of her employment included these matters:

(a)She was to be the main contact person for the company. That meant answering the phones, dealing with all customer queries, opening the mail, receiving and responding to emails and other correspondence;

(b)She was to receipt all money paid to the company by customers, whether that was cash over the counter or by electronic transfer into bank accounts;

(c)She was to bank all cash into the bank accounts for the company;

(d)She paid creditors of the company;

(e)She paid the staff wages; and

(f)She paid taxes on behalf of the company and, if there were not funds available to pay taxes, she was required to tell him.

[9]Mr Cathcart also makes the point that:

(a)she was not allowed to use business funds for her own purposes;

(b)she was not to hide or destroy any emails or correspondence sent to the business;

(c)she was not to hide any important information from him; and

(d)she was not to keep any cash paid by customers.

While she worked for him he was confident that she was doing her job in a professional and honest way.

[10]   He says that he found out that there was a problem with the Inland Revenue in November 2017 when he was contacted by lawyers. They told him that they had been instructed by Ms Bowman to deal with a liquidation proceeding. He was advised that Inland Revenue had started a liquidation proceeding for unpaid taxes, interest and penalties. He has attached a copy of the statement of claim. There had been a statutory demand but that had been served on the registered office of the company which was at the office of accountants in Papakura. He says he was never advised of the statutory demand.

[11]   The Inland Revenue statement of claim has a schedule setting out the unpaid taxes: goods and services tax, PAYE deductions; and other miscellaneous taxes. As for income tax, there is one charge for a late filing penalty but otherwise income tax does not figure. The core unpaid taxes come to $259,000. The total amount claimed, after taking account of penalties, interest and payments is some $425,000. The schedule shows consistent non-payment of taxes, at least from December 2015 onwards. There have been payments marked against PAYE for July, September, October and November 2015. Those payments appear to have been made late because there have been charges for interest and penalties on those payments as well.

[12]   Mr Cathcart emphasises that he only found out about this from the lawyers who contacted him. Ms Bowman herself did not volunteer any information to him about the proceeding. He changed accountants for the business and he instructed

lawyers.    The matter was finally resolved in April 2017 by the company paying

$517,784.07 and the proceeding was then withdrawn. The company did not have the funds to make that payment and instead he realised assets. As I have already explained, he sold his Pukekohe home and later his Cable Bay bach to fund the payment and repay the short-term loan he had taken out. His affidavit exhibits documents that confirm those parts of his evidence.

[13]   Mr Ryan’s written submissions set out the elements for a cause of action in deceit:

(a)there must be a representation of fact;

(b)the defendant must have made it knowing it to be false;

(c)with the intention that it be relied upon by the plaintiff;

(d)he does in fact rely upon it; and

(e)he suffers damage as a result.

[14]   There is no evidence of any actual misrepresentations by Ms Bowman to the company or to Mr Cathcart. If there had been any incidents where Ms Bowman had made actual statements that taxes had been paid (when they had not been) they would need to be properly identified in the statement of claim.4 There are no particulars about that in the pleading in the statement of claim. Nor is there any evidence to support any allegation of actual misrepresentation. Instead Ms Gold submitted that there could be liability in deceit by Ms Bowman’s silence. She has not pleaded the case in quite that way but in any event for summary judgment purposes I am not satisfied that silence would give Mr Cathcart any claim in deceit against Ms Bowman. For that I rely on Bell v Lever Brothers Ltd where Lord Atkin said:5

It is said that there is a contractual duty of the servant to disclose his past faults. I agree that the duty for the servant to protect his master’s property

4      For the need to give proper particulars in a claim of fraud or actual dishonesty, see Schmidt v Pepper (Custodians) Ltd [2012] NZCA 565 at [15].

5      Bell v Lever Brothers Ltd [1932] AC 161 (HL) at 228.

may involve a duty to report a fellow servant whom he knows to be wrongfully dealing with that property. The servant owes a duty not to steal, but, having stolen, is there superadded a duty to confess that he has stolen? I am satisfied that to imply such a duty would be a departure from the well-established usage of mankind and would be to create obligations entirely outside the normal contemplation of the parties concerned….

That decision has stood since 1932. I am not aware of that part of the decision having been departed from in New Zealand.

