Robert Jones Holdings Ltd v McCullagh
[2016] NZHC 2529
•21 October 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-003475 [2016] NZHC 2529
UNDER Sections 292, 294 and 295 of the
Companies Act 1993
IN THE MATTER
of the liquidation of Northern Crest
Investments Limited (in liquidation)BETWEEN
ROBERT JONES HOLDINGS LIMITED Applicant on review
AND
ANTHONY JOHN MCCULLAGH AND STEPHEN MARK LAWRENCE Respondents on review
Hearing: 17 October 2016 Counsel:
D G Chesterman for Applicant on review
B P Keene QC and L Van for Respondents on reviewJudgment:
21 October 2016
JUDGMENT OF DOWNS J
This judgment was delivered by me on Friday, 21 October 2016 at 3 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Anthony Harper, Auckland.
B P Keene QC, Auckland.
D G Chesterman, Auckland.
ROBERT JONES HOLDINGS LTD v MCCULLAGH [2016] NZHC 2529 [21 October 2016]
Table of Contents
Para No
The case [1] The facts [5] The case for RJH [19] The proceedings before the Associate Judge [22] Clearing the decks [26] The discovery applications [32] Discovery in relation to the licence agreement and whether it was a sham [37] Disclosure applications as possible sources of evidence for solvency [41] Discovery for the purpose of challenging witness “credibility” [47] Waiver of privilege [58] Fresh evidence [71] Costs [74]
The case
[1] Mr McCullagh and Mr Lawrence are the liquidators of Northern Crest Investments Ltd, or Northern Crest for short. They have brought an action against Robert Jones Holdings Ltd, or more easily, RJH. The action alleges RJH was the beneficiary of a series of insolvent transactions between it and Northern Crest, which resulted in RJH receiving more money than it should at the expense of other unsecured creditors. The action is an originating application. It was commenced in
2013. And, it is yet to be heard.
[2] On 26 June 2015 Associate Judge Bell dismissed a suite of discovery applications and an application to set aside privilege, all brought by RJH, in relation to documents held by the liquidators.1 The Associate Judge ordered costs against RJH on an increased basis, because the Judge concluded RJH was “stalling” (my word rather than the Judge’s, but that was very much his sentiment). RJH seeks review of these decisions—the application before me.
[3] Between then and now, RJH sought and was granted leave by Duffy J to amend its notice of opposition to the substantive action and place additional evidence before me. The liquidators contend this evidence is irrelevant. And, they
invite me to receive other fresh evidence on the review application, at least some of
1 McCullagh v Robt Jones Holdings Ltd [2015] NZHC 1462, (2015) 22 PRNZ 615.
which has since been filed by RJH in the substantive action. The liquidators contend the review application should be dismissed.
[4] Against this somewhat messy backdrop, the facts remain important.2
The facts
[5] This Court placed Northern Crest in liquidation on 2 June 2011.3 Claims of unsecured creditors extend to $10,166,000. That sum does not include investors’ claims in relation to Blue Chip, an earlier iteration of Northern Crest. Those claims extend to approximately $36,000,000, albeit the liquidators have not accepted them.
[6] Before basing its operations in Sydney, Northern Crest leased premises from RJH in Queen Street, Auckland. In 2008 Northern Crest fell behind in rent and rates. RJH served statutory demands and notices to cancel the lease. Two default notices were remedied, but Northern Crest abandoned the premises after a final default notice on 8 August 2008. RJH re-entered its premises on 25 August that year.
[7] In September 2008, RJH served a statutory demand for unpaid rent and rates. On 16 October, Northern Crest paid RJH $28,544. More money followed on
10 November 2008. RJH then served a further statutory demand for unpaid rent and rates. Northern Crest was successful in setting aside that demand but for the sum of
$1,125.56. The High Court held the balance was a claim in damages, not a debt.
[8] In May 2009, RJH claimed damages against Northern Crest for breach of the lease. The claim was brought on a summary judgment basis. RJH obtained judgment for $285,132.07, with directions for a hearing to determine further damages. On 15 October 2009, the parties apparently settled matters by Northern Crest agreeing to pay RJH $285,132.07 by 30 October 2009, with a further $120,000 by 30 November 2009. But, Northern Crest did not pay the first instalment on
30 October.
2 The facts below are from the Associate Judge’s decision and were not challenged on review.
3 Northern Crest Investments Ltd v Haywood HC Auckland CIV-2010-404-7741, 3 June 2011.
[9] In November 2009 Minter Ellison Rudd Watts brought a liquidation proceeding against Northern Crest. RJH joined the proceeding as a second plaintiff. RJH’s statement of claim alleged Northern Crest was unable to pay its debts as they fell due. The statement of claim cited non-compliance with an earlier statutory demand and Northern Crest’s failure to make payment.
[10] The law firm later withdrew its liquidation proceeding, and RJH and Northern Crest entered into a second settlement agreement. On 22 January 2010, Northern Crest paid RJH $150,000. On 24 February 2010, it made a second payment of $135,133.07. In so doing, Northern Crest paid RJH what it had earlier agreed to pay by 30 October 2009. But that left outstanding the $120,000 payment which had fallen due on 30 November 2009.
[11] In April 2010 RJH and Northern Crest agreed to settle the former’s damages
claim in relation to the cancellation of the lease. Northern Crest was to pay RJH
$450,000 by four payments of $100,000 on 21 April, 31 May, 30 June and 30 July
2010, with a final payment of $50,000 on 20 August 2010. Northern Crest signed an admission of claim for $450,000.
[12] Northern Crest made the first two payments (totalling $200,000), but defaulted thereafter. RJH sought judgment for the balance of $250,000. The High Court granted that on 14 July 2010. RJH served a statutory demand on Northern Crest the next day. And then on 6 August 2010, RJH commenced its own liquidation proceeding against Northern Crest, citing non-compliance with the statutory demand as evidence of inability to pay debt.
