Reynolds v Calvert
[2013] NZHC 3254
•6 December 2013
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV-2012-412-000910 [2013] NZHC 3254
IN THE MATTER OF the liquidation of James Developments
Limited (in liquidation)
BETWEEN GRANT BRUCE REYNOLDS Plaintiff
ANDHILARY JANE CALVERT and HGW TRUSTEES LTD of the Frongopolus Trust Defendant
Hearing: 19 November 2013
Appearances: M J McCartney QC for Plaintiff
M R Sherwood King for Defendants
Judgment: 6 December 2013
JUDGMENT OF ASSOCIATE JUDGE OSBORNE
upon interlocutory applications
Introduction
[1] This judgment relates to a number of interlocutory applications by the parties. At the hearing, the position adopted by the parties on some applications meant that those applications could be disposed of immediately, and a separate judgment has been issued in relation to those matters.1
[2] The applications which are dealt with in this judgment concern:
(a) The plaintiff’s joinder of an additional defendant, Chris James;
1 Reynolds v Calvert [2013] NZHC 3084.
REYNOLDS v CALVERT [2013] NZHC 3254 [6 December 2013]
(b) The plaintiff’s application for discovery orders against the defendants;
(c) The extent to which interrogatories should be answered by the defendants; and
(d) The defendants’ application for discovery orders against the plaintiff.
[3] By agreement of the parties, for convenience at the hearing I heard also an application by Mr James (represented also by Mr Sherwood King) in which Mr James seeks leave to bring a claim against Mr Reynolds (as liquidator of James Developments Ltd) under s 284 Companies Act 1993. I deal with that application in a separate judgment issued contemporaneously with this.
The subject-matter of this proceeding
[4] The subject-matter of this proceeding is central to the issues on the plaintiff’s
joinder application and is also relevant to other interlocutory issues.
[5] That subject-matter has already been considered by the Court when hearing and ultimately dismissing a summary judgment application of the plaintiff.2
[6] In that judgment, on the pleadings as they were filed, I set out the relevant background under a heading “A loan is re-documented”. I then recorded that:3
In 2006, things were going well for the fortunes of Chris James. He had a family trust, the Frongopolus Trust. The trustees (the defendants in this case) decided to purchase an 8,925 m² block of land, at Jacks Point, Queenstown, in order to build there a very substantial home for the James family.
To finance the purchase, Mr James had his company, James Developments Limited (“JDL”), advance $740,000 on 3 October 2006 to the trustees. The money was cleared through another company (Campbell’s Stores Limited), but went to the trustees on the same date.
The advance and credit were recorded in the financial statements of JDL and the Trust respectively for the financial year ending 31 March 2007. And so, too, for the year ending 31 March 2008.
2 Reynolds v Calvert [2013] NZHC 1159.
3 At [1] – [14].
By mid-2009, JDL was heading towards liquidation. It had received an adverse High Court civil judgment in April 2009.
The firm of Harvie Green Wyatt were the accountants for the James family and their entities. Todd Miller, of that firm, was the partner responsible for the James’s entities. He was also, and remains, a director of the firm’s trustee company, HGW Trustees Limited, which as a co-trustee of the Frongopolus Trust is the second-named defendant in this proceeding.
By July 2009, Mr Miller had draft financial statements ready for JDL for the year ending 31 March 2009.
A meeting was convened in relation to JDL on either 1 or 2 July 2009. Present were Mr James and his accounting and legal advisers. They were Mr Miller (accountant), Michael Van Aart (solicitor) and Colin Withnall (Queen’s Counsel). For discussion were issues associated with JDL's imminent liquidation. The shareholders shortly afterwards, on 6 July 2009, placed JDL in liquidation.
At the meeting, the discussion included recognition that the $740,000 debt of the Trust was liable to be called up by a liquidator of JDL. It was one of the assets of JDL which could be “a problem”. A decision was made to re- document the transaction. The re-documentation which ensued was through a resolution of the director which Mr James signed and dated 1 July 2009. The resolution recorded:
James Developments Limited Resolution of Director
Background:
On 3 October 2006 a cash withdrawal of $740,000 was made from the company bank account. This withdrawal was incorrectly narrated in the company computer ledger, and subsequently in the company financial statements, as an advance to the Frongopolus Trust. The correct treatment of this advance was as a repayment of earlier advances from Chris James ($500,000) and Heriot Holdings Limited ($240,000). Heriot Holdings Limited is wholly owned by Chris James.
Resolved that:
The 2009 company financial statements be amended to correctly record the $740,000 withdrawal on 3 October 2006 as a repayment to the advances made by Chris James $500,000 and Heriot Holdings Limited $240,000.
The draft JDL financial statements for the year ending 31 March 2009 were amended to show that the advance of $740,000 to the Trust was no longer an asset of JDL. They were subsequently finalised in that form so as to reflect the disappearance of the Trust’s debt to JDL. The $740,000 advance was instead treated on JDL’s new financial statement as if it had been a repayment of advances from Mr James ($500,000) and Heriot Holdings Limited (“Heriot”) (240,000) respectively.