[15]   In short then, a major element in the cause of action, the making of a misrepresentation, has not been established and on that point alone the summary judgment application for the cause of action in deceit must fail.

[16]   I mention some other matters. Understandably the company has claims against Ms Bowman for stealing money and maybe also for failing to attend to her duties in arranging to pay taxes. Those matters seem to be arguable at least. But it is another matter whether Mr Cathcart has a claim in tort against her. The matter turns in part on whether she made any misrepresentations to him which he acted on to his detriment and suffered loss as a result. The pleading is not clear as to what particular damage he suffered. I do understand that once the liquidation proceeding was on foot, he took steps as a director and shareholder to stop the company from being put into liquidation and he did that by injecting funds into the company. But his hope of being repaid may turn instead on the company asserting its rights against his former employee rather than his having a direct claim against her. I signal that as a question for Ms Gold to reflect on.

[17]   I also wish to comment on aspects of the claim by the company. It has sued Ms Bowman for breach of contract. Ordinarily, claims by an employer against an employee for breach of contract may be heard in the Employment Relations Authority. Section 161(1) of the Employment Relations Act 2000 says:

161(1)  The  Authority  has  exclusive  jurisdiction  to  make  determinations about employment relationship problems generally, including —

…(b)      matters relating to a breach of an employment agreement. …

Section 161(3) goes on:

(3) Except as provided in this Act, no court has jurisdiction in relation to any matter that, under subsection (1), is within the exclusive jurisdiction of the Authority.

[18]   The application of that section is not straightforward. The Court of Appeal has recognised that claims for embezzlement by an employee can be brought in civil courts, even if they are based on breach of contract. Here I refer to JP Morgan Chase Bank NA v Lewis:6

While Ms Hagai was clearly in breach of her employment contract, the essence of the Society’s claim was her dishonest theft of the money. This was not an employment-related problem, although it would undoubtedly have justified her dismissal. While the claim may have had its origins in the employment relationship in the sense that the relationship created the opportunity for the theft, Ms Hagai’s conduct was such as would have made her liable to the plaintiff without any such relationship. In other words, the existence of the employment relationship was not a necessary component of many of the causes of action which could have been asserted against her. That indicates that the essence of the claim was not employment-related, and should not have been regarded as within the Authority’s jurisdiction.

(Emphasis added)

Neil’s Auto Centre Ltd sues not only for embezzlement but also for other losses caused by alleged breaches of contract by Ms Bowman. So far as those other losses are concerned it appears the company will rely on the employment agreement to establish its claim against her. In light of the approach of the Court of Appeal in JP Morgan Chase Bank NA v Lewis, it may be that that part of the case cannot be brought in this court. Again I signal for Ms Gold’s further consideration what parts of the case can be brought in this Court and those parts of the case which lie within the exclusive jurisdiction of the Employment Relations Authority.

[19]   I refer to another matter I discussed with counsel: the availability of damages for breach of contract for defective performance of an employment agreement by an employee. Generally, if an employee is simply “slack” in performing their duties and causes financial losses to the employer, the employer has to carry the loss. They cannot ask to be indemnified by the employee. I say that as a matter of fact rather than a

6      JP Morgan Chase Bank NA v Lewis [2015] 3 NZLR 618 at [97].

matter of law. It seems to me it would be highly questionable if the law were to impose a duty on an employee to indemnify an employer for slack or incompetent performance of their duties. That would subvert the normal employment relationship by allowing employers to keep the profits but outsourcing the losses to the staff. It may be otherwise if the employee has acted deliberately or maliciously to inflict loss on the employer. In that case there may be recourse against the employee. Again, that is a matter for further consideration.

Conclusion

[20]I dismiss the summary judgment application.

[21]I follow the normal approach of reserving costs on the application.

[22]I direct the Registrar to arrange a case management conference.

[23]   By the time of that conference I hope that the plaintiffs will have reviewed the case and worked out how they intend to proceed further with the proceeding. Again, if the company considers that there may be efficiencies in going to the Employment Relations Authority it may be able to abandon some parts of the case pending in this Court. Mr Cathcart’s case remains within the civil jurisdiction of this Court. There is no relevant employment relationship between him and Ms Bowman.

……………………………….

Associate Judge R M Bell