Talley's Group Limited v Biomex Trustees Limited
[2023] NZHC 1732
•5 July 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-773
[2023] NZHC 1732
BETWEEN TALLEY’S GROUP LIMITED
Plaintiff
AND
BIOMEX TRUSTEES LIMITED
First Defendant
MACLAB (NZ) LIMITED
Second DefendantJ B BROADBENT NOMINEE PTY LTD
Third DefendantContd/2
Hearing: 28 June 2023 Appearances:
D McLellan KC for Plaintiff
O J Skilton and A Church for Defendants
Judgment:
5 July 2023
JUDGMENT OF WOOLFORD J
(Application by Plaintiff for Discovery)
This judgment was delivered by me on Wednesday, 5 July 2023 at 2:15 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors: Solutions Law Office (G P Malone), Nelson
MinterEllisonRuddWatts (A Church and O Skilton), Auckland Counsel: D McLellan KC, Auckland
Copy to: R J Hollyman KC and J Steel, Auckland
TALLEY’S GROUP LIMITED v BIOMEX TRUSTEES LIMITED [2023] NZHC 1732 [5 July 2023]
MCFARLANE MARKETING (AUST) PTY LTD
Fourth Defendant
MACLAB AUSTRALIA PTY. LTD
Fifth Defendant
JAMES MEREDYTH BROADBENT
Sixth Defendant
ANDREW CHRISTOPHER BROADBENT
Seventh Defendant
WILLIAM RAMSDEN BROADBENT
Eighth Defendant
[1] This proceeding is now of some antiquity having been filed on 30 April 2019. It has been set down for a three-week trial commencing on 24 July 2023. The close of pleadings date was 6 March 2023.
[2] On 2 June 2023, the plaintiff, Talley’s Group Limited, filed a notice of interlocutory application for particular discovery from the defendants and non-party discovery from Pharmalink Extracts Limited. The application for non-party discovery has been resolved by consent orders. The defendants oppose the application. I heard the application at 11:45 am on Wednesday, 28 June 2023.
The substantive proceeding
[3] The substantive proceeding has been summarised in earlier judgments of this court relating to an application by the defendants for further particulars1 and applications by the plaintiff and defendants for further and better discovery.2
[4] The substantive dispute involves the parties’ rights and obligations under an agreement for the procurement and supply of mussels dated 12 March 2014 (the agreement). The mussels were to be processed into mussel powder to be used in the nutraceutical industry.
[5] Under the agreement, the plaintiff agreed to grow and supply the mussels. The plaintiff was to be paid the price for the mussels, commission and monthly royalty payments. In addition, the first defendant agreed to transfer to the plaintiff five per cent of the issued capital of a new entity, which was to be established to hold the first defendant’s assets.
[6] The plaintiff sues the defendants for breach of contract, rectification and knowing assistance.
[7] Schedule 3 of the agreement included the following clauses, which are central to the plaintiff’s claim:
1 Talley’s Group Ltd v Biomex Trustees Ltd & Ors [2020] NZHC 591.
2 Talley’s Group Ltd v Biomex Trustees Ltd & Ors [2021] NZHC 2922.
(a)Clause 13
… Talleys shall receive a monthly royalty payment equal to five per cent of MacLab’s gross revenue in each calendar month. …
(b)Clause 18
… MacLab shall transfer to Talleys five per cent of the issued capital (ranking equally in all respects) in an entity to be established (which may, for the avoidance of doubt, include a limited partnership) then holding substantially the assets held by MacLab as at the date of this Agreement (including all sales contracts, equipment, intellectual property rights and other assets reasonably required to operate the MacLab Group business) (the “New Entity”) on the basis which fairly represents a 95 per cent/five per cent business relationship.
…
[8] The defendants say that to meet their obligations under cl 18 of the agreement, a unit trust called MacLab (NZ) Unit Trust (Trust) was formed on 9 November 2016. The first defendant then transferred its assets as at 12 March 2017 to the Trust. The second defendant is the trustee of the Trust. Further, the defendants say that in May 2017, five per cent of the units in the Trust were issued to the plaintiff. Since 23 April 2019, the plaintiff is also said to have owned five per cent of the shares in the second defendant.
[9]The plaintiff says that contrary to the obligations set out in the agreement:
(a)The first defendant established a unit trust (rather than a company or similar entity) as the new entity referred to in the agreement despite the plaintiff’s objections. The plaintiff’s main concern, as set out in the pleadings, is that the terms of the relevant trust deed did not provide protections for the plaintiff such as those that would be available if the new entity were a company;
(b)the Trust did not receive all of the assets of the first defendant and the sixth, seventh and eighth defendants did not re-structure the business to go through the Trust;
(c)the assets that were transferred were subject to a debt back so that their value would be netted out of the Trust; and
(d)The five per cent royalties were not (and are yet to be) paid in accordance with cl 13 of the agreement, and the first defendant has refused to allow the plaintiff to audit the accounts to check what was included.
