Stickland v Drummond HC Auckland CIV2006-404-3078

[2008] NZHC 2318

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV2006-404-3078

BETWEEN  R L STICKLAND AND OTHERS First Plaintiff

ANDTERRY PROPERTIES LIMITED Second Plaintiff

ANDP S DRUMMOND AND OTHERS Defendant

Hearing:         19 February 2008

Counsel:         C Light for First and Second Plaintiffs

G Hall and S Pidgeon for Defendants

Judgment:      13 May 2008 at 12 pm

RESERVED JUDGMENT OF ASSOCIATE JUDGE H SARGISSON

Solicitors:

Stace Hammon, P O Box 19-101, Hamilton

Buddle Findlay, PO Box 1433, Auckland

STICKLAND AND OTHERS AND ANOR V DRUMMOND AND OTHERS HC AK CIV2006-404-3078 13

May 2008

[1]      The defendants have made application for:

a)        An order rescinding an earlier order I made by consent on 12 June

2007 appointing Terry Properties Limited as representative plaintiff, in so far as the order relates to Romulus Investments Limited.

b)An order that the plaintiffs and those they represent comply with orders for further and better discovery.

[2]      The plaintiffs for their part have made application for an order that answers to the defendants’ interrogatories not be required or be limited.

[3]      On 8 February 2008 I made orders by consent in respect of discovery, leaving for argument the defendants’ application for the order relating to Romulus and the plaintiffs’ application relating to interrogatories.

[4]      I deal first with the plaintiffs’ application relating to interrogatories.

Background

[5]      It is helpful to briefly recap on aspects of the background.  In October 2001

DF Mainland offered for sale up to 3,000,000 convertible notes at $1 per note.  DF Mainland did not issue a prospectus in relation to the offer.  The first plaintiff, Mr Stickland, and the persons he represents in this proceeding were some of the individual subscribers to the offer. The second plaintiff, Terry Properties Ltd, and the persons it represents save for Romulus, were underwriters of the offer and were called upon under the terms of their underwrite deeds to take up their shares of the unsubscribed balance.  At the time, the defendants were directors of DF Mainland.

[6]      A purpose of the notes’ issue was to obtain funding to repay a loan. The loan had been made by one of the underwriters, St Laurence Property & Finance Ltd, to DF Mainland to enable the latter to purchase 100% of the shares in Ord Minnett Jardine Fleming Futures (NZ) Ltd, a public broker on the New Zealand Futures & Options Exchange.

[7]      St Laurence assigned its rights under the loan agreement to Romulus on or about 14 December 2001 by which time DF Mainland had repaid a substantial part of the loan.   The loan balance at this point was $603,040.79.   The defendants’ contention is that the entire loan facility including that balance was repaid out of funds raised by the convertible notes’ offer.

[8]      Subsequently, in February and April 2002 three of the underwriters, Rodney Martin, Melvin Stewart and Stewart & Associates Ltd assigned their convertible notes to Romulus, and at the request of the assignors DF Mainland re-allotted the convertible notes to Romulus.

[9]      DF Mainland went into voluntary liquidation in December 2002.

[10]     In May 2006, Mr Stickland and Terry Properties on their own behalf and on behalf of the classes they represent commenced this proceeding against the defendants.   The former seeks recovery of subscriptions totalling $505,000.   The latter seeks recovery of underwrite subscriptions of $1,056,120.

[11]     The plaintiffs’ causes of action allege that the allotment of convertible notes to the individual subscribers and the underwriters were void for breaches of ss 37 and 56 of the Securities Act 1978, negligent misstatements, breach of  fiduciary obligations/knowing assistance of breach of fiduciary obligation, and deceit.

