Frankton Gateway Apartments (2003) Limited (in liquidation) v Sullivan [2012] NZHC 2399 (21 September 2012)

Last Updated: 10 October 2012

IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY

CIV-2011-476-000060 [2012] NZHC 2399

BETWEEN FRANKTON GATEWAY APARTMENTS (2003) LIMITED (IN LIQUIDATION) Plaintiff

AND EDWARD ORAL SULLIVAN First Defendant

AND SUZETTE KAY FITZGERALD Second Defendant (Discontinued)

AND NOEL RAYMOND FITZGERALD Third Defendant

AND JOHN ROBERT MCGLASHAN Fourth Defendant

AND JOHN ROBERT MCGLASHAN, EDWARD SULLIVAN, ROBERT VINCENT, GAY FANNING, KEN MCKENZIE AND JAMES WALLACE Fifth Defendants

Hearing: 29 August 2012

Appearances: S D Munro for Plaintiff

A Challis for First, Fourth and Fifth Defendants

Judgment: 21 September 2012

_{RESERVED JUDGMENT OF ASSOCIATE JUDGE MATTHEWS}

Introduction

[1] On 11 June 2004 Frankton Gateway Apartments (2003) Limited (FGA) advanced $823,855.52 to the Trailways Trust, of which the first, second and third defendants were the trustees. On 1 July 2004 FGA advanced a further sum of

$32,000 to the Trailways Trust. In this proceeding the liquidator of FGA seeks to

_{recover these advances from the trustees (the first, second and third defendants), sues}

FRANKTON GATEWAY APARTMENTS (2003) LIMITED (IN LIQUIDATION) V EDWARD ORAL SULLIVAN HC TIM CIV-2011-476-000060 [21 September 2012]

the fourth defendant as a former director of FGA, alleging breach of his duties as a director, and sues the fifth defendants as the firm of solicitors which acted for FGA on a number of transactions, including the two advances.

[2] All of the defendants say they have specific defences to FGA’s claims, and the first, fourth and fifth defendants seek summary judgment – that is, judgment without trial – against FGA or (alternatively) orders striking out the proceedings. This judgment determines these applications.

Background facts

[3] FGA and the Trailways Trust are two of a number of entities owned at all material times by two members of the Fitzgerald family, Mr N R Fitzgerald (the third defendant) and his daughter Miss M Fitzgerald. Mr Fitzgerald is a trustee of the Trailways Trust; Miss M Fitzgerald is a director of FGA. The fifth defendant, RSM Law, acted for Mr Fitzgerald and Miss Fitzgerald, and for all the Fitzgerald entities. Either or both of them would give instructions to RSM Law in relation to the affairs of the Fitzgerald entities whether or not in relation to any particular entity the person giving the instruction was a trustee, director or manager of that entity. According to Mr Fitzgerald all the entities authorised either of them to give these instructions. RSM Law acted on instructions so given.

[4] Both the first defendant, Mr Sullivan and the fourth defendant, Mr McGlashan, were at all material times partners in RSM Law. The fourth defendant was the solicitor in the firm who attended to all work relevant to this claim.

[5] The monies advanced to the Trailways Trust represented some of the proceeds received by FGA from the sale of eight apartments in Queenstown to a Ms E M Russell. The Trailways Trust used the monies to purchase from Ms Russell a property at Lakeside Estate, Queenstown. The Trailways Trust also borrowed a sum from the Ashburton Permanent Building Society, and granted it a first mortgage. Later, the Lakeside Estate property was sold by the mortgagee without any part of the sale proceeds being available to repay any part of the advances made by FGA.

