Se Swiss Entrepreneur AG v Kiwi Deposit Building Society
[2015] NZHC 1851
•6 August 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-1320 [2015] NZHC 1851
UNDER The Judicature Act 1908 BETWEEN
SE SWISS ENTREPRENEUR AG First Plaintiff
ZHANG LOTUS LIMITED
Second Plaintiff/Counterclaim DefendantAND
KIWI DEPOSIT BUILDING SOCIETY Defendant/Counterclaim Plaintiff
SCOTT CAMPBELL MACAW AND LACHLAN JAMES WILLIAMS Third Parties
Hearing: 4 August 2015 Appearances:
D G Hurd for Plaintiffs
S O McAnally and B M Hojabri for DefendantsJudgment:
6 August 2015
JUDGMENT OF WHATA J
This judgment was delivered by Justice Whata on
6 August 2015 at 10.00 a.m. pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Dawson Harford & Partners, Auckland
Keegan Alexander, Auckland
Copy to:D G Hurd, Auckland
SE SWISS ENTREPRENEUR AG v KIWI DEPOSIT BUILDING SOCIETY [2015] NZHC 1851 [6 August
2015]
[1] The plaintiffs, SE Swiss Entrepreneur AG (SES) and Zhang Lotus Ltd (Zhang Lotus), claim, in short, that the defendant, Kiwi Deposit Building Society (KDBS), was a vehicle for the management of funds directed to them for the purchase of their shares in Newsat Ltd. They say that, in breach of its obligations as trustee and custodian of the shares, KDBS sold the shares without paying the proceeds of sale to the plaintiffs. They seek among other things an order that KDBS account to SES or Zhang Lotus for the amount of the proceeds of sale.
[2] KDBS counterclaims that one or other of the plaintiffs is liable to KDBS in respect of amounts paid by it to Zhang Lotus. KDBS also claims contractual interest at the rate of 29.5 per cent in relation to unauthorised overdraft interest on various amounts it paid to Zhang Lotusover the period 9 March 2012 to 1 March
2013.
[3] This matter is set down to commence on 31 August 2015. Evidence in chief has been exchanged, and the plaintiffs’ counterclaim and reply evidence is due shortly. KDBS now seeks leave to amend its statement of defence (and counterclaim) in two respects, namely to allege that:
(a) The terms of a loan and profit sharing agreement between SES and
Zhang Lotus do not reflect its parties’ true intention; and
(b)Zhang Lotus’ multi currency accounts should be treated separately (with interest accruing daily and separately on any debit balances) until the date of KDBS’s dissolution on 18 April 2013, at which point the balances should be consolidated and considered as a single total, in Euros.
[4] SES and Zhang Lotus contend that the proposed amendments substantially alter the basis upon which the proceeding has been framed to date and ought not to be granted.
[5] After a short adjournment I granted the application with reasons to follow. This judgment records those reasons.
Background
[6] SES is an overseas company providing asset management, investment and transaction advice. It is wholly owned by Christoph Dietsche. Zhang Lotus is an overseas company and provides intermediary services to businesses. KDBS was, until 18 April 2013, incorporated as a building society under the Building Societies Act 1965. It provided financial and banking services, including trustee and custodian services to investors.
The Statement of Claim
[7] The plaintiffs claim that in March 2012 Zhang Lotus became a client of KDBS and transacted with KDBS as a depositor, borrower and investor. They say that Zhang held various accounts, including both “on balance sheet” accounts and “off balance sheet” accounts, with KDBS.1 As currently pleaded, KDBS accepts that various transactions were executed on Zhang Lotus’ multi currency accounts, but otherwise denies the claim.
[8] The plaintiffs also allege that (in short):
(a) Zhang Lotus and Christoph Dietsche (through a trust structure called Belver International (Belver) agreed to participate in collaboration in an equity raising for Newsat Ltd (Newsat).
(b) KDBS acquired the Newsat shares on behalf of Zhang Lotus and
Belver acquired Newsat shares through an account it had with Baillieu
Holst Ltd (Baillieu).
1 “On balance sheet” is particularised as those assets held by KDBS on its balance sheet and form part of KDBS’s asset base and include assets or funds held in accounts such as current accounts and term deposits. “Off balance sheet” is pleaded to refer to those assets held by KDBS as custodian and trustee for its clients. So KDBS’s off balance sheet assets are not recorded on its balance sheet, do not form part of KDBS’s asset base and include assets or funds held in accounts such as segregated deposits, custody accounts and trust accounts.
(c) KDBS held the shares on trust and in an off balance sheet account for Zhang Lotus. The shares were subsequently sold by KDBS and the proceeds credited to Zhang Lotus’ account with KDBS.