[13] Later that month, Northern Crest and RJH entered into a further settlement agreement under which the July judgment debt and interest were to be paid with a final payment on 5 November 2010. Northern Crest met this commitment. However, at least one other creditor was not satisfied. On 25 November 2010, Northern Crest sought to defeat a statutory demand from Mr Ross Hayward in the sum of $142,049.78. Notably, Mr Hayward was a former financial officer of Northern Crest. He was owed money by another company within the Blue Chip group, in relation to which Northern Crest had offered a guarantee.
[14] Northern Crest’s application to set aside Mr Hayward’s statutory demand failed. On 2 June 2011 Associate Judge Christiansen instead made an immediate order for liquidation. The Judge concluded Northern Crest was insolvent. Between April and September 2010, it had apparently traded with a net loss of approximately
$3,000,000 and negative equity of approximately $7,700,000.
[15] This narrative refers to Northern Crest paying RJH. But things are not quite that simple. Between 22 January 2010 and 5 November that year, Northern Crest had two other companies make payments to RJH, allegedly in satisfaction of Northern Crest’s liability to it. These payments total $751,941.52. And, it is these transactions the liquidators contend amount to insolvent transactions which RJH should repay for the benefit of other unsecured creditors. A little more detail is necessary, first about the transactions themselves. These are best understood by reference to the following table.
Date Source
Amount
22 January 2010
Columbus Property Marketing Pty Limited
(Columbus)
$150,000.00
24 February 2010
Columbus Property Marketing Pty Limited
$135,133.07
2 March 2010
Columbus Property Marketing Pty Limited
$4,000.00
20 April 2010
Columbus Property Marketing Pty Limited
$100,025.00
28 May 2010
Columbus Property Marketing Pty Limited
$100,025.00
Total Columbus payments
$489,183.07
7 September 2010
MSH No.2 Pty Limited (MSH No. 2)
$28,000.00
14 September 2010
MSH No.2 Pty Limited
$26,000.00
15 September 2010
MSH No.2 Pty Limited
$24,000.00
16 September 2010
MSH No.2 Pty Limited
$27,000.00
14 October 2010
MSH No.2 Pty Limited
$25,000.00
27 October 2010
MSH No.2 Pty Limited
$30,000.00
4 November 2010
MSH No.2 Pty Limited
$98,000.00
5 November 2010 MSH No.2 Pty Limited
$4,758.05
Total MSH payments
$262,758.05
Total payments
$751,941.52
[16] Now something about Columbus and MSH No.2.
[17] The liquidators contend Columbus paid RJH to offset Columbus’ liability to Northern Crest in relation to a licence agreement between it and Northern Crest. Evidence in the substantive action includes a licence agreement between Northern Crest and Columbus dated 26 November 2009. The agreement was to run for five years unless renewed or terminated, and by it, Northern Crest permitted Columbus to use its intellectual property in return for a minimum annual fee of $3,500,000. The first payment was due 31 March 2010.
[18] As to MSH No.2, the liquidators contend it was a subsidiary of Northern Crest, and acted as treasurer to it and other Northern Crest companies. The liquidators contend payments by MSH No.2 to RJH constituted advances to Northern Crest.
The case for RJH
[19] Put broadly, RJH contends the 13 payments in issue were not payments in law of Northern Crest. This is because s 292(3) of the Companies Act 1993 requires an insolvent transaction to have been a transaction by the insolvent company, and RJH contends the case does not fall within the common law situations to date in which a transaction by a third party is treated as a transaction by the insolvent company. More particularly, RJH contends the Columbus payments were not made by Columbus to discharge its liability to Northern Crest, as it was not liable to Northern Crest for anything under the licence agreement. Why? Because RJH contends that agreement was a sham. RJH’s amended notice of opposition is more polite than that, asserting: “the alleged licences either did not exist or were not legitimate”. But in substance, that is RJH’s contention. Indeed, Mr Chesterman referred to the licence as a sham at the hearing.
[20] In relation to MSH No.2, RJH’s amended notice of opposition “denies” MSH No.2 was treasurer for Northern Crest and contends there is insufficient evidence the transactions represented a loan. RJH also contends there is “insufficient and unreliable evidence … [Northern Crest] was insolvent at the date of each of the 13 payments”.
[21] The only remaining ground of opposition that needs to be mentioned is the eighth and last: RJH contends the action is an abuse of process because the liquidators have failed to sufficiently investigate whether the transactions were a sham, and because the liquidators are allegedly motivated exclusively by the prospect of fees. The ground is not further particularised or referenced to authority. And the notice does not explain how, if true, these facts would constitute an abuse of process sufficient to defeat the statutory claim. In short, this ground has the hallmarks of a make-weight. Mr Chesterman resisted this characterisation but nothing turns on it.
The proceedings before the Associate Judge
[22] RJH sought discovery of particular documents and categories of documents on the basis they were relevant to its defence of the action. Relevance was asserted on two grounds. First, as going to the issue of whether the licence agreement between Northern Crest and Columbus was a sham. And second, as germane to the issue of Northern Crest’s solvency between January and November 2010. The Associate Judge disagreed. He concluded even if the licence agreement was a sham; the documentation sought could not be relevant to RJH’s defence of the action. Or,
in the Judge’s own words:4
[27] The liquidators have put in evidence records of Northern Crest recognising that the licence agreement was a genuine transaction. They have also put in correspondence from Wellington solicitors instructed on behalf of Columbus to make payment to Robt. Jones’ lawyers by way of reductions of Northern Crest’s debt to Robt. Jones. There is accordingly an initial implausibility about this aspect of Robt. Jones’ case. For this decision, I set aside those doubts. I assume for the purpose of argument that the licence agreement was without legal effect and that Columbus paid under a mistake, under a void transaction or for a total absence of consideration. Notwithstanding that, it is clear that Northern Crest and Columbus were
dealing with each other in a commercial relationship. Given that, it is fanciful to suggest that Columbus was gratuitously discharging Northern Crest’s liability to Robt. Jones. Instead, if Columbus paid under a mistake, under a void transaction or for a total absence of consideration, Northern Crest would come under a restitutionary obligation to repay Columbus. The position would be little different from Columbus lending the funds to Northern Crest. An obligation to repay would apply in both cases, one arising by agreement, the other by operation of law. The effect would be that Columbus would be substituted for Robt. Jones as Northern Crest’s creditor to the extent of the payments made. Payments made under an allegedly ineffective transaction would still be payments by Northern Crest under s 292(3)(e) of the Companies Act.
