Torchlight Fund no.1 LP (in receivership) v Johnstone
[2017] NZHC 2835
•17 November 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2014-404-002136 [2017] NZHC 2835
UNDER the Receiverships Act 1993 BETWEEN
TORCHLIGHT FUND NO. 1 LP (IN RECEIVERSHIP)
Plaintiff
AND
KARE JOHNSTONE, WILLIAM GUY BLACK, AND JASON PRESTON
First Defendants
WILACI PTY LTD Second Defendants
NZ CREDIT FUND (GP) 1 LIMITED (IN LIQUIDATION)
Counterclaim Defendant
Hearing: 17 November 2017 Appearances:
M C Smith and A Ho for Proposed Examinee/Applicant N Gedye QC and M McCarthy for Second Defendant/Respondent
Judgment:
17 November 2017
JUDGMENT OF VENNING J
ON APPLICATION TO SET ASIDE ORDER FOR EXAMINATION
This judgment was delivered by me on 17 November 2017 at 4.00 pm, pursuant to Rule 11.5 of the
High Court Rules.
Solicitors: Gilbert Walker, Auckland
Lowndes Ltd, Auckland
Copy to: N Gedye QC, Auckland
NBR
TORCHLIGHT FUND NO. 1 LP (IN REC) v JOHNSTONE & ORS [2017] NZHC 2835 [17 November 2017]
[1] Mr Kerr has been served with a summons requiring him to attend for examination on 12 December 2017. He applies to set aside that summons.
Background
[2] On 2 May 2017 the Court of Appeal gave judgment for Wilaci Pty Ltd (Wilaci) against Torchlight Fund No. 1 LP (in receivership) (Torchlight) and NZ Credit Fund (GP) 1 Limited (in liquidation) (NZGP) for AUD$31,477,194 together with interest from 1 August 2015 and costs and disbursements of $21,550.23.
[3] At all material times Mr Kerr was a director of NZGP. NZGP was itself the general partner of Torchlight. Wilaci applied for and obtained without notice an order requiring Mr Kerr to attend Court for examination under HCR 17.12. The order required him to be orally examined on oath about both NZGP and Torchlight’s:
(i) receipts and payments for the preceding 52 weeks;
(ii) assets and liabilities;
(iii) income and expenditure; and
(iv) means of satisfying the judgment.
[4] In relation to NZGP Mr Kerr was also required to produce the following documents:
(i)financial statements for NZGP for the years 31 March 2011 through to 31 March 2017, and management accounts for the period 1 April 2017 to date;
(ii) all tax returns for NZGP for the years 2011 through to current.
[5] In relation to Torchlight Mr Kerr was also required to produce the following documents:
(i) any financial statements or management accounts for
Torchlight from 31 March 2013 to date; and
(ii) all tax returns for the plaintiff for the years 2011 through.
[6] Following the issue of the order NZGP was put into liquidation on Wilaci’s application on 6 October 2017. The liquidators consent to the continuation of the proceeding but abide the decision of the Court as to the outcome of this particular application.
[7] As noted the order for examination was made without notice. Mr Kerr is entitled to be heard on the application to set the order for examination aside. He applies to have the order for examination set aside on the following grounds:
(a) Wilaci did not first serve a notice under r 17.10 before resorting to an application under r 17.12.
(b)Wilaci appointed receivers over Torchlight pursuant to a general security agreement on 10 June 2014, and the receivers have commenced proceedings to recover the judgment sum. Wilaci has also commenced other proceedings against Mr Kerr personally. The proposed examination is outside the scope of the procedure as it is made to obtain information to bolster enforcement steps already in train or to potentially conduct a “dress rehearsal of cross-examination of Mr Kerr”.
(c) NZGP was placed into liquidation on Wilaci’s application on 6 October
2017. The liquidators have required Mr Kerr to deliver up NZGP’s trading and statutory records and indicated they may choose to examine him under oath pursuant to s 261(3)(c) of the Companies Act 1993 in due course.
(d) An examination could not lead to an increase in assets of Torchlight or
NZGP from which to satisfy Wilaci’s judgment given the information
already available and the undertakings provided by other defendants in the receivers’ proceedings.
(e) The cost and inconvenience to Mr Kerr outweighs the benefit of the examination order to Wilaci.
(f) The order for examination was not properly served. It was served on
Mr Kerr overseas without leave having been applied for.