(d)On or about 25 February 2013, SES became a client of KDBS by engaging KDBS to provide “off balance sheet” services, so as to acquire and to hold through KDBS’s account with Macquarie Private Wealth New Zealand (Macquarie) shares acquired on behalf SES. This is particularised to refer to the following:
(i) KDBS’s engagement by SES arose following SES’s entry into the loan and profit sharing agreement described in paragraphs 20 and 21 below with KDBS’s existing client Zhang Lotus,
(ii) In accordance with its engagement, KDBS acquired and held on SES’s behalf, through KDBS account with Macquarie, the 2013 Newsat shares as detailed in paragraphs 28 and 29 below.
[9] Paragraphs 20 and 21 of the statement of claim then read:
20. On or about 25 February 2013, Zhang Lotus and SES orally agreed the terms of a profit and loan sharing arrangement in connection with the
2013 Newsat capital raising. Under that arrangement:
(a) Zhang Lotus loaned AUD$1,728,000 (“the ZL Loan”) to SES to enable SES to purchase shares (4,320,000 shares at $0.40 per share) as part of the 2013 Newsat capital raising;
(b) The ZL Loan was to be transferred directly into an account designated by KDBS to enable SES, through KDBS, to purchase the said Newsat shares;
(c) SES was to pay Zhang Lotus 2% interest per annum on the ZL Loan plus a 90% profit share in respect of any net profits relating to the security trading activities conducted by SES; and
(d) In line with SES’s activities and expertise, SES was to manage the Newsat investment and any subsequent investment of the sale proceeds of the Newsat investment or of any part of that investment.
21. The Loan and Profit Sharing Agreement subsequently signed by the parties, and with an effective date of 25 February 2013, formally documented the agreement between Zhang Lotus and SES detailed in paragraph 20 above.
[10] The plaintiffs’ narrative of events then describes the acquisition of the Newsat shares and the various funding arrangements and steps taken to give effect to their purchase. This is said to have culminated in Zhang Lotus transferring AUD$2,199,972.33 from its bank account to HSBC in Hong Kong to KDBS’s account with Baillieu.
[11] The plaintiffs then say that KDBS (as custodian) held the acquired shares off balance in various segregated sub-accounts with Macquarie which were partially sold by KDBS, leaving a balance from the Newsat share sale proceeds of AUD$192,500. KDBS was put into dissolution by its members on 18 April 2013. The plaintiffs claim that at that time KDBS held as custodian for SES:
(a) 3,478,489 Newsat shares; and
(b) A substantial amount of Commonwealth Bank of Australia bonds.
[12] They also claim that without SES’s authority KDBS sold the remaining
Newsat shares for $1,695,386.52 together with the CBA bonds for $195,936.39. [13] The plaintiffs seek declarations that:
(a) The remaining Newsat shares and CBA bonds were held by KDBS as trustee and custodian for SES; and
(b) The Newsat proceeds are held by KDBS as trustee and custodian for
SES.
[14] Orders are also sought requiring, in effect, that KDBS account for the proceeds. An alternative cause of action is made on the basis that the shares were held by KDBS on behalf of Zhang Lotus, with similar relief sought.
KDBS counterclaim
[15] In addition to denying the substance of the plaintiffs’ claim, KDBS, on the
current pleadings, pleads affirmative defences, including equitable set off, breach
of contract, and money had and received. In short, KDBS claims that any proceeds of the sale of Newsat Ltd’s shares or CBA bonds should be reduced or offset by the amount of principal ($1,206,873.15) plus interest to 1 November 2014 of
€827,993.26. KDBS claims that it paid to the second plaintiff the equivalent of
€1,206,873.15 in excess of any funds deposited by it with KDBS. It also says that interest at the rate of 29.5 per cent per annum should be paid. In terms of breach of contract, KDBS claims that Zhang Lotus drew more on its accounts than it deposited, such that amounts were due and owing on specified dates in the period March 2012 to March 2013. This culminates in the following pleading:
As at 1 July 2014 the unauthorised overdraft interest on the amounts owing to the defendant, from time to time and as pleaded at paragraph 58 above, totals €827,993.26.
[16] There is then the alternative claim, namely that the funds drawn by Zhang Lotus on its accounts were in excess of those deposited by it as money had and received, and is owing to KDBS.
