Reynolds v Finnigan
[2021] NZHC 2668
•6 October 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-2717
[2021] NZHC 2668
BETWEEN GRANT BRUCE REYNOLDS, Liquidator First Plaintiff
JOANNE LEE YOUNG
Second Plaintiff
THE LEARNING LADDER LIMITED (IN LIQUIDATION)
Third Plaintiff
AND
PERI MICHAELA FINNIGAN and BORIS VAN DELDEN
First Defendants
RED 9 LIMITED
Second DefendantTHE LEARNING LADDER (2018) LIMITED
Third Defendant
PEAT JOHNSON MURRAY LIMITED
Fourth Defendant
Hearing: 10 September 2021 Appearances:
Karl J M Robinson for the Plaintiffs
Virginia Wethey for the First Defendants
M J Fisher and James Ryan for the Second and Third Defendants Sophie Pasley for the Fourth DefendantJudgment:
6 October 2021
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 6 October 2021 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
REYNOLDS v FINNIGAN and VAN DELDEN [2021] NZHC 2668 [6 October 2021]
[1] This case has a fixture for two weeks beginning 8 August 2022. The plaintiffs are suing for $290,000 plus costs and interest. The second and third defendants say that that amount does not warrant a two week hearing. The costs of trial would be uneconomic for all parties. Instead, they have a proposal to save costs and time: a preliminary question decided ahead of the trial is likely to resolve the major issue in contention. They say that the plaintiffs’ $290,000 damages claim is excessive. Establishing the damages properly claimable by the plaintiffs is likely to lead to a prompt settlement and the two week hearing will not be required.
[2] The case is about a licensed early childhood centre in Howick. The Learning Ladder Ltd was incorporated to carry on the business. It had two shareholders and directors: Mrs Joanne Young, the second plaintiff, and Mrs Dayle Walker. Mrs Walker’s husband is a chartered accountant at Peat Johnson Murray Ltd, the fourth defendant. He provided accounting services to The Learning Ladder Ltd and Red 9 Ltd, the second defendant.
[3] Red 9 Ltd provided the funds to buy the business. Mrs Walker and her husband are the directors of the company. They and people associated with them are the shareholders. Red 9 Ltd borrowed funds from the Walkers’ bank and on-lent them to The Learning Ladder Ltd taking security under a registered general security agreement. The amount advanced was $430,000. It was a term loan, with monthly repayments set to equal the Red 9 Ltd’s repayments to its bank. The plaintiffs say that The Learning Ladder Ltd never defaulted in paying Red 9 Ltd.
[4] There were differences between Mrs Walker and Mrs Young. Red 9 Ltd considered that The Learning Ladder Ltd was insolvent and made demand for repayment in full of the loan. On 9 March 2018, the day after it made demand, it appointed insolvency practitioners, Ms Finnigan and Mr van Delden, as receivers. On the day they were appointed the receivers sold the business to The Learning Ladder (2018) Ltd, the third defendant, for $470,000. That company had been incorporated
the day before. Mrs Walker is its sole director and shareholder. On 10 March 2018, Ms Finnigan and Mr Van Delden completed their receivership and resigned. The Learning Ladder (2018) Ltd has operated the business ever since. Mrs Young successfully applied for The Learning Ladder Ltd to be put into liquidation. Mr Reynolds, the first plaintiff, was appointed liquidator on 24 July 2018.
[5] The plaintiffs have received advice that on 9 March 2018 the business of The Learning Ladder Ltd was worth $760,000. They accordingly say that the receivers sold the business at an undervalue and claim damages of $290,000 as the difference. The amended statement of claim of 8 May 2020 has these causes of action:
(a)A claim against the receivers under s 18 of the Receiverships Act 1993 for exercising their powers other than in good faith and for a proper purpose;
(b)A claim against the receivers under s 19 of the Receiverships Act for failing to obtain the best price reasonably obtainable for the business;
(c)A claim against Red 9 Ltd for breach of contract in making demand and appointing receivers;
(d)A claim by Mr Reynolds as liquidator against The Learning Ladder (2018) Ltd under s 298 of the Companies Act 1993 for buying the business at an undervalue;
(e)Two claims against Peat Johnson Murray Ltd, Mr Walker’s accountancy practice, first for breach of contract and second for breach of fiduciary duty.
