Ruthan Limited v Forsyth Barr Group Limited HC Dunedin Civ-2006-412-512

[2007] NZHC 1627

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2006-412-000512

BETWEEN  RUTHAN LIMITED Plaintiff

ANDFORSYTH BARR GROUP LIMITED Defendant

Hearing:         13 February 2007

Appearances: D Tobin for Plaintiff

P Churchman for Defendant

Judgment:      15 February 2007

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

The Dispute

[1]      As at 21 December 2005:

a)        Ruthan held 13,365 shares in Forsyth Barr that were worth $400,950 based on a sale price of $30 per share.

b)Mr S Loomans, an employee of Forsyth Barr, was a director and controlling shareholder of Ruthan.

[2]      On 21 December 2005 Mr Loomans’ contract of employment with Forsyth Barr was terminated.   Forsyth Barr did this adopting a provision of Mr Loomans’ employment agreement, claiming serious misconduct by him.

[3]      As a result of the alleged serious misconduct Forsyth Barr says it had to make payments to clients from whom funds had been misappropriated by Mr Loomans’

RUTHAN LIMITED V FORSYTH BARR GROUP LIMITED HC DUN CIV-2006-412-000512  15 February

2007

actions.  Pursuant to a shareholder’s agreement, Forsyth Barr claimed to be entitled to sell Ruthan’s shareholding in Forsyth Barr and to apply the funds in restitution of the losses it claimed were caused by Mr Loomans.

[4]      Ruthan also claims to recover funds totalling about $183,000 held to its account with Forsyth Barr and under the name of M A Loomans (apparently the name of Mr Loomans’ mother).  These were also taken by Forsyth Barr in the same circumstances and for the same expressed purpose for which Ruthan’s shares were taken and sold.

[5]      Of the total value of about $580,000 in those funds held to its account Ruthan received the sum of just $48,804.74 in May 2006.  Forsyth Barr paid this to Ruthan as being the balance available after accounting for the consequences of Mr Loomans’ “serious misconduct”.   In issue between the parties is whether Forsyth Barr was entitled to treat Mr Loomans and Ruthan as the same person.   Even if it was not, Forsyth  Barr  claims  it  would  be  unconscionable  to  allow  Ruthan  to  retain  the proceeds of Mr Loomans’ fraud.   Mr Loomans’ actions are the subject of police charges which are yet to be heard.

[6]      Ruthan sues to recover the funds it says Forsyth Barr had no right to take. Also it denies Forsyth Barr had any right to act against its property.  Mr Loomans denies any “serious misconduct”.

Security for Costs

Forsyth Barr’s Evidence

[7]      Forsyth Barr applies for an order that Ruthan gives security for its costs in the amount of $35,000.  It says Ruthan will be unable to pay its costs if it is unsuccessful in the proceeding.  Its enquiries indicate Ruthan has minimal assets and likely also significant liabilities.

[8]      Mr Paviour-Smith, of Forsyth Barr, has sworn an affidavit in support dated

13 November 2006.  He has made enquiries concerning Ruthan’s asset position.  Of the 100 shares in Ruthan he noted Mr Loomans owned 98, and as well had an

interest in one of the two remaining shares.   Mr Paviour-Smith suggests that if Ruthan has any assets, the acquisition of those would likely have been financed by way of loan or advance.   His enquiries revealed Ruthan owns a property at Waikouaiti, north of Dunedin.

[9]      Regarding  Ruthan’s  shareholding  in  Forsyth  Barr  Exchange  Holdings Limited (FBEHL) (which was not the subject of pre-emptive action by Forsyth Barr) he comments that following a restructuring of that company Ruthan became a beneficial owner of 12,520 shares in New Zealand Exchange Limited (NZX).   He said Ruthan’s purchase of the majority of those shares was likely financed by a loan. He surmises likely more than $20,000 was still owed for the purchase of those shares, notwithstanding that some dividends would have been paid.   He says the value of those NZX shares to Ruthan would now be approximately $58,000 nett.