The plaintiffs’ reply
[17] In the presently relevant parts of the plaintiff reply, the plaintiffs admit that:
(a) From time to time in the period 9 March 2012 and 18 April 2013, their accounts with KDBS were in deficit; and
(b)The deficit balances set out at subparagraphs 58(a)-(g) correctly reflect the deficit balances as at the dates to which they respectively refer. They also plead that as at 1 March 2013, the plaintiffs’ accounts with KDBS were in deficit of €132,539.48 and as at 1 April 2013, in surplus of €90,809. The plaintiffs say that allowing for an interest rate of five per cent per annum on the debit balances from time to time in the second plaintiff’s accounts with KDBS but otherwise calculating the balances from time to time on the net balances, KDBS were in credit as at the date of KDBS’s dissolution by $90,089.
[18] In terms of the further basis for counterclaim the plaintiffs say that the relevant accounts were either in surplus of €90,809 or a deficit of €132,620 and that any overdrafts were not unauthorised and as a result interest was payable on any such debit balance at an authorised overdraft rate.
[19] The plaintiffs also challenge, in a detailed way, the specific accounting method adopted in terms of the relevant inputs.
The amendments sought
[20] In substance the defendants seek to belatedly plead that:
(a) The terms of a loan and profit sharing agreement between SES and
Zhang Lotus do not reflect the true intention of the parties to it; and
(b)
Zhang Lotus’ multi currency accounts should be treated separately
(with interest accruing daily on any debit balances) until the date of
KDBS’s dissolution on 18 April 2013, at which point the balances
should be consolidated into a single total in Euros. [21]
Mr
McAnally explained in oral argument that the first amendment
particularised a bare denial and simply foreshadows that the defendants will be challenging the Loan Agreement as a sham. The significance of this is that, if correct, SES will not have a proper basis for a direct claim to the proceeds of sale.
[22] Mr McAnally accepted that the second amendment is a substantial change insofar as SES now asserts it was previously wrong to calculate the amount owing to Zhang Lotus on a combined accounts (net sum) basis, with positive and negative balances offset on an ongoing basis over time to arrive at a regularly updated net euro balance. Rather, KDBS wishes to plead that the amount owing to Zhang Lotus should be calculated on the basis that Zhang’s four separate accounts must be separately reported until KDBS’ dissolution. The effect of this is that the amount of interest owing on the accounts with a negative balance continued to accumulate through to dissolution, with result that the amount of interest owing to KDBS increased by about €700000 to €1,000,000.
Threshold test
[23] There is common ground that the threshold test for amended pleadings remains as stated in Elders Pastoral Ltd v Marr, namely that an applicant must show that the amendment is in the interests of justice, will not significantly prejudice the respondent and will not cause a significant delay. 2 I am also assisted by authority cited by the plaintiffs, namely Aon Risk Services Australia Ltd (AON) v Australian National University (ANU).3 In that case, the High Court of Australia allowed an appeal, ruling that leave ought not to have been granted to amend pleadings in that case. The majority held that:4
An application for leave to amend a pleading should not be approached on the basis that a party is entitled to raise an arguable claim, subject to payment of costs by way of compensation. There is no such entitlement. All matters relevant to the exercise of the power to permit amendments should be weighed. The fact of substantial delay and wasted costs, the concerns of case management, will assume an importance on an application for leave to amend.
Assessment
Findings
[24] I am grateful for the helpful and thorough submissions of Counsel. The succinctness of my response should not be seen as in any way indicating a criticism of their argument.
[25] I accept Mr Hurd’s submission for the plaintiffs that:
(a) The amendments signal a very substantial change in the defence very late in the lead up to trial – the contractual basis for SES claim is now challenged and the entire method for calculating the interest owing has fundamentally changed.
(b)The plaintiffs, if forced to address the amended pleading, will be put to considerable inconvenience and additional cost, including further
2 Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383.
3 Aon Risk Services Australia Ltd (AON) v Australian National University (ANU) [2009] HCA 27.
4 At [111].
pleadings, additional discovery and new evidence, including from experts;
(c) The extent of the inconvenience is especially aggravated given that the key deponents for the plaintiffs and the third parties are resident overseas.
[26] However, I consider that the allegations made in the amended pleadings are meritorious enough that I am justified in allowing them to go to trial. I deal first with the allegation that the Loan and Profit Agreement is a sham. This is a matter for evidence and evaluation, and if it is a sham, then the defendants will have a good basis for contending that SES’ direct claim to the proceeds is flawed. Putting aside the lateness of the pleading, the substance of the allegation passes the
orthodox tests for strike out and summary judgment.5
[27] In fairness to Mr Hurd, and his understandably confused client, Mr Dietsche the basis upon which KDBS was seeking to challenge the agreement did not become clear until argument.