[8] In his focussed oral submissions, Mr Smith identified three threads to Mr
Kerr’s application:
• Neither Torchlight nor NZGP are active – pointlessness.
• The existence of the other proceedings – an abuse of process.
•Concerted campaign against Mr Kerr personally – convenience and abuse of process.
[9] While focusing his submissions on those threads, Mr Smith did not abandon the other grounds.
[10] Mr Kerr has sworn an affidavit in support of his opposition. He says his recollection is that NZGP was not required to and did not prepare standalone financial statements or tax returns but rather reported its financial affairs as part of the consolidated Pyne Gould Corporation (PGC) accounts. If separate financial
statements or tax returns for NZGP do exist, they would have been prepared and held by PGC’s accountants, who are Deloitte, up to 30 June 2014 and Praxis ITM after that. He says he expects the liquidators will make any necessary inquiries.
Principles
[11] The parties are largely agreed on the principles to apply to an application for examination. An examination is not to be ordered mechanically and is to be granted in the exercise of the Court’s discretion.1
[12] Once judgment has been entered the Court will more readily accept the discretion ought to be exercised in favour of the examination. In AMP Finance Ltd v Linecorp Investments Ltd Barker J distinguished between an application prior to judgment and an application after judgment stating:2
The position is of course different once judgment has been entered. The plaintiff then has a cast-iron justification for wanting to know the defendant’s assets.
[13] The means of satisfying the judgment under r 17.12(3)(iv) are not limited to pecuniary resources immediately available to satisfy the judgment debt but extend to resources or sources whereby assets or property may become available to satisfy the judgment debt.3
[14] The examination is intended to be vigorous.4 It is an extraordinary power of inquisitorial nature.5
[15] With those principles in mind, I turn to the issues raised by Mr Kerr in opposition to the issue of the order for examination.
[16] There is one preliminary point. Mr Gedye QC noted that neither of the judgment debtors opposed the examination. He submitted that where the examinee personally sought to set the summons aside the grounds should be restricted to personal considerations, such as:
• pointlessness;
1 First Fishing Company Ltd v Wairau Energy Centre Ltd (1991) 4 PRNZ 222 at 224; and Wiltshire
Investments Ltd v Halstead HC Auckland CIV-2005-404-6473, 10 May 2010.
2 AMP Finance Ltd v Linecorp Investments Ltd HC Auckland CP351/90, 14 June 1991.
3 McCormack v National Australia Bank Ltd (1992) 106 ALR 647 (FCA), at 650.
4 First Fishing Company Ltd v Wairau Energy Centre Ltd, above n 1 at 223.
5 McCormack v National Australia Bank Ltd, above n 3.
• abuse of process; and
• convenience.
[17] While I acknowledge the point, it is unnecessary to decide it, as the application in this case either falls into these categories or else relies on application of the rules.
Rule 17.10
[18] There is nothing in the point that Wilaci has not issued a notice under HCR
17.10. The wording of HCR 17.12(1) is clear. It is not necessary to serve a notice under HCR 17.10 before applying for an order for examination against an examinee6 under HCR 17.12. Context is everything. Where the judgment is for a relatively small amount the cost and formality of an examination may not be warranted and a notice under HCR 17.10 might be a reasonable first step.7 That is not the case here. Wilaci holds a sealed judgment against both NZGP and Torchlight for in excess of $31 million with interest accruing on a compounding basis. I also note that Wilaci’s solicitors have invited Mr Kerr (through his solicitors) to supply information, in which case it would review the need for the examination. The invitation has not been responded to.
Neither Torchlight nor NZGP are active
[19] Wilaci appointed receivers to Torchlight in June 2014. NZGP is in liquidation.
[20] A theme of Mr Kerr’s opposition to the order for examination is that all relevant information has been provided as Torchlight and NZGP have not traded since December 2012. Mr Smith submitted the receivers have seen the accounts prepared by Torchlight for the years ended 31 March 2011, 2012 and 2013. The 2013 statements record the partnership ceased trading in December 2012.
[21] Mr Smith emphasised that the liquidators of NZGP have sought copies of relevant financial information and submitted they should be left to carry out their task.
They can conduct an examination of Mr Kerr in due course.
6 The examinee referred to in HCR 17.12 includes an officer of the corporation where the party sought to be examined is a corporation.
