Saha v Reardon
[2017] NZHC 831
•28 April 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2013-404-005129- [2017] NZHC 831
IN THE MATTER of SAHA INTERNATIONAL
PARTNERSHIP
BETWEEN
GOVIND PRASAD SAHA Plaintiff
AND
TIMOTHY PETER REARDON First Defendant
NEIL ANTONY LOWNE FROST Second Defendant
LUKE BRAMWELL HOUGHTON Third Defendant
JONATHAN ROBERT MacDONALD MYERS
Fourth Defendant
RICHARD HUGH MORISON Fifth Defendant
TIMOTHY GERARD ARBUCKLE Sixth Defendant
MICHAEL ANTHONY PEAD Seventh Defendant
VISWA PHANI KUMAR PADISETTI Eighth Defendant
Hearing: 9 April 2017 Counsel:
G J Harley and P W G Ahern for Plaintiff
J D Haig for First Defendant
P R W Chisnall for Second Defendant
S A Barker and P J Niven for Third and Sixth Defendants
D K Evans for Fifth and Seventh DefendantsJudgment:
28 April 2017
SAHA v REARDON [2017] NZHC 831 [28 April 2017]
JUDGMENT OF COLLINS J
Introduction
[1] Two issues are addressed in this judgment. The first issue concerns access by Mr Frost, a current partner in Saha International Partnership (the partnership) to specific documents held by Dr Saha on behalf of the partnership. Dr Saha is also a current partner in the partnership. The second issue asks whether former partners of the partnership have “control” of documents held by the partnership and therefore responsibility for complying with the obligations of discovery.
[2] The background to both issues is explained in Part I of this judgment. The first issue is addressed in Part II of this judgment and the second issue is answered in Part III.
PART I
[3] The background to this dispute is set out in my judgment of 1 April 20151 in which I dismissed applications for summary judgment brought by the third and sixth defendants against Dr Saha, and the judgment of the Court of Appeal dated
18 November 20152 in which the third and sixth defendants’ appeal from my
judgment was partially allowed.
[4] The partnership was established in 2001 by Dr Saha. It provided management and financial consulting services in New Zealand, Australia, Namibia and South Africa. The defendants became partners of the partnership. Apart from Mr Frost, the defendants retired from the partnership between 28 October 2010 and
1 December 2010.
1 Saha v Reardon [2015] NZHC 638.
2 Houghton v Saha [2015] NZCA 553.
[5] The partnership had a formal deed of partnership that was settled in August
2009 but by agreement, it was operative from the commencement of the partnership on 1 October 2001. That deed provided amongst other matters:
(1) that the partnership’s annual accounts were to be prepared in
accordance with the New Zealand Financial Reporting Act 1993;
(2)partners’ remuneration was to be based on partner performance over the medium term; and
(3)Dr Saha was to have extensive power, including the sole responsibility and discretion for determining the level of remuneration of partners.
[6] From 2006 onwards, a practice developed whereby partners’ profits were allocated, not only on the basis of actual income and profits for each financial year, but also on the basis of income and profits that were anticipated to be derived in subsequent years. It transpired that the anticipated profits for 2007 to 2010 did not materialise and the partners had taken drawings from their current accounts based on overestimated partnership profits for those years.
[7] This unsatisfactory state of affairs came to a head when an agreement was negotiated to sell part of the partnership business to Deloitte Australia (Deloitte). During the negotiation of that agreement, disputes arose between the partners about the winding up of the partners’ current account deficits and their capital account balances.
[8] The dispute between the partners led to Mr Reardon, the first defendant, leaving the partnership between August and October 2010 and Mr Myers, the fourth defendant, leaving the partnership in November 2010. On 21 and 22 November
2010, the remaining partners attended a mediation at which 14 settlement principles were agreed to. The settlement principles acknowledged that the partnership would be wound up, with Dr Saha being paid to manage the winding-up process.