[12]     In their statement of defence, the defendants deny liability under all of the causes of action.  They also plead affirmative defences that include:

a)       Two affirmative defences to the claim made by Mr Stickland. The first defence relies on s 37(6) of the Act and is essentially that if the convertible notes offer did breach s 37 (which is denied) default in repayment, as the Act requires, was not due to any misconduct or negligence on the defendants’ part. The second is that the defendants in any event acted honestly and reasonably and should be excused from liability and it is made under s 63;

b)        A third affirmative defence is pleaded against all of the underwriters.

It pleads that the allotment to the underwriters was valid and effective.

c)        A fourth affirmative defence relies on s 6 of the Illegal Contracts Act

1970. It is raised against St Laurence and Romulus. It pleads that if the subscriptions from the convertible notes offer were derived from a void allotment (which is denied), then DF Mainland’s use of the subscriptions to pay the St Laurence loan, makes the loan an illegal contract.  Therefore, DF Mainland’s payments to St Laurence and to Romulus as assignee, were illegal under the Illegal Contracts Act and St Laurence and Romulus are accordingly liable to repay the other plaintiffs their respective subscriptions.   In the alternative, the defendants say they are entitled to relief by way of restitution Court under s 7 of the Illegal Contracts Act.

d)The fifth affirmative defence is raised against the plaintiffs. It pleads that if the notes’ offer was void under s 37 (which is denied) it is just and equitable that the Court grant the defendants a relief order under s

37AH because:

i)        Some of the first plaintiffs were not members of the public;

and

ii)The  second  plaintiffs  derived  benefits  from  the  convertible notes issue including underwriters fees, relief from obligations under the underwrite deeds when the convertible notes were issued to the first subscribers; and thirdly repayment of the St Laurence loan from monies raised by the convertible notes issue.

e)        The sixth affirmative defence is based on s 6 of the Securities Act

1978. It is submitted that DF Mainland allotted notes to Romulus. The convertible notes securities contained in these Third, Fourth and Fifth allotments had previously been allotted to Rodney Martin, Melvin

Stewart and Stewart & Associates Ltd, underwriters of the offer, as part of the Second allotment of notes. Therefore, if the Court should find that the First and Second allotments are invalid and of no effect because the offer was made to the public (which is denied) then the defendants, as directors of DF Mainland are not jointly and severally liable to repay Romulus in respect of the Third, Fourth and Fifth allotments given that those allotments are securities.

Interrogatories

[13]     The defendants served an amended notice on the plaintiffs on 13 August

2007 requiring the plaintiffs to answer interrogatories, under r 278.   The notice contained 13 interrogatories, some of which contained two or more questions.  The interrogatories are set out in the schedule attached to this judgment.

[14]     Mr Stickland has provided verified answers to all of the interrogatories. Terry Properties  however  objects  to  providing answers.   In  addition,  both  oppose  the provision of further verified answers by any member of the classes of persons they represent.

[15]     At the hearing, counsel for the defendants indicated that the application was never intended to apply to the second plaintiff or the class it represents. That leaves for determination a single issue namely should the Court order that members of the class Mr Stickland represents not be required to answer interrogatories, or should it refuse the order with the consequence that the class members will be required to give verified answers.

[16]     As the plaintiffs’ application raises objection only to interrogatories 1 to 7, I proceed on the basis that there is no objection to the provision of verified answers to interrogatories 8 to 13.

[17]     For reasons I will come to, I am satisfied that there should be orders relating to the members of the class Mr Stickland represents, along the following lines:

a)        They should not be required to answer interrogatories 1, 2 and 5;

b)They should provide verified answers to i)           interrogatories 3, 4, 6 and 7;

ii)interrogatories 8 to 13, no objection  having been  raised  to them.

[18]     There is a proviso. It is that any members of the class who acknowledge (by appropriate means) that they are not members of the public for the purpose of the Securities Act 1978, should not be required to answer the interrogatories.

[19]     Before coming to my reasons it is helpful to set out the relevant principles.