7 Re Carters ex parte McGuigan HC Auckland CIV-2007-485-1746, 7 July 2008.
[22] Against that, as Mr Gedye submitted, the financial statements may only present part of the picture. On the evidence before the Court Torchlight and NZGP procured payment by the Cayman LP or GP of AUD$10,126,000 between February and November 2015. Further, on or about 17 December 2012 NZGP received partnership units in the Cayman LP worth at the time AUD$10,269,000. Next, while the partnership may have ceased trading, it has apparently remained active. Seven days after being served with the statutory demand on 31 July 2017 NZGP transferred its shares in its subsidiary Torchlight Real Estate Fund Limited (TREFL) to Torchlight GP Ltd, the general partner of Torchlight Fund LP registered in the Cayman Islands.
[23] Mr Gedye also referred to the affidavit of Ms Gair sworn yesterday. Ms Gair is a senior manager working with the receivers of Torchlight. On 15 November she spoke to one of the liquidators of NZGP. She says that in the course of that discussion he disclosed that the liquidators had obtained a document relating to NZGP that showed it had substantial receivables as at 30 April 2014. The liquidator has presently declined an invitation to provide an affidavit to confirm that information. After taking advice yesterday counsel for the liquidators advised that the liquidators’ present position was to abide by any decision of the Court requiring production.
[24] Mr Smith opposed the admissibility of the affidavit on the basis it was hearsay. Mr Gedye emphasised that the purpose of the affidavit was not to rely on the truth or accuracy of the detail disclosed to Ms Gair but rather the fact that the liquidators had obtained relevant information which Mr Kerr would also be aware of. To the extent the information is hearsay, noting Mr Gedye’s point that the actual detail is not itself relied on, it would be admissible under s 20(1) of the Evidence Act 2006 and HCR
9.76(1)(d)(i) on the basis that the statement is admissible under s 18 of the Evidence Act. The circumstances in which it was made provide reasonable assurance that it is reliable and undue expense or delay would be caused if the liquidator was required to attend Court to give evidence on this interlocutory application, given the limited nature of the reliance placed on it.
[25] Next, as Mr Gedye noted, the liquidator is not presently funded to pursue a rigorous examination of Torchlight or NZGP’s affairs. The liquidators may or may not pursue an examination of Mr Kerr. If the current examination proceeds, then it
may well be unnecessary for the liquidators to pursue their own examination. The possibility of an examination by the liquidators in the future is no answer to the examination by Wilaci in these proceedings. I accept the force of Mr Gedye’s point that Wilaci is in a better position to appear and conduct an efficient examination as it and its lawyers have more than three years background knowledge of the case at present.
[26] Mr Smith also noted that in the receivership proceedings undertakings have been provided by Caymans’ defendants. Some AUD$27 million and NZ$7 million plus interest is held in Lowndes Jordan’s trust account together with a further AUD$2 million held by Credit Suisse.
[27] But the position in relation to the moneys held pursuant to the undertakings is not quite as straightforward as it might appear. First, with interest to 27 September
2017 the quantum of the unsatisfied judgment is AUD$35,267,624. It increases monthly with interest accruing. More relevantly, Mr Kerr is the director of the Cayman GP which manages the Cayman LP, both of which parties deny any liability for debts claimed by Wilaci. They assert the moneys are not assets of Torchlight and NZGP. If ultimately that is held to be correct the moneys held pursuant to the undertakings will be of no value in terms of the enforcement of the judgment debt. Wilaci is entitled to pursue other means of enforcement which may make it unnecessary to pursue those other proceedings.
Other proceedings – abuse of process
[28] In August 2014 Torchlight’s receivers commenced the 2166 proceeding seeking to trace into and recover transferred assets.
[29] The receivers have applied for Wilaci to be joined as plaintiff to that proceeding. The application is yet to be heard by the Court. The plaintiffs have signalled that a new cause of action will be introduced against Mr Kerr alleging tortious inducement of breach of contract.
[30] Further, a recent proceeding was issued in October 2017 alleging breaches of
Mr Kerr’s duties as a director. Mr Smith submitted the examination should be seen as
an attempt to obtain impermissible forensic advantage in advance of the potential claims in those other proceedings. He noted the 2166 proceedings focused on the transfer of the partnership’s assets in 2012 and suggested the examination would be an impermissible attempt to be a “deposition” for those other proceedings.