The journal entry for the alteration of the treatment of the $740,000 debt in the Trust was not completed until 21 September 2009 (more than two
months after the liquidation of JDL), when an entry was made to re-code the debt to Campbell Stores Limited.
The initial liquidators of JDL do not appear to have identified the significance of the previous existence of the trustees’ $740,000 debt. The debt no longer appeared in JDL’s accounts. The initial liquidators were replaced by the current liquidator, Mr Reynolds, (the plaintiff in this proceeding) in November 2010. He, too, remained initially unaware of the prior existence of the $740,000 debt. But by his investigations, he identified the relevant background as I have summarised it.
Under s 261 Companies Act 1993, Mr Reynolds examined Mr James on 30
May 2012 and Mr Miller on 8 June 2012. This process led Mr Reynolds, on
26 June 2012, to demand from the trustees’ payment of the $740,000
together with interest. The trustees, through their solicitors, denied that there was any basis for the liquidator’s demand either as to principal or interest. Around the same time, however, Mr James and Heriot presented (through Mr Harvie of Harvie Green Wyatt) their proofs of debt for sums which were meaningful only if the July 2007 re-documentation is ignored. That is to say the proofs of debt assume that there was no settlement by JDL of the debt owed to Mr James and Heriot.
Mr Reynolds pursued further documentation from various parties. He also continued to pursue, unsuccessfully, payment of the $740,000.
In November 2012, Mr Reynolds issued this proceeding. The trustees had continued to deny they owed anything to JDL. On the day before Mr Reynolds swore his affidavit in support of the summary judgment application, a letter from the trustees’s solicitor stated:
The $740,000 Advance – Limitation Defense [sic]
My clients stand by the treatment of this sum in the accounts of JDL resulting from the directors’ minute of 1 July 2009. Without prejudice to that stance, however, it is noted that the advance was made on 3 October
2006, being now more than six years ago. Would you please advise what records you hold that you would contend meet the requirements of s 26 of the Limitation Act 1950 should your view of the transaction prevail.
[7] By the time the summary judgment application was heard, Mr Reynolds as liquidator had amended his statement of claim. He asserted an entitlement to recover the $740,000.00 from the defendant on three different bases:4
(a) A contract of claim for repayment of a debt (with interest);
(b)A claim for payment of the $740,000.00 pursuant to the terms of resulting trust (with interest);
4 At [17].
(c) An order under s 348 Property Law Act 2007 requiring payment of the $740,000.00 (with interest) as reasonable compensation for prejudicial disposition.
[8] I found that, although the liquidator’s evidence was strong5 the defendants had raised arguable defences which could properly be determined only at a trial.
Application to join Chris James
The proposed claim against Mr James
[9] Mr Reynolds has filed a draft of a (second) amended statement of claim to show how the proposed claim against Chris James would be pleaded. Against the present defendants Mr Reynolds intends to pursue the existing causes of action (repayment of the debt, payment to resulting trust, and an order under s 348 Property Law Act) and to add a fourth cause of action for breach of fiduciary duty.
[10] As against Mr James, Mr Reynolds proposes to pursue two claims, first for breach of fiduciary duty and secondly for breach of duties under ss 131, 135 and 301
Companies Act.
[11] In particular, Mr Reynolds’ draft claim in relation to breach of fiduciary duty
would add the following pleading -
30.The second defendant as director of James Developments Limited owed fiduciary duties to the company to act loyally and serve the interests of the company.
31. The fiduciary duties required the second defendant;
a. to preserve the property of JDL;
b. to not take for himself property of JDL;
c.to account to James Developments Limited for any property improperly taken and without consideration; and
d.to not remove property of the company prior to liquidation to defeat claims of the creditor.
5 At [77].
32.The transaction by which Chris James as director purported to release and set-off the advance of $740,000 in favour of himself and his interests was in breach of the fiduciary duties owed to James Developments Limited.
33.The second defendant is obliged to account to the plaintiff for the sum of $740,000 together with interest from 1 July 2009 on a compounding basis.
[12] Mr Reynolds’ draft claim in relation to breach of duties under the Companies
Act would add –
40.The second defendant by his actions in removing and misapplying the property of James Developments Limited is:-
a.in breach of s 131 of the Companies Act 1993 by failing to act in the best interests of the company;
b.in breach of s 135 of the Companies Act 1993 for trading recklessly and/or causing and allowing the business of the company to be carried on in a manner likely to cause substantial risk of severe loss to the company’s creditors;
c.in breach of s 301 of the Companies Act 1993 for misapplying property of the company.
The relief Mr Reynolds would seek against Mr James is in each case for judgment in the sum of $740,000.00 together with compounding interest.
Basis of application for joinder
[13] Mr Reynolds’ application to join Mr James as second defendant is based on the propositions that Mr James ought to be joined to enable the Court to adjudicate on all the issues in the proceeding and that Mr James is required to be joined so that there may be a complete adjudication of all issues involved.
