Slavich v Hughes
[2012] NZHC 3117
•22 November 2012
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2011-019-1186 [2012] NZHC 3117
BETWEEN JOHN KENNETH SLAVICH AND ANTHONY NICHOLAS SLAVICH AS TRUSTEES OF THE KAS FAMILY TRUST
Plaintiffs
ANDCHRISTOPHER JOHN HUGHES Defendant
Hearing: 16 November 2012
Counsel: AJ Nolan for plaintiffs
R Scott for defendant
Judgment: 22 November 2012
JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for summary judgment]
Solicitors: AJ Nolan, PO Box 1268, Hamilton
McElroys, PO Box 835, Auckland 1140
JK SLAVICH AND AN SLAVICH AS TRUSTEES OF THE KAS FAMILY TRUST V HUGHES HC HAM CIV-2011-019-1186 [22 November 2012]
The applications
[1] The defendant applies for an order granting summary judgment against the
plaintiffs in respect of the plaintiffs’ amended statement of claim dated 6 March
2012.
[2] The defendant, in the alternative, applies for an order requiring that the plaintiffs give security for costs in an amount to be fixed by the Court and for a consequential order staying the proceedings until security is given.
The pleadings
[3] The amended statement of claim was drawn by the first-named plaintiff. It is a prolix document. Mr Nolan, who has now been instructed as counsel for the plaintiffs, advised me that I should proceed on the basis that there are two causes of action pleaded in the amended statement of claim. They are that:
(a) The defendant is in breach of a fiduciary duty owed to the plaintiffs arising out of documents created for the purpose of inviting a further share purchase by the plaintiffs in Pacer Print Group Limited, a company in which the plaintiffs held 25 per cent of the shareholding at the time the documents were issued; and
(b) The same circumstances give rise to breach of s 9 of the Fair Trading
Act 1986.
The grounds in support of the application
[4] The defendant asserts that:
(a) The circumstances do not give rise to any fiduciary duty or obligation owed by the defendant to the plaintiffs; and
(b)The defendant has made no representation to the plaintiffs. Therefore it is asserted that no circumstances exist which might ground a claim pursuant to s 9 of the Fair Trading Act 1986. In addition, the defendant says that even if such a claim existed it is now statute- barred by the operation of s 43 of the Fair Trading Act 1986.
The Court’s approach to a defendant’s summary judgment application
[5] Rule 12.2(2) of the High Court Rules requires that the defendant satisfy the court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[6] In Westpac Banking Corp v MM Kembla (New Zealand) Ltd the Court of Appeal noted the following when dealing with r 136(2), the predecessor of r 12.2(2):1
[58] The applications for summary judgment were made under R 136(2) of the High Court Rules which permits the Court to give judgment against the plaintiff “if the defendant satisfies the Court that none of the causes of action in the plaintiff's statement of claim can succeed”.
[59] Since R 136(2) permits summary judgment only where a defendant satisfies the Court that the plaintiff cannot succeed on any of its causes of action, the procedure is not directly equivalent to the plaintiff's summary judgment provided by R 136(1). …
[60] Where a claim is untenable on the pleadings as a matter of law, it will not usually be necessary to have recourse to the summary judgment procedure because a defendant can apply to strike out the claim under R 186. Rather R 136(2) permits a defendant who has a clear answer to the plaintiff which cannot be contradicted to put up the evidence which constitutes the answer so that the proceedings can be summarily dismissed. The difference between an application to strike out the claim and summary judgment is that strike-out is usually determined on the pleadings alone whereas summary judgment requires evidence. Summary judgment is a judgment between the parties on the dispute which operates as issue estoppel, whereas if a pleading is struck out as untenable as a matter of law the plaintiff is not precluded from bringing a further properly constituted claim.
[61] The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually summary
1 Westpac Banking Corp v MM Kembla (New Zealand) Ltd [2001] 2 NZLR 298 (CA).
judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff's claim. Examples, cited in McGechan on Procedure at HR 136.09A, are where the wrong party has proceeded or where the claim is clearly met by qualified privilege.
[62] Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose the facts and the legal issues. Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear (Pemberton v Chappell [1987] 1 NZLR 1), novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective.
[63] Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff's claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff's case prematurely before completion of discovery or other interlocutory steps and before the plaintiff's evidence can reasonably be assembled.