[28] While Columbus would be substituted as creditor for Robt. Jones to the extent of those payments, no question of prejudice to other creditors arises. The fact that other assets of the company remain unchanged is irrelevant. The key point under s 292(2)(b) will be that however the payments are characterised, Robt. Jones would have received more than it would in the liquidation.
[23] The Judge concluded this was true too of MSH No.2:
[29] As an aside, MSH No.2 Pty Ltd, the company with the treasury function, will be treated in the same way.
[30] For the above reasons discovery of District Courts to establish the authenticity or otherwise of the licence agreement will not make any difference to the position that the money Robt. Jones received from Columbus was payments by Northern Crest.
[24] And as to discovery vis-à-vis insolvency, the Judge concluded:5
[40] There is, however, one strand of the liquidators’ evidence which Robt. Jones cannot take issue with. That is Robt. Jones’ own efforts to recover payment from Northern Crest starting from the abandonment of the premises in 2008. Robt. Jones’ efforts included the following:
(a) Four statutory demands: 5 September 2008, 20 November 2008 (only partly upheld), 25 September 2009 and 15 July 2010.
(b) Two summary judgment applications, both successful, one resulting in the judgment of 23 September 2009 and the second on 14 July 2010.
(c) Three settlements: October 2009, April 2010 and August 2010.
Northern Crest defaulted under each.
(d) Two liquidation proceedings filed on 23 November 2009 and
6 August 2010, both withdrawn after payment or settlement.
5 Paragraph [42] of the judgment referred to a without prejudice settlement offer from RJH to Northern Crest, which RJH contends is a privileged communication. Whether that is so will be for the trial Judge. I put this evidence to one side.
[41] The abandonment of the lease points to insolvency. After receiving notice of non-payment of rent, Northern Crest simply left the premises without notice and without making any orderly arrangements to terminate the lease, including paying outstanding rent to Robt. Jones. From that time on, Robt. Jones had two years of debt-collecting efforts to recover payments due. It is particularly telling that Northern Crest entered into settlement agreements under which it was allowed time in which to pay, yet under each settlement agreement, it failed to pay on time. The explanation is obvious. Northern Crest did not have the funds to pay Robt. Jones.
…
[43] Similarly, in an email of 19 October 2010, Robt. Jones’ counsel advised counsel for Northern Crest how it intended to prove that Northern Crest was insolvent. As well as relying on the statutory presumptions arising from failure to comply with statutory demands, the evidence was to include:
1 Failure of NCIL to pay its judgment debt for six months, resulting in a previous liquidation proceeding ...
2 Failure of NCIL to abide by the settlement agreement, resulting in filing of an admission of claim, being the basis for the judgment debt in the present proceeding ...
[44] Given this indisputable evidence as to Northern Crest’s inability to pay its debts to Robt. Jones during 2010, I can see no useful purpose in Robt. Jones trying to prove solvency or to resist the liquidators’ claim that during
2010 Northern Crest was unable to pay its debts as they fell due. Requiring discovery of further documents might show that other aspects of the
liquidator's evidence on insolvency, such as the reconstruction of accounts,
are subject to challenge, but it could not alter the fact that Robt. Jones’ own
dealings with Northern Crest show that the company was insolvent.
[25] In addition to its application for discovery, RJH also sought a determination Northern Crest had waived privilege in approximately 87 documents over which privilege has been claimed. The liquidators have disclosed 10 communications between Northern Crest and its lawyers, each of which is relied upon to advance a factual proposition or propositions in support of the liquidators’ case. For example, the liquidators refer to correspondence from Northern Crest’s general counsel, Mr Stapleton, in which he noted his fees had not been met, in turn advanced as circumstantial evidence of Northern Crest’s insolvency. The Judge concluded the
liquidators had not waived privilege:6
In this case, the communications between lawyer and client were at particular stages in legal proceedings where instructions and advice were given to deal with the particular circumstances at the time of a communication. Each can be read and understood on their own, without
reference to other privileged material. Because advice and instructions were given episodically at particular stages of litigation and without any reference to any wider litigation strategy, there is no unfairness to Robt. Jones in its not knowing the contents of other advice given at other stages in the proceedings. Under either the transaction test or the issues test Master Kennedy-Grant referred to in Pacific Pine Ltd v KRTA Ltd, other communications passing between Northern Crest and its lawyers at other stages in the litigation are not associated materials. In putting some communications in evidence, the liquidators have not lost the right to continue claiming privilege in others. In finding that the liquidators have not waived privilege, I do not consider that there is any unfairness of the sort described in McGuire v Wellington Standards Committee (No 1) and AstraZeneca Ltd v Commerce Commission.
Clearing the decks
[26] The parties filed extensive written submissions. Among other things, RJH contended the Judge erred in making factual determinations which may leave RJH estopped from pursuing their defence in the substantive action. To provide an example, RJH argued the Associate Judge found Northern Crest was insolvent, and so RJH may be precluded from advancing the contrary proposition at the hearing. RJH contended the Judge had no jurisdiction to do so, as he was only seized of interlocutory matters.