[14] Mr James opposes the application upon the basis that neither of the propositions in the application is sound. In more detailed grounds of opposition there is a repeated refrain that the transaction by which the $740,000.00 loan was re- documented by Mr James and others was “financially neutral”. In Mr Sherwood King’s submissions it was further asserted that any loss to James Developments Limited was caused not by the actions of the defendants but by the failure of Mr Reynolds as liquidator to recover the relevant asset within the limitation period.
[15] Mr Reynolds’ application proceeds upon the jurisdiction established by r 4.56(1)(b)(ii) High Court Rules which permits a Judge at any stage of the proceeding to order the joinder of a defendant if that person’s presence before the Court may be necessary to adjudicate on and settle all questions involved in the proceeding.
[16] The purpose of the joinder rule is neatly summarised in Sim’s Court Practice
where the authors state: 6
The general purpose of the rule is to ensure the determination of all disputes relating to the same subject matter without the delay and expense of separate proceedings...The courts take a liberal approach to the interpretation of the rule, particularly where a plaintiff seeks to join a further defendant: Westfield Freezing Co Ltd v Sayer & Co (NZ) Ltd [1972] NZLR 137.
Discussion
[17] This is a clear case for joinder of Mr James. He was centrally involved in the re-documenting of the $740,000.00. He had interests on both sides of the transaction
– as a director with prima facie fiduciary responsibilities to James Development Limited and as an individual with personal interests in a family trust on the other hand. If Mr Reynolds had chosen to issue a separate proceeding against Mr James, which he could have done, the Court would then have had before it two separate proceedings in relation to the same transaction. Some of the questions such as the intentions of those involved would have been common to both proceedings. The necessity in this case for adjudication on settlement of all questions involved is plain.
[18] I turn briefly to two particular aspects of the opposition advanced by the defendants. First, there is a proposition that it was the liquidator’s failure to recover an asset within the limitation period which has caused the damage to the plaintiff. Such a proposition is essentially for trial and, even in that context, unlikely to be a complete answer to Mr Reynolds’ claim. Amongst other things, the findings in relation to Mr Reynolds’ allegation of concealment of the transaction may deprive
this ground of opposition of much if not all of its force.
6 Sims Court Practice at [HCR4.56.3].
[19] Secondly, there is the refrain in the notice of opposition that the re- documenting of the loan was “financially neutral” so far as James Developments Limited was concerned. That proposition is not established by any evidence. As matters stand Mr Reynolds is encountering a great deal of difficulty in recovering an asset of $740,000.00 that was, until it was re-documented, clearly showing on the books of James Developments Limited. For the time being the asset has been lost to James Developments Limited. If the limitation defence is successful, the asset might be permanently lost on contractual debt principles but other causes of action, such as the fiduciary claim, may provide a means by which damages can compensate for the loss of the debt. In his submissions Mr Sherwood King pointed to “the fact” that the removal of the assets from the books of James Developments Limited was off-set against the removal of the liabilities comprising debts owed to Mr James and Heriot Holdings Limited. The flaw in that submission is that it contains an assumption as to a matter which has yet to be established and is keenly in issue in the proceeding, namely whether there were genuine and recoverable debts owed to Mr James and Heriot Holdings Limited in the sums asserted by them. The defendants have not established that re-documenting the loan was “financially neutral”.
[20] I am satisfied that no injustice will be caused to Mr James through being joined as a defendant in this proceeding. He was, as I have said, centrally involved in the transaction. Mr Sherwood King has described Mr James as in any event having “every opportunity to protect his rights by participating in the Defendants’ preparation for trial”. Mr Sherwood King referred to the probability that Mr James would be called to give evidence. No injustice results if he now does those things as a party rather than as a supporter and witness.
[21] An order for joinder will be made.
The plaintiff ’s discovery applications
The subject matter of applications
[22] Mr Reynolds pursues orders in relation to three areas of discovery:
(a) A verified listing of additional documents disclosed by the defendants informally.
(b)An individualised listing of documents over which the defendants have claimed privilege.
(c) The provision of further documents by way of further and better discovery.
[23] Through the position adopted by Mr Sherwood King the first two requests (maintaining no further opposition to those two requests) can be resolved simply. There will be an order in relation to the filing of a verified list of additional documents informally disclosed. There will also be an order that the privilege claimed by the defendants in Part 2 of their second verified list of documents in a blanket manner in relation to “correspondence between the defendants, their solicitors and the defendants’ expert adviser...” be identified on an individual document basis. In this regard I adopt the requirements under the High Court Rules
which are identified in Vanda Investments Ltd v Logan.7 The adequate identification
of discovered documents is intended, in relation to privileged documents, to ensure that the opposite party becomes aware of the documents claimed to be privileged and enables that party to meaningfully consider a challenge to the claim of privilege in relation to that document.8
[24] There will be orders in relation to those two aspects of the discovery application.
Further and better discovery – particular categories
[25] Mr Reynolds particularised the additional documents of which he sought discovery in a schedule to his application – that schedule is attached as Schedule A to
this judgment.
7 Vanda Investments Ltd v Logan HC Dunedin, CIV-2009-412-000219, 27 November 2009. See especially the form of table at [2] of the judgment, as approved at [59] of that judgment.