[64] The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.
[7] These passages were approved by the Privy Council in Jones v Attorney- General.2
The background facts
[8] The plaintiff trust was settled on 14 June 1996. The trust through its trustees at the time, Mr JK Slavich and Mr P Lang, a solicitor, acquired 30,000 shares in
2 Jones v Attorney-General [2004] 1 NZLR 433 (PC) at [5].
Pacesetterr Print Group Ltd (“the company”). That represented a 25 per cent
shareholding in the company.
[9] In September 2005 the shareholding in the company was:
Shareholder Percentage Number
John Kenneth Slavich and Phillip Munro
Lang 25 30,000
John Rhodes Maurd 25 30,000
Brett Baird and Teresa Baird 25 30,000
Dean Barry Cuff – group 25 30,000
[10] The plaintiff trust had no direct representation on the board of the company in September 2005. The affidavits record that persons who have acted as trustees for the plaintiff trust from time to time did not trust the board of directors of the company. The other three groups of shareholders were, however, represented on the board of directors.
[11] In early 2005 the board of the company became concerned about its financial status and the management of the company. It hired the chartered accountancy company Staples Rodway Waikato Ltd (“Staples Rodway”) to carry out a review and to determine an accurate view of the company’s financial position.
[12] The defendant is a director of Staples Rodway and is a chartered accountant. He produced a letter of engagement. The letter contained the following:
We confirm your instruction to provide financial accounting assistance and undertake a business appraisal of Pacesetter Print Group Limited (“PPGL”) and report to the directors in accordance with the objectives of this assignment.
Scope of the Engagement
As requested, our assistance will focus on the following issues:
Assess the financial position of PPGL as of 28 February 2005 and establish the future financial viability of PPGL.
Assess PPGL’s systems and processes.
Review and update the budgets prepared by PPGL through to 31
March 2006.
Implement accurate management reporting and ensure this is provided on a timely basis.
Review and recommend appropriate funding for PPGL and any other matters which we consider relevant to provide a secure financial base suitable for business continuity of PPGL.
In carrying out this engagement we will make recommendations to you as the Directors. However we will have no authority to direct the company’s management or its Directors, and all responsibility for implementation of any of our recommendations will remain with you as the Directors.
[13] Discussions ensued over the several months that followed. A number of options were considered. A report, which is central to the issue raised in this proceeding, was forwarded by the defendant to the directors of the company on
27 June 2005. In that report the following points were made:
(a) Under the heading “Shareholders’ equity” the level of equity and existing funding when combined with the historical trading position is unsustainable.
(b)Under the heading “Capital expenditure” there had been an excess in capital expenditure for the year of $905,511 which had been unbudgeted for.
(c) Under the heading “Prudential ratios” the report concluded that the company was significantly undercapitalised. It calculated that the minimum new equity required was $600,000 and that ideally that would be provided by existing shareholders. It noted that that apparently was beyond the resources of the current shareholders.
(d)Under the heading “Future projections” it noted that, if the directors could not see the potential to trade the company into a solvent position and be able to repay the considerable borrowings that had already been committed, they could not recommend continuing to trade the company.
(e) Under the heading “Conclusion” it recorded:
We believe PPGL is technically insolvent. This view is based on the assumption that the assets, particularly fixed assets, are unlikely to realise book value, and a continuation of trading for an extended period of time without generating trading profits, would place the directors in an invidious position, and in all likelihood, subject to a personal claim by a liquidator should this appointment be necessary.
(f) Under the heading “Recommendation”
PPGL shareholders introduce more equity into the business as recommended above, or seek the introduction of new investors to provide this equity.
Depending on your decision, a compromise with creditors, combined with new equity would preserve a greater percentage share of PPGL for existing shareholders, but carries greater risk on a performance basis. If existing shareholders are unable to contribute a minimum of $300,000, then it will be necessary for external shareholders to be introduced to PPGL.
We cannot recommend this action while Mr Slavich is threatening legal action against the PPGL and the directors. This issue could become a major distraction for management and existing shareholders, and should therefore be resolved as quickly as possible.
[14] The directors decided that one of the steps that they would take to improve the company’s financial position would be to obtain further capital from shareholders by way of a share issue. The directors also sought further bank funding. Mr Hughes says that because of the urgent need for funding in early August 2005 two shareholder groups – those of Mr Baird and Mr Cuff – put in $100,000 each as loans on the understanding that they would be converted to capital when the new shares were issued.