[9] On 1 December 2010, Messrs Arbuckle, Frost, Houghton, Morison, Padisetti, Pead and Dr Saha formally resolved to dissolve the partnership with effect from that date. Messrs Arbuckle, Houghton, Morison, Pead and Padisetti resigned from the partnership on 1 December 2010, leaving Dr Saha and Mr Frost as the only remaining partners. It was also on 1 December 2010 that part of the partnership business was sold to Deloitte for $3 million and Messrs Arbuckle, Houghton and Padisetti became partners in Deloitte.
[10] The dispute between the parties concerning all of the accounts for the partnership from 2007 onwards led to Dr Saha and the partnership commencing proceedings against the eight defendants in December 2013. In an amended statement of claim filed in June 2014, Dr Saha and the partnership sought:
(1)declarations that the accounts prepared and issued by the partnership up to the winding up period were settled and binding;
(2)directions on how accounts for the years subsequent to 2010 were to be finalised; and
(3)orders requiring the defendants to pay the negative balances in their current accounts.
[11] If successful, Dr Saha’s claim would result in the defendants paying to the partnership $4,686,700, and a further $3,160,442 to Dr Saha personally. Most of the defendants have responded with counterclaims against Dr Saha personally and in his capacity as a member of the partnership.
[12] Mr Reardon, the first defendant, has counterclaimed seeking $1,125,913 damages against Dr Saha for misrepresentation and misleading or deceptive conduct. Mr Frost, the second defendant, has counterclaimed against Dr Saha seeking
$989,259 for breach of contract, misrepresentation, negligence and breach of fiduciary duties. Mr Houghton, the third defendant, seeks $2,461,016 against Dr Saha and Mr Arbuckle, the sixth defendant, has counterclaimed against Dr Saha seeking $1,980,300.53. The third and sixth defendants allege negligence, breach of
contract and breach of fiduciary duties on the part of Dr Saha. Mr Myers, the fourth defendant, has counterclaimed against Dr Saha in similar terms to Mr Houghton and Mr Arbuckle. He seeks $2,651,943.86. Mr Morison, the fifth defendant and Mr Pead, the seventh defendant generally support the plaintiff’s position. Mr Padisetti has generally aligned himself with the third and sixth defendants.
[13] On 9 March 2016, Associate Judge Smith ordered tailored discovery in respect of this proceeding pursuant to r 8.9 of the High Court Rules. That in turn has led to the dispute, which I address in Part III, namely which party or parties should bear the burden of discovering the bulk of the documents relevant to this proceeding.
[14] It is generally accepted that the documents that will need to be discovered fall into two general categories namely, the partnership documents and personal documents.
[15] The present disputes relate to partnership documents, which are said by the plaintiff to comprise:
(1) approximately 103 archive boxes;
(2) the partnership server in Wellington;
(3) documents held on what is described as a “post decommissioning”
server;
(4) the South African partnership records; (5) the Australian partnership server; and
(6) documents held by professional advisers to the partnership.
[16] All parties agree that the task of identifying, assembling and disclosing relevant documents will be significant for whichever party or parties is responsible for discovery.
PART II
[17] Mr Frost applied for orders on 20 January 2017 against Dr Saha requiring him to “facilitate access by [Mr Frost’s] agent to [a] data file containing all the emails sent and received by [Mrs] Saha using her partnership email account for inspection and copying by [Mr Frost’s] agent”.3
[18] Mrs Saha was at all material times employed by the partnership as its human resources manager.
[19] In his affidavit, Mr Frost explains the scope of the documents he wishes to access and that he has sought access to the email file since mid-2013. Mr Frost states:4
I have sought a range of partnership information stored in New Zealand from
[Dr] Saha in reliance on my rights under s 27[(1)] of the Partnership Act
1908. I have sought that information in my capacity as a partner for two reasons:
(a) The serious problems of the partnership came as a surprise to me in mid-2010. During the course of the wind-up I, and other partners, have sought information to understand the real reasons for the collapse of the partnership.
(b) The reasons for the collapse of the partnership are relevant to the wind-up of the partnership. Obviously if a partner or partners have breached their duties, then that may affect the allocation of losses as between partners.