Requirement of leave to file application
[10] Rule 7.7(1) of the High Court Rules 2016 provides that an interlocutory application cannot be filed after the close of pleadings date without leave of the Court. The principles for granting leave are set out in Elders Pastoral Ltd v Marr.3 The plaintiff must show that granting leave:
(a)is in the interests of justice;
(b)will not significantly prejudice the defendants; and
(c)will not cause significant delay.
[11] The threshold for meeting this test is high with each criteria presenting a “formidable hurdle”.4
Approach to application for particular discovery
[12] An application for particular discovery may be made under r 8.19 of the High Court Rules. In Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd, the Court
3 Elders Pastoral Ltd v Marr (1989) 2 PRNZ 383 (CA).
4 At 385.
set out a four-step approach to take in considering an application for particular discovery:5
(a)Relevance and importance: A document will only be discoverable if it is relevant to the pleaded issues.
(b)Grounds for believing the documents exist and are within the party’s control: There must be grounds for believing that the documents exist. This will often be a matter of inference.
(c)Proportionality: The Court is required to balance the likely time and cost of discovery against its potential value. Broader considerations, such as the amount at issue, the resources of the parties and delay are also relevant.
(d)Weighing and balance the first three steps, is an order appropriate. The Court retains an overriding discretion.
Documents sought
[13] The application as it relates to the defendants seeks five categories of documents as follows:
Category Documents Grounds 1 Documents relating to the defendant’s disposal of any marine farm assets since 2019, including interests in Golden Bay Mussels and SMW Consortium Mr Broadbent’s brief of evidence served 20 April 2023 and a contemporaneously discovered board paper [MAC.06.0001] disclosed the defendants’ plans to dispose of marine assets in 2019.
In the course of briefing it was identified that the second defendant’s 2019 balance sheet [MAC.04.04008] referred to having interests in SMW Consortium and Golden Bay Mussels, but those interests are no longer reported in subsequent balance sheets [MAC.01.04009].
The defendants appear to have newly incorporated companies to deal in marine farm assets (refer Category 2 below).
5 Assa Abloy New Zealand Limited v Allegion (New Zealand) Ltd [2015] NZHC 2760 at [8] – [14].
Category Documents Grounds 2 Documents relating to the assets and liabilities of:
· Maclab (NZ) Marine Assets Ltd
· MacLab (NZ) No 3 Pty Ltd
· MacLab Marine Holdings Pty Ltd
· MacLab (NZ) No. 2 Ltd
These entities appear to be controlled by the defendants and their interests and are related to the MacLab business, but no discovery of the defendants’ dealings or relationship with these entities has been provided, including MacLab (NZ) Marine Assets Limited which was incorporated in the course of this proceeding (23 December 2022). 3 Documents relating to the MacLab Unit Trust No. 2 or any similar entity The second defendant’s 2022 trial balance [MAC.04.00011] refers to an advance having been made to MacLab Unit Trust No 2, but no discovery of documents concerning that trust/entity, the advance or to what it relates, have been provided. 4 Any valuations of the defendants’ interests in Gold Bay Mussels and SMW, including the valuations referred to in the 2019 Natoli Report The 2019 Natoli valuation [MAC.01.03984] refers to valuations of the defendants’ interest in Gold Bay Mussels and SMW (some dated March and April 2020), but which have not been discovered. 5 The defendants’ board papers A board paper was discovered with Mr Broadbent’s brief of evidence which suggests a practice of preparing such papers, but no other board papers have been discovered and the defendants’ have refused and/or failed to confirm no other board papers exist.
[14] I was advised by counsel for the plaintiff that the application now relates only to Categories 1 to 3, as Categories 4 and 5 have been resolved by the parties.
[15]In written submissions dated 22 June 2023, the documents sought are:
Category Documents 1 Documents relating to the Trust’s disposal of marine farm assets to MacLab Marine and Orizon in April 2023 (and associated licensing back) including all correspondence relating to the Trust’s entry into those transactions and any valuations relating to the same. 2 Financial statements, management accounts and fixed asset registers for MacLab Marine, Trust No 2, Orizon, MacLab (NZ) No 2 Limited, MacLab (NZ) No 3 Pty Limited and MacLab Marine Holdings Pty Limited.
Category Documents 3 Documents concerning the Trust’s financing of the purchase of the marine farm referred to in paragraphs 50 and 51 of Mr Rountree’s brief and its subsequent disposal to MacLab Marine.