[31] Mr Smith submitted that principles applicable to a liquidators’ examination summons are applicable. In ANZ National Bank Ltd v Sheahan the Court refused to allow an examination as it would be an abuse.8 In the course of his judgment Heath J cited with approval the following comments from Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England:9
(a) Whether there is an abuse of process will depend on the purpose of the application and the circumstances of the case. Generally, for an abuse of process to be found, it is necessary that the offensive purpose be, at least, the predominant purpose.
(b) If an applicant for an examination order has the purpose of obtaining a forensic advantage not otherwise available, his or her conduct is
likely to amount to an abuse of process.
[32] But as Mr Smith properly accepted, the ANZ case is distinguishable on its facts. The Court found it would have been oppressive to require the examinee to attend an examination where no benefit could flow to the creditors of Cedenco NZ who had been paid in full.10 The present case is quite different.
[33] As to Mr Smith’s reliance on the observations in McCormack that the Court must be astute to prevent any oppressive, vexatious or unfair use of the extraordinary process, it is important to note that the Court’s comments in that case were in the context of the conduct of the examination and the nature of the questions asked rather than whether an order for examination should be made at all.
[34] Ultimately whether an examination is an abuse of process will depend on the purpose of the examination and the circumstances of the particular case. Mr Gedye
submitted that the focus of the examination would not be on the transfer in 2012, rather
8 ANZ National Bank Ltd v Sheahan [2013] 1 NZLR 674.
9 ANZ National Bank Ltd v Sheahan, above n 8, citing Re Excel Finance Corporation Ltd (Receiver
and Manager Appointed); Worthley v England (1994) 52 FCR 69 (footnotes omitted).
10 ANZ National Bank Ltd v Sheahan, above n 8.
it would be on the payment of $10,126,000 by the Cayman entities in satisfaction of other judgment debts in this proceeding and the receipt of the units in the Cayman LP worth AUD$10,269,000. Further, Wilaci wants to pursue the transfer by NZGP of its shares in Torchlight Real Estate Fund Ltd, shortly after service on it of a statutory demand on 31 July 2017. There will be other general questions about other means of satisfying the judgment.
[35] I accept that the purpose of the examination in the present case is to obtain information relevant to the ways in which Wilaci can obtain satisfaction of the judgment debt. If the examination leads to information which enables that then the other proceedings may be rendered unnecessary. In any event, it is not fatal to an examination that it may lead to other information relevant to other proceedings. I am satisfied such is not the predominant purpose of the examination in this case.
[36] At the examination Mr Kerr will obviously be represented and the Court will be alive to the issue of abuse of process. The answer to the potential for abuse lies in the control over the scope of the examination and the conduct of the examination rather than whether the order for examination, if otherwise appropriate, ought to be made.
Campaign against Mr Kerr – inconvenience
[37] While it will be inconvenient for Mr Kerr to attend the examination as he would otherwise be in London, he has strong connections with New Zealand. A recent judgment recorded him as having a home in Queenstown. His affidavit in opposition was sworn there. Also, while he was served overseas, a matter to which I will return to shortly, he was served some 75 days before the date for examination. He has had time to organise attendance at the examination. As Mr Kerr himself has properly noted, if the order stands he will reorder his affairs and attend as directed. I also note that it is implicit in the submissions that Mr Kerr would attend an examination by liquidators. Any such examination would be in New Zealand. The limited
inconvenience to Mr Kerr does not support setting aside the examination order.
Service
[38] The last issue is the issue of service. Mr Kerr was served outside New Zealand. HCR 6.30 required leave for service outside New Zealand. Wilaci did not seek leave. However, HCR 1.5(1)(b) applies. It is open for the Court to exercise its powers to make any order dealing with the proceeding generally as it thinks just: HCR 1.5(2)(b). The purpose of service was to bring the order to his attention. That has been achieved. Mr Kerr has had ample time to fully instruct solicitors in relation to the matter. It would be a vain thing and would frustrate the objective of the rules to set aside the examination order solely on the ground that leave had not been obtained before serving him overseas. Finally, I note that HCR 6.29 provides for retrospective leave to be granted where an originating process has been incorrectly served without leave. It would be strange if there could be an ex post facto remedy in such cases, but not in the present case.
[39] If necessary the Court would grant relief under HCR 1.5(2)(b) and grant leave retrospectively.
Result
[40] For the above reasons the application to set aside the examination order is dismissed. Mr Kerr is to attend the Court for examination at 10.00 am, 12 December
2017.
Costs
[41] Costs to the respondent Wilaci on a 2B basis.
Venning J
0
3
0