Reeder v Reeder

[2013] NZHC 646

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2012-470-599 [2013] NZHC 646

BETWEEN  NELLIE REEDER First Plaintiff

ANDWENDY LEE GUNMAN IN HER CAPACITY AS EXECUTOR OF THE ESTATE OF WILLIAM JOHN REEDER Second Plaintiff

ANDJEFFREY GRANT REEDER First Defendant

ANDREEDER HOLDINGS LIMITED Second Defendant

ANDLEYTON PROPERTIES LIMITED Third Defendant

Hearing:         14 March 2013

Appearances: Mr S Barter for Plaintiffs

Mr P Crombie for Defendants

Judgment:      27 March 2013

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

27.03.13 at 5 pm, pursuant to

Rule 11.5  of the High Court Rules. Registrar/Deputy Registrar

Date……………

Counsel:

Cooney Lees Morgan, P O Box 143, Tauranga – [email protected]

Barter & Co, P O Box 197, Albany Village – [email protected]

REEDER & Anor V REEDER & ORS HC TAU CIV-2012-470-599 [27 March 2013]

[1]      The plaintiffs have applied for particular discovery pursuant to r 8.19 High Court Rules (HCR). It is necessary to briefly describe the background to the present applications.  The late Mr Jack Reeder is the first defendant and was the husband of Mrs Nellie Reeder.  He died in September 2010.  Mr and Mrs Reeder and their three children all acquired shares in various family-owned companies.

[2]      In proceeding CIV 2011 4173 the substance of the claims which are brought against Mr J G Reeder are stated in the following terms:

(a)       Breach  of  trust  and/or  undue  influence  in  relation  to  shares  in  Reeder Holdings Limited.   The plaintiffs say that the 40,000 shares which they transferred to Jeffrey Reeder in July 1996 (which were subsequently transferred by Jeffrey Reeder to the trustees of the Salisbury Victoria Trust) were to be held on trust for their benefit.  This is denied by Jeffrey Reeder and the current trustees of the Salisbury Victoria Trust;

(b)Breach of trust  in relation  to a  property at 141  Okere  Road  which the plaintiffs say is held by Jeffrey Reeder on trust for their benefit and which trust Jeffrey Reeder denies.   He says he is holding a half share of the property on trust for the plaintiffs.

[3]  The other proceeding (“the 174 proceeding”) is a claim brought by the plaintiffs against Jeffrey Reeder, Reeder Holdings Limited (“RHL”) and Leyton Properties Limited (“LPL”) pursuant to s 174 of the Companies Act.

(a)       The plaintiffs claim that Jeffrey Reeder has conducted the affairs of RHL and LPL in a manner that is oppressive, unfairly prejudicial and/or unfairly discriminatory against her [sic] as shareholder of the companies.

(b)       The 174 proceeding also contains an application for the Court to grant leave to RHL to bring a derivative action against Petroleum Properties Limited (“PPL”) on the basis that the affairs of PPL have been conducted in a manner that is oppressive, unfairly prejudicial and/or unfairly discriminatory against RHL as shareholder of PPL.

Discovery rules

[4]      The first step in deciding whether the application for particular discovery should be granted is to enquire what obligation the respondent party had to give discovery of documents.  Such an enquiry is necessary because there are now at least two broad categories of discovery which call for different responses from the parties. As is well-known, the test for discovery used to be that set out in the Peruvian

Guano case.[1]    Under that authority, the party was required to give discovery even

though the documents might not be of direct relevance to an issue in the proceeding. If the documents might conceivably lead to the discovery of other evidence which could assist the party’s case or adversely affect the case of the opposition party, then they needed to be disclosed.   There seems to be little doubt that the very wide parameters of such a test contributed to the cost of discovery.   The width of the potential documents that the party had to search for and then disclose was too wide. For that reason, an alternative and more restrictive test was adopted in the 2012 discovery rules.   Standard discovery required disclosure of documents which the party relies upon and also documents which might adversely affect the party’s own case or support the case of the opposite party.  While the rules do not expressly say that that is the “default” discovery test, there can be little doubt that having regard to the objectives of simplifying and limiting discovery, it will very often be the test which the Court will adopt.   The power to order “tailored discovery” under r 8.8

HCR means that the direct relevance test contained in r 8.7 HCR is not the sole standard for discovery that the Court can adopt.