[10]     Mr Paviour-Smith’s enquiries reveal the Waikouaiti property was purchased in November 2004 for $155,500.   Absent any issue of share capital, he infers the purchase price would have been funded entirely by way of debt.  He notes a search indicates the property to be subject to a Westpac Banking Corporation mortgage.

[11]     Enquiries through Ruthan’s lawyer provided the response that the Westpac mortgage ought to have been discharged some time previously, as no monies were outstanding under it.  The registration of a Property (Relationships) Act notice by Mr Loomans was, the lawyers said, “part of the relationship property division process” and that Mr Loomans had given instructions to withdraw that notice of claim.

[12]     Mr   Paviour-Smith   said   despite   requests   for   other   verifying   financial information, none had been provided to Forsyth Barr.  Although Westpac’s mortgage may since have been repaid, he surmises the only way the purchase price could have been financed was by way of loan.  Therefore if Westpac has been repaid it could only have occurred because of shareholder finance.

Ruthans’ Evidence

[13]     In opposition to the application for security Ruthan claims there is an absence of any reasonable evidence to support the contention that it is unable to pay its costs in the event it is unsuccessful in this proceeding.

[14]     In his affidavit in opposition, Mr Loomans notes that the total amount of his claim against Forsyth Barr is in the region of $530,000.  He says the details of the amount seized by Forsyth Barr are unclear because they have never given him a thorough accounting of what was seized, when, and for what purpose.

[15]     He  said  a  recent  value  of  the  Waikouaiti  property  indicates  a  worth  of

$205,000, including chattels of $1000; that the property is not encumbered; and the lodging of the Property (Relationships) Act notice was a mistake on his part.

[16]     Mr Loomans states Ruthan holds funds of approximately $100,000 in its solicitor’s trust account comprised of the funds paid by Forsyth Barr in May 2006, and includes dividends and the proceeds of sale of Ruthan’s shareholding in NZX.

[17]     He was surprised at Mr Paviour-smith’s claim that Ruthan has no income and had no capital contributed to it by its shareholders, and therefore that the purchases must have been funded entirely by borrowing.  He said for the three years ended 31

March 2006 Ruthan earned cash dividends totalling about $137,000 from FBEHL and from Forsyth Barr Group Holdings Limited.  That, he said, would be known to Forsyth Barr.  Further, for the year ended 31 March 2007 he said Ruthan earned cash dividends of $8,862 from NZX Limited.  Mr Loomans said Ruthan is not willing to provide any further financial information to Forsyth  Barr.   Mr  Loomans denies allegations of wrongdoing on his part while an employee of Forsyth Barr.

[18]     He suggests the application for security of costs is part of a ‘deep-pocketing’ exercise.  He says Ruthan is simply seeking to recover assets in funds seized off it by Forsyth Barr without the legitimacy of any Court order.

[19]     Mr Loomans’ affidavit was sworn on 28 November 2006.

Forsyth Barr’s Further Evidence

[20]     At this hearing before me a further affidavit, sworn by Mr Paviour-Smith on

12 February 2007, was filed.  Mr Tobin informed me Ruthan/Mr Loomans took no issue with its lateness, and did not wish this hearing to be adjourned.

[21]     Mr Paviour-Smith’s affidavit provides information regarding the plaintiff’s financial position and notes a recent Companies Office search of Ruthan showed that a Mr Gyles-Pain now owned 98 shares in the company, and that Mr Loomans no longer had an individual shareholding, although he remained a director of the company.  Further, and just seven days after Mr Loomans swore his affidavit on 28

November 2006, the shareholding which he held jointly with others was increased from one share to 90 shares, while Mr Loomans’ shareholding and that of a Ms White each became five shares.  The transfer of 98 shares to Mr Gyles-Pain occurred on 27 January 2007.

[22]     A search of the Waikouaiti property shows the Property (Relationships) Act notice of Mr Loomans remains, and in addition a new notice of similar kind has been registered by Ms White.  Mr Paviour-Smith surmises it is difficult to see how the property could potentially be relationship property unless Ruthan is actually holding it on trust for Mr Loomans or Ms White.