For all causes of action, the plaintiffs claim damages of $290,000 being the difference in value between the price the business was sold to The Learning Ladder (2018) Ltd and their value of $760,000.
[6] The second and third defendants have applied under r 10.15 of the High Court Rules 2016 for a separate hearing to decide this question:
What was the market value for the business of the third plaintiff at the time it was sold on 9 March 2018?
[7] For the second and third defendants, Mr Fisher explained that their expert witness will say that in March 2018 the business was worth between $460,000 and
$500,000. That means that the business was sold at its current market value and the plaintiffs suffered no loss. The defendants have seen the report of the plaintiffs’ expert. They consider that it is flawed for applying a valuation methodology wrongly. That could be demonstrated at a hearing to decide the correct value of the business in March 2018. If the plaintiffs’ valuation is discredited, the plaintiffs’ case will collapse. On the other hand, if the plaintiffs’ valuation is upheld, the defendants will be strongly motivated to settle. Accordingly, a hearing on the damages question would be more efficient than going to trial on both liability and damages. Mr Fisher also confirmed that when Ms Finnigan and Mr Van Delden were appointed receivers, they were given indemnities by the other defendants.
[8] For the plaintiffs, Mr Robinson was not entirely averse to the proposal. He appreciated the efficiencies in deciding the damages question but advised that the plaintiffs were considering amending their pleadings to add a claim for loss of profits.
[9]In a minute of 20 August 2021 Lang J recorded three potential problems:1
[a] Even if the preliminary question was heard before the end of this year, a decision may not be available until February or March 2022. This leaves little time for any appeal to be heard and determined before the commencement of the trial in August 2022. Determination of a preliminary question therefore risks postponement of the substantive trial.
[b] I am not sure whether the answer to the proposed preliminary question is likely to have a material effect or benefit for all, as opposed to some of the causes of action presently pleaded.
[c] If the preliminary question is to be argued at all, great care will need to be taken to define the term “market value” in this context.
[10]Rule 10.15 says:
1 Reynolds v Finnigan HC Auckland CIV-2019-404-2717, 20 August 2021 at [3].
10.15Orders for decision
The court may, whether or not the decision will dispose of the proceeding, make orders for—
(a)the decision of any question separately from any other question, before, at, or after any trial or further trial in the proceeding; and
(b)the formulation of the question for decision and, if thought necessary, the statement of a case.
[11] Courts approach any application for separate questions to be decided ahead of trial with caution.2 That is reflected in Lang J’s observations. The caution often comes in response to the confident assertion of the party seeking a separate hearing that the court will inevitably find in their favour and that will be the knock-out blow. Here, the second and third defendants showed that confidence.
[12] McGechan on Procedure3 lists 14 matters the courts have typically taken into account in deciding whether to order a split trial. In Haden v Attorney-General,4 these were synthesised into five questions:
1Will there be difficult demarcation questions between those issues to be addressed at the first trial and those left for the second?
2Will the proceeding be brought to an end?
3What potential time-saving does the separate question offer?
4How will appeals be dealt with?
5Are there any other practical considerations tending one way or the other?
I add that, given the confident assertions usually made by the applicant, it is as well to consider the matter on the basis that their predictions may be wrong.
2 Tilling v Whiteman [1980] AC 1 at 25; Windsor Refrigerator Co v Branch Nominees [1961] 1 Ch 375 (CA) at 396.
3 AC Beck McGechan on Procedure (online loose-leaf, Thomson Reuters) at [HR10.15.06(1)].
4 Haden v Attorney-General (2011) 22 PRNZ 1 (HC) at [50]–[67].
[13] I refer to the plaintiffs’ point that they intend to amend their pleadings to add a claim for loss of profits for what the business would have earned but for the actions of the defendants. If such a claim were available, it would count against a separate hearing. With respect, I do not consider that the plaintiffs can claim loss of prospective profits as well as damages for sale at an undervalue. The ability of a business to generate profits is part of its goodwill, a component of its value. Under s 298(3)(a) of the Companies Act, on which the liquidator sues:
The value of a business or property includes the value of any goodwill attaching to the business or property.