8 At [48].
[26] Mr Reynolds based his application for further and better discovery on the basis that the defendants were likely to have the additional documents requested, that the documents are relevant to the issues, and that their non-discovery involves a failure by the defendants to provide documents adverse to their case.
[27] Mr Reynolds refers to discovery orders made by consent in July and September 2013. Included was a requirement for standard discovery pursuant to r 8.7 (thereby invoking the “adverse documents” regime).
[28] The defendants initially opposed the entire scope of Mr Reynolds’ discovery application. The principal grounds of opposition were that the discovery sought was neither reasonable nor proportionate in relation to the nature and extent of issues between the parties and amounted to a “fishing expedition”. Notwithstanding their reliance upon proportionality, the defendants also asserted that they had in fact supplied all relevant documents and had met their obligations in relation to adverse documents.
[29] Relevance in this case is to be tested not only by the events immediately surrounding the $740,000 advance but also by matters of conduct in subsequent years. A limitation point is taken by the defendants. Mr Reynolds asserts in reply to that limitation defence that there has been acknowledgement of the debt by the defendants. Mr Reynolds also relies on concealment in the years after the $740,000 was re-documented. These issues must all be considered when approaching the relevance of discovery in this case.
[30] There was no controversy between counsel as to the principles I should apply in relation to particular discovery. But to the extent that the defendants invoke the requirement of proportionality and the proscription of applications for discovery which amount to fishing, there was some distance between counsel on the application of those principles to this case.
[31] The list of 35 categories of documents sought from the defendants (the remaining 11 categories relate to Mr James) initially appear to be extensive, particularly having regard to the fact that some discovery has already occurred. But
the Court must have regard to the circumstances which led Mr Reynolds as liquidator to wish to ensure that he has seen all documents which may serve to inform him or the Court of exactly what were the circumstances at the time the
$740,000 loan was re-documented, exactly what happened, and exactly what was known or intended by which people. The defendants were involved or at least benefited from the re-documenting of the $740,000 loan. It does not lie in their mouths to suggest that the liquidator is fishing or engaging in disproportionate discovery when he seeks access to all documents which may inform a full understanding of the $740,000 and all financial transactions which have a relevance to it.
[32] Against this background, I turn to the individual items as sought by Mr
Reynolds through Schedule A.
Item 1 – James Developments Ltd’s accountants’ full files from 31 March
2005 – 31 March 2009 – these will provide the fullest information available as to background to the $740,000 loan and the financial relationship of the company to the other parties who were to benefit from the re-documenting of the loan. They are relevant. It cannot be oppressive for the full files to be discovered. Any burdensome aspect of the exercise can be dealt with by allowing the defendants, if the files are intact and complete, to give each file a number for discovery as a single item and to permit the defendants to simply number every page on the file sequentially so that documents can be
identified in the course of inspection.
Items 2 – 10 – various financial and correspondence records relating to James Developments Ltd – Ms McCartney accepted in the course of submissions that if there is an order in relation to Item 1, the remaining items 2 – 10 will not be additionally required. There will accordingly be no orders in relation
to those.
Items 11 and 12 – Ms McCartney also did not pursue these items.
Item 13 – these relate to an asset of James Developments Ltd known as
“Speargrass”, with discovery sought of the relevant loan account records and
how proceeds of sale were dealt with and in particular loan monies applied. They are relevant and should be provided.
Item 14 – Mr Reynolds seeks James Developments Ltd’s cheque books (for the same period as Item 1 – 31 March 2005 – 31 March 2009). These are relevant for the same reasons as the Item 1 accountants’ files and should be
discovered.
Item 15 – accountants’ files for the Frongopolus Trust for the period 31
March 2006 to date – Ms McCartney indicated that she understood that Mr Reynolds now has the full files but seeks an order that any undiscovered documents within that category be discovered. The Frongopolus Trust records for the period following the $740,000 re-documentation are relevant to such issues as the limitation defence, and the issues of acknowledgement
and concealment.
Items 16 and 17 – Ms McCartney did not pursue these items.
Item 18 – correspondence with banks or other financiers relating to advances between James Developments Ltd and the Frongopolus Trust. This correspondence, which Ms McCartney asks to be discovered in an un-
redacted form, is clearly relevant to the $740,000 re-documentation.
Item 19 – correspondence under which Frongopolus Trust accounting information was sent out to any parties (including Messrs James and Broad and the trustees themselves). Ms McCartney seeks this correspondence in un-redacted form. Undertakings as to commercial sensitivity were required to be given by counsel and experts in this case and, in the circumstances of the concealment argument, the redaction of addresses is inappropriate.
Discovery on an unredacted basis will accordingly be ordered.
Item 20 – all correspondence on accountants’ files held for Frongopolus
trustees. I am not satisfied that such a broad category of discovery is justified
when other specifically relevant categories are covered. There will be no
order in relation to item 20.
Item 21 – Ms McCartney does not pursue this item upon the basis that she
has received confirmation that all resolutions have been provided.
Items 22, 23 and 24 – these items relate to bank records and solicitors’ trust account records involving money of the Frongopolus Trust including in relation to the property purchase funds of approximately $2,340,000. How the funds of Frongopolus were utilised is relevant to the arrangements that were made in relation to the re-documenting of the $740,000 loan.