[6] The advance of $823,855.52 was recorded in the accounts for the Trailways

Trust as a debt owing to FGA, and in the accounts of FGA as an asset. On 24 March

2009 Mr G L Hansen was appointed liquidator of FGA. On 1 September 2009 FGA

made written demand on the trustees for payment of $855,856 by 5.00 pm on Friday,

11 September 2009. The demand was not met, resulting in this proceeding being issued.

Legal principles applying to applications to strike out, and for summary judgment in favour of a defendant

[7] Rule 15.1 provides:

15.1 Dismissing or staying all or part of proceeding

(1) The court may strike out all or part of a pleading if it –

(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or

(b) is likely to cause prejudice or delay; or

(c) is frivolous or vexatious; or

(d) is otherwise an abuse of the process of the court.

(2) If the court strikes out a statement of claim or a counterclaim under subclause (1), it may by the same or a subsequent order dismiss the proceeding or the counterclaim.

(3) Instead of striking out all or part of a pleading under subclause (1), the court may stay all or part of the proceeding on such conditions as are considered just.

(4) This rule does not affect the court’s inherent jurisdiction.

[8] The defendants rely on r 15.1(2) and ask that the proceeding be dismissed. The principles to be applied by the Court in considering an application under this rule were summarised in Attorney-General v Prince1 thus:

(a) Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation.

(b) The cause of action or defence must be clearly untenable.

(c) The jurisdiction is to be exercised sparingly, and only in clear cases.

This reflects the Court’s reluctance to terminate a claim or defence

short of trial.

(d) The jurisdiction is not excluded by the need to decide difficult questions of law requiring extensive argument.

(e) The Court should be particularly slow to strike out a claim in any developing area of the law, perhaps particularly where a duty of care is alleged in a new situation.

[9] In Couch v Attorney-General,2 Elias CJ and Anderson J said, in relation to the second of these criteria, that it is inappropriate to strike out a claim summarily unless the Court can be certain that it cannot succeed.

[10] The Court may enter summary judgment against FGA if a defendant establishes that none of the causes of action against that defendant can succeed.3

[11] Again, the principles to be applied are settled:4

(a) A defendant who has a clear answer to the plaintiff’s claim, which cannot be contradicted, can advance evidence to summarily dismiss the proceedings.

(b) To succeed the defendant must prove on the balance of probabilities that the plaintiff cannot succeed. This may occur where the defendant offers evidence which is a complete defence to the claim.

(c) Summary judgment is appropriate where abbreviated procedure and affidavit evidence will sufficiently expose the facts and legal issues. It

2 _{Couch v Attorney-General [2008] NZSC 45.}

3 _{HCR 12.2(2).}

4. Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA), cited with approval in Jones v Attorney-General [2004] 1 NZLR 433 (PC).

is inappropriate where there are factual disputes or where the Court must determine material facts independently of affidavit evidence.

The issues to be decided

[12] All the applicants raise one issue: whether the positive defence raised in each statement of defence, that the plaintiff ’s claims against them are barred by the provisions of the Limitation Act 1950,5 must be treated by the Court as admitted by the plaintiff given that the plaintiff did not file a reply within 10 working days after the day on which the statement of defence was served. The first issue to be determined is whether rr 5.62 and 5.63 of the High Court Rules have this effect.

[13] Secondly, each of the applicants raises limitation as a ground for summary judgment. Mr Sullivan also alleges that his liability, if any, is limited to the assets of the Trailways Trust, and that he did not authorise the advances to be made so is not bound by them.

[14] Thirdly, Mr McGlashan pleads that he did not owe the duty of care as a director relied on by FGA.

[15] Fourthly, RSM Law pleads that it did not act for FGA, and that if it did it did not breach a duty of care to that firm.

[16] After dealing with the first issue, it will be convenient to deal with these defences in groups by reference to the three separate defendants. In each case the issue is whether the defendants have established the defence to the requisite standard, in accordance with the above principles, so that either judgment should be entered for the defendants or the proceeding should be struck out.

Rules 5.62 and 5.63: filing and service of a reply

[17] Rule 5.62 provides:

5.62 Duty to file and serve reply

If a statement of defence asserts an affirmative defence or contains any positive allegation affecting any other party, the plaintiff or that other party must, within 10 working days after the day on which that statement of defence is served, file a reply and serve it on the party serving the statement of defence.