[15] The payments were documented in deeds of agreement dated 31 August
2005. The funds were to be used towards outstanding creditor payments.
[16] On 15 September 2005 the BNZ made a loan offer to the company. It included a debt finance facility. The objective of the refinancing was to retire existing debt and replace it with a consolidated advance on more competitive terms. The bank required an increase in shareholder equity and guarantees from Mr Maurd, Mr Cuff and Mr Baird.
[17] On 27 September 2005 copies of the documents were sent to the first-named plaintiff, Mr Slavich, from which it was clear that the Board intended to accept the loan offer. Those documents included the resolution to accept the Bank’s offer of finance.
[18] The next development occurred with the Board instructing Staples Rodway to provide a valuation calculation in relation to the shares in the company. Staples Rodway was also required to comment on whether the issuing of further shares for a consideration of between 25 cents and 50 cents would be fair and reasonable to the company and to all existing shareholders. Staples Rodway accepted the brief and another director, Mr Peter Bridges, prepared a valuation dated 21 September 2005. His report in summary provided as follows:
(a) The company had been making losses and its financial position as at
30 June 2005 was very weak;
(b)A significant injection of further funds was necessary to enable creditors to be paid;
(c) If the creditors were not paid, liquidation was a distinct possibility;
(d)The appropriate method of valuation of the company was a notional liquidation basis;
(e) There was a deficiency in equity of $937,411;
(f) The shares in Pacesetter had no value as at the valuation date;
(g)In the circumstances, he believed it would be fair and reasonable to the company, and all existing shareholders to issue further shares at a price between 25 cents and 50 cents per share.
[19] Neither Mr Hughes nor Staples Rodway had any contact with the plaintiff trustees.
[20] The next development occurred when the company’s solicitors prepared a document which is entitled “Summary of financial position of Pacesetter Print Group Ltd by the board of directors and proposal to shareholders” together with a document which is entitled “Shareholders’ resolution in lieu of meeting pursuant to s 122 of the Companies Act 1993”. That last document was signed by the three shareholders who were directly represented on the board of directors of the company.
[21] The summary of financial position documents makes mention of the following:
(a) That Staples Rodway had been hired to carry out a review to determine an accurate view of the company’s financial position;
(b)Staples Rodway had reported to the Board that the company was technically insolvent;
(c) Discussions had been undertaken covering options including borrowing (which was not a viable option), outside investment, further shareholder contributions and other options;
(d)The Board proposed to raise $400,000 by way of share issue, with the shares first being offered to existing shareholders. It said that these funds would be used to make payments to outstanding creditors;
(e) The Board proposed to make an arrangement with the company’s bank with regard to the company’s debtors to assist with further creditor payment and cashflow;
(f) Staples Rodway had advised that in its opinion the company’s net
worth was nil.
[22] The same document recorded that the directors had resolved, subject to shareholder approval by special resolution, that:
(a) $400,000 would be raised by the company issuing one million ordinary shares at 40c per share;
(b)The shares would first be offered to all existing shareholders in accordance with the company’s constitution;
(c) The shareholders would have ten days from the posting of the offer in which to take up and pay for the shares they elected to receive; and
(d)In the directors’ opinion the consideration for, and the terms of issue of, the shares were fair and reasonable to the company and to all existing shareholders.
[23] The trustees of the plaintiff at the time received the two documents and a
covering letter from the company’s solicitors on 5 October 2005.
[24] The trustees instructed the legal firm, Stace Hammond, to represent them. On 19 October 2005 Stace Hammond wrote to the company’s solicitors, Harkness Henry, setting out a number of questions relating to the company’s finances and the share offer. The letter sought an extension of time. Harkness Henry wrote back advising that the extension was refused. The letter also referred to the fact that the requested information would be unlikely to be available by the deadline for acceptance of the offer, which was 21 October 2005. On 21 October 2005 the trustees subscribed to the share offer and paid by bank cheque.
[25] The plaintiffs discovered subsequently that the share offer to the three other shareholders was funded by them from moneys that they, or companies associated with them, had earlier advanced to the company. The result was that no new capital other than that paid by the plaintiffs was in fact introduced. In short, the debt owed to the interests of the other three shareholders representing the amount of funds required for the shares to be acquired was simply retired or discharged.