Discovery of the documents will be ordered.
Item 25 – an application by the Frongopolus Trust trustees to the ASB bank for funding. This is relevant to establish the nature of the advance and will
be ordered.
Item 26 – security documents relating to the ASB funding. These documents
are at one remove from relevance and will not be ordered.
Items 27 and 28 – these items concern correspondence as to advances made to the Frongopolus Trust and/or repayments made by that Trust (both of principal and interest) – these items are parallel to item 19 and are focussed specifically on advances. They are clearly relevant to the issues in the
proceeding. Discovery will be ordered.
Item 29 – the correspondence with the ASB relating to variation of loan advances and the challenge to the caveat lodged over the Jacks Point property by the plaintiff – this item is at one remove from the documents specifically
relating to the advances and will not be ordered.
Item 30 – valuation of the Jacks Point property. Ms McCartney no longer pursued this item.
Item 31 – documents showing the accrual of interest on the loan advance by James Developments Ltd to Frongopolus trustees and how it was dealt with. This item is relevant as the plaintiff’s claim includes interest in relation to the
re-documented loans. Discovery will be ordered.
Item 32 – advice to the trustees of the Frongopolus Trust in relation to the re- documentation of the advance – this item is clearly relevant amongst other things to the knowledge or intention of those involved. Discovery will be
ordered.
Item 33 – correspondence, advice and documents in relation to the transfer of the re-documenting of the advance – Mr James has referred to his having received advice and such advice is again relevant to the issues. Discovery
will be ordered.
Item 34 – correspondence and other documents flowing between the accountants and the Frongopolus Trust trustees relating to explanations or advice as to the $740,000 re-documentation. This is again plainly relevant to
the issues. Discovery will be ordered.
Item 35 – tax returns for the Frongopolus Trustees (other than IR6 returns which have already been discovered). These are at one remove from the
central documents and I am not satisfied that they need to be discovered.
Further and better discovery – Mr James’s documents
Items 36–46 in Schedule A are documents in the possession of Mr James. It would be premature to make any order for discovery against Mr James as he is being added to the proceeding as a defendant today. Many of the items sought against Mr James are directly parallel to those sought by way of further discovery against the existing defendants. It can be anticipated the Court would proceed in a parallel manner in relation to discovery of Mr James’s documents. Mr James has been cooperating with and assisting those already involved in the proceeding and it can be anticipated that the existing
defendants’ solicitors will have substantial understanding, if not possession of Mr James’s relevant documents. Mr James will have his obligation of initial disclosure under r 8.4 High Court Rules when entering an appearance and in relation to documents in any categories not covered by existing orders. The parties can anticipate that the Court will be taking a relatively broad approach
to what is appropriately discoverable in this case.
To the extent that the request for discovery of items 36 – 46 in Schedule A
was made at a premature point, I adjourn that aspect of the application for mention at the next case management conference.
Interrogatories
Interrogatories for answer by Mr James
[33] Mr Reynolds’s application included a request for orders that Mr James answer interrogatories. Ms McCartney accepts that, as with the discovery application, the interrogatories application in relation to Mr James is premature. It is accordingly adjourned for mention at the next case management conference. To the extent that there is overlap between the interrogatories for Mr James and those administered to Ms Calvert, counsel can anticipate that the Court is likely to take a parallel approach. This suggests that Ms McCartney should, in the first instance, reconsider the interrogatories for Mr James in the light of this judgment and issue an amended notice to Mr James immediately after he has filed his defence or other appearance. If the scope of the interrogatories administered to Mr James then has to be considered by the Court, the amended notice is likely to provide a more satisfactory starting point for the Court’s consideration.
Interrogatories for Ms Calvert
[34] Attached to this judgment as Schedule B is the notice to answer interrogatories as served upon Ms Calvert.
[35] Of the interrogatories in the notice, Ms McCartney abandoned at the hearing the following:
18, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 32, 66, 68, 74, 75, 76, 77
[36] Ms Calvert did not file a response to the interrogatories which Mr Reynolds administered. She instead exercised her right to make an application under r 8.36
High Court Rules. She sought an order that the answers to interrogatories are not required or need to be given only to specified interrogatories or classes of interrogatories or to specified matters that are in question in the proceeding. In her grounds in support of her application, Ms Calvert asserts that the interrogatories are unnecessary or oppressive and/or require unnecessary answers.
[37] In an affidavit in support of Ms Calvert’s application, Mr Harvie explained that he had been advised that many of the 78 interrogatories were irrelevant and/or unnecessary and that the defendants awaited the direction of the Court before embarking on the lengthy and expensive exercise of answering any of them.
[38] In the event, at the hearing, Mr Sherwood King identified 11 interrogatories which he accepted should and would be answered. Those were the questions numbered 11, 12, 13, 43, 44, 45, 46, 47, 48, 49 and 50. I am satisfied that those interrogatories are relevant and appropriate and they will be included within the order I make.
[39] That leaves the balance which the Court must consider. I will examine them in batches according to subject matter but first refer to the general principles I adopt.