[1] Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 (CA).

[5]      There may be cases where greater or lesser discovery than that responding to r 8.7 would be required.  One of the obvious cases where there is likely to be a more expensive discovery, “more discovery” as the rules describe it, is where the Court concludes that discovery of the Peruvian Guano kind is called for.

[6]      In the circumstances of this case, standard discovery was required.  This has relevance to the issues that need to be determined because the original discovery order did not require the defendants to disclose documents which, for example, could

lead to a chain of enquiry that may in turn disclose other documents.

[7]      The present application has been brought pursuant to r 8.19 HCR. An order can be made where there are grounds for believing that a party has not discovered one or more documents “that should have been discovered”.  It would seem logical that in enquiring whether there has been a failure to discover required documents, the Court first has regard to the discovery test which it is suggested that the discovering party ought to have complied with but did not.  In other words, where the Court has already determined what type of discovery is to be awarded in the particular case, an opposing party can only complain if there has been a failure to provide what the Court order required the discovering party to provide.

[8]      The plaintiffs must establish the grounds for belief that the first defendant has not discovered documents that he should have.   In AMP Society v Architectural Windows Ltd,[2] the Court held that an application in general terms would not suffice, but rather the applicant must satisfy the Court that there are “grounds for a belief that such a document or class of document exists and must specify them accordingly.”

[2] AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190 (HC).

[9]      In addition to considering the type of discovery order which was made in the first instance, it is necessary to consider the issues that arise in the case and various other factors which might have a bearing upon whether the discovery provided was adequate.

The specific orders that the plaintiffs seek – category 1(a)-(d) Synopsis of

Applicant’s Counsel

[10]     The following is the description of the documents in relation to which the plaintiffs seek particular discovery of within category (f):

The plaintiff/applicant is seeking an order that the first defendant provide discovery of the following documents pursuant to Rules 8.19 and 8.7 of the High Court Rules.

Statements  for  all  bank  accounts  held  by  the  First  Defendant  for  the following periods:

(a)       October to December 1993; (b)    July and August 1994;

(c)       April and May 1996;

(d)      February and March 1996

[11]     The foundation of the claims for discovery in this category is an allegation contained in the amended statement of claim that the proceeds of sale of four properties which the plaintiff sold were received by the first defendant on the basis that he would pay the money into RHL on their behalf as an investment in that company.  The plaintiffs now allege that the first defendant did not in fact do that but received the money himself and put it to his own use.  That broad allegation is the subject of what the parties called the “share transfer transaction”.

[12]     The approach that Mr Barter took was that the plaintiffs having made these allegations in the statement of claim, it was incumbent upon the first defendant to provide various documents, including the above bank statements which were said to be relevant to the allegation.  They were relevant because if the money was paid into the first defendant’s personal bank account, then it would be expected that an entry/entries in the bank statements would reflect such payment.

[13]     The defendants deny the plaintiffs’ allegations.  They have already provided

extensive discovery.  They did not include the bank statements.

[14]     When I asked Mr Barter on what basis he could demonstrate that there may have been incomplete discovery, his answer, summarised, was to repeat that the documents sought were relevant to allegations in the pleadings and to submit that it would be necessary for the plaintiffs to have access to the documents in order to prove those allegations.  This answer did not respond to the question.

[15]     The procedural rules concerning discovery proceed on the assumption that the parties will meet their obligations to disclose all relevant documents.   But the affidavit of documents that a party files is not final or conclusive to the extent that if there is some material to suggest that discovery of relevant documents has not been given, the Court will exercise its powers to direct particular discovery.  There is no evidence to support the suggestion that the bank accounts information is relevant in the sense that I have been discussing.   Nor is it intrinsically likely in the overall circumstances of the case that it was relevant.  There is no dispute that the properties were sold and converted into proceeds of sale.  It is disputed that the first defendant

received the money.  It is not to be supposed that he did receive the money in the absence of proof put forward by the plaintiffs that he did.   There is no evidence laying the foundation for a suspicion that the money might have gone to the first defendant.  As Mr Crombie said there are no settlement statements, no information from someone who was involved in the transaction or some other source from which the Court could conclude that there was at least a basis for suspecting that the money might have gone to the first defendant.