[28] As to the second amendment, the new claim by KDBS is problematic, not least because the trustees previously assumed that the proper basis for calculating the principal and interest amounts owing was to take a combined net sum approach rather than a disaggregated accounts approach. I also acknowledge the affidavit evidence from Mr McCaw (a Zhang Lotus representative, third party and KDBS’s chairman until its dissolution) and Mr Williams (managing director of KDBS at the relevant time), that Zhang Lotus took no active steps to apply incoming AUD proceeds to the Euro account given, and in reliance on, the combined approach to the management of Zhang Lotus’s accounts. This aligns also with KDBS’s internal reporting practice, namely to report a net Euro position on a regular basis. Taken together, there is some force to Mr Hurd’s argument that KDBS should not be allowed to resile from the approach taken prior to and confirmed by KDBS at the
time of dissolution.
5 See Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at
313-314; Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].
[29] But the method of calculating interest now proposed by KDBS is supported by KDBS’s online reporting to its clients, including Zhang Lotus, that is by reference to separate accounts. I also understand that expert evidence will be given to support the basic proposition that financial institutions such as banks ordinarily account to their clients on a disaggregated accounts basis. So it cannot be said with surety that the claim, (though apparently weak), is without merit.
[30] I am also not satisfied that the manner in which the claim was pleaded amounted to election estoppel requiring the defendant to seek interest only in the manner specified. The central issue in dispute was whether interest should be paid. That has not changed. While the pleading currently assumes the combined net sum method of calculating the interest owing, I do not consider that it amounts to conduct inducing the plaintiffs to definitely believe that there was no other basis for
quantifying the interest owing.6
[31] I now turn to examine the threshold issues in light of these findings.
Interests of justice
[32] The significant inconvenience caused to the Plaintiffs by the belated amendments is a significant factor to be weighed. But I am satisfied that the amended pleadings are necessary for the purpose of determining the real controversy between the parties and that it would be unjust to deprive the defendant of the opportunity to ventilate the two matters they now seek to raise. I do not need to dwell on the first amendment; Mr Hurd quite properly indicated that the plaintiff should be able to deal with it on the merits at the scheduled hearing date.
[33] In relation to the second amendment, as the plaintiffs say, it is a “u turn”. But it is not a fresh cause of action. Rather, it is an allegation going to quantum of the interest alleged to be owing. Instead of pleading interest based on a combined net sum approach, interest is now claimed on a disaggregated account approach. Furthermore, the expert evidence dealing with the practice of financial institutions
like KDBS and the arithmetic accounting side of the evidence should be relatively
6 See Shanton Apparel Ltd v Thornton Hall Manufacturing Ltd [1989] 3 NZLR 304 (CA).
straightforward and a matter upon which the Court might expect expert agreement. The evidence dealing with the understanding of the parties as to the basis for any interest calculation, while not straightforward, should not be unduly burdensome on the plaintiffs, given that it appears from the affidavit evidence that the key actors are already involved in the litigation and dispute the interest liability. In this context, it would be unfair to deprive the defendant of the opportunity to re-plead, provided that the plaintiffs were not unduly prejudiced in terms of the timing of the trial.
Delay and Prejudice
[34] On the issue of timing to trial, I share Mr Hurd’s disquiet about the delay in raising the material asserted by the amended pleading. It appears at first blush that the defendant already had some inkling that the method of calculating interest might be wrong or need to be revisited when it briefed its expert. But I am prepared to accept Mr McAnally’s advice that the methodological change emerged from the defendant’s expert in response to a general brief to identify what a bank would do in the same context. I am therefore satisfied that the delay was not a tactical one.
[35] It also appears that the plaintiffs may be able to accommodate the change in the pleadings within the time to the commencement date, though not without some considerable difficulty and added cost. I am grateful to Mr Hurd for this forthright indication and his active management of the preparation, including briefing of an expert to assist on the new allegations.
[36] In any event, I do not think that the prejudice occasioned by an adjournment of the proceedings, if required, is sufficient to outweigh the significant private and public interest in having complex commercial proceedings for substantial sums ventilated by reference to the real issues in dispute. It also has to be borne in mind that the amendments were flagged two months out from the trial.
Result
[37] I have come to the view therefore that the amendments should be allowed on the following basis:
(a) The plaintiffs shall have until 5.00 pm 14 August in which to elect whether to proceed to hearing on 31 August 2015;
(b)If the plaintiffs elect not to proceed, a further hearing date will be set down on the first available date acceptable to the parties – this will include the associated proceedings, which will need to be adjourned in the meantime;
(c) If the plaintiffs elect to proceed, then a further conference shall be convened under urgency to confirm a timetable for final preparation to the hearing; and
(d)The plaintiffs must be entitled to their costs including arising from this application and any consequential costs. If they cannot be agreed, the parties may file submissions as to costs arising from the amendments to the pleadings.
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