[40] I adopt as an appropriate summary of the fundamental purposes of interrogatories the following passage which previously appeared in McGechan on Procedure:9
The fundamental requirement is that interrogatories be relevant. Interrogatories may be asked provided they relate to ‘any matter in question between the interrogating party and the party served’. The words ‘relate to any matter in question in the proceedings’ means that they have some association with the matters in question: Seidler v John Fairfax & Sons Ltd [1983] 2 NSWLR 390.
9 McGechan on Procedure as at 1990 at [278.04(8)], adopted in Bank of New Zealand v Gardner
(1990) 2 PRNZ 278 (HC) per Master Hansen at 282.
[41] Rule 8.36(3) High Court Rules requires the Judge to make orders required to prevent unnecessary or oppressive interrogatories or unnecessary answers to interrogatories.
[42] Without limiting the scope of what is “unnecessary”, interrogatories which
seek irrelevant material will be by their nature unnecessary.
[43] What is “oppressive” in this context was considered by Jeffries J in Elston v State Services Commission (No 2) in the following passage, which I respectfully adopt:10
The word oppressive is not specifically defined in any case that I have been able to discover related particularly to interrogatories, but in other aspects of the law, namely the criminal law, and company law, oppressive is generally understood to mean contrary to the rules of justice or fair play, and to be burdensome or wrongful.
[44] The requirement that interrogatories not be oppressive was further explained by Barker J in Sunde v Meredith Connell & Co:11
Those expressions normally disallow an interrogatory where the answering would require research or enquiry out of all proportion to the value of the question, or, generally, where to answer would be burdensome.
Application of the principles to the questions
[45] I first make an overarching observation as to the tests to be applied. In relation to all questions I have focussed on relevance. In relation to the assertion that the interrogatories or the answering of them are oppressive, I do not find anything in the evidence to justify a conclusion that the interrogatories individually or by sheer weight of numbers are oppressive. In his opposing affidavit, Mr Harvie did not directly refer to oppression (suggesting instead that the interrogatories on the advice he had received were “irrelevant and/or unnecessary”). What Mr Harvie indicated was that he wanted the direction of the Court before embarking on the “lengthy and expensive exercise of answering any of them” (by which I understood him to mean,
assisting Ms Calvert to answer them). This is litigation which has already been
10 Elston v State Services Commission (No 2) [1979] 1 NZLR 210 at 215; approved in K.
McDougall Ltd v Radley & Co Ltd HC Auckland A630/85, 12 August 1986.
11 Sunde v Meredith Connell & Co HC Auckland A1479/85, 19 September 1986 at 3.
keenly fought for more than a year. The litigation was commenced after the liquidator had been investigating the affairs of James Developments Ltd, making enquiries of the relevant parties and going so far as to formally examine two of the people involved. The defendants themselves and their legal representatives must be taken to be very familiar with the events and documents of what in litigation terms is not a lengthy period of activity.
[46] I also take into account in my rejection of oppression as a significant issue in this case the way in which the $740,000 loan was re-documented, for the same reason as I have taken into account in relation to discovery. The parties involved with the re-documenting of the loan should not be heard to protest too loudly that they are having to go into more detailed answers by way of interrogatories than they might have to in relation to more straightforward commercial transactions.
[47] I am accordingly satisfied that the real issue which attracts the Court’s
consideration in relation to these interrogatories is the issue of relevance or necessity.
[48] I am not required to further consider the questions identified in paragraphs [35] and [38] above for the reasons there stated. I therefore turn to the remaining questions which are in issue.
Questions 1 – 4
[49] These questions focus on the circumstances of the $740,000 advance. Mr Sherwood King challenges these interrogatories on the basis that they are “not in issue”. I regard the circumstances particularly relating to the knowledge of the
$740,000 advance as information which it is relevant for the plaintiff and his counsel to have as they move towards a trial which focuses on the re-documenting of that advance and the intention of the parties involved.
Questions 5 – 10
[50] These questions concern the purchase of a property at Jacks Point. Mr Sherwood King said of these interrogatories quite simply that they are irrelevant. He noted question 7 “to whom was the deposit paid?” suggesting this to be a clear
example of irrelevance. I am not so satisfied. Allegations of concealment are made by Mr Reynolds. Questions as to what was done in the course of related transactions may assist the plaintiff in that regard.
Questions 14 – 17
[51] These questions seek to identify documents in which any record of advance or terms of advance are said to be contained. Mr Sherwood King objects to these questions on the basis that the relevant documents have all been provided. The objection misses the point that all the documents in question will be those of the defendants or the related parties who are the people best placed to know whether particular references in documents are references to the advance or the terms of the advance.
Questions 30 and 31
[52] These questions relate to the way in which ASB funding operated for the purchase and development of Jacks Point. As a group the questions do not have relevance to the issues in the present proceeding. By way of example, whether Mr James gave a personal guarantee over the borrowing will not throw any light on any issue involved.