[20] Mr Frost has also explained that through his lawyers he has repeatedly requested Dr Saha allow Mr Frost’s lawyers access to the email file. Instead of complying with these requests, Mr Frost says Dr Saha has only offered to make available a set of emails between Mrs Saha and Dr Saha that have been subject to deletions.
[21] Dr Saha has not filed an affidavit in opposition to Mr Frost’s application.
Instead, through his counsel, Dr Saha submits that Mr Frost’s application is “an unnecessary duplication of the matters”. I address this in Part III of this judgment.5
3 Frost v Saha HC Wellington CIV-2017-485-23.
4 Affidavit of NAL Frost in support of originating application for orders allowing copying of partnership information, 3 January 2017 at [17].
[22] The undisputed facts are therefore:
(1) Mr Frost is a current partner of the partnership.
(2) Mr Frost has been denied access to partnership documents by
Dr Saha.
(3) Dr Saha controls the documents which Mr Frost seeks to access.
[23] The answer to Mr Frost’s application lies in s 23(1) of the Partnership Act
1908 which provides:
23 Partnership property
(1) All property and rights and interests in property originally brought into the partnership stock, or acquired (whether by purchase or otherwise) on account of the firm or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership and in accordance with the partnership agreement.
...
[24] Section 23(1) reflects the common law position that partnership property lies within the exclusive domain of the partnership and may only be divested from the partnership by agreement amongst the partners “to convert that which was partnership property into the separate property of an individual”.6 Section 23(1) also gives legislative effect to the common law position whereby it was acknowledged that a partner “has an interest in every asset of the partnership and that the interest is a ‘beneficial interest’ of its own kind (sui generis)”.7
[25] In the present case, there has been no agreement to transfer the documents sought by Mr Frost to the ownership of Dr Saha. Those documents remain the
property of the partnership. Technically therefore, the order sought by Mr Frost
5 Notice of opposition to originating application for orders allowing copying of partnership information, 24 February 2017, at [3(c)].
6 RI Banks Lindley & Banks on Partnership (19th ed, Sweet & Maxwell, London, 2010) at [18-44] citing Ex parte Wheeler (1817) Buck 25; Ex parte Cooper (1840) 1 MD & D 358; Hawkins v Hawkins (1858) 4 Jur (NS) 1044.
7 Fazio v Fazio [2012] WASCA 72 at [58].
should be against the partnership. In reality, however, Dr Saha controls the partnership property, as is clear from Mr Frost’s affidavit, the requests he has made and Dr Saha’s counter proposal to disclose certain documents. It is therefore appropriate that Mr Frost seek against Dr Saha the orders he has applied for.
[26] The statutory rights conferred upon Mr Frost by s 23(1) are very clear. As a current partner Mr Frost is entitled to access the partnership property, including the email documents which are sought in his application. He is therefore entitled to the orders which he has sought.
PART III
[27] The issue in the third part of this judgment is resolved by determining who has control of the partnership documents for the purposes of complying with the obligations of discovery.
[28] “Control” is defined in r 1.3 of the High Court Rules in the following way:
control, in relation to a document, means—
(a) possession of the document; or
(b) a right to possess the document; or
(c) a right, otherwise than under these rules, to inspect or copy the document.
Plaintiff ’s arguments
[29] The plaintiff’s arguments, as advanced by Dr Harley and Mr Ahern may be distilled to the following seven points:
(1)The vast majority of the documents in issue are the partnership documents.
(2)The documents belong to the partnership. The dissolution partners in particular (Messrs Arbuckle, Frost, Houghton, Morison, Padisetti, Pead and Dr Saha) did not contract out of remaining rights under the partnership.
(3)Each partner has discovery obligations in relation to the partnership documents.
(4)The need to search for and assemble discoverable documents stems from the counterclaims brought by the counterclaim defendants.
(5)The counterclaim defendants should bear the burden of searching for and disclosing documents to support their claim.
(6)As “partners of the Partnership at the time documents were created, each party has the same rights and obligations in relation to discovery” and each has “control” of those documents within the meaning of the High Court Rules.