The plaintiffs’ claim
[26] The plaintiffs complain that the share offer and valuation omitted material information and included false statements. They say they should have been told:
(a) How other shareholders would be paying for the shares; (b) Whether the funds raised would be used to pay creditors;
(c) What the company’s likely level of solvency after the share issue
would be; and
(d) What the precise bank funding arrangements would be.
[27] The plaintiffs say that had they had this information they would have been in a position to gain control of the company, inject sufficient cash to pay creditors and block the sale of the company’s assets in 2006.
[28] Mr Nolan, for the plaintiffs, submitted that the defendant was under a fiduciary duty to provide this information. Alternatively, the plaintiffs claim that the failure to provide the information is misleading and deceptive conduct and is in breach of s 9 of the Fair Trading Act 1986.
Analysis – the fiduciary duty cause of action
[29] I deal firstly with the cause of action alleging breach of fiduciary duty.
[30] The plaintiffs’ claim is that a chartered accountant (assuming for the moment that nothing turns on the fact that it was the company, not Mr Hughes, who undertook the work) who was instructed by the board of directors owed a fiduciary duty to a shareholder in relation to documents prepared by or on behalf of the directors and their solicitor, inviting a purchase of new shares to be issued.
[31] Neither counsel could find a case where a fiduciary duty had been found to exist in these circumstances.
[32] This application requires me to determine whether Mr Hughes’ position and the actions or alleged failure to act on his part give rise to a fiduciary duty owed to the plaintiffs.
[33] In Chirnside v Fay when addressing the issue of whether the circumstances gave rise to a fiduciary duty the Supreme Court said:3
[73] Many cases, textbooks and articles in learned journals have considered when and against what criteria the courts will find that a relationship gives rise to fiduciary duties. In essence, there are two situations in which that will be so. In the first, the relationship is of a kind which, by its very nature, is recognised as being inherently fiduciary. Most cases involving a breach of fiduciary duty are of this kind. They fall into one of the recognised categories of relationships which are inherently fiduciary. These include the relationships of solicitor and client, trustee and beneficiary, principal and agent, and doctor and patient.4
[74] There is a strong case for saying that most joint venture relationships can properly be regarded as being inherently fiduciary because of the analogy with partnership.5 The relationship between partners is one which has traditionally been regarded as a classic example of a fiduciary relationship in that the parties owe to each other duties of loyalty and good faith; and they must, in all matters relevant to the activities of the partnership, put the interests of the partnership ahead of their own personal interests.6
[75] The second situation in which a relationship will be classed as fiduciary depends not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so classified. No single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories is such that the parties owe each other obligations of a fiduciary kind. The literature in this field is voluminous. No useful purpose would be served by an attempt at a general survey.
[76] As a convenient starting point we refer to the decision of the Privy Council in New Zealand Netherlands Society “Oranje” Inc v Kuys,7 and to the more recent decision of the Court of Appeal in Day v
3 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [73]–80].
4 Such relationships will almost always give rise to fiduciary duties on the part of the relevant party, albeit, as noted at [72] above, a breach of duty by a fiduciary is not necessarily to be regarded as a
breach of fiduciary duty: BNZ v NZ Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) at 680 and
688, Bristol v West Building Society v Mothew [1998] 1 Ch 1 at 16 per Millett LJ and Hilton v Barker Booth and Eastwood (a firm) [2005] 1 WLR 567 at [29] approving Millett LJ’s approach in Mothew.
5 See the discussion in Equity and Trusts at [14.3.6], commencing at 418.
6 See Equity and Trusts at [14.3.6], fn 444.
7 [1973] 2 NZLR 163.
Mead.8 In Kuys, Lord Wilberforce, for the Board, said that fiduciary obligations will apply:9
…whether the case is one of a trust, express or implied, of partnership, of directorship of a limited company, of principal and agent, or master and servant, but the precise scope of it must be moulded according to the nature of the relationship. As Lord Upjohn said in Boardman v Phipps:10
“Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.”
