Patel v Beecharaju

[2021] NZHC 964

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-000557

[2021] NZHC 964

BETWEEN

SURESH PATEL

Plaintiff

AND

MURALIKRISHNA BEECHARAJU

First Defendant

SANTOSH REDDY SONTIREDDY
Second Defendant

YAKASAI ASSOCIATES LIMITED

Third Defendant

Hearing:	27 April 2021
Appearances:	D Purusram for Plaintiff S Young for Defendants
Judgment:	4 May 2021
Reissued:	6 May 2021

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 4 May 2021 at 3.00 pm and re-issued on 6 May 2021 pursuant to r 11.5 of the High Court Rules

Registrar / Deputy Registrar Date……………………..

SURESH PATEL v MURALIKRISHNA BEECHARAJU [2021] NZHC 964 [6 May 2021]

Introduction

[1]    Mr Patel seeks orders for particular discovery (High Court Rules 2016, r 8.19) and non-party discovery (r 8.21) in proceedings brought under s 174 of the Companies Act 1993. His third statement of claim also includes causes of action for breaches of contract and misrepresentation in relation to loan advances made to the defendants and his investment in Yakasai Associates Ltd (YAL).

[2]    Mr Patel alleges that his fellow directors and shareholders, Mr Beecharaju and Mr Sontireddy, have mismanaged the financial affairs of YAL, have misappropriated company funds and property, and have operated parallel businesses through other entities. He contends that they diverted profit belonging to YAL to those other businesses.

[3]    Since my minute of 19 October 2020 adjourning the original discovery hearing, the parties have, to their credit, made significant progress in narrowing the categories of document at issue.

[4]    The principal remaining category of documents at issue is the personal bank statements of Mr Beechraju and Mr Sontireddy, which they contend are not relevant to the proceedings.

Factual background

[5]    Mr Patel is a director of YAL and holds 33 per cent of the shares in that company. The other two shareholders and directors are the defendants, Mr Beecharaju and Mr Sontireddy.

[6]    YAL was incorporated in May 2016 to acquire the timber flooring business of Hystand Flooring Ltd.

[7]    Mr Beecharaju and Mr Sontireddy were previously employed by Mr Patel in a liquor store business owned and operated by Mr Patel.

[8]    In March 2018, Mr Beecharaju and Mr Sontireddy formed a new timber flooring company, Flooring Mechanics Ltd. Both Mr Beecharaju and Mr Sontireddy are directors of Floor Mechanics Ltd and each holds a 50 per cent shareholding interest in the company.

[9]    Mr Patel alleges that Mr Beecharaju and Mr Sontireddy set up Flooring Mechanics Ltd to operate in parallel with YAL and to hide income and/or profits in that business that properly belong to YAL.

[10]   Mr Patel further alleges that he invested $50,000 in the acquisition of shares in YAL and that as a shareholder he has been deprived of his right to profit and income that rightly belongs to YAL. He says that he has been deprived of that income as a result of the oppressive and unfairly  prejudicial  conduct  of  Mr  Beecharaju  and Mr Sontireddy.

Relevant legal principles

(a) Rule 8.19 – orders for particular discovery

[11]   Asher J in Assa Abloy NZ Ltd v Allegion NZ Ltd1 adopted the following four- stage approach:

(a)Are the documents sought relevant, and if so, how important will they be?

(b)Are there grounds for belief that the documents sought exist? This will often be a matter of inference. How strong is that evidence?

(c)Is discovery proportionate, assessing proportionality in accordance with Part 1 of the discovery checklist in the High Court Rules?

(d)Weighing and balancing these matters, in the Court’s discretion, applying r 8.19, is an order appropriate?

1      Assa Abloy NZ Ltd v Allegion (NZ) Ltd [2015] NZHC 2760 at [14].

(b) Rule 8.21 – Non-party discovery

[12]   To obtain non-party discovery, there must be grounds for belief that a non-party has or had documents that would be discoverable if the person was a party. The two key considerations, namely relevance and proportionality, apply.2

[13]The power to make an order under r 8.21 is discretionary.3

[14]   A non-party discovery order must be necessary in the sense that “other sources of evidence are unlikely to be sufficient because they are materially incomplete or unreliable” and “the documents sought may make a real difference, and are not merely marginal”.4

Decision

[15]   I address in turn each of the outstanding categories of documents that remain at issue.5

(i)Signed financials of YAL from August 2016 to the present

[16]   Mr Purusram advises that the 2018 and 2019 financial statements, albeit incomplete and some of them unsigned, are no longer at issue.

[17]   Mr Patel’s outstanding complaint is that the 2017 financial statements have not been provided at all.

[18]The defendants’ position on this category is neutral.

[19]   I find that the documents sought are both relevant and important. They are in the control of the defendants and it is the responsibility of the company accountant to co-operate with the parties to make the financial statements for the year ending      31 March 2017 available.

2      Westpac NZ Ltd v Adams [2013] NZHC 3113.

3      Vector Gas Contracts Ltd v Contact Energy Ltd [2014] NZHC 3171, [2015] 2 NZLR 670 at [28].

4      Vector Gas Contracts Ltd v Contact Energy Ltd, above n 3, at [30].

5      The categories are helpfully set out in a schedule attached to the memorandum of counsel for the first and second defendants dated 23 April 2021. Mr Patel agrees with that list.

[20]   I find that the defendants should provide the documents sought in this category. There is no issue as to proportionality.

(ii)The account books and records of YAL

[21]The defendants again adopt a neutral position with respect to this category.