[18] Rule 5.63 provides:

5.63 Contents of reply

(1) A reply must be limited to answering the affirmative defence or positive allegation and otherwise must comply with the rules governing statements of defence so far as they are applicable.

(2) An affirmative defence or positive allegation in a statement of defence that is not denied is treated as being admitted.

[19] Ms Challis submits that the duty set out in r 5.62 is mandatory – the rule uses the word “must” and sets a time limit for the filing and service of a reply. Rule 5.63 sets out a mandatory limitation on the contents of a reply and a requirement that it must comply with the rules governing statements of defence, so far as applicable. Rule 5.63(2) then provides that an affirmative defence or positive allegation in a statement of defence that is not denied “is treated as being admitted”, from which Ms Challis invites me to determine that if a reply is not filed within the requisite time, a plaintiff is barred from denying the defence. The result in this case would be that the defence of limitation bars every claim.

[20] Ms Challis accepts that there is no prejudice from lack of notice to the defendants because FGA’s opposition to the Limitation Act argument was notified in other documents, and that she cannot point me to any authority supporting her proposition.

[21] Mr Munro argues that when a limitation defence was first raised in the statement of defence, FGA filed an amended statement of claim with particulars relevant to the accrual of the causes of action against the trustees of the trust, and

these amendments flowed through into the second amended statement of claim which was filed after joinder of the fourth and fifth defendants. Thus, he submits, the affirmative defence raised by the first, fourth and fifth defendants had already been answered by the time the fourth and fifth defendants first pleaded a limitation defence.

[22] Secondly, Mr Munro notes that before the first case management conference FGA filed a memorandum noting that the limitation defence was in issue, which was accepted in a memorandum of counsel for the first defendant two days later and recognised by the Court in a Minute issued from the conference three days after that.

[23] Thirdly, Mr Munro, pointing out that the same firm of solicitors acted for the first, fourth and fifth defendants throughout, refers to a joint memorandum signed on behalf of these parties on 8 November 2011 acknowledging that the issues in the proceeding include when the causes against the defendants accrued and whether the Limitation Act 1950 applies.

[24] Fourthly, Mr Munro notes that the liquidator of FGA swore an affidavit in June 2011 in which he confirmed that FGA denies the defences raised, including the limitation defence.

[25] Mr Munro therefore submits that the defendants have been fully aware that Limitation Act defences are in issue, from an early point in the proceeding, so a reply, although required by r 5.62, would have added nothing to the state of the pleadings. He submits that there is no public policy argument in favour of requiring a further denial to be made in a reply document when that denial has already been made and is common ground between the parties.

[26] Mr Munro argues that if the filing of a reply document is to be treated as mandatory, FGA should be given an extension of time under r 1.19 to file it. He candidly accepts that FGA’s solicitors had not turned their minds to the filing of a reply as FGA’s denial of the pleaded limitation defence was documented already. He also submits that no prejudice has been caused by the delay in filing a reply.

[27] In Sargison v VinPro Ltd,6 the Judge noted the discretion to extend time “must ultimately be exercised in the light of the overall justice of the case”. In granting an application for extension of time to file a reply in that case, the Judge noted that there was no room for any doubt that the affirmative defences pleaded by the defendant were squarely in issue.

[28] Counsel also relied on Main Farm Ltd (in Rec) v Otago Regional Council,7 where, in the absence of a reply being filed, leave was granted to amend the statement of claim to deny an affirmative defence because in the absence of any prejudice to the defendants in that case, it was in the interests of justice to do so.

[29] There is no doubt that the filing and service of a reply to a positive defence is a mandatory procedural step. Rule 5.62 is worded in directory terms, a time limit is set, and r 5.63 sets out the requirements for a reply. It is consistent with the mandatory nature of the filing requirements that the lack of a reply should have an effect, and that effect is set out in r 5.63(2) – the affirmative defence to which there has not been a reply is to be treated as being admitted.