[27] The short answer to these submissions is that while the Judge’s approach to discovery was arguably robust, nowhere did the Judge purport to conclusively determine issues necessarily reserved for the substantive action. Moreover, it is inconceivable the Judge hearing the substantive action would approach matters in this way. To use the vernacular, RJH is entitled to have its day in court. And at the hearing, RJH may present its case in accordance with its (amended) notice of opposition. I am satisfied the Associate Judge did not intend to suggest otherwise.
[28] For the same reasons, a third argument of RJH falls away. When addressing the discovery applications, the Judge remarked it was “clear” Northern Crest and Columbus were dealing with each other in a commercial relationship.7 RJH argues there is evidence to support a contrary view. It may be correct. But again, that is for the hearing. It is not an issue I should seek to resolve on an application for review of interlocutory applications directed at discovery, privilege and costs.
[29] RJH’s fourth argument concerns the Associate Judge’s construction of s 292(6) of the Companies Act, and can also be put to one side. In the course of discussing the test for insolvency, the Judge noted the parties disagreed whether the transactions were inside the restricted period in s 292(6). He observed:8
[33] On Robt. Jones’ submission, the case comes within s 292(6)(a) because (b) and ( c) apply only to applications to put a company into liquidation. Applications to set aside statutory demands are directed at avoiding liquidation by challenging demands under s 289, even if unsuccessful applications might result in liquidation. I disagree on that interpretation of s 292( 6)(b) because:
(a) Whereas s 292(6)(c)(i) expressly refers to an application to put a company into liquidation, s 292(6)(b) is not so limited. While the Court will make a liquidation order only on application, the subclause does not require that to be a liquidation application. On the wording, “application” includes an application under s 290.
(b) It is consistent with the legislative purpose of creating a presumption of insolvency in the period before the start of the proceeding that results in a liquidation order. If the presumption applies in the six months before a creditor begins a successful liquidation application (for example, relying on non- compliance with a statutory demand), it is also appropriate to apply the same presumption if the company unsuccessfully applies to set aside a statutory demand and the court is satisfied on dismissing the application that the company should go into liquidation forthwith, by-passing the normal steps of a liquidation application.
[34] Accordingly, only the first four payments are outside the restricted period. For all the others, there is a presumption that at the time of payment, Northern Crest was unable to pay its debts as they fell due. Robt. Jones has the burden of proving ability to pay due debts during the restricted period. To oppose the substantive proceeding on this question, for the first four payments, Robt. Jones may do no more than test the adequacy of the liquidators’ evidence. On the other hand, where it has to prove ability to pay debts, it may become more important to require the liquidators to disclose relevant documents in their control.
[30] This argument was peripheral to the applications before the Associate Judge. And whether the transactions fall inside the restricted period is no consequence to the application before me. The point should be resolved with the benefit of full argument at the substantive hearing, particularly given its potential importance to cases beyond this one.
[31] I signalled this approach on all four arguments to counsel at the commencement of the hearing. No one sought to dissuade me from this course.
The discovery applications
[32] Mr Chesterman contended the Judge erred in relation to his approach to all of the applications by placing undue weight upon the evidence in the substantive action. He noted the Judge repeatedly concluded discovery would not serve any useful purpose because of the complexion of the evidence. The Judge’s own summary of his reasoning perhaps captures Mr Chesterman’s point:
[84] I am not satisfied that the liquidators are required to give a further affidavit of documents on any of the classes of documents for which Robt. Jones seeks discovery under r 8.19. I do not regard discovery directed at showing the alleged illegitimacy of any licence agreement or at testing the ability of Northern Crest to pay its due debts as serving any useful purpose. The legitimacy or otherwise of any licence agreement is irrelevant. Payments by Columbus were applied to reduce Northern Crest’s debts to Robt. Jones. That will not change if the licence agreement were shown to be a sham or otherwise ineffective.
[85] Similarly, Robt. Jones cannot seriously argue that Northern Crest was solvent at relevant times, given that its own dealings show unmistakeably that the company could not pay all its due debts. The pursuit of documents to probe the solvency of Northern Crest is a barren exercise.
[33] Mr Keene QC defended the Judge’s approach by reference to the discretionary nature of discovery and associated canons of appellate deference; the absence of discovery in the context of originating applications; the complexion of the evidence and orthodox principles of relevance, materiality and proportionality.
[34] The starting point is that there is no presumption for discovery in the context of the originating application procedure, as there is in the standard statement of claim procedure. This is “because the originating procedure was designed … to provide a relatively speedy and inexpensive mechanism for a number of applications which need to be made to the Court under specific statutory provisions”.9 However, when appropriate, a Judge may exercise his or her discretion to direct particular
discovery in originating applications.10
[35] In Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, Asher J considered discovery in the context of r 8.19.11 The Judge concluded discovery constituted a function of relevance, proportionality and discretion.12 I respectfully agree. Embedded within the concept of proportionality is materiality; the likelihood discovery will result in admissible evidence of meaningful probative value to an issue in dispute. If admissible evidence is unlikely to be yielded; yielded on a point
of little consequence; or otherwise of only likely modest probative value on a more material issue in dispute, considerations of materiality and proportionately will tell against discovery.
[36] Other considerations may arise. The instant case as an example of how that may be so, because in seeking documents which it contends may demonstrate Northern Crest’s solvency, RJH is prosecuting a thesis antithetical to its publicly stated position in relation to Northern Crest in the same period. All of which brings me to the specific applications.
Discovery in relation to the licence agreement and whether it was a sham
[37] There is evidence that in late 2010, Rutherford Franchising Proprietary Ltd, or Rutherford, replaced Columbus as the primary licencee in relation to intellectual property belonging to Northern Crest. RJH sought disclosure of the Rutherford licence in the hope it might cast light on the validity of the Columbus licence, or more particularly, whether it was a sham. RJH also sought disclosure of correspondence between the liquidators and the law firm Sekel Oshry. Mr David Sekel is a Sydney solicitor in the firm Sekel Oshry. He was also a director of Northern Crest. There is reason to believe Sekel Oshry drafted the intellectual
property licences. Because of this, RJH contends all correspondence between the
10 Rule 7.43A allows a Judge to make any direction or order as to the conduct of proceedings, and applies to originating applications by r 19.11. In terms of when it will be appropriate to so order, see Commissioner of Police v Yan [2015] NZHC 3315; Madsen-Ries v Fonterra Brands (New Zealand) Ltd [2016] NZHC 1305, each citing Katavich v Meltzer HC Auckland CIV-2006-
404-005968, 29 May 2009.