His Lordship’s reference to cases of implied trust, as well as express trust, is of significance as will appear later. It is significant also that the Board emphasised that a person in a particular relationship to another may be in a fiduciary position with regard to part of his activities but not with regard to other parts.11
[77] Day v Mead was referred to by the High Court in Estate Realties Ltd v Wignall.12 The Judge in that case observed:
The word “fiduciary” derives from the Latin word “fiducia” the primary meaning of which is trust. Important secondary meanings are confidence and reliance. The cases demonstrate that a fiduciary relationship will arise where one party is reasonably entitled to repose and does repose trust and confidence in the other, either generally or in the particular transaction: see per Casey, J in Day v Mead where His Honour said that the relationship in question in that case “generated that degree of confidence and trust which in my view justifies the intervention of equity”.
[78] The only other case which should be mentioned at this stage is the more recent decision of the Privy Council in Arklow Investments Ltd v MacLean.13 The judgment of their Lordships was delivered by Henry J. He said that the concept of a duty of loyalty:14
…encapsulates a situation where one person is in a relationship with another which gives rise to a legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in such a way which is adverse to the interests of the principal.
[79] The reference to “interests of the principal” was appropriate in the
context of that case but the concept is of general application. A little
8 [1987] 2 NZLR 443.
9 At 166.
10 [1967] 2 AC 46.
11 Also at 166.
12 [1991] 3 NZLR 482 at 492 per Tipping J.
13 [2000] 2 NZLR 1.
14 At 4.
later their Lordships described as apposite a passage from the judgment of Millett LJ in Bristol and West Building Society v Mothew.15 His Lordship had there focused on the need for the circumstances to give rise to a relationship of trust and confidence. This observation was linked with the idea that a fiduciary was someone who had undertaken to act for or on behalf of another; a point to which we will have occasion to refer again below.
[80] It is clear from the authorities that relationships which are inherently fiduciary all possess the feature which justifies the imposition of fiduciary duties in a case which falls outside the traditional categories; all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests.
[34] The circumstances of this case do not fall within the first situation referred to by Tipping J. There is no relationship that could be classified of a kind which, by its very nature, is recognised as being inherently fiduciary. That, no doubt, is the reason why counsel’s research has been unable to locate any case authority where circumstances similar to those in this case have been found to give rise to fiduciary duties. The result is that one must now examine whether the particular aspects here justify the circumstances as fiduciary, thus giving rise to fiduciary duties.
[35] When that examination is undertaken the following points emerge:
(a) Mr Hughes or, more correctly, Staples Rodway received instructions from the Board;
(b)Those instructions were to give the Board advice. The responsibility for implementing any recommendation remained at all times with the Board;
(c) Mr Hughes had no contact with the plaintiff trust or any of its trustees.
There is no suggestion that the plaintiff trust relied specifically on
Mr Hughes. In fact, the trust instructed its own solicitors to write to clarify the matters which they now complain should have been
15 [1998] Ch 1 at 18.
advised to them by Mr Hughes. The letter, however, was not addressed to Mr Hughes;
(d)Mr Hughes was not the author of the share offer and accompanying documents. The evidence is that he was provided with a draft. There is no evidence to suggest that he proposed any changes. The clear inference to be drawn is that the company’s solicitors, on the advice of the Board drew the documents and, on the instructions of the Board, then issued them to the plaintiffs;
(e) One must also look at the valuation itself. On its face, its purpose was a limited one. That was to determine for the board of directors what a fair value for the issue of further shares in the company would be and, further, whether the issuing of further shares for a consideration between 25 cents and 50 cents would be fair and reasonable to the company and/or existing shareholders;
(f) The purpose of the valuation clearly, on its face, does not give a comprehensive guide to an existing shareholder as to whether further investment in the company was justified or not. It did not cover what capital would be raised. It did not specify how potential shareholders would pay for their shares. It did not give any indication as to the company’s financial position or what its shares would be worth after the issue of the shares. It is accepted that the trustees would have expected the Board to comply with s 47 of the Companies Act 1993. This, however, does not create any obligation on Mr Hughes. The documents were not his and he was not the drafter of them;
(g)The evidence is that neither Mr Hughes nor Mr Bridges consented to the valuation being sent to the plaintiffs or were ever consulted about that. The valuation report has a disclaimer of the following form:
No responsibility whatever is accepted to persons other than the party to whom the report is addressed for any errors or omissions whether of fact or opinion.