Interrogatories – Principles

[20]     Rule 278 provides that any party that has filed a pleading may file and serve on any other party that has filed a pleading, a notice in form 23 requiring that party to  answer  specified  interrogatories  relating  to  any  matter  in  question  in  the proceeding between the interrogating party and the party served.

[21]     Interrogatories are designed to elicit information before trial in order to assist in the proof of the interrogating party’s case and are different from requests for particulars.  Particulars are essentially required to give fair notice of the party’s case. They are matters of pleading, designed to make plain to the opposite party the case to be raised.

[22]     Answers to interrogatories are different from briefs of evidence and may be used as evidence at trial.  For this reason, interrogatories must not exceed the bounds of what are permissible interrogatories.

[23]     There are four objects of interrogatories which have been explained in the commentary in McGechan at HR 278.03 in the following way:

a)        To obtain admissions as to facts which will support the case of the interrogating party;

b)To obtain admissions which will destroy or damage the case of the party interrogated;

c)        In exceptional cases, as a request for further and better particulars;

and

d)       To obtain accounts from a party occupying a fiduciary position.

[24]     Rule 280 allows a party to seek an order that answers to interrogatories not be required or be limited.  The Court has a discretion on the application of any party to order that answers to interrogatories shall not be required, or shall be limited to such interrogatories or classes of interrogatories or to such of the matters in question in the proceeding, as may be specified in the order.

[25]     The   grounds   upon   which   objection   may  be   taken   to   answering   an interrogatory are set out in r 284(1).  Those grounds are:

a)        That the interrogatory does not relate to any matter of fact in question between the objecting party and the party requiring the answer;

b)        That the interrogatory is vexatious or oppressive;

c)        Privilege; or

d)That the sole object of the interrogatory is to ascertain the names of the witnesses.

[26]     The plaintiffs rely on the first two of these grounds.  In respect of those two grounds, it is established law that:

a)        It is not permissible to ask questions based on mixed questions of fact and law, or based on disputed assumptions of fact.

b)A party interrogated is required to answer “specified interrogatories”, as required by r 278(1).   Interrogatories must be precise and direct, not ambiguous.  Each interrogatory should refer to one distinct matter and ask short simple questions.  The purpose of interrogatories calls for strict adherence to the letter of the words used and there is no place  in  either  interrogatories  or  answers  for  reading  between  the lines, adopting a liberal construction, or seeking the author’s intention rather than the meaning the words bear on their face.  Without these constraints, interrogatories would become an unjust cause of expense and delay;

c)      Interrogatories as to the contents of an existing document are unacceptable: see McGechan HR 278.11 (4).  Discovery of documents and their consents is a matter for discovery, and if necessary an application for further and particular discovery under r 306; and

d)The category of oppressive interrogatories is not closed, and it would encompass most serious objections: see McGechan HR 284.03. Common to all categories of unreasonableness amounting to oppression is the complaint that interrogatories exceed the legitimate expectations of the occasion.

[27]     It has also been established that although r 284 prescribes the grounds on which a party may object to interrogatories, the rule is not intended to modify the general law on interrogatories.  As a result, it is still not permissible to ask for what amounts to mere evidence of facts in dispute: Wilson v BCNZ (1987) 1 PRNZ 368. In other words, a party may object to answering an interrogatory if it is aimed at ascertaining facts which are merely evidence of facts in issue as opposed to part of the disputed primary facts themselves.

[28]     In dealing with an application to compel or limit answers, the Court is also bound to consider whether an order is necessary at that time taking into account the general law: see rules 280(2) and 282 (2).

[29]     Fishing interrogatories are not permissible.  These are interrogatories that do not seek information on matters in question between the parties, but rather attempt to discover a cause of action or defence other than that actually pleaded.   For this reason  they  are  irrelevant  to  the  matter  in  question  between  the  parties:  see McGechan HR 284.02.

[30]     Although a party objecting to interrogatories is required to be specific as to the nature of the objection, the Court may disallow interrogatories as a whole where they involve an oppressive number of questions or the questions are prolix or there are substantial infringements of the rules governing interrogatories: Shore v Thomas [1949] NZLR 690, 696.