[16]     There has been nothing more than a bare assertion by the applicant that the money was diverted to the first defendant.  That is not enough to justify the Court in coming to the view that there may be other documents which the first defendant has not discovered but which he ought to have discovered.

[17]     The factual position concerning the $250,000 was further complicated by references  which  both  counsel  made  to  the  factual  scenario  under  which  the

$250,000 advance was allegedly made by RHL (acting under the influence of and at the instigation of the first defendant) which advance the first defendant allegedly repaid to RHL on 15 March 2012.

[18]     Counsel for the first defendant noted that in any event the first defendant has conducted a reasonable search for the bank statements, he contacted the bank and was advised that banks are only required to keep such statements for seven years. Mr Barter took what I would describe as a rather technical approach to this averment saying that the bank did not actually say that they did not have them.  I am satisfied that in the context in which this comment was made that the bank statements cannot be found.   If a particularly rigorous approach were taken to this matter the Court could direct the first defendant to swear a further affidavit of documents but on a discretionary basis I decline to make any such order because it would be futile.

[19]     I am satisfied that the plaintiffs are not entitled to the order that they seek under this heading.

Category three applicant’s synopsis

[20]     The category of documents defined in paragraph (I)(i) was modified at the hearing[3] so that the following range of documents was sought:

[3] Paragraph 3 of synopsis.

In relation to Reeder Holdings, Leyton Properties and Petroleum Properties the plaintiffs require discovery of:

(a)     The electronic accounting database Cashbook used by the first defendant relating to RHL, LPL and PPL dating back to 1998.

(b)     Credit card statements held in the name of the first defendant or any other party (excluding the plaintiffs) including but not limited to Visa and Global Plus statements which have been paid by:

(i)     RHL and LPL for the period from 1 August 2005 to present. (ii)   PPL for the period from 1 April 2005 to present.

(c)     Invoices rendered to:

(i)     RHL and LPL for the period from 1 August 2005 to present. (ii)   PPL for the period from 1 April 2005 to present.

(d)     Cheque butts for:

(i)     RHL and LPL for the period from 1 August 2005 to present. (ii)   PPL for the period from 1 April 2005 to present.

(e)     Deposit books for:

(i)     RHL and LPL for the period from 1 August 2005 to present. (ii)   PPL for the period from 1 April 2005 to present.

(f)     The cashbooks for LPL for the financial year ending 31 July 1993; 31

July 1994; 31 July 1995 and 31 July 1999.

(g)    Documentation showing all shares held by any of the above named companies including all receipts, invoices and correspondence relating to any share purchases or disposals.

(h)All documentation relating to the informal lease arrangements for the part of the building owned by LPL at 1129 Hinemoa Street which is occupied by the bar, restaurant and hotel.

Plaintiffs’ synopsis documents A .1(2)

[21]     I understand that under this heading the plaintiffs are seeking documents relating to the repayment by the Salisbury Victoria Trust of the sum of $250,000 to the first plaintiff’s current account in 2012.  It is said that this request for additional discovery is based upon an alleged failure on the part of the first defendant to provide them with information relating to the financial affairs of RHL and in particular that there is insufficient documentation available to enable verification of the accuracy of the accounts of RHL.   It is further said that the documents will enable the plaintiffs  to  determine  whether the  first  defendant  and  the trust  had sufficient money in their current accounts in RHL to enable the crediting of the first plaintiff's current account with the sum of $250,000 needed to repay the loan.

[22]     I am not satisfied that there are additional documents over and above what has already been discovered in regard to which the plaintiffs are entitled to an order for particular discovery.  I note that the differential first defendant has agreed to provide copies of the financial statements of RHL to 31 July 2012 when they are completed.