Questions 33 to 40
[53] These questions all concern communications with the ASB Bank. It is clear that what Mr Reynolds is seeking to establish is whether the ASB Bank was told anything that supports his case as to the $740,000 debt and the way it was treated or, on the contrary, undermines the case of the defendants. Given that the communications in question were contemporaneous communications (including oral communications) the questions are valid.
Question 41
[54] Mr Reynolds seeks to establish whether Mr James has forgiven any part of the advances made to the Frongopolus Trust. How the various parties have conducted themselves in relation to advances may inform the parties or the Court as
to the thinking and intentions of those involved. The intention in relation to the re- documenting of the advance of the $740,000 and the steps which were to follow are an issue in the proceeding.
Question 42
[55] Mr Reynolds seeks answers as to Ms Calvert’s knowledge of an adverse judgment which James Developments Ltd received in April 2009, a few months before the $740,000 loan advance was re-documented. Details of Ms Calvert’s awareness of the adverse judgment are relevant.
Questions 51 to 65
[56] All these questions relate to the re-documentation of the $740,000 advance in the account to the Frongopolus Trust. They are all legitimate questions identifying Ms Calvert’s knowledge of what was being documented, the process by which it was done and the steps taken by the relevant people.
Question 67 – this relates to whether the Frongopolus Trust carries on a business
[57] I am not satisfied that there is any basis for suggesting that the answer to such a question is relevant.
Questions 69 – 73
[58] These questions all concern the state of the financial statements of the Frongopolus Trust in 2009 and the way in which a liability to James Developments Ltd of $740,000 was re-documented. They are clearly relevant.
Question 78
[59] In question 78, reference is made to redacted parts of correspondence from Harvie Green Wyatt (accountants) to Alastair Broad (trustee), the interrogatory requiring Ms Calvert to specify what the redacted parts say. This is not a legitimate interrogatory. Issues arising from the redaction of discovered documents are to be dealt with as issues of discovery and/or inspection, as they will be.
Defendants’ application for discovery orders against the plaintiff
[60] The defendants apply for orders of standard discovery (under r 8.7 High Court Rules) in relation to dealings between Mr Reynolds as liquidator of James Developments Ltd on the one hand and Mana Property Trustee Ltd (Mana) and/or the Central Otago District Council (CODC) on the other hand. In particular documents are sought which involve correspondence about parcels of land near Cromwell which Mana was to have purchased from James Developments Ltd.
[61] The basis of the defendants’ application is additionally explained by a further category of documents sought namely any document relevant to the quantum of Mana’s claim in the liquidation of James Developments Ltd.
[62] Mr Sherwood King explained (and Ms McCartney accepted) that there have been negotiations of some kind as between James Developments Ltd (or its liquidator), Mana and CODC which may have an impact on the level of loss sustained by Mana and therefore the sum for which Mana might prove in the liquidation of James Developments Ltd.
[63] Ms McCartney noted that negotiations of that nature are commercially sensitive. More fundamentally, she confirmed from the Bar that the negotiations had at this point not resulted in any agreement with the consequence, she submitted, that the documents themselves are irrelevant to the quantum of Mana’s claim in the liquidation.
[64] The notice of opposition filed by Mr Reynolds accordingly states a single ground of opposition, namely that the documents sought by the defendants are not relevant to matters in issue in this proceeding by which the plaintiff as liquidator seeks to recover $740,000 plus interest from the defendants.
[65] I accept that the ground of opposition advanced by Mr Reynolds is a complete answer to the defendants’ application. I believe I do not do Mr Sherwood King’s frank submissions a disservice by observing that the underlying concern of the defendants, in seeking documents which might indicate that Mana has by a successful negotiation mitigated its damages, is that it may transpire that the
liquidator has pursued this proceeding substantially for the benefit of a single creditor whose debt may be very substantially reduced or even eliminated. Such a concern is not relevant to the issues in this litigation which revolve, as Ms McCartney submitted, around the $740,000 advance. If the defendants have issues as to the involvement of a creditor in the liquidation and the steps the liquidator is taking, those concerns fall to be pursued through a different avenue under the Companies Act and not in the guise of an application for discovery in this civil proceeding.
[66] The defendants pursue a second category of documents, namely any documents relevant to or in any way connected with a funding agreement dated 11
July 2011 between the plaintiff, Mana and Ms McCartney. This application is made not on the basis that such documents if discovered would be relevant to the issues in the proceeding. Rather, the application is pursued on the basis that it is appropriate in relation to a litigation funding arrangement that the funded litigant should give discovery of the documents relevant to the funding arrangement to the other party.
[67] The defendants’ solicitors already have a copy of the funding agreement which was entered into in July 2011. A secretary from the solicitors acting for the defendants in this proceeding has produced the funding agreement in support of Mr James’s application for leave to apply for orders under s 284 Companies Act (which
is the subject of a separate judgment delivered contemporaneously with this).12
[68] Mr Sherwood King noted that the terms of the funding agreement are such that Mana funds all legal costs and disbursements associated with the claims on the basis that it will be repaid in priority to all other creditors. Mr Sherwood King submitted that the impact of the funding agreement on the nature and extent of Mana’s debt is critical to all proceedings, including the s 284 Companies Act application. He submitted that issues which arise include the nature of agreements or understandings in relation to Mana’s claim involving a preference over other
creditors.