Reasons for Proposed Orders

[31]     I deal first with the interrogatories that Mr Stickland’s class members are not required to answer.

Interrogatories 1, 2 and 5

[32]     Interrogatory 1 seeks answers to a question about the respondent’s dealings with DF Mainland.   It contains no reference to the nature of the dealings the defendants want to know about, or limits on the period when the plaintiffs say any dealings are relevant, or the kinds of employees relevant dealings would have been with. It is so open-ended as to be oppressive.

[33]     Interrogatory 2 is similarly open-ended.  It seeks a description of the nature of the contacts each respondent had in the course of the unspecified dealings as referred to in interrogatory 1.  It is objectionable for similar reasons as interrogatory

1.

[34]     Interrogatory 5 is vague and non-specific, and suffers from the same open- ended character as interrogatories 1 and 2.  It potentially covers an indefinite period pre-1999, and its reference to “other similar investments” when read in context is uncertain.   Individual respondents are left to wonder whether to list every minor

interest-bearing bank deposit for the duration of his or her life pre-1999, or whether the question is concerned with more significant investments made during a more limited period.

[35]     The open-endedness of these interrogatories means they potentially go to evidential matters of doubtful and peripheral relevance and not to establishing relevant primary facts. They substantially infringe the rules governing interrogatories and in keeping with Shore, I take the view that they should be disallowed.

[36]   Counsel for the defendants acknowledged that the interrogatories are problematic because of their non-specific nature.   He suggested that this could be overcome if answers are restricted to the period 1999 to 2001. That limitation disposes interrogatory 5 because it concerns investments prior to that period. As to the other interrogatories 1 and 2 counsel pointed out that Stevens J limited the defendants’ request for further and better discovery by adopting a similar approach. However, in the context of interrogatories there are difficulties with counsel’s suggestion, which is itself a tacit acknowledgement that the interrogatories, in their present form,  are potentially so wide  ranging as to be oppressive.    It  does  not overcome all of the elements of uncertainty inherent in interrogatories 1 and 2, and it overlooks  the  fundamental  requirement  that  interrogatories  must  be  precise  and direct, leaving no room for reading between the lines when it becomes to their meaning.   The solution is not to be found in tinkering with the interrogatories or attaching conditions or restrictions to them.

[37]     The need for interrogatories 1 and 2 is also unclear.  They deal with contact with non-specified employees or kinds of employees at DF Mainland.  I assume the purpose is to identify whether or not the individual respondent was a close business associate of DF Mainland or habitually invested in DF Mainland Securities.  If that is their purpose, then they overlap with and potentially duplicate interrogatory 3.

[38]     I come next to the interrogatories that the class members are required to answer.

Interrogatories 3, 4 6 and 7

[39]     Interrogatories 3, 4, 6 and 7 do not give rise to concerns about imprecision and   the   plaintiffs   have   not   themselves   raised   any   such   concerns.   These interrogatories seek factual answers to questions about the investment history of each class member and the member’s association with DF Mainland.   They relate to investments the respondent member made through DF Mainland and other entities in the period 1 March 1999 to 31 December 2001, the respondent’s placement in the DF Mainland offers list and the respondent’s contacts with DF Mainland in relation to the offers list.

[40]     The interrogatories relate to matters of fact raised in various defences. They are plainly relevant to the defendants’ pleading in paragraph 10 of the statement of defence to the second amended statement of claim.  That pleading is a denial of the plaintiffs’ first cause of action where the plaintiffs plead that the convertible notes issue was an offer to the public and they therefore deny that it was in breach of s 37. For the purpose of their denial, the defendants plead at paragraph 10 that under the Securities Act, DF Mainland offered its convertible notes only to persons who were not members of the public, but were either:

i)Relatives or close business associates of DF Mainland or a director of DF Mainland;

ii)Persons  whose  principal  business  was  the  investment  of money or who habitually invest money in the course of and for the purposes of the business.

iii)Any other person who in all the circumstances could properly be  regarded  as  having  been  selected  otherwise  than  as  a member of the public.