Documents Sought under Paragraph 3 of Synopsis of Counsel for Applicants

[23]     The applicant makes an application in very wide terms for documents in this group.   I understand that the information is sought in relation to pleadings in the statement of claim in the section 174 proceeding where it is alleged there has been a failure on the part of the first defendant to provide required financial information about the financial affairs of RHL.  It is also said that the documents that are sought are required in order to “determine the accuracy of the accounts of LPL”:

(i)In relation to Reeder Holdings, Leyton Properties and Petroleum properties the plaintiffs require discovery of:

(a)        the electronic accounting database Cashbook used by the first defendant relating to RHL, LP L and PPL dating back to 1998

[24]     I  will  first  examine  the  issue  from  the  point  of  view  of  relevance.    I understood that Mr Barter went so far as to suggest that where an application has been made that shareholders have been the subject of conduct which amounts to oppressiveness under s 174 Companies Act 1993, an entitlement to receive full sets of all the records of the company including the primary transaction evidence in its entirety ought to be ordered on discovery.   I do not accept that that is the case. Consistent with principle, what the plaintiffs have to do is to set out particulars of how they have been oppressed.  Once that is done, and depending upon whether the allegations are denied in whole or in part, the issue which needs to be proved at trial will emerge.   In that way the relevant class of discoverable documents will be identified.

[25]     If it is alleged that the respondent has not discharged its obligations to give discovery, then there must be some basis pointed to which provides a foundation for the applicant submitting that its criticisms have substance.   Whether by adducing explicit  evidence  on  the  point  or  by  invoking  the  probabilities  inherent  in  the situation which is described in the pleadings, the applicant may be able to show that further discovery is required in order to make good the deficiency in the original discovery.  But it cannot be the case that an application for the company’s records in their entirety will be permitted even if there appears to be a lack of proper discovery in relation to some particularised breach of s 174 Companies Act.

[26]     If, for example, the applicant says that he/she has not received documentary information about the company's affairs which would be called for in accordance with acceptable standards of companies governance, then evidence relating to what ought to have been provided and what was provided would be required  at trial to establish the claim.  So, if there was a dispute about whether or not a party had been given copies of the annual accounts of the company, for example, it might well be arguable that the minimum level of financial information that the typical shareholder

is entitled to has not been provided in the circumstances of the case.   Documents which bear upon the question of whether there has actually been neglect or refusal to provide the information will be discoverable.  However, there can be no obligation in response  to  an  allegation  that  there  have  been  instances  of  oppression  that  the entirety of the company’s financial records ipso facto become discoverable.

[27]      I decline to make the order sought under this category.

Category A (1)(3) (b) of Applicants' Counsel's Synopsis

[28]     This category is concerned with the application for discovery of records relating to the personal credit cards of the first defendant.

[29]     The applicants consider that access to the credit card statements of the first defendant would show whether there had been improper distributions of funds from the companies to the credit cards.   When I asked Mr Barter about the basis upon which the Court was invited to conclude that there was material in the credit card statements which tend to prove that issue, he told me that there was no particular evidence pointing to that being the case and nor was there any specific inference which showed that there was some prospect that disclosure of the credit card statements would prove the type of facts that the plaintiffs relied upon.  Mr Barter said that the plaintiffs’ view of matters was that the companies had not been properly run and that it was likely that there would be evidence in the credit card statements. He also went further than that and said that it would be impossible for the plaintiffs to prove their case unless the Court gave access to these records.  I do not consider that the latter approach is the correct one as I will set out shortly.

[30]     The defendants in opposition put before the Court a specimen copy of a personal credit card statement which would fit the category in respect to which particular discovery is sought.   Mr Crombie submitted that that document showed only that the account was in the name of the first defendant and that it did not contain any information about who the “payer” was.  It was his submission that even if the other obstacles to the making of an order for further discovery could be overcome, the documents would not in fact contain any evidence of assistance to the plaintiffs.

[31]     I do not consider that the order sought by the plaintiffs in regard to the credit cards ought to be granted.  They have not been able to demonstrate by referring to any evidence or inherent circumstances of the case that there is reason to believe that the  credit  card  information  which  they  seek  by  way  of  particular  discovery  is relevant to the allegations that the first defendant and the other defendants had been operating the companies in an oppressive way by making payments to the first defendant to which he was not entitled.