A willing and informed purchaser will take into account the ability of the business to generate profits in working out what price to offer. Similarly, a seller may not sell if they can make more by retaining the business. A discounting of future earnings is factored into the purchase price of the business. When, as here, the value of the business is based on its ability to make profits, there cannot be a further claim for loss of prospective profits.
[14] The measure of damages payable by the receivers may be different from what can be claimed against other defendants. That can be illustrated by comparing their position with that of Red 9 Ltd. Red 9 Ltd is alleged to have enforced its rights as creditor when it was not entitled to, and thereby brought about a loss of value by appointing receivers. The measure of the loss caused by Red 9 Ltd will be the difference between the price at which the business was actually sold for, and what it was worth before Red 9 Ltd made demand and appointed receivers. On the other hand, under s 19 of the Receiverships Act, the receivers were under a duty to obtain the best price reasonably obtainable at the time of sale. A sale by receivers is often a forced sale and may not represent the price obtained between a willing buyer and a willing seller. Their liability should be assessed according to the price that a receiver complying with their duty under s 19 would have obtained, not what the business would have sold for on the open market. That seems to be the second point Lang J was making in his minute.
[15] The second and third defendants played down this aspect. They had given the receivers an indemnity. If they were liable the damages they would have to pay the
plaintiffs would also satisfy any liability of the receivers. That is sound up to a point. It presupposes that the other defendants will be good for any damages they are ordered to pay and that the receivers will not be the only solvent liable party. I do not know enough about the defendants to share that assumption. It will be necessary to consider two measures of damages, one payable by the receivers and the other by the other defendants.
Will there be difficult demarcation questions between those issues to be addressed at the first trial and those left for the second?
[16] Subject to that, I am however satisfied that the measure of loss can be satisfactorily separated from questions of liability. An appropriate demarcation is possible. The damages inquiry will notionally assume that the defendants may be held liable. For the second, third and fourth defendants that will be on the basis that the business ought not to have been sold. For the receivers it will be on the basis of what price would be obtained without any breach of s 19 of the Receiverships Act. It will not however be necessary to decide if any of the defendants are in fact liable to the plaintiffs. That can be left until later if required.
Will the proceeding be brought to an end?
[17] If the court finds for the defendants on the measure of loss, there will be little if anything left to argue about. On the other hand, if the case goes against the defendants and the court finds that the business was worth what the plaintiffs claim, the case may yet still go to trial. But in the face of findings that the business was sold at an undervalue, it may be difficult for the second and third defendants to justify their actions. The undervalue question is perhaps the only significant issue in the claim under s 298 of the Companies Act. There does not seem to be any dispute that The Learning Ladder (2018) Ltd is a company under the control of Mrs Walker, a director of The Learning Ladder Ltd. Accordingly, even if matters do not go the way of the defendants on the separate question, the findings are likely to give the parties a clear pointer to resolving the case, instead of going to a second hearing.
What potential time-saving does the separate question offer?
[18] It was estimated that the separate hearing might require one-and-a-half days. I allow two days, as extra evidence may be required to consider separately what damages might be awarded against the receivers. That offers a considerable saving on the two weeks to decide all questions of liability and damages.
How will appeals be dealt with?
[19] If a finding on the separate question went against the defendants, an appeal would stymie the substantive hearing to begin in August 2022. To address that, after the hearing the defendants filed a memorandum agreeing:
(a)The formulation of the question for decision is to be: What was the market value for the business of the third plaintiff at the time it was sold on 9 March 2018?
(b)No party will lodge an appeal from the decision on the separate question or any application for leave to appeal from that decision out of time until after the determination of a substantive dispute as to liability; and
(c)After the determination of any substantive dispute as to liability, in the event that any party is named as a respondent to an application for leave to appeal out of time from the decision of the separate question, that party will consent to such application and promptly sign a consent memorandum to that effect.