[41]     The interrogatories are also plainly relevant to the affirmative defences that raise the same issues about the investment status of the respondents and that incorporate the particulars pleaded at paragraph 10 of the statement of claim.

[42]     Counsel for the plaintiffs acknowledged that the interrogatories are relevant to the pleading at paragraph 10 and the defendants’ first cause of action.  However he argued that the interrogatories could not be justified for the purpose of advancing this defence.  He advanced, as the reason, that the convertible notes offer would have breached s 37 of the Securities Act if merely one individual subscriber were a member of the public. He added that Mr Stickland patently was a member of the public for the purposes of the Act and therefore the convertible notes offer did breach s 37 and the allotments to every subscriber were therefore void. He submitted that, in these circumstances, answers to the defendants’ interrogatories, if given by any other persons in the class, would not serve any of the legitimate purposes of interrogatories.   Indeed, if others are required to answer the interrogatories the requirement would run counter to r 280 which states that the Court must make:

..such  orders  as  maybe  required  to  prevent  unnecessary  or  oppressive interrogatories or unnecessary answers to interrogatories.

[43]     Counsel  also  argued  that  the  interrogatories  are  not  relevant  to  any affirmative defence or rather to any tenable affirmative defence.

[44]     I do not accept counsel’s arguments. There is no dispute that if Mr Stickland is a member of the public, a consequence will be that the convertible notes offer was made in breach of s 37. However, the plaintiffs’ assertion that Mr Stickland was patently a member of the public cannot be treated as a conclusive finding at this stage of the proceeding. The assertion may yet be right, but it may not be right. As counsel for the plaintiff agreed at the hearing, the plaintiffs would be unwise to rely solely on Mr Stickland’s evidence about his investment status to establish that at least one subscriber was a member of the public, and not to call any members of his class to give evidence.

[45]     Even if I were wrong to conclude that Mr Stickland’s being a member of the public   remains   a   matter   of   disputed   fact,   requiring   others   to   answer   the interrogatories could not be categorised as pointless.  The answers clearly would be relevant to matters of fact raised in at least some of the affirmative defences and in particular to the pleas made in those defences for discretionary relief.

[46]     In the second affirmative defence, brought in reliance on s 63, the defendants plead that if the convertible notes offer did breach s 37 (which they deny) then the Court should take into account a range of circumstances. They include whether any members of Mr Stickland’s class who were habitual or professional investors or close business associates of DF Mainland. They also include  the  steps  that  DF Mainland took, on legal advice, to ensure the offer was not made to the public and that persons responding to the offer had notice that unless they regarded themselves as habitual or professional investors or close business associates of DF Mainland, they should not respond to it. These factors or circumstances are all raised in paragraph 10 of the amended statement of defence.

[47]     Counsel for the plaintiffs argued that since the s 63 defence has not been particularised the defendants cannot say that the interrogatories are relevant to the defence.  That argument is not correct.  The defence, at paragraph 110, incorporates the particulars in para 109 of the statement of defence, which in turn incorporates the particulars at para 10.  The defence pleads at paragraph 110:

If it appears to the Court that the defendants are or maybe liable in respect of any negligence, default or breach of duty in respect of the offer of securities to first plaintiff and the other first subscribers (which is denied) the defendants nevertheless acted honestly and reasonably and accordingly, having regard to all the circumstances of the case  ought  fairly to  be excused for the said negligence, default or breach of duty from liability from such terms as the Court may think fit.