12 James v Reynolds [2013] NZHC 3253.
[69] The application for further information about the funding agreement must fail in this proceeding for the same reason as the application relating to negotiations between James Developments Ltd, Mana and CODC. The way in which Mana is to be treated as a creditor and the sums it might receive as an outcome of successful litigation in this proceeding are not themselves issues in this proceeding.
Application for discovery against non-parties (Mana and CODC)
[70] In what were essentially mirror versions of the defendants’ applications for discovery of negotiation and funding agreement documents from Mr Reynolds, the defendants applied for non-party discovery of the same documents from Mana and from CODC.
[71] Mana filed opposition. Mr Reynolds himself filed opposition. The grounds of opposition began with the proposition that the documents sought by the defendants are not relevant to matters in issue in this proceeding in which the liquidator seeks to recover $740,000 plus interest from the defendants.
[72] For the same reasons as apply to the parallel application against Mr Reynolds, the applications for non-party discovery against Mana and CODC13 in this proceeding must fail.
Costs
[73] The hearing has proceeded through the co-operation of counsel to deal with a number of applications by both parties with varying degrees of success. The nature and outcome of the hearing does not lend itself to a straightforward costs decision. I look to counsel to consider whether costs can be robustly resolved failing which the plaintiff is to file any submissions (five page limit) to be followed within five working days by the defendants’ submissions. I will then deal with costs on the
papers;
13 Above at [69].
Orders
[74] I order:
(a) Costs are reserved, in accordance with [73] above.
Joinder
(b)Chris James is to be joined as a defendant in this proceeding, with the current defendants now to be “First Defendants” and Mr James to be “Second Defendant”;
Discovery by consent
(c) The first defendants are to file and serve a verified list of additional documents disclosed by the defendants informally within 10 working days;
(d)The first defendants are also to file and serve a properly individualised list of documents over which the defendants have claimed privilege within 10 working days;
Further and Better Discovery (by reference to Schedule A)
(e) The first defendants are within 10 working days to make discovery of:
(i) Item 1 – copies of the accountant’s full files from 31 March
2005 to 31 March 2009, giving each file a number for discovery as a single item with sequential page numbers on each page on the file;
(ii)Item 13 – loan account records showing how proceeds of sale dealt with and loan monies were applied;
(iii) Item 14 – James Developments Ltd’s cheque books from 31
March 2005 to 31 March 2009;
(iv)Item 15 – any accountants’ files for the Frongopolus Trust for the period 31 March 2006 to date that have not already been discovered;
(v)Item 18 – correspondence with banks or other financiers relating to advances between James Developments Ltd and the Frongopolus Trust;
(vi)Item 19 – correspondence under which Frongopolus Trust accounting information was sent out to any parties in an unredacted form with appropriate undertakings by counsel and experts as to commercial sensitivity;
(vii)Items 22 – 24 – bank records and solicitors’ trust account records involving money of the Frongopolus Trust in relation to property purchase funds of approximately $2,340,000;
(viii)Item 25 – any application made by the Frongopolus trustees to the ASB bank for funding;
(ix) Items 27 and 28 – correspondence as to advances made to the
Frongopolus Trust and/or repayments made by that Trust;
(x) Item 31 – documents showing the accrual of interest on the loan advance by James Developments Ltd to Frongopolus trustees and how it was dealt with;
(xi) Item 32 – documents relating to advice the trustees of the Frongopolus Trust received in relation to the re-documentation of the advance;
(xii) Item 33 – correspondence, advice and documents in relation to the transfer or the re-documenting of the advance;
(xiii) Item 34 – correspondence and other documents flowing between the accountants and the Frongopolus Trust trustees relating to explanations or advice as to the $740,000 re- documentation;
Further and Better Discovery sought by Mr Reynolds in relation to Mr James’s
documents
(f) This aspect of the plaintiff’s application I adjourn for mention at the
next case management conference in the proceeding;
Interrogatories for answer by Mr James
(g)I adjourn issues relating to the interrogatories administered upon Chris James (now the second defendant) for mention at the next case management conference in this proceeding;
Interrogatories for Ms Calvert
(h)Ms Calvert is to answer within 10 working days the following questions in the interrogatories filed on 6 November 2013 namely:
Questions 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 14, 15, 16, 17, 33, 34, 35, 36, 37,
38, 39, 40, 41, 42, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64,
65, 69, 70, 71, 72, 73
Defendant’s application for discovery orders against the plaintiff
(i)The defendants’ application for discovery of documents in relation to the quantum of Mana’s claim in the liquidation of James Developments Ltd and in relation to a funding agreement between the plaintiff, Mana and Ms McCartney is dismissed;
Application for discovery against non-parties (Mana Property Trustee Ltd and
Central Otago District Council)
(j)The defendants’ applications for discovery against both non-parties are dismissed.
Associate Judge Osborne
Solicitors:
M J McCartney QC, Auckland for Plaintiff
Mackay & Gilkison, Wellington for Defendants
Counsel: M R Sherwood King, Barrister, Wellington
Schedule B
1