Although invited to, the plaintiffs did not sign the memorandum. I understand that the defendants intend that there be only one appeal, and that any appeal rights would be exercised only after a final substantive decision. The defendants also accept that when ordering a separate question to be tried under r 10.15 the court has no power to restrict any party’s right of appeal.
[20] Appeals by the defendants can be managed this way. If the defendants lose on the separate question but they consider that the judgment is wrong, they will have their normal rights of appeal which will require any appeal to be filed within 20 working days of the decision.5 But there is no need for the appeal to be heard before the
5 Court of Appeal (Civil) Rules 2005, r 29.
substantive hearing in August 2022. That appeal could be held over to await the outcome of the substantive hearing in August 2022.
[21] The matter is not so straightforward if the plaintiffs fail on quantum. That would mean the loss of their case altogether. They may wish to appeal. If so, they would need to vacate the August 2022 fixture while they appealed. The postponement of that hearing is inefficient and messy. Such matters bring out a judge’s wariness about split trials.
[22] All the same it is necessary to apply some sense of reality to the suggestion of appeal. The separate question will be on a factual matter, the value of the business in March 2018. Expert witnesses will give evidence. No doubt there will be evidence about the company’s financial position. But once a judge gives a decision, the prospects of an appeal are low, especially in light of the relatively small amount in issue. The appeal question does not count conclusively against a separate hearing on quantum.
Are there any other practical considerations tending one way or the other?
[23] The main consideration here is that the amount in issue is not high. It is within the civil jurisdiction of the District Court.6 The case needs to be run in a way that allows for a just, speedy and inexpensive determination.7 That is better achieved if there is a hearing on the main issue dividing the parties instead of a full hearing on liability and relief. A two-day hearing is just as likely to produce the finality the parties seek as a ten-day hearing. The case will not stand a ten-day hearing.
[24] Overall, I am satisfied that it is appropriate to order a separate hearing on the value of the business. Lang J’s concerns do not count against it. The hearing will consider two questions:
(a)What was the market value for the business of the third plaintiff at the time it was sold on 9 March 2018?
6 District Court Act 2016, s 74.
7 High Court Rules 2016, r. 1.2.
(b)What was the best price reasonably obtainable by the receivers in March–April 2018?
This order is subject to the condition that if the defendants file an appeal against the decision given on the preliminary questions, the plaintiffs may require the case to go to hearing in August 2022, regardless of the appeal.
[25] These questions are to be decided at a hearing on 30 November and 1 December 2021.
[26]For that hearing, I give these directions:
(a)The plaintiffs are to serve their statements of evidence, including expert evidence, and list of documents for the bundle by 29 October 2021;
(b)The defendants are to serve their statements of evidence, including expert evidence, and lists of documents by 12 November 2021;
(c)By 19 November 2021 the experts are to confer and file and serve reports setting out the matters they agree and disagree on and the reasons for their disagreement;
(d)The plaintiffs are to file and serve the common bundle of documents by
19 November 2021.
(e)The plaintiffs are to file and serve their opening by 23 November 2021;
(f)The defendants are to file and serve their openings by 29 November 2021.
[27] Mr Robinson explained that his valuer wished to inspect the premises to assist in his work in valuing the business. I expect the parties to arrange that themselves, so long as the normal courtesies are observed. Failing that, leave is reserved to apply for further directions.
[28]Costs on the application for a separate hearing are reserved.
[29] I take it that with a hearing at the end of November this year, Associate Judge Sussock’s timetabling directions in her minute of 18 March 2021 do not need to be adjusted, but leave is reserved to apply in case that is necessary.
…………………………………….
Associate Judge R M Bell
Solicitors:
Wynyard Wood Lawyers (Karl Robinson), Auckland, for the Plaintiffs
Fee Langstone (Virginia Wethey/Rachel Anderson), Auckland, for the First Defendants Claymore Partners (James D Ryan), Auckland, for the 2nd and 3rd Defendants
Robertsons (Helen Twomey/Sophie Pasley/Whitney Robertson), Auckland, for the 4th Defendant
Copy for:
M J Fisher, Barrister, Erskine Chambers, Auckland, for the 2nd and 3rd Defendants
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