Particulars

The defendants repeat the particulars pleaded in para 109 above. [Emphasis added]

[48]    Section 63 affords a wide discretion to the Court to look at a range of circumstances when deciding whether or not to mitigate the effects of the statutory liabililty to refund subscriptions under s 37 and the associated statutory interest that accrues until the refund is made. Section 63 states:

(1)If in any proceedings against any person for negligence, default, breach of duty, or breach of trust in connection with –

(a)  An offer to the public of allotment of securities;

(b) …

It appears to the Court hearing the case that the person or maybe liable in respect of the negligence, default, breach of duty or breach of trust, but that he or she has acted honestly and reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he or she ought fairly be excused for the negligence, default, breach of duty or breach of trust, the Court may relieve him or her wholly or partly from his or her liability on such terms as the Court may think fit.

[Emphasis added]

[49]     The factors raised by the defendant are circumstances relevant to the Court’s discretion when deciding whether or not to excuse all or any of the directors for the negligence, default, breach of duty or breach of trust that he may be found liable for. The interrogatories in turn seek factual information related to those factors.

[50]     I do not therefore accept the plaintiffs’ argument that the interrogatories are irrelevant to any valid defences that the defendants may have.

[51]     I  also  reject  counsel  for  the  plaintiffs’  argument  that  answers  are  not necessary at this stage and should not be required until the issue of further and better discovery has been put to rest.  As counsel advised at the hearing, there are relevant documents that have been lost over time, and there will not necessarily be documentary records for all relevant communications that subscribers may have had with DF Mainland. Counsel also mentioned that the process of achieving compliance with the orders Stevens J made for further and better discovery in April 2006, and that the process has been cumbersome and slow.   While these problems are understandable given the large number of people in Mr Stickland’s class, they are not good reasons to rule out interrogatories. If anything, they support the need for interrogatories now to enable the defendants to elicit primary factual information in an efficient a way as possible ahead of trial and to avoid the possible difficulty in eliciting that information at the trial.

[52]     Counsel for the plaintiffs also pointed to questionnaires that subscribers had completed as a reason for not requiring interrogatories but they are not a substitute for verified answers to interrogatories.

[53]     I am satisfied in the circumstances that these particular interrogatories should be answered by the members of the class that Mr Stickland represents but with one important qualification to take account of an acknowledgement made by counsel for the plaintiffs at the hearing.

[54]     At the hearing, counsel indicated that the plaintiffs do not contend that each and every member of the class Mr Stickland represents are members of the public. He indicated that a small number may be habitual or professional investors although he was at pains to stress that their inclusion in the class was immaterial for the plaintiffs’ action which requires only that one of the class was a member of the public.

[55]     Counsel for the defendants accepted at the hearing that if there are such people in the class, it would be unnecessary to order them to answer the interrogatories.  I agree.

[56]     If therefore there are members of the class who acknowledge that they are such investors, then they will be released from the obligation to answer interrogatories.   Clearly they will need to be identified for that purpose and in an appropriate way and I will reserve leave for that purpose.

Orders

[57]     For the above reasons I make the following orders in relation to the members of the class of persons Mr Stickland represents:

a)        They should not be required to answer interrogatories 1, 2 and 5;

b)They should provide verified answers to i)        interrogatories 3, 4, 6 and 7; and ii)       interrogatories 8 to 13.

c)       Orders (a) and (b) are subject to the proviso that any members of the class who acknowledge (by appropriate means) that they are not members of the public for the purpose of the Securities Act 1978, should  not  be  required  to  answer  the  interrogatories.    Leave  is reserved for that purpose to file a memorandum on 3 days notice seeking further orders.

[58]     Costs on the application are reserved. I will hear from counsel on the issue of cost at the next conference if there is not agreement as to how costs should be dealt with. If necessary I will make directions for the filing of memoranda. I turn now to the question whether the representative order should be rescinded in respect of Romulus and whether Romulus should now be named as a separate plaintiff.