(7)Partnership documents have already been accessed and produced as evidence, which were sufficient for the summary judgment proceedings and caused the plaintiff substantial cost.
[30] The proposals put forward by the plaintiff are:8
(a) Each party is to provide discovery of any documents (partnership or otherwise) it has in its possession or control which fall within the agreed categories, but excluding… the partnership documents;
(b) All parties will in addition be given full access to the partnership documents [listed] to such extent as they need both for inspection and to meet any further obligations around discovery. This will be subject to the position of the third parties who have physical possession of those documents;
(c) Each party will accept the obligations of and responsibility for completing discovery from the partnership documents in relation to any agreed categories of discovery which they have proposed. The parties will however agree any protocols around search terms and the like to enable that party to carry out the discovery.
Opposing arguments
[31] The third and sixth defendants took the lead in advancing the argument on behalf of most of the defendants.9 Mr Barker and Mr Niven submitted:
8 Plaintiff ’s memorandum for interlocutory hearing, 1 March 2017 at [26].
(1) There is no jurisdiction to make the orders sought by the plaintiff.
This is because the High Court Rules expressly provide that a party is obliged to discover all documents falling within the scope of the discovery order, whether the order is a standard discovery or a tailored discovery order, that are or have been in that party’s control.
(2)The orders sought by the plaintiff cannot be made because the former partners do not have control of partnership documentation, save for those cases in which they have actual possession of documents.
(3)Tailored discovery should be ordered with the parties ordered to discover all documents that have been in their control falling into a category of documents which counsel listed in their memorandum.
(4)Discovery should be ordered on a staged basis with a first limited discovery stage leading up to a judicial settlement conference, followed by the bulk of discovery in a second stage if the parties fail to reach settlement. The categories of documents for the first stage of discovery were listed as a separate appendix in counsel’s memorandum.
Analysis
[32] In determining which of the parties has “control” over the partnership documents, it is necessary to consider the terms of four interrelated documents, namely the partnership deed, the “settlement principles”, the “partnership exit agreements”, and the “Deloitte transaction agreement”.10
[33] Clause 17.3 of the partnership deed provides:
No dissolution: One or more partners ceasing to be a partner … shall not
dissolve the partnership as to the other partners.
9 The first, second, fourth and eighth defendants supported the position taken by the third and sixth defendants. The fifth and seventh defendants generally supported the submissions made on behalf of the plaintiff with a focus on limiting costs.
10 See for example, Inversiones Frieira SL v Colyzeo Investors LP [2011] EWHC 1762 (Ch).
[34] The authors of Lindley & Banks on Partnership explain that: 11
… as a matter of law, a change in the composition of a partnership results in a dissolution of the existing firm and the creation of a new firm; in such a case, the new firm will usually take on the assets and liabilities of the old, without any break in the continuity of the business. This is often referred to as a “technical” dissolution and is usually, but not always, the result of agreement.
[35] As was observed in Rushton v Rushton,12 the reference to a “technical” dissolution may be somewhat of a misnomer because it is not the dissolution but the winding-up which is notional. Nevertheless, I will continue to use the terminology in Lindley & Banks on Partnership.13
[36] Clause 17.3 of the partnership deed compliments the law governing a “technical” dissolution of the partnership upon the resignation of a partner. Thus, upon the resignation of Mr Reardon in late 2010, the partnership was technically dissolved, but continued as the reconstituted partnership as between Dr Saha and the second to eighth defendants (inclusive). Upon the technical dissolution of the partnership, the partnership’s assets transferred to the reconstituted partnership. This state of affairs did not, however, affect the right of a retired partner to payment of his or her share of the partnership as at the date of resignation and to have access to documents to enable him or her to determine their entitlement. Any payout due to a retiring partner as at the date of his or her resignation would be a debt accruing at the
date of the technical dissolution.14 Any entitlement of a retiring partner to payment
of his or her share of the partnership should, however, not be conflated with the retiring partner having control over the assets of the partnership from the date of his or her resignation. The retiring partner no longer has any control over the partnership property, save to the limited extent that they implicitly retain control in order to satisfy the terms of their resignation.