Issues

[23]     In this case they are:

i)Whether there is reason to believe that Ruthan, if unsuccessful in its claim, will be unable to pay Forsyth Barr’s costs.

ii)Whether  there  is  sufficient  evidence  of  proof  of  Ruthan’s inability to pay costs if unsuccessful.

iii)Whether Ruthan assumes any onus or responsibility to provide evidence of its ability to meet an adverse award of costs.

iv)Whether if satisfied of Ruthan’s inability to meet an adverse award of costs the Court should nevertheless use its discretion not to award security.

[24]     The first three are about Forsyth Barr’s responsibility to provide proof in support of its application for security.   The fourth concerns the Court’s ability to decline, in whole or in part, the application even if sufficient proof is available.

Considerations

[25]     For  Ruthan,  Mr  Tobin  notes  Forsyth  Barr  admits  the  existence  of  two substantial assets of Ruthan: namely the Waikouaiti property and the funds held by its solicitors.   He submits Forsyth Barr’s position seems to be that there was no significant injection of capital when Ruthan was set up, and therefore it must have corresponding liabilities for any assets.   That argument, he submits, is at best speculative.   Further he says there is evidence before the Court to show the defendant’s proposition is  plainly wrong.   He refers  to  the  evidence  of  Ruthan receiving cash dividends totalling about $136,000 to 31 March 2006.   Further Mr Loomans referred to income of around $8600 from NZX to 31 March 2007.

[26]     Mr Tobin says Forsyth Barr’s own pleading acknowledges substantial income earned by Ruthan, albeit in circumstances claimed by Forsyth Barr to be improperly obtained.

[27]     Contemporary  evidence  indicates  the  Waikouaiti  property  to  be  worth

$205,000 including chattels of $1000.   That property continues to be registered in Ruthan’s name.   There is no registered mortgage, but two Property (Relationship) Act notices remain registered.

[28]     Also there is Mr Loomans’s evidence of the sum of approximately $100,000 being held by it with its solicitors.  That sum is now about $87,500 after deduction of legal fees.

[29]     Therefore Mr Tobin submits the application  must  fail  because the Court cannot be satisfied Ruthan will be unable to pay costs.  He notes Ruthan has both

real estate and cash on hand.  Mr Tobin adopts the reasoning of Thomas J in New

Zealand Kiwifruit Marketing Board v Maheatataka Cool Pack (1993) 7 PRNZ 209,

212:

Difficulty in paying costs if unsuccessful is the likely outcome of litigation for many plaintiffs.   Few individuals can face the prospect of paying the other party’s Court costs with equanimity.  Similarly, because of the large quantum of the claims likely to be involved in today’s commercial environment and the corresponding high level of Court costs, corporations may also confront financial issues in paying costs if they fail in their contentious bid.  I do not accept that it was intended that r. 60(1)(b) would automatically embrace these luckless litigants.

For the rule to apply, therefore, I believe that something more is required before it can be said that there is “reason to believe” that the plaintiff will be unable to pay the successful defendant’s Court cost.  The plaintiff must be outside the usual run of plaintiffs.   It follows that it is not enough for the defendant to challenge  the  plaintiff’s  ability to  pay costs  and  then  seek security for those  costs relying upon  the  plaintiff’s refusal  or  failure  to furnish details of his financial positions.   There must be some evidential foundation or indication to support the charge that there is reason to believe that the plaintiff will be unable to pay the costs…

[30]     In that case Thomas J also commented about the failure or omission of the party concerned to respond with financial information.   The learned Judge said it should not be seen as necessarily being fatal:

A question is always whether it is appropriate to draw an adverse inference against  the  plaintiff  because  of  his  or  her  silence  as  to  their  financial position.    Whether  it  is  appropriate  is  a  question  which  can  only  be determined having regard to the material before the Court in each case.

[31]     In this case Mr Tobin states the plaintiff has been unwilling to provide copies of its financial accounts because it considers they are not relevant documents, but also because it is suspicious of the defendant’s motives “for the understandable reason that the defendant unilaterally seized shares and cash from it”.

[32]     Mr Tobin then moves on to deal with matters commonly covered in security for costs applications, namely concerning the merits of the plaintiff’s proceeding and prospects of success.  Also there is the issue about whether any inability to pay may have been caused by the actions of the defendant.