[32]     In any event, based upon the uncontradicted evidence of the first defendant, the Court must accept that the credit card statements do not contain any material evidence which would assist the plaintiffs to prove their case pursuant to s 174

Companies Act.  This part of the application is therefore disallowed.

Documents at Paragraphs A.1 (3) (C) -( G) of the Synopsis of Applicants

Counsel

[33]     The documents in this category broadly correspond to the categories set out at (I)(i)-(vii) of the notice of application although there are some refinements introduced.

[34]     The applicants seek discovery of the following:

3.In relation to Reeder Holdings, Leyton Properties and Petroleum Properties the plaintiffs require discovery of:

(i)      The electronic accounting database Cashbook used by the first defendant relating to RHL, LPL and PPL dating back to 1998.

(j)      Credit card statements held in the name of the first defendant or   any other party (excluding the plaintiffs) including but not limited to Visa and Global Plus statements which have been paid by:

(iii)    RHL and LPL for the period from 1 August 2005 to present. (iv)  PPL for the period from 1 April 2005 to present.

(k)     Invoices rendered to:

(j)     RHL and LPL for the period from 1 August 2005 to present.

(ii)     PPL for the period from 1 April 2005 to present. (l)        Cheque butts for:

(iii)    RHL and LPL for the period from 1 August 2005 to present. (iv)  PPL for the period from 1 April 2005 to present.

(m)    Deposit books for:

(iii)    RHL and LPL for the period from 1 August 2005 to present. (iv)  PPL for the period from 1 April 2005 to present.

(n)     The cashbooks for LPL for the financial year ending 31 July 1993; 31

July 1994; 31 July 1995 and 31 July 1999.

(o)    Documentation showing all shares held by any of the above named companies including all receipts, invoices and correspondence relating to any share purchases or disposals.

[35]     The documents that are sought on this category relate to an allegation that the first defendant has failed to provide the plaintiffs with information relating to the financial  affairs  of  RHL  and  another  company  LPL.     It  is  said  that  further information is required so that the plaintiffs are able to verify whether the financial statements of those companies are accurate.    LPL is the third defendant in the proceeding.   References are also made to another company called Petroleum Properties Limited (PPL) which is not a party to the present proceeding.   PPL is referred to in these proceedings because an application has been made for the first plaintiff on behalf of RHL to bring a derivative action against PPL based on an alleged property transaction between the two companies.

[36]     During the course of his submissions, Mr Barter told me that the applicants would not be proceeding with the application so far as it was concerned with (viii) to (x) which were included in the original application for particular discovery and I will not therefore consider them.

[37]     In the submission for the plaintiff it is stated:

In relation to the documents sought .........herein there are specific pleadings relating to the alleged failure of the first defendant to provide the plaintiffs with information relating to the financial affairs of RHL and a particular allegation  that the first plaintiff  has provided  insufficient information  to determine the accuracy of the accounts of Reeder Holdings Limited.  There are specific pleadings relating to the alleged failure of the first defendant to provide the plaintiffs with information relating to the financial affairs of LPL and a particular allegation that the first plaintiff has provided insufficient information to determine the accuracy of the accounts of LPL.   These allegations are also made in relation to the financial affairs of PPL.  There are also specific allegations that the first defendant has advanced funds belonging to LPL to himself and other entities in which he has an interest on numerous occasions and that the annual accounts and financial statements of LPL have been prepared on the first defendant’s instructions and on the basis of information he has compiled in relation to the finances of LPL.   The source documents on which the accounts are based including the invoices, cheque butts and deposit books and expenses paid by the companies which are put through the first defendant’s credit cards are relevant to determining whether the accounts of the companies are accurate.

[38]     In order to assist understanding of this part of the application, it is necessary, again, to link it to what the substantive issues are in the case as disclosed by the pleadings  which  the  parties  have  filed.     Rather  than  consider  the  numerous allegations which are made in the statement of claim in their entirety, attention will be given to the allegation at paragraph 21(G).   It is asserted in that section of the statement  of  claim  that  the defendants  conducted themselves  in  a  way that  the oppressed the defendants by:

Failing to provide the plaintiffs with information relating to the financial affairs of Reeder Holdings limited in a timely manner or at all

[39]     Further particulars are provided which include an allegation that:

The first defendant has failed to provide the first plaintiff with copies of all documentation relating to the finances of Reeder Holdings Limited including its  bank  statements,  cashbooks  and  journals  despite  numerous  requests having been made by the first plaintiff that such information be provided to her.