Romulus

[59]     By way of joint memorandum dated 12 April 2007, counsel for both sides consented to representative orders being made in respect of the first and second plaintiffs.  The orders I made included an order that Terry Properties may continue the proceeding on behalf of the 6 additional underwriters listed in the schedule to the order.  The order was made on the basis that all of them were underwriters of the convertible notes’ issue.

[60]     The order was made on terms that reserved leave to all parties to apply for variation or rescission of any orders relating to the representation.   The Court recognised the practice of reserving leave in R J Flowers v Burns [1987] 1 NZLR

260 at 271. There, the Court observed that it is appropriate to reserve leave to allow a party to seek rescission if facts later emerge that reveal that representative orders are no longer justified.

[61]     The defendants’ application seeking that the order be rescinded in relation to

Romulus is made in reliance on the reservation of leave and r 78.  The rule states:

Persons having same interest

Where 2 or more persons have the same interest in the subject-matter of a proceeding, 1 or more of them may, with the consent of the

other or others, all by direction of the Court on the application of any party or intending party to the proceeding, sue or be sued in such proceeding on behalf or for the benefit of all persons so interested.

[62]     Counsel for the defendants stressed that the application is not an attempt to raise again the issue of separate legal representation for Romulus.  It simply goes to the question whether Romulus can stand behind the representative plaintiff, Terry Properties, particularly when it was not an underwriter and it must prove that its own alleged entitlement to relief arises out of an assignment of the convertible notes that DF  Mainland  issued  to  others.    The  defendants  also  raised  concerns  based  on defences that are raised solely in relation to Romulus and/or St Laurence and Romulus.

[63]   I am satisfied that the continued inclusion of Romulus in the class of underwriters that Terry Properties represents is not now appropriate.

[64]     It is now clear that Romulus does not have the same interests in the subject matter of the proceeding as other members of the underwriters’ class.   Unlike the other members of the class, Romulus was not an underwriter of the convertible notes issue and it was not a party to an underwrite deed with DF Mainland.

[65]     Each side takes issue with the other over the significance of these facts. Counsel for the plaintiffs argues that their only significance is that Romulus is entitled to stand in the shoes of the assignors of the convertible notes. It has the exact same  rights  that  the  assignors  would  have  had  in  the  proceeding  had  they  not assigned the convertible notes to Romulus.

[66]     On the other hand, counsel for the defendants relied on the assignment as evidence that the convertible notes had been previously allotted, and argued that the previous allotment gives rise to an affirmative defence against Romulus under s 6(1) of the Securities Act 1978.

[67]     Section 6(1) states:

Previously Allotted Securities

(1)Subject to this section nothing in sections 33, 34, 37 to 38A…shall apply in respect of a security that has previously been allotted.

[68]     Counsel argued that s 6(1) provides a defence against Romulus alone because it makes clear that nothing in s 37 of the Act shall apply in respect of securities that have been the subject of a prior or previous allotment.

[69]     It is not necessary to rule now on this defence  and in  particular  on  the question whether s 6 has the effect that the defendants claim.  Irrespective of who is right about the availability of the defence, the more critical issue is that the existence of Romulus’ complaint against the defendants depends on the assignment.   The existence of the assignment is a matter of fact that differentiates Romulus from the underwriters.  Romulus is in the position where it must plead the assignment and the facts of its own case, and it must establish its own right to relief.  It is not appropriate for Terry Properties to attempt to obtain relief for Romulus based on the different facts applying to the underwriters. Nor is it enough for Terry Properties to state, as it has done, an amendment into its own pleading alleging the assignment while at the same time maintaining an inconsistent pleading that Romulus was one of the underwriters.  The  result  of  this  ad  hoc  approach  is  to  create  ambiguity  in  the pleading and to fall short of the basic requirement for a pleading that gives fair notice of the case the defendants are required to meet.  In short, Romulus’ case is not the same as the claim of the others in the underwriters’ class and its case is not based on the same interest as theirs. It requires separate pleading.