[33]     Mr Tobin submits that Forsyth Barr has to establish it is entitled to keep monies and shares “that it has seized in some unregulated self-help basis”.  He states

Forsyth Barr will be required to prove fraudulent activity by Mr Loomans, and in that respect they bear a high burden.   Further they need prove that the alleged fraudulent behaviour of Mr Loomans is somehow attributable to Ruthan, or that in some other way it is entitled to seize Ruthan’s property or cash in the bank account of M A Loomans as a result of Mr Loomans’ alleged wrongdoings.  As Mr Tobin notes, the victims of the alleged wrongdoing was not Forsyth Barr but clients of Forsyth Barr.

[34]     In summary, Mr Tobin submits that any assessment of the merits at this stage must favour Ruthan.

[35]     Concerning the issue of impecuniosity, Mr Tobin notes the Courts have long recognised that any reasonable probability that a plaintiff’s impecuniosity is as a result of the actions of the defendant then it is a fact that weighs against the making of an order for security for costs.

[36]     In this case unquestionably if the proceeds of the sale of shares have been returned to Ruthan, or if Ruthan still retained its shareholding in Forsyth Barr then it is much less likely a security for costs application would succeed.

Decision

[37]     Because an order for security may stop a genuine plaintiff from pursuing its claim, an order having this effect should only be given where the claim has little chance of success.  This means that as far as possible the Court may enquire into the merits of the case in order to assess the prospects of success.  In this case, and on the face of things, a number of transactions were undertaken by Mr Loomans, the result of which was to benefit Ruthan at the considerable expense of clients of Forsyth Barr.  Forsyth Barr has recompensed the clients affected.  The transactions have been the subject of a police investigation and charges have been brought against Mr Loomans.

[38]     One  transaction  involved  the  closing-out  of  a  USD  forward  exchange contract belonging to a Forsyth Barr client which generated a gain of US$52,135.

Apparently Mr Loomans arranged for that amount to be credited to the account of Ruthan, and subsequently the amount in question was transferred to Ruthan’ bank account with Westpac banking corporation.  Except to argue in a general submission to the Court that Forsyth Barr (and perhaps now the police) have a heavy burden to prove that allegation, the particulars of it have not been  addressed at all.   The allegation is strongly suggestive of “serious misconduct”.

[39]    In selling Ruthan’s shares pursuant to a shareholders’ agreement and in terminating Mr Loomans’ employment pursuant to his contract of employment it has not been argued that Forsyth Barr was without the authority to do so where serious misconduct has occurred.   Of course, neither Ruthan nor Mr Loomans has a responsibility to provide proof that serious misconduct was not involved.  Also, there remains a question whether Ruthan should bear the consequences of Mr Loomans’ actions, even if serious misconduct is established.  The fact is there is a contractual basis permitting Forsyth Barr to act as it did concerning Mr Loomans.  Also, if he has acted in the manner alleged there is a strong possibility a Court would not permit Ruthan to retain the funds received by it as a result of these transactions.

[40]     Unquestionably,  by  the  pre-emptive  actions  of  Forsyth  Barr  in  selling Ruthan’s shareholding and in seizing the funds in the account of M A Loomans, Ruthan has been deprived of substantial assets.  However Ruthan maintains it has the means to meet any adverse award of costs.  It is that claim I wish to review.  First I note that the funds held in the name of M A Loomans have not been subject to an independent claim for return by Mr Loomans’ mother.  An available inference is that Mr Loomans’ mother is not aware that funds were held to her account with Forsyth Barr.

[41]     I  have  already  mentioned  that  Mr  Tobin  has  submitted  that  claims  of

Ruthan’s impecuniosity are speculative.  I think there is more to it than that.

[42]     There is evidence that Ruthan has received earnings of around $137,000 to 31

March 2006.  There is no evidence as to what has happened to those earnings.   It appears not to be part of the sum of about $87,000 (after deduction of legal fees) in its solicitor’s trust account.