[40]     Against that background, the substantive elements of the claim which the plaintiffs will need to establish at trial will be:

(a)       That the first defendant in fact was subject to a duty to provide the documentation that is claimed;

(b)       That the plaintiff made the request that she said she did;

(c)       That the documents which the plaintiffs sought actually exist; (d)     That the defendants failed to comply with her requests.

[41]     The  statement  of  defence  responding  to  this  allegation  says  that  the defendants deny the contents of that paragraph in the statement of claim.

[42]     It is not necessary in order to establish elements A, B and D to produce the entirety of the cheque butts, deposit books, etc.  The proposition that the company has failed to keep the plaintiff properly informed will not be advanced by providing all the invoices and cheque butts and deposit books from the company’s records.

[43]     If the documents are sought to be produced because the allegation is that the defendants oppressed the plaintiffs by compiling false accounts, then to establish the grounds for an order being made under r 8.19 HCR, there must be some basis to suggest that the documents exist and that they are relevant in the sense that they would assist the plaintiff to prove such a case.  But all that has occurred is that the plaintiff  has  pleaded  that  such  a  state  of  affairs  existed,  which  is  insufficient. Mr Barter complained that it would be impossible for persons in the position of the plaintiffs to get access to the detailed records of the company.  I accept that it may be difficult  but  it  is  not  impossible.    To  take an  example,  if  a shareholder in  the company noted in the financial records that there had been a sale of the property entered at a certain figure which that shareholder believed was incorrect and was able to establish some ground supporting that view, for example by obtaining particulars of the sale of the property price which were inconsistent with the amount in the financial statements, then the Court may well take the view that focused particular discovery on that subject should be granted.  That is a long way from the approach that the plaintiffs have taken in this case which seems to be that all that

they need to do is plead that a certain state of affairs exists in order for them to acquire a right to scrutinise all the minutiae of the company's financial affairs.

[44]     Even if the plaintiff were able to surmount the hurdle of relevance, there is still  a  necessity  to  satisfy  the  Court  that  what  is  sought  by  way  of  additional discovery is proportionate and is not oppressive.  In weighing up whether such an order would be made, the Court would be entitled to have regard to the fact that that element could be proved more simply, cheaply and expeditiously by other means such as administering targeted interrogatories, for example.

[45]     The short point is that there would be a wrongful exercise of the discretion of the Court to make the orders sought with regard to this category of documents.

[46]     So far as category 3 (f) is concerned, this category of documents corresponds to  group  “vi”  in  the  notice  of  application.    This  category  is  concerned  with cashbooks of LPL for the years 1993, 1994 and 1999.  The first defendant accepts that discovery is required of those documents but he has stated on oath that despite looking for the documents they cannot be found.

[47]     Because of that concession on their part there is no need for me to examine in detail whether that group of documents ought to be made the subject of an order for particular discovery.

[48]     I deal next with Plaintiff synopsis category 1.A(3)(g).

[49]     This part of the application seeks discovery of all shares held by any of the companies and documents ancillary to ownership of the shares or acquisition of them and assumes that there will be relevant documents forthcoming as a result of a discovery order.  There is no basis spelt out for why the Court should come to that conclusion.  The first defendant says that he has already made substantial disclosure of many of these documents.   The point has now been taken, however, that the documents cannot have any relevance to the oppression proceedings.

[50]     Rather than repeat observations made earlier with regard to what documents are relevant to the proceeding under s 174, it is noted that the documents in question are not relevant to the substantive issue of whether there has been oppression.  That is sufficient to dispose of this category of documents.  I decline to make any order in regard to them.

Conclusion

[51]     The application is dismissed.

[52]     The only matter remaining is the question of costs.  The parties should confer on  that  issue  and  if  they  are  unable  to  agree  they  should  file  memoranda  not

exceeding five pages on each side within 21 days of the date of this judgment.

J.P. Doogue

Associate Judge