[37] The settlement principles agreed to on 22 November 2010 were designed to record agreement as to the winding-up of the partnership. The settlement principles
11 Lindley & Banks on Partnership, above n 6, at [24-02] (footnotes omitted).
12 Rushton (Qld) Pty Ltd v Rushton (NSW) Pty Ltd [2003] QCA 210, (2003) 1 Qd R 320 at [9].
13 See also Fazio v Fazio, above n 7, at [65].
14 Partnership Act 1908, s 46.
were also negotiated in anticipation of amongst other matters, the “Transaction
Deloittes sale … effective 1 December 2010”.15
[38] Clause 13 of the settlement principles stated:
The partnership winding-up activities shall continue with [Dr Saha] managing the run out period and paid in accordance with part time attendances …
The same clause provided that Dr Saha’s remuneration would cease no later than 31
March 2011.
[39] Thus, as at 22 November 2010 it was anticipated that on 1 December 2010: (1) The partnership would commence being wound up.
(2) Part of the partnership business would be sold to Deloitte.
(3)Messrs Houghton, Arbuckle, Morison, Pead and Padisetti would resign from the partnership.
(4)Dr Saha would remain as a partner of the partnership to attend to the winding-up of the partnership and would be paid for this, but not beyond 31 March 2011. It also appears Mr Frost was to remain as a partner of the partnership after 1 December 2010.
[40] On 1 December 2010, and in accordance with the settlement principles, Messrs Arbuckle, Houghton, Morison, Pead and Padisetti resigned as partners of the partnership. This left Dr Saha and Mr Frost as partners of the reconstituted partnership, albeit one that was in the process of being wound up.
[41] The “partnership exit agreements” signed on 1 December 2010 recorded that
each retiring partner resigned from the partnership and acknowledged “that the
partnership is in the process of being wound up”.16
15 Settlement principles, cl 12.
16 Partnership exit agreement, 1 December 2010, cl 2.1.
[42] Also on 1 December 2010, the “Deloitte transaction agreement” was
executed which resulted in the sale of part of the partnership business to Deloitte for
$3 million. That agreement recorded that Messrs Arbuckle, Houghton and Padisetti were “ceasing to be members of [the partnership] and being released from those partnership obligations which they [were] required to be released from … in order to
… become partners of Deloitte”.17
[43] The effect of the relevant provisions of the four documents I have examined is that from 1 December 2010, Dr Saha and Mr Frost were the only partners of the partnership and it was intended by all parties that the partnership would be promptly wound up. That, however, did not happen. Dr Saha explained in an affidavit he swore on 6 December 2014 in this proceeding that the partnership was still in the process of being wound up and that winding-up could not proceed because of the impasse between the parties over, amongst other matters, the settlement of the partnership accounts and the correct meaning of the settlement principles.
[44] My analysis of the relevant documents and law leads to the conclusion that Dr Saha and Mr Frost are the parties to this litigation who are still partners of the partnership and as such they have the legal control of the property of the partnership. Retired partners do not have control of the partnership property and in particular the documents relevant to this litigation.
[45] As I have explained in Part II however, Mr Frost has been denied access to partnership property including documents relevant to the issues in this case. He has been forced to take the step of obtaining orders to compel Dr Saha to grant Mr Frost access to the documents that he is entitled to have as of right. In these circumstances it can hardly be said Mr Frost has “control” over documents that he cannot access because of Dr Saha’s conduct. As I have emphasised in Part II of this judgment, Dr Saha has control over the partnership documents, not Mr Frost.
[46] In these circumstances, I conclude that it is Dr Saha and the partnership that has control over the documents that need to be disclosed in the process of discovery
in this litigation.
17 Transaction agreement, 1 December 2010, cl 2.1.1(b).
Staged discovery
[47] Mr Barker, on behalf of the third and sixth defendants, has proposed staged discovery. I set out in the Schedule to this judgment the documents that are identified as being necessary for the staged discovery process.