[36] When I analyse the above I find that there is simply no basis for concluding that the trustees were reasonably entitled to repose trust and confidence in Mr Hughes for what was contained in the share offer and accompanying documents. The plaintiffs simply have not laid out a basis upon which any legitimate expectation that Mr Hughes owed them such a fiduciary duty exists. I conclude that there is no foundation for the plaintiffs’ claim that Mr Hughes owed them a fiduciary duty in relation to the share offer and accompany documents, upon which the plaintiffs acted.
The Fair Trading Act cause of action
[37] Section 9 of the Fair Trading Act 1986 provides:
9 Misleading and deceptive conduct generally
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[38] In Red Eagle Corp Ltd v Ellis the Supreme Court said: 16
The approach to be taken in a particular case will depend upon the type of situation under scrutiny; for example, whether there is a claimant alleging an injurious consequence already suffered, whether the claimant instead fears future loss for itself or others, or whether the claim is brought by the Commerce Commission or another party which is acting in the interests of those who may be affected by the defendant’s conduct.
…
It is, to begin with, necessary to decide whether the claimant has proved a breach of s 9. That section is directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances.17 Naturally that will depend upon the context, including the characteristics of the person or persons said to be affected. Conduct towards a sophisticated businessman may, for instance, be less likely to be objectively regarded as capable of misleading or deceiving such a person than similar conduct directed towards a consumer or, to take
16 Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [26] and [28].
17 It is not necessary to show that the defendant had any intention to mislead or deceive anyone:
Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978)
140 CLR 216 at 228; Neumegen v Neumegen & Co [1998] 3 NZLR 310 at 317.
an extreme case, towards an individual known by the defendant to have intellectual difficulties.18 … The question … is accordingly whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived.
[39] The plaintiffs’ complaint is essentially about lack of information in the share offer documents. I have already recorded that Mr Hughes was not the author of the valuation or the share offer. He had no communication with the trustees. I can find no reasonable basis to find that Mr Hughes made any representation to the trustees about how capital would be used, the bank funding, how shareholders would pay and about what payments would be made to creditors. There is just nothing in the material placed before the Court that supports the conclusion that Mr Hughes’ involvement was capable of misleading or deceiving a person in the position of the plaintiffs. Accordingly, I reach the conclusion that there is no reasonable cause of action available to the plaintiffs based on breach of s 9 of the Fair Trading Act 1986.
[40] The defendant also relies on the limitation provided by s 43(5) of the Fair Trading Act 1986. A claim may be made at any time within three years after the date on which the loss or damage or the likelihood of loss or damage was discovered or reasonably to have been discovered.
[41] The plaintiffs’ claim is that, in particular, Mr John Slavich did not appreciate the loss that had been sustained until he read Mr Bridges’ letters dated 15 December
2011 and 9 February 2012 which confirmed that when Mr Bridges was preparing the valuation report he was unaware of the manner in which the directors paid for their shares.
[42] That position, however, is irreconcilable with the fact that Mr Slavich took proceedings in 2006 in relation to the issuing of shares following the share offer.
18 The position may be different where the conduct is directed towards a wide section of the community, as in an advertisement. In a well-known passage in Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at 202, Deane and Fitzgerald JJ said that in such a case the matter is to be considered by reference to all who come within the section “including the astute and the gullible, the intelligent and the not so intelligent, the well educated as well as the poorly educated, men and women of various ages pursuing a variety of vocations”. But in such cases the test has also been said to be not the effect on a person who is quite unusually stupid: Annand Thompson Pty Ltd v TPC (1979) 40 FLR 165 at 176.
Mr Slavich alleged that as a result of the way in which the share offer was made and accepted the plaintiff trust became the only shareholders to have subscribed for the new shares. It was argued on his behalf that he and his co-trustee held a 75 per cent stake in the company. That contention was disputed by the remaining shareholders. The proceeding was issued to determine that point of difference between the shareholders. Heath J, in an oral judgment delivered on 6 April 2006, declined an
application for an interim injunction sought by Mr Slavich.19 What that case
indicates is that Mr Slavich was aware of the alleged issues relating to consideration for the shares. It is clear that he was aware that he had lost the opportunity to purchase the shares of the other shareholders.