Category 1 documents
[16] The application originally focused on the Trust’s interests in Golden Bay Mussels and SMW Consortium. However, the plaintiff is no longer seeking documents in relation to the Trust’s interest in those entities because the Trust has not disposed of its interests in them.
[17] The plaintiff’s focus has shifted to the Trust’s disposal of marine farms in April 2023 to MacLab Marine and Orizon for a total of $2.34 million plus GST. This was after the close of pleadings date. The details of these transactions are as follows:
(a)Three marine farms were acquired by the Trust in September 2020 (site 8290) and March 2021 (sites 8306 and 8307). The marine farms and the associated resource consents were sold to MacLab (NZ) Marine Assets Limited at the balance sheet price in April 2023 and the purchase price was paid in full. The resource consents are licensed back to the Trust at market price; and
(b)a marine farm and associated resource consent purchased by the Trust in April 2020 was sold in April 20203 at market price to Orizon Limited, an entity owned by Gary Rountree (Chief Financial Officer at MacLab), Scott Gillanders (Chief Operating Officer at MacLab) and an entity associated with Andrew Broadbent, a director of the first to fifth defendants. The purchase price was paid in full. The resource consents are licensed back to the Trust at market price.
[18] Notwithstanding their claim that these sales and licences are irrelevant to the pleaded causes of action, the defendants have disclosed copies of the sale and purchase agreements and license agreements to the plaintiff.
[19] Nonetheless, the plaintiff seeks discovery of valuations of the marine farm assets and any documentation evidencing the negotiations and reasons for sale of those assets on the basis that it wants to understand the commercial rationale and the impact of the transactions on the value of the Trust.
[20] The defendants say the transactions are irrelevant to the pleaded causes of action. The plaintiff does not plead that the Trust has breached an obligation or duty that it would have owed if a structure other than a unit trust had been established. For example, the plaintiff’s suggestion in its submissions that the Trust has disposed of assets in a manner that is detrimental to the value of the Trust is not pleaded.
Category 2 documents
[21] The Category 2 documents sought follow on from the Category 1 documents sought. The plaintiff maintains its application for financial statements, management accounts, and fixed assets registers of six entities, in particular MacLab Marine and Orizon, because both entities acquired marine farm assets from the Trust either directly or indirectly.
[22] The plaintiff says it is entitled to test the defendants’ assertions that they have not diverted assets to the entities identified so as to have the effect of reducing the value of the plaintiff’s interest.
[23] In relation to the entities other than MacLab Marine – the apparent purpose of which is to hold marine farm assets outside the Trust – the defendants have offered no explanation as to their function and purpose. The plaintiff submits that it can reasonably be inferred that MacLab Marine Holdings Pty Limited, MacLab (NZ) No 2 Limited and MacLab (NZ) No 3 Pty Limited are related to the business and operation of the Trust.
[24] The plaintiff’s expert says that the value of the Trust may have been diminished if the other entities hold assets or undertake business that would otherwise have been held or undertaken by the Trust.
[25] The defendants again say that these documents are irrelevant to the pleaded causes of action. They say the plaintiff is fishing for documents, clearly seeking to discover a cause of action that is different from that pleaded.
Category 3 documents
[26] A second unit trust, MacLab Unit Trust No 2 (Trust No 2), was established in 2017 and in April 2021 it purchased a marine farm, which was then sold to be MacLab Marine. To assist with the initial purchase, the Trust advanced $549,155 to Trust No 2 in April 2021. This amount was recorded in the Trust’s trial balance for the year ended 30 June 2022. The trial balance was disclosed to the plaintiff on 26 January 2023.
[27] Counsel for the plaintiff explains that the significance of the transaction was only recognised after the close of pleadings date when the plaintiff’s expert, Mr Hussey, commenced preparation of his brief of evidence.
[28] The advance of $549,155 was repaid by Trust No 2 in full on 1 July 2022. In consequence, the defendants’ expert, Mr Apps, says the advance can have no impact on the value of the Trust. Mr Hussey does not necessarily agree with Mr Apps’ opinion, saying it is impossible to identify whether there was a negative impact on the Trust without the provision of documentation relating to the transaction and Trust No 2.
Discussion
[29] I am of the view that leave should not be granted under r 7.7(1) of the High Court Rules for the plaintiff to file its application for particular discovery for the following reasons:
(a)The parties have engaged extensively over the years on discovery related issues. Both the plaintiff and defendants filed applications for orders requiring further and better discovery on 6 November 2020. Numerous affidavits were filed. They were the subject of a substantial judgment by Associate Judge Sussock on 29 October 2021. The first and second defendants made an application for non-party discovery on
3 November 2021. This led to another substantive judgment by Associate Judge Sussock on 28 April 2022. On 29 April 2022, Associate Judge Sussock directed the parties to file memoranda updating the Court on various matters, including a proposed date for the completion of discovery. On 15 September 2022, the parties filed a joint memorandum to “address outstanding discovery issues”. The plaintiff did not suggest that further discovery would be sought or necessary.