11 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760.
12 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, above n 11, at [12]–[14].
liquidators and Sekel Oshry is relevant as it is material which may permit RJH to better examine whether the licence between Northern Crest and Columbus was a sham.
[38] The Judge dealt with each category in a similar way. He concluded whether there was a valid licence agreement between Northern Crest and Columbus would not alter the source or nature of the payments from Columbus to RJH.
[39] I accept the Judge expressed these conclusions in definitive terms in a manner somewhat inconsistent with the interlocutory nature of the application. Moreover, the law governing whether a third party transaction is that of an insolvent company strikes me as evolving.13 So, this is an area in which being categorical is not without risk. However, it does not follow the Judge was plainly wrong or committed some other species of reversible error,14 because modest recalibration of his reasoning demonstrates its availability:
(a) In the context of litigation, it is not difficult for a party to assert it needs a document or documents in order to fairly advance its position at trial. That will be especially so when, as here, the underlying documentation is incomplete through no fault of the parties.15
(b)Consequently, claims of relevance must be tested and as Asher J observed in Assa Abloy, considered against principles of proportionality in the context of an exercise of discretion. So too
materiality, and perhaps other considerations.
13 Although there is case law which has captured third party transactions within the voidable transactions regime, this has involved payments where the money used has been deemed to be the company’s money: see Paul Heath (ed) Heath and Whale on Insolvency (online looseleaf edition, LexisNexis) at [24.41]. None of the cases refer to involve restitutionary liability or the formation of a debt as being within the section.
14 The parties agreed the governing principles were those expressed by Fisher J in Wilson v Neva Holdings Ltd [1994] 1 NZLR 481 (HC) at 490–491 and so RJH had the burden of persuading me the Associate Judge’s decision was wrong. The parties were also agreed the determinations by the Associate Judge in relation to discovery and costs involved the exercise of a discretion so that intervention was permissible “only if there has been an error of principle, if the [Associate
Judge] has been influenced by relevant considerations, if there has been a failure to take into
account relevant considerations, if significant fresh material has been introduced on review, or if a decision is plainly wrong”; see Wilson v Neva Holdings Ltd at 490-491.
15 It is common ground the records are not complete because they were “sanitised” by an individual or individuals connected with Northern Crest before the liquidators gained full control of the records in Sydney.
(c) In terms of the licence agreement between Rutherford and Northern Crest, it is far from clear how it could have any logical bearing on whether the intellectual property licence was a sham. Put another way, the mere fact the same agreement or a similar version was entered into with another company or transferred to that company says little if anything about whether the agreement was a sham. Indeed, the fact of transfer may imply the contrary.
(d)The application in relation to Sekel Oshry is even more elliptical to the point of constituting a fishing expedition. There is nothing before me to give an air of reality to the proposition relevant evidence would be uncovered through this exercise.
(e) Considerations of materiality and proportionality also tell against discovery.
[40] In reaching these conclusions, I have not overlooked the apparent inconsistency in the liquidators’ position in asserting they have not seen a copy of a licence agreement between Northern Crest and Rutherford, and a letter from their solicitors declining to disclose the same information on grounds of relevance. The point remains these applications fail bedrock principles of relevance, materiality and proportionately.
Disclosure applications as possible sources of evidence for solvency
[41] RJH sought five categories of documents from the liquidators on the basis they may constitute or yield evidence Northern Crest was solvent at the time of the transactions. Four of the five are below; the fifth I will discuss later:
(a) The first was based upon the Rutherford licence agreement described above. RJH contended if the licence was not a sham, it was relevant to solvency because there would be an income stream to Northern Crest towards the end of the transaction period. As the Associate Judge noted, RJH’s alternative advancement of irreconcilable propositions is not without awkwardness. In any event, the Judge
concluded RJH’s own conduct towards Northern Crest demonstrated the latter was insolvent. His Honour concluded discovery would be pointless.
(b)When Northern Crest was put into liquidation in June 2011, it is possible the Commissioner of Inland Revenue owed Northern Crest
$500,000. Reconstituted balance sheets for 22 January, 24 February,
22 March, 20 April and 28 May 2010 show entries for an asset as “tax paid” or “deferred tax asset” in the sum of $500,000. But the apparent asset does not appear in later balance sheets. RJH contends documents held by the liquidators in relation to this asset should be discovered as relevant to the question of solvency. The Associate Judge disagreed, noting even with inclusion of the asset, the reconstituted balance sheets all showed working capital deficits and negative equity.
(c) There is evidence to suggest WWP Accounting carried out at least some accountancy work for Northern Crest. The firm is located in Australia. The liquidators contend they are not in control of any documents held by WWP Accounting. The Associate Judge considered RJH’s application in relation to this material speculative, noting other accounting documents had already been discovered.
(d)RJH sought documentation in relation to Hudson Red Investments Ltd, as they claimed there was reason to believe it became a licensee of Northern Crest’s intellectual property. RJH contended that would generate income, in turn relevant to solvency. The Associate Judge dismissed this application because the liquidators had sworn they had not seen a licence agreement between Hudson Red Investments Ltd and Northern Crest, and, even if a licence did exist, “what counts is Northern Crest’s ability to pay all its due debts from its resources.