[43] Ms Scott, however, drew attention to a further case, Slavich v Pacesetter Print Group (2004) Ltd, which was an application for an order for particular discovery.20 The documents considered in that case would indicate that if there was damage or loss suffered as a result of the 2005 share transaction, the plaintiff trustees became aware of it on or before the hearing of the application for particular discovery on 5 March 2007. This proceeding was not issued until 20 September
2011. If I accept Ms Scott’s submission that the knowledge which is relevant for the purposes of s 43 is that of the plaintiffs and not, as was suggested on the plaintiffs’ behalf, of what Mr Bridges knew when he was preparing his valuation this cause of action is barred. I conclude, therefore, that the defendant has a defence to the Fair Trading Act 1986 cause of action pursuant to s 43(5) and that the circumstances would justify the dismissal of that cause of action on the basis that it is an abuse of process because of the existing limitation defence. Strictly speaking, a final ruling is not required having regard to my conclusion in relation to the Fair Trading Act 1986 cause of action analysed earlier in this judgment.
Other possible causes of action
[44] Mr Nolan raised the possibility that a cause of action might be able to be pleaded in deceit. No draft statement of claim was provided to me. If I had thought
19 Slavich v Pacesetter Print Group Ltd HC Hamilton CIV-2006-419-318, 6 April 2006.
20 Slavich v Pacesetter Print Group (2004) Ltd HC Hamilton CIV-2006-419-318, 11 April 2007.
that a cause of action in deceit was a possibility I would have required same and adjourned the application so that it could be analysed.
[45] In Amaltal Corp Ltd v Maruha Corp Ltd the Court of Appeal said:21
The tort of deceit is summarised in Clerk & Lindsell on Torts
(18th ed, 2000), para [15-01] in these terms:
“The tort involves a false representation made by the defendant, who knows it to be untrue, or who has no belief in its truth, or who is reckless as to its truth. If the defendant intended that the claimant should act in reliance on such a representation and the claimant in fact does so, the defendant will be liable in deceit for the damage caused.”
The misrepresentation which is relied on to found an action of deceit must be a representation as to a past or existing fact. It may be either express or implied from conduct. In most instances, non-disclosure of the truth does not ground the tort; “mere silence, however morally wrong, will not support an action for deceit”.
[46] The plaintiffs’ case is based on a failure to disclose information to Mr Bridges so that it could be included in his report. It is difficult to see, having regard to the facts that are disclosed in this case, how there could be an actual representation that might found a cause in deceit. I conclude that there is no foundation and accordingly there is no justification for refusing summary judgment in favour of the defendant on this possible ground.
Deemed director
[47] Mr Nolan submitted that the defendant’s position was that of a deemed director or a de facto director of the company. On that basis he submitted he would owe the fiduciary duties that attached to directors.
[48] I dismiss this submission because there is simply no foundation in the evidence for it. The letter of instruction makes it plain that no role akin to that of a director was assumed or undertaken by Mr Hughes. There is no evidence that he had actual control of the company, or that his vote at a meeting of the directors was ever taken. In short, I conclude that there is no foundation for this proposition.
[49] I have not specifically discussed the position as to whether Mr Hughes had any personal involvement as opposed to his involvement as a director of Staples Rodway. Certainly, if the matter had to be considered from the perspective of a cause of action in tort, decisions such as Trevor Ivory Ltd v Anderson would need to be considered.22 On the conclusions that I have reached, and particularly as counsel did not raise argument about the matter, I address it no further in this judgment.
Security for costs
[50] Although it is unnecessary to determine this application in view of my conclusions on the summary judgment application, in case I am proved to be incorrect in relation to the summary judgment application I set out my conclusions to security for costs.
[51] The defendant applies for an order that the plaintiffs give security for costs and an order that until such security is paid the proceeding be stayed. Counsel for the defendant has calculated security for costs having regard to Category 2 Band B according to the following table:
Description Time (Days) $ Amount
Commencement of defence (receiving instructions, research, preparing, filing and serving statement of defence)
3,980.00
Filing memoranda for case management conferences or mentions hearings
0.4 (x4) 3,184.00
Appearance at case management conferences
0.3 (x4) 2,388.00
List of documents on discovery 2.5 4,975.00
Inspection of documents 1.5 2,985.00
Preparation for hearing 8 15,920.00
Appearance at hearing 4 7,960.00
Total $41,392.00
The Court’s approach to security for costs applications
[52] The application is made in reliance on r 5.45 of the High Court Rules. The relevant parts of that rule for the purposes of this application are as follows:
5.45 Order for security of costs
(1) Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—
…
(b) that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.