[48] In view of my conclusion that the plaintiff is responsible for discovering the partnership documents, I propose to adopt the recommendations of Mr Barker in relation to staged discovery. This will mean that the plaintiff is responsible for discovering the documents which I have listed in the Schedule to this judgment.
[49] After this stage of discovery is completed, there will be a judicial settlement conference.
Conclusion
[50] Mr Frost is entitled to access to the documents that he seeks.
[51] Dr Saha and the partnership have control of the documents that are to be disclosed by the partnership.
[52] Dr Saha is to discover the documents listed in the Schedule to this judgment.
[53] Costs are reserved.
D B Collins J
Solicitors:
Morrison Kent, Auckland for Plaintiff
Macalister Mazengarb, Wellington for First Defendant Greenwood Roche Chisnall, Wellington for Second Defendant Buddle Findlay, Wellington for Third and Sixth Defendants Aspire Legal Services, Porirua for Fifth and Seventh Defendants
SCHEDULE
Categories for staged discovery
All documents falling within the following categories created during or after 1 April
2006 (ie the commencement date of FY2007):
(a) All correspondence and documents relating to Mr Cross’ paper dated
7 February 2016, whether held by Mr Saha or any partnership adviser, including copies of earlier drafts of and Mr Saha’s comments on those drafts;
(b)Any documents relating to the qualification for FY2007 and FY2008 of the leave provision;
(c) All docments relating to any costs associated with the winding-up charged to the partnership by Mr Saha or his company SIAL;
(d)Any documents relating to the activity list setting out the activities undertaken, and the time taken for each activity, that Mr Saha was required to submit under SP13 as a condition of remuneration as wind-up manager on a part-time basis up until 31 March 2011;
(e) A fully updated list of all unpaid creditors, including:
(i)A copy of the general ledger showing details of the unpaid creditors;
(ii)Where legal expenses are claimed, confirmation of which legal expenses have been incurred by Mr Saha in his capacity as wind-up manager supported by full time records from the legal advisers in question;
(iii)A breakdown of what unpaid invoices have been accounted for in which existing wind-up accounts; and
(iv) Copies of all unpaid invoices;
(f) In relation to the utilisation of tax losses, all documents relating to:
(i)Any advice from partnership advisers not disclosed to the partners; and
(ii)If any tax losses have been allocated and utilised by any partner, documents showing what allocation has been made by Mr Saha and how those tax losses have been utilised.
(g) Documents held by Mr McKechnie relating to:
(i) income allocations for partners for the years FY2007-FY2011; (ii) the decision not to consolidate the South African losses in
FY2007;
(iii) the decision not to record non-consolidation of the South
African losses in FY2008 as a note in the FY2008 accounts;
(iv) the decisions to allocate accrued income in FY2008-FY2009; (v) the decision to create a loan between SIL and SIP for interest
on capital in FY2009 and to retain a loss in SIL for that year;
and
(vi) the accounting treatment of the retained loss in SIL in the draft
FY2009 accounts and FY2010 accounts;
(h)Documents relating to the alleged agreement entered into by partners authorising Mr Saha to enter into a compromise of John Thompson’s liability to the partnership;
(i) John Thompson’s current account balances from June 2009 through
until the final payments made to him under the settlement agreement;
(j)Documents relating to any disclosure by Mr Saha to other partners, as at the time at which Saha alleges he was authorised to compromise on John Thompson’s liability to the partnership, of:
(i) The debit balance of Mr Thompson’s current account;
(ii)Any other liabilities that were likely to arise in respect of Thompson’s period of service to the partnership, in which Thompson was obliged to share, such as the write-off of the ERM success fee;
(iii)The implications for the partnership in its financial position at the time of:
(1) Waiving Thompson’s liabilities to the partnership;
(2) Paying Thompson an income for FY2010; and
(3) Repaying Thompson’s capital.
(k)Any documents relating to any disclosure to other partners of any of the matters in [1(i)] after the time at which that Saha alleges he was authorised to compromise on John Thompson’s liability to the partnership, but before the time at which Saha entered into a settlement agreement with Thompson.
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