Requiring the liquidators to carry out further searches for licence agreements with Hudson Red would not serve any useful purpose”.16
[42] Mr Chesterman contended the Associate Judge placed undue weight on evidence tending to suggest Northern Crest was insolvent, thereby confusing the interlocutory process and substantive action. He submitted RJH was confronted with an application to claw back monies it had properly received, against the backdrop of an incomplete documentary picture. As to the issue of solvency, Mr Chesterman submitted Northern Crest had actually paid what it owed to RJH; the decision by the Associate Judge to place the company into liquidation was a “line call”; and the same Judge had set aside a statutory demand in June 2009 on the basis Northern Crest was then solvent. It followed, Mr Chesterman submitted, discovery could unearth material of genuine relevance to the question of solvency.
[43] I acknowledge the Judge was somewhat categorical in his treatment of these discovery applications too. But again, I am not satisfied the Judge committed reversible error:
(a) This case is unusual in that RJH is seeking discovery for the purpose of arguing Northern Crest was insolvent in 2010, when in that year RJH was vigorously pursuing Northern Crest for unpaid rent, rates and damages—all while alleging Northern Crest was insolvent. Consequently, RJH seeks discovery to prove a proposition the contrary of which it has previously and publicly asserted.
(b)Neither counsel was able to cite an authority in which discovery had been sought in such circumstances. That is unsurprising.
(c) Mr Chesterman accepted in argument the Associate Judge was entitled to place weight upon RJH’s earlier conduct in relation to Northern
Crest (but maintained the Judge placed undue weight upon it).
16 McCullagh v Robt Jones Holdings Ltd, above n 1, at [78].
(d)Testing RJH’s applications against its own conduct vis-à-vis Northern Crest is not to prejudge the outcome of the substantive action. Rather, it is to conduct a sober assessment of relevance, materiality and proportionality.
[44] The same conclusion is reached if one approaches each category of alleged documentation individually. So, while there is a basis for a belief Northern Crest was owed $500,000 by Inland Revenue in the first half of 2010, even the inclusion of that figure did not portray a solvent enterprise on the reconstituted accounts. The application in relation to WWP Accounting records is speculative. And in relation to Hudson Red Investments Ltd, the application is unlikely to yield material evidence.
[45] This leaves one category of documentation the Associate Judge did not rule on, perhaps by oversight. RJH sought all of the documentation sent by Northern Crest to the Australian Stock Exchange for an attempted relisting on 15 June 2011. RJH contends the documents are relevant as they are “likely to show that Northern Crest’s Australian creditors were supportive of a relisting process and were not pursuing their debts”. The difficulty with this application is that the attitude of the creditors is not coterminous with the test for solvency, which is concerned with the ability of a company to pay its debts as they fall due. The application fails the test of relevance.
[46] Mr Chesterman sought the same material on the basis it was likely to show Northern Crest’s financial position in the years preceding 2011. That may be so, but is unlikely to yield material evidence, for the reasons discussed above in relation to solvency. Again, this is an unusual case.
Discovery for the purpose of challenging witness “credibility”
[47] In order to understand this aspect of the judgment, a detour is necessary.
[48] On 29 July 2014 Manifest Capital Management Proprietary Ltd, or more easily Manifest Capital, submitted a proof of claim to the liquidators as a creditor of Northern Crest. Detail in relation to the claim need not detain us. On 20 September
2011, the liquidators wrote to Manifest Capital rejecting its claim. On 13 October
2011, Manifest Capital filed an application challenging the liquidators’ position. The company also sought an order to remove the liquidators.
[49] The case was heard by Heath J.17 The Judge found Manifest Capital was a creditor. The application to remove the liquidators was adjourned for further hearing, if necessary. In light of the fact the liquidators remain as they were, I assume that application was abandoned or overtaken by other events. In any event, before the hearing, Mr Michael Reeves, who was assisting Manifest Capital, met with Mr Stephen Lawrence, one of the liquidators. The meeting was conducted on a without prejudice basis. Mr Reeves secretly recorded his conversation with Mr Lawrence. Mr Reeves filed an affidavit in the proceeding, but omitted to mention this aspect. Mr Reeves alleged Mr Lawrence offered to forego an investigation into the affairs of Northern Crest in return for the payment of fees of
$850,000.
[50] Heath J observed it was not alleged by Mr Reeves that Mr Lawrence was corruptly asking for money to go to him, or for the payment not to be disclosed to creditors in a liquidators’ report. Rather, the allegation appears to have been Mr Lawrence was prepared to act in a manner inconsistent with his duties to creditors in return for accepting a questionably large fee for his partnership.
[51] Heath J heard argument on whether Mr Reeves’ evidence was admissible. The issue was whether an otherwise privileged conversation between Mr Reeves and Mr Lawrence was vitiated by a dishonest purpose on the part of Mr Lawrence in terms of s 67(1) of the Evidence Act 2006. The Judge noted while Mr Reeves’ evidence was not contradicted by Mr Lawrence’s sworn statement, there remained “much scope for doubt about the nature and extent of Mr Reeves’ assertions of what
was said between Mr Lawrence and himself”.18 The Judge was also troubled
Mr Reeves had been less than candid in failing to mention the fact he had recorded the conversation, and secretly.
17 Manifest Capital Management Pty Ltd v Lawrence HC Auckland CIV-2010-404-7741,
20 December 2011.
18 Manifest Capital Management Pty Ltd v Lawrence, above n 17, at [77].
[52] RJH contends it should have discovery of the recorded conversation and a related transcript. An application to search the Manifest Capital court file is also pursued, albeit I gather the recording is no longer on the file. The application is brought under r 3.11 of the High Court Rules, although the applicants seek to draw an analogy with their position and that of a party to proceedings under r 3.8.
[53] And the relevance of all this? RJH contends the credibility of the liquidators is relevant to the determination of the case (the abuse of process argument) in circumstances in which there is recent authority for the proposition discovery may be ordered, if necessary, in relation to credibility. The Associate Judge disagreed:19
I see no purpose in requiring discovery for the purpose of attacking the liquidators’ credibility and integrity. Discovery is not normally ordered for that purpose. In this case it would be disproportionate. The parties should not spend extra time and effort pursuing peripheral matters.