[70]     As Sim at HCR78.4 notes:

It is essential for the application of the rule that all persons represented have the  same  interest  in  the  subject  matter  of  the  proceeding,  whether  as plaintiffs or defendants.   Where the interest of each are or may be divergent a representative proceeding is not possible and the individual should be joined as parties in their own right under RR 73 or 74.

The representative action must be beneficial to all of the class, who must have a common interest in the proceeding and must all be able to claim as

plaintiffs in separate actions with no defences applicable only to some: R J Flowers Ltd v Burns [1987] 1 NZRL 260.

[71]     The  problems  that  have  emerged  can  be  overcome  by  the  addition  of Romulus as an individual plaintiff sharing same legal representation as the other plaintiffs.   That outcome will not involve significant procedural disadvantage for Romulus or the other plaintiffs but it will overcome potential disadvantage to the defendants.

[72]     In reaching the above conclusion, I have not overlooked the submission made by counsel for the plaintiff that divergent interests do not rule out a representative action.  He cited Prudential Assurance Co Ltd v Newman Industries Ltd [1979] 3 All ER 507 in support. However that decision is not an authority for the proposition that divergent interests do not rule out representative action.

[73]     As the Court noted in RJ Flowers Ltd v Burns [1987] 1 NZLR 260 the overall effect of Prudential was to allow a representative action for damages where use of the procedure would not let in claims of an unlike nature or foreclose available defences.

Result

[74]     For the above reasons, I make orders as follows:

a)        I rescind the order that Terry Properties Ltd may continue the action in a representative capacity in so far as the order relates to Romulus.

b)Romulus is to be joined as a party in its own right. It is to be named as third plaintiff.

c)        An amended statement of claim is to be filed and served for that purpose under and in compliance with r 73 of the High Court Rules.

d)       The amended statement of claim is to be filed and served by 22 May

2008, or such further time as the court allows on application made by memorandum.

[75]     Costs on the application are reserved.

[76]     I will hear from counsel on the issue of costs at the next case management conference.  If the issue of costs cannot be dealt with at the conference then I will

make directions for the filing of memoranda.

Associate Judge Sargisson

SCHEDULE

[1]      Please state the name or names of the employees of DF Mainland Group

Limited (“DF Mainland”) with whom you dealt.

[2]      Please describe the contact you had with the employee or employees referred to above including:

(a)       By what means you corresponded;

(b)How regularly you corresponded and, if possible, the dates on which you corresponded.

(c)       The purpose or subject of the correspondence;

(d)       Whether in each instance the correspondence was initiated by you or

DF Mainland.

[3]      List all investments you made through DF Mainland Limited in the period 1

March 1999 to 31 December 2001 including:

(a)       The types of investment including details of the types of security and the issuer;

(b)      The dates of the investment; (c)            The amounts invested.

[4]      List of all investments you had or made in the period 1 March 1999 to 31

December 2001 including:

(a)       The types of investment including, in the case of securities, details of the types of security and the issuer;

(b)       The dates of the investment; (c)           The amounts invested.

[5]      Did you have or make any other similar investments prior to 1 March 1999? [6]      Did you request to be placed on the DF Mainland “offers list”?

[7]      If the answer to question 6 is yes:

(a)       Was the request oral or in writing; (b)  On what date was the request made?

(c)       To which employee of DF Mainland was the request made? (d)        Where was the request made?

[8]      Did you discuss the offer of convertible notes with any employee of DF Mainland?

[9]      If the answer to question 8 is yes:

(a)       With which employee did the discussion occur? (b)    What was said in relation to the offer?

[10]     Did you read the information memorandum issued by DF Mainland?

[11]     Did you obtain any professional advice from, for example, an accountant, lawyer or stockbroker on the convertible note issue?

[12]     Did you seek any further information from DF Mainland?

[13]     If the answer to question 12 is yes:

(a)       What information was sought?

(b)       How did you seek the information? (c) What information was provided?