(2) A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
(3) An order under subclause (2)—
(a) requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—
(i) by paying that sum into court; or
(ii) by giving, to the satisfaction of the Judge or the
Registrar, security for that sum; and
(b) may stay the proceeding until the sum is paid or the security given.
[53] In AS McLachlan Ltd v MEL Network Ltd helpful guidance is given as to the approach that should be taken on applications for security for costs.23 For the purposes of this application the Court’s comments at [13]–[16] are particularly helpful:
[13] Rule 60(1)(b) High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.
[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a checklist of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
[54] The reference in the Court of Appeal decision to r 60(1)(b) is a reference to the predecessor of the current rule that I have set out.
[55] The first part of the inquiry, often referred to as the threshold test, was summed up by Rodney Hansen J:24
In considering whether the threshold issue of the ability of the plaintiff to pay the defendants’ costs if unsuccessful has been reached, it is, as Hammond J said in Hamilton v Papakura District Council (supra), necessary to make a broad overall assessment. Something more than having difficulty in making payment is, however, required. Some plaintiffs will not be able to meet costs without some financial rearrangement: NZ Kiwifruit Marketing Board v Maheatataka Coolpack Limited (1993) 7 PRNZ 209. And if a plaintiff’s financial position is improving and is likely to improve still further, there may not be reason to find an inability to pay costs: see Rivendell Mushrooms Limited v Horowhenua Electric Power Board
(unreported, High Court, Wellington, CP844/92, 13.11.98, Master
Thomson).
[56] I was advised that the plaintiff trust has no balance sheet. It holds two groups of shares. They are shares in private farming companies. It is claimed that it has a shareholders’ current account of $305,898. It is not suggested in the affidavits that if I were to order security that that necessarily would prevent the plaintiffs from proceeding with their claim.
[57] Mr Slavich’s personal financial position is unsatisfactory. He was adjudicated bankrupt in October 2006 and obtained a discharge from that bankruptcy in May 2010. He was adjudicated bankrupt again on 29 June 2012 and is currently a bankrupt. Orders for security for costs have been made against him in other proceedings.
[58] The problem here is that the trust’s shareholdings are in farming companies. There are no liquid assets. There is no evidence that the companies would choose to sell assets in order to meet the trust’s debts or guarantee that they could be liquidated or required to purchase the trust’s shares if they refused to do so. In short, the trust itself would have some difficulty in the event that a costs order was made against it in meeting same. Unless the companies in which it holds shares were prepared to sell assets and make a distribution to shareholders, the prospect of any party successfully gaining an order for costs and uplifting them from the plaintiffs is not high.
[59] I am satisfied that the threshold is met in this case and that there is reason to believe that the plaintiffs would be unable to pay costs. I am also satisfied that the case involved is a Category 2 case. There must be some room for discount on the actual costs calculated by counsel for the defendant and which I have set out in this judgment because of the uncertainty of the trial time involved. That leads me to the position that, at this stage, the overall security that I consider justified in this case would be a sum of $35,000.
[60] The application is made at a relatively early stage of the case and it seems to me that some consideration would need to be given to ordering security on a staged
basis. If I were to make an order, my order would require security in the sum of
$15,000 to be given forthwith; that to cover costs up to and including the setting down stage of this proceeding. At the time of setting down I would require a further sum of $20,000 to be paid as security.
[61] Because it is unnecessary to determine this part of the application I am recording my reasons and what I would have done had it been necessary to make an order for security for costs in this case.
Costs
[62] Counsel were in agreement that this is a Category 2 case. The defendant has been successful. He is entitled to costs on the application and in respect of the proceeding as this judgment concludes the proceeding. My preliminary view is that Band B should apply to the steps that have been taken in this proceeding. Because there has been no detailed analysis of that I give that indication to the parties in the hope that they can agree the quantum of costs. If they cannot agree on the quantum of costs, memoranda in support, opposition and reply shall be filed and served at seven-day intervals and the file shall then be referred to me.
Orders
[63] Summary judgment is entered against the plaintiffs in respect of all causes of
action pleaded in the plaintiffs’ amended statement of claim.
JA Faire
Associate Judge
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