(b)The close of pleadings date was 6 March 2023. It has a clear purpose. It is to ensure that the pleadings have been completed and all interlocutory matters have been completed, so that the parties can concentrate on preparing for the hearing, drafting evidence and delivering it, preparing chronologies and preparing lists of documents for the common bundle. That is demanding work which clearly requires time and attention. It should not be subject to disruption by interlocutory matters. A three-week trial is scheduled to commence in three and a half weeks’ time. The closer to trial, the more difficult it is to persuade a Court to grant leave.
(c)In relation to documents from Categories 1 and 3, the defendants had disclosed documents that gave the plaintiff the opportunity to be aware in February 2021, or September 2022 at the latest, that the Trust had not disposed of its interest in Gold Bay Mussels Limited and, in January 2023, that the Trust had made an advance to Trust No 2.
(d)At least one of the categories of documents sought (Category 2) is broad and ill-defined. The plaintiff seeks financial statements, management accounts and fixed asset registers for six entities. The plaintiff complains that the defendants have offered no explanation as to their function and purpose. It submits that it can reasonably be inferred that MacLab Marine Holdings Pty Limited, MacLab (NZ) No 2 Limited, and MacLab (NZ) No 3 Pty Limited are related to the business and operations of the Trust. The lack of explanation from the defendants
and an inference that they are in some way connected with the Trust is insufficient to establish relevance to pleaded issues three and a half weeks prior to trial, particularly where proceedings were filed over four years earlier.
(e)Without necessarily determining the issue, there is apparent merit in the defendants’ submission that the documents sought are not relevant to any pleaded issue. The plaintiff’s substantive claim centres on alleged breaches of a procurement and supply agreement, dated 12 March 2014, by the first defendant. Counsel for the defendants submits that the plaintiff’s claim boils down to four key issues:
(i)Royalty issue: Did the first defendant properly account for the royalty of five per cent of gross revenues attributable to the sale of mussel powder and oil to third party customers?
(ii)Entity structure issue: Was the first defendant entitled to create the Trust to operate its business as opposed to a different form of corporate structure? Was the plaintiff deprived of certain protections as a result of the creation of the Trust?
(iii)Debt issue: Did the parties agree that the first defendant was to transfer only its assets to the plaintiff without any corresponding debts and liabilities?
(iv)Missing assets issue: Did the first defendant transfer substantially the assets held, as at 6 March 2014, to the Trust?
The plaintiff points to cl 28(3) of the statement of claim as establishing relevance to a pleaded issue, but cl 28(3) refers to the first defendant as breaching its obligations under the contract. There does not appear to be any pleaded allegation against the Trust, yet the documents sought relate to actions of the Trust in selling assets and licensing them back or advancing funds which were repaid in full (Categories 1 and 3). The
plaintiff’s suggestion in its submissions that the Trust has disposed of assets in a manner that is detrimental to the value of the Trust is not pleaded. There was no restriction on the Trust buying and selling assets once it was formed, more than two years after the agreement, and the plaintiff does not plead otherwise.
(f)The existing documentation has enabled Mr Hussey to calculate its specific loss arising from the first defendant’s alleged breaches of the 2014 agreement:
(i)At least $5,276,000, being the 2023 value arising from the entity structure issue, missing assets issue and debt issue.
(ii)At least $462,000 in relation to the royalty issue.
(iii)Alternatively, if the first defendant was entitled to establish the Trust, at least $3,620,000, being the difference between the 2023 value of the Trust, including the alleged value associated with the debt issue and the missing assets issue; and the 2023 value of the Trust.
Result
[30] It would not be in the interests of justice to grant leave to the plaintiff to file its application for particular discovery. Searching for and reviewing documents in broad and ill-defined categories will also prejudice the defendants’ preparation for a three- week trial that includes complex expert evidence. Looking beyond the question of leave, there are also real doubts about the relevance of the documents sought. When the Court balances the likely time and cost of discovery against its potential value, the balance is clearly in favour of declining the application.
[31] The notice of interlocutory application for particular discovery from the defendants dated 2 June 2023 is dismissed. Costs are to follow the event. If they cannot be agreed, the parties are to file memoranda of no more than five pages by 31 July 2023 and I will determine costs on the papers.
Woolford J
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