[43]     The Court is invited to consider that this fund with the solicitors would be sufficient to meet any claim for costs against it.  I do not agree.  Where in proper cases evidence is given, upon which reasonable inference can be made, suggesting the Court is entitled to more information than mere bald assertion of the value of assets, a Court should receive information with which to assess the nett value of a company.  Here, and despite requests by Forsyth Barr, Ruthan has failed to provide evidence.    Accounts  for  the  year  ended  31  December  2006  were  requested  by Forsyth Barr and were promised by the plaintiff, but none were provided, even though those accounts were required by statute to be prepared.   I accept Mr Churchman’s submission that without accounts it is impossible to determine with any precision what Ruthan’s nett asset position really is.

[44]     The value of the Waikouaiti property is supported by a registered valuation. The name of the party for whom the registered valuation was prepared has been deleted from the copy provided to the Court.

[45]     With regard to the funds in the solicitor’s trust account, Ruthan have declined Forsyth Barr’s request confirming the basis upon which these are held.  There is a reasonable inference that the funds are held for some other purpose than for investment on behalf of the company.

[46]     No explanation has been given to explain the fate of the earnings of Ruthan over the last three years.

[47]     The Waikouaiti property was financed by a loan from Westpac Banking Corporation.   That mortgage has now been discharged, but there must remain a question about whether Ruthan owns this property in its own right or whether it is in fact held on trust (in whole or in part) for another person.  If it is held on trust then this would likely explain the two Property (Relationship) Act notices now registered against the title.   A proper inference is that Ruthan’s property is subject to a relationship property dispute.

[48]     More  significant  from  my  viewpoint  have been  the  changes  in  Ruthan’s shareholdings over recent months.   In his affidavit dated 28 November 2006 Mr

Loomans stated that the registration of a notice of claim by him over the Waikouaiti property was a mistake, and therefore he was “able to protect whatever interest I personally have in the company from that position”.   Yet seven days later he significantly changed the extent of his shareholding, and about two weeks or so prior to this hearing he transferred 98 of the 100 shares to a person about whom nothing is known.    Notwithstanding he  remains  a  director  of  the  company,  it  appears  the shareholding, and with it one assumes the assets of Ruthan, have been transferred to the control of another.  On the face of it there is nothing to prevent that other person from utilising the assets of Ruthan for his own purposes.  It cannot be assumed those assets will remain in place until such time as the outcome of these proceedings is known.

[49]     In his affidavit evidence Mr Paviour-Smith has, when making observations regarding Ruthan, resorted to inference.  Nevertheless, it is evidence the Court can have regard to.  The Court is entitled to draw reasonable inferences – indeed it is obliged to do so.  In determining whether Ruthan could meet a claim for costs the Court is entitled to make an assessment of the overall position, and in appropriate cases even when it has a paucity of evidence available to it – particularly where that paucity of information could and should have been supplied.

[50]     In my view the Court cannot conclude that Ruthan is solvent now.   In my judgment it is appropriate to order security.

[51]     The ordering of security is seldom based on a likely award of costs.   It is fixed in an amount the Court thinks fit in all circumstances, having regard to the nature of the proceeding, the relief claimed, and the estimated duration of the trial.

[52]     This proceeding involves complex financial transactions.   Expert evidence will almost certainly have to be given.  Mr Churchman’s estimate of a substantive hearing taking five days is, I think, conservative.  In that context a claim for $35,000 by way of security is modest.

Judgment

[53]     The application for security is granted.   Security is fixed in the amount of

$35,000.  Payment of security shall be in such form as is acceptable to the Registrar of the Court.  In that respect I note Forsyth Barr has offered to accept a mortgage over the Waikouaiti property securing the amount.   Ruthan’s proceedings will be stayed pending security being posted.

[54]     Costs  upon  the  application  will  be  paid  to  Forsyth  Barr  calculated  on  a category 2B basis together with disbursements approved by the Registrar.  There will be an order that the reasonable travelling costs of Mr Churchman be met.

Other Orders

[55]     This proceeding will be adjourned to a telephone conference at 9.40 a.m. on

26 March 2007 when progress will be reviewed.

Solicitors:

Sharon Start Lont, Dunedin

D Tobin, Dunedin

Kensington Swan, Wellington

P Churchman, Wellington