[54] RJH contends the Judge erred because Mr Lawrence will be giving evidence in the nature of expert evidence and his “credibility” is in issue.
[55] I am satisfied the Judge did not err:
(a) There is a clear line of authority discovery directed exclusively at witness credibility is impermissible.20
(b)While it is true Associate Judge Matthews in Domenico Trustee Ltd v Tower Insurance Ltd concluded otherwise,21 Mander J has subsequently described that decision as involving “highly unusual and rare” facts.22 Moreover, discovery applications framed in connection with witness credibility may often be speculative and oppressive. So,
assuming without deciding Domenico Trustee Ltd represents an
19 McCullagh v Robt Jones Holdings Ltd, above n 1, at [59] (footnote omitted).
20 Thorpe v Chief Constable of Greater Manchester Police [1989] 1 WLR 665 (CA); Favor Easy
Management Ltd v Wu [Practice Note] [2010] EWCA Civ 1630, [2011] 1 WLR 1803; and George Ballantine & Son Ltd v FER Dixon & Son Ltd [1974] 1 WLR 1125 (Ch D). In a New Zealand context, see West Harbour Holdings Ltd (in liq) v Tamihere [2014] NZHC 716.
21 Domenico Trustee Ltd v Tower Insurance Ltd [2014] NZHC 2657.
22 C & S Kelly Properties Ltd v Earthquake Commission [2014] NZHC 3111, (2014) 22 PRNZ 539 at [19].
accurate statement of the law, there is a need to keep this doctrine firmly in check.
(c) The term “credibility” is not recognised by the Evidence Act. This is not to assert evidence in relation to credibility is not admissible under the Act, but rather to be mindful of the conceptual basis upon which it is admitted. Evidence a witness has been dishonest in connection with their testimony is of course relevant and admissible in terms of s 7 of the Evidence Act. But a contention a witness has a disposition to be dishonest constitutes veracity evidence pursuant to s 37 of that Act. And, such evidence must be substantially helpful in order to be admissible. Different again are challenges to witness reliability.
(d)The contention Mr Lawrence has given unreliable expert opinion evidence is a distinct proposition from the proposition he has a tendency to be dishonest. The former may be assessed by conventional challenge in terms of cross-examination or contrary expert evidence, a point the Associate Judge made. But as observed, veracity evidence must be substantially helpful in order to be admissible. And, the greater the likelihood such evidence would entail a trial within a trial, the greater the likelihood the evidence will
not be substantially helpful.23
(e) While these considerations are directed at admissibility rather than the antecedent question of discovery, materiality must be assessed in part by the likelihood admissible evidence will result.
(f) Added to these difficulties is the fact Heath J concluded the conversation between Mr Lawrence and Mr Reeves was privileged, and not in the advancement of a dishonest purpose. Consequently, RJH is seeking discovery of material in relation to which a Judge of
this Court has concluded is privileged.
23 Section 37 of the Evidence Act essentially incorporates the previous collateral issues rule at common law, to prevent matters not in issue becoming the focus of a trial: see Best v R [2016] NZSC 122.
(g)And if this were not enough, the relevance of this chapter is at best peripheral.
[56] For the same reasons, I decline RJH access to the Manifest Capital court file.
[57] This leaves one outstanding category of documents. RJH sought documentation in relation to the liquidators’ fees; again on the basis this was relevant to witness credibility. The Associate Judge recognised the amount of liquidators’ remuneration can be an issue in voidable transaction cases.24 However, the Judge considered it was not in issue in this case because the credibility of the liquidators was not relevant to whether the transactions were those of Northern Crest, or whether the company was insolvent at the time of the transactions. I agree. And as observed above, other considerations tell firmly against discovery of this type of material.
Waiver of privilege
[58] The liquidators have disclosed 10 communications between Northern Crest
and its lawyers to advance the liquidators’ case. On 27 August 2010 and 21 October
2010, Mr Stapleton reminded Northern Crest his fees and disbursements remained unpaid. Northern Crest advances this correspondence as circumstantial evidence of insolvency.
[59] On 12 January, 28 January, 28 April and 3 September 2010, Mr Stapleton reported to Northern Crest. Those reports are in the main anodyne, save Mr Stapleton emphasised Northern Crest’s indebtedness to RJH was a threat of an existential order, meaning unless Northern Crest made arrangements to promptly pay RJH, it was likely to be put into liquidation. The same correspondence refers to Northern Crest’s indebtedness to Minter Ellison Rudd Watts as constituting a lesser but still serious threat.
[60] The remaining propositions in correspondence to which Northern Crest has waived privilege are twofold. First, that the payments by Columbus to RJH were in
24 McCullagh v Robt Jones Holdings Ltd, above n 1, at [63], citing Horton v Cowley [2012] NZHC
3089.
satisfaction of Columbus’ indebtedness to Northern Crest, in consequence of the licence agreement between it and Northern Crest (Mr Eakin to Mr Stapleton dated
27 August 2010 and 8 September 2010). Second, that MSH No.2’s payments to RJH represented a “banking service” (I assume this means a loan) from MSH No.2 to Northern Crest (Mr Eakin to Mr Stapleton dated 8 September 2010).
[61] The Associate Judge concluded the liquidators’ use of these communications did not constitute a waiver of the balance of otherwise privileged communications between Northern Crest and its lawyers. The Judge considered each communication could be read and understood on its own, that is, without reference to privileged material, and that Northern Crest had not sought to justify its actions by reference to legal advice, a typical situation in which privilege is waived.
[62] Mr Chesterman contended the Associate Judge misdirected himself, citing Capital + Merchant Finance Ltd v Perpetual Trust Ltd.25 Mr Chesterman submitted by approaching the case in this way, the liquidators had waived Northern Crest’s claim to privilege in relation to the balance of communications between it and its lawyers. Mr Keene resisted this analysis, while accepting as correct the articulation of principle in Capital + Merchant Finance Ltd.