[22]   I find that there is a proper evidential basis for inferring that there are further documents in this category which have not to date been disclosed by the defendants (and should have been). In particular, I find that there is a good basis for concluding that there ought to be many more customer invoices than those that have to date been provided.

[23]   It may be that the company stopped trading at some time in 2019, but that is not an excuse for a failure to provide relevant invoices or other records and account books.

[24]   I further find that documents sought in this category are both relevant and sufficiently important to require further disclosure by the defendants.

[25]   I accordingly order that the defendants are to provide documents in this category, being account books and records of YAL (and including customer invoices) from July 2016 until the present.

(iii & iv) Personal bank statements of the first and second defendants from July 2016 to December 2019

[26]   This is the only truly outstanding category that remains at issue. The defendants say that the personal bank statements are not relevant and, in any event, to provide what would be substantial personal information would be fundamentally disproportionate. They say that the “level” of disclosure sought is not required.

[27]   The touchstone for determining relevance is of course the pleadings and, in particular, the third amended statement of claim.

[28]   It is clear from the pleadings that Mr Patel is alleging that company profits and funds were diverted through the personal bank accounts of the defendants for unauthorised and improper purposes. It is alleged that there was an intermingling of funds and that on occasions the defendants used their personal bank accounts to pay YAL company employees.

[29]   I reject the submission of Ms Young that the further disclosure sought in this category will not shed light on the nature and basis of the payments at issue. Mr Patel alleges at paragraphs 14 and 15 of the third amended statement of claim that he transferred a total of $44,000  to  the  personal  accounts  of  Mr  Beecharaju  and  Mr Sontireddy. He also pleads at paragraph 17 that those two defendants made unauthorised payments from the YAL bank account to their own personal bank accounts and for matters unrelated to the company. The personal bank accounts sought may well be the primary evidence that supports Mr Patel’s claims.

[30]   It may not be in dispute that Mr Patel made loan advances to the defendants, but the application of those funds (i.e. as spent by the defendants) is in dispute and on the evidence provided by Mr Patel, the personal bank statements may shed light on that critical issue.

[31]   In all the circumstances, I find that there is a proper basis for the non-party orders as sought against the trading banks. The documents in this category are relevant, clearly of some importance and the disclosure provided to date by the defendants, including some personal bank statements but with redactions, has been incomplete.

[32]   There is no issue as to proportionality. The personal bank account statements will be in digital form and, in any event, it will be for Mr Patel in the first instance (and subject to any further order of the Court) to meet the reasonable costs of the non- party trading banks in providing discovery.

[33]   I note that each of the non-parties has been served with the applications and that they will abide the Court’s decision.

[34]   I understand the sensitivity of the defendants to disclosure of very personal and private financial information. However, I reject the submission of Ms Young that the defendants should be able to provide redacted personal bank statements if the application were to be granted. The better approach, in my view, is for the non-party banks to provide unredacted disclosure but the affidavits of documents should, in the first instance, be provided to counsel only. Mr Patel would then need further leave of the Court if he or any of his witnesses wished to see the document themselves.

(v) All signed documents in support of staff of YAL (including employment agreements and immigration records held for all staff) from July 2016 to the present

[35]The defendants are again neutral in relation to this category.

[36]   I find that Mr Patel has satisfied the criteria in Assa Abloy.6 The documents sought are relevant and of some importance and as a matter of discretion they should, in my view, be provided. The immigration records appearing as annexure “B” to the memorandum of the plaintiff, dated 23 April 2021, provide an evidential basis for my finding that the disclosure to date in this category has been incomplete.

Result

[37]   I find that Mr Patel’s amended applications for particular discovery (r 8.19) and non-party discovery against the trading banks (r 8.20) should be granted and on the terms set out below.

[38]   The first and second defendants are to file and serve further affidavits of documents within 15 working days stating whether:

(a)The categories of documents at (i) (ii) and (v) above are or have been in their control; and

6      Assa Abloy NZ Ltd v Allegion (NZ) Ltd, above n 1.

(b)If they have been but are no longer in their control, their best knowledge and belief as to when the documents ceased to be in their control and who now has control of them;

(c)If the documents are in their control, to make those documents available for inspection in accordance with r 8.27.

[39]   I also order, pursuant to r 8.21, that the following non-party trading banks, namely the ANZ Bank NZ Ltd, ASB Bank Ltd, Bank of New Zealand, Westpac NZ Ltd and Kiwibank Ltd are to file and serve affidavits of documents within 20 working days stating:

(a)Whether personal bank account statements of Muralikrishna Beecharaju and Santosh Reddu Sontireddy are or have been in their control; and

(b)If they have been but are no longer in their control, their best knowledge and belief as to when the documents ceased to be in their control and who now has control in them;

(c)If the documents are in their control, to make those documents available for inspection in accordance with r 8.27;

(d)If any of the non-parties do not hold any personal bank accounts in the name of either Muralikrishna Beecharaju or Santosh Reddy Sontireddy, then the deponent of the affidavit is to confirm that that is the case.

[40] The reasonable costs of the non-party trading bank entities referred to at [39] above are to be met in the first case by the plaintiff, Mr Patel. Leave is reserved to the non-parties to seek further directions, including directions in relation to costs, from the Court.

[41]   As to costs on the applications before me, I find that the defendants, as the losing parties, should pay costs to the plaintiff, Mr Patel, on a 2B basis. If costs cannot be agreed, then memoranda addressing the issue (no more than three pages) are to be

filed and served within 20 working days. I would expect counsel to take into account the fact that co-operation and agreement between the parties has resulted in a substantially reduced range of documents at issue and the subject of this judgment.

Associate Judge P J Andrew