[63] Section 65 of the Evidence Act provides for the waiver of a privileged communication when the privilege-holder produces a privileged communication in circumstances inconsistent with a claim of confidentiality, or acts so as to put the privileged communication in issue in a proceeding.
[64] In Capital + Merchant Finance v Perpetual Trust Ltd, Katz J considered these concepts in the context of apparently failed settlement negotiations. I say apparently because the dispute in that case concerned whether a settlement agreement had been reached. The plaintiff in that case filed evidence from its lawyers and those instructing them, which led to the predictable response they had waived privilege in relation to all such communications over the settlement
negotiation period of six days. The plaintiff contended it was required to discover
25 Capital + Merchant Finance Ltd v Perpetual Trust Ltd [2015] NZHC 1233. The admissibility of evidence does not involve an exercise of discretion but is a determination of a question of law; see R v Gwaze [2010] NZSC 52, [2010] 3 NZLR 734.
only the specific communications and any obviously related communications—but not everything. With reference to Nea Karteria Maritime Co Ltd v Atlantic & Great Lakes Steamship Corp (No 2), Katz J concluded “the correct position lies somewhere between these two extremes”.26 The Judge considered the correct approach was encapsulated in the principle of collateral waiver to avoid “cherry-picking”, identified in Nea Karteria, which prevented a party from presenting the Court with a
selective view of the relevant evidence.
[65] Under this principle, a party is required to disclose any further privileged communications relevant to the same discrete factual proposition in relation to which the privileged material had been deployed. Katz J identified the factual propositions in relation to which the evidence had been adduced, and concluded collateral waiver had occurred in relation to those particular topics in the course of the settlement negotiations.
[66] Cross on Evidence cites Nea Karteria as an illustration of the waiver principle,27 and a decision of Dobson J in NZX Ltd v Ralec Commodities Pty Ltd as holding that fairness may require the disclosure of privileged communications so the inspecting party and Court may satisfy themselves selective disclosure has not left a misleading picture.28
[67] The Judge did not approach the issue in this way, instead holding the disclosed communications were self-contained. That may be correct, but it does not address the possibility the evidential picture is selectively inaccurate. I consider the Judge misdirected himself.29 By tendering otherwise privileged communications on discrete factual propositions, the liquidators have waived privilege on those factual propositions in undiscovered privileged communications.
[68] It will be apparent I have not accepted the entirety of RJH’s argument:
Mr Chesterman contended RJH was entitled to all otherwise privileged
26 Capital + Merchant Finance Ltd v Perpetual Trust Ltd, above n 25, at [29], citing Nea Karteria
Maritime Co Ltd v Atlantic & Great Lakes Steamship Corp (No 2) [1981] Com LR 138.
27 Mathew Downs (general ed) Cross on Evidence (online looseleaf edition, LexisNexis) at
[EVA65.4].
28 NZX Ltd v Ralec Commodities Pty Ltd [2015] NZHC 241.
29 In fairness to the Judge, Capital + Merchant Finance, above n 25, and Nea Karteria, above n 26, might not have been drawn to his attention.
communications between Northern Crest and its lawyers. However, the correct principle is that RJH is entitled to those communications only to the extent they deal with the factual propositions I have identified earlier. One does not police cherry- picking by harvesting the entire crop.
[69] To give an example, if the privileged communications contain instances in which Mr Stapleton refers to his fees, whether paid or otherwise, those must be discovered to that extent. Similarly, if Mr Stapleton in an otherwise privileged communication refers to the threat or apparent absence of threat posed to Northern Crest by its indebtedness to RJH or Minter Ellison Rudd Watts, that communication must be discovered, again to that extent.
[70] It is important to be clear this ruling relates only to communications made by Mr Eakin and Mr Stapleton, the two correspondents in relation to whom the liquidators have waived privilege. And as observed, only to the extent either individual refers to any of the discrete factual propositions at [58]–[60]. Legal professional privilege is protected for good reason and any incursion into that principle must be strictly proportionate. So too waiver in this context.
Fresh evidence
[71] Duffy J granted RJH leave to adduce fresh evidence on the application for review,30 which by procedural quirk meant a determination that would otherwise fall to me was determined by another Judge in advance of the hearing. The liquidators contend this evidence is irrelevant and invite me to receive other fresh evidence,31 at least some of which has since been filed by RJH in the substantive action. RJH objected to the liquidators adducing any evidence in response to its fresh evidence, largely on the basis the evidence is not fresh.
[72] At the hearing, I explained to counsel I had not read any of the fresh evidence and would not do so until I had reached a provisional view on the merits of the
review application. Counsel endorsed that course. I have since read all of the fresh
30 McCullagh v Robt Jones Holdings Ltd [2016] NZHC 263.
31 Specifically, affidavits from Mr Colin McCloy, Mr John Carlaw Hagen and Mr Timothy Colin
Kerr.
evidence, which I formally admit in the interests of justice. But none of that evidence has changed my view in relation to any aspect of this judgment.
[73] The liquidators’ contention the affidavit of Mr Greg Loveridge (of 6 August
2015) is inadmissible is a matter better dealt with by the trial Judge.
Costs
[74] The Associate Judge ordered costs to the liquidators on an increased basis. RJH contends the Judge was wrong to uplift costs. It would be artificial for me to enter this fray because circumstances have materially changed: RJH has enjoyed a measure of success on review. Consequently, I quash the Associate Judge’s costs order and make no order of my own.
[75] I will receive memoranda if necessary, but encourage agreement notwithstanding the history of the case thus far.
[76] I have released this judgment promptly on the expectation the parties will do likewise in relation to advancing the substantive hearing. This action was brought in
2013 and should have been concluded by now.
……………………………..
Downs J
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