[30] The difficulty, however, in interpreting r 5.63(2) in the way urged on me by the defendants is that a slip in the process of refining the pleadings would have the effect of denying FGA the right to argue the validity of the positive defence claimed

– in other words, it would bring all or part of FGA’s claim to a peremptory halt, even though the claimed positive defence might, in some cases at least, lack merit. I do not think that the rule was intended to have that effect. It may be compared with the situation that applies when a statement of defence is not filed within time. The Rules allow a plaintiff to obtain judgment by various steps depending on the nature of the proceeding. In contrast there are no equivalent rules which specifically allow a defendant to seek a permanent stay or strike-out of a plaintiff’s claim on the ground that a reply has not been served. In my opinion this supports an interpretation of rr

5.62 and 5.63 as a mechanism to bring about prompt definition of the issues in a

_{case. I do not think these rules are to be interpreted so as to deprive a plaintiff of}

6. Sargison v VinPro Ltd HC Dunedin CIV-2011-412-453 28 October 2011, Associate Judge Osborne.

7 Main Farm Ltd (in Rec) v Otago Regional Council HC Dunedin CIV- 2010-412-385

21 November 2011, French J.

access to justice. The phrase “treated as being admitted” should be interpreted as

having procedural effect only, not substantive.

[31] In my opinion it is open to the Court to find that a reply has been sufficiently given in another formal document filed in the interlocutory process, including by way of a memorandum filed by counsel for the purposes of a case management conference, and that in the absence of any document sufficiently constituting a reply, and putting the defendants on notice that a claimed positive defence is in issue, it is appropriate where the interests of justice so require, to extend time (Sargison v VinPro Ltd and Main Farm Ltd (in Rec) v Otago Regional Council, at [27] above).

[32] Accordingly I reject the defendants’ submission that the positive defence must prevail. I am satisfied that there has been sufficient response to the positive defences to comply with the rules. However, out of an abundance of caution I am prepared to extend time for the filing of a reply as requested by FGA.

Mr E O’Sullivan’s application

[33] For Mr Sullivan, Ms Challis advances three defences:

The proceeding against Mr Sullivan was issued more than six years after the cause of action accrued, and there has been no subsequent acknowledgement of the claim so it is barred by the Limitation Act

1950.

Alternatively, any liability Mr Sullivan has is limited to the assets of the Trailways Trust.

Mr Sullivan did not know of or consent to the making of the advances and therefore is not liable to repay them.

Limitation Act 1950

[34] Ms Challis argues that as the loans were made in June and July 2004, and this proceeding was issued in February 2011, recovery of the advances is statute-barred.

Ms Challis says that the loans were repayable upon demand with the result that the cause of action accrued when the advances were made. She says there has not been any subsequent acknowledgement of liability. Accordingly there are two issues to be decided:

a) When did the cause of action accrue?

b) If it accrued at the time the advances were made, has there been a subsequent acknowledgement of liability?

First issue: when did the cause of action accrue?

[35] Mr Munro argues that the advances were not repayable immediately they were made, and therefore the cause of action against the first defendant did not accrue in respect of each of the advances on the date it was made.

[36] There are scant contemporaneous records of the terms on which either advance was made. Mr Fitzgerald says that Mr McGlashan of RSM Law queried whether the advances should be subject to a mortgage or other security. He considered that as the advances were “going to be of such short term, no security was needed”. He says that Mr McGlashan then drafted a deed of acknowledgement of debt in relation to the advances but it was never signed. He produced a copy of the draft, which relates only to the advance of $823,855.52, not the $32,000 advance. Mr Fitzgerald and Mr Sullivan are described as “the debtor”, and at paragraph 2 the draft provides:

The debtor will repay the advance to the creditor UPON DEMAND free of interest.

[37] The only other record produced to the Court is the accounts for the trust at

31 March 2007. In the statement of financial position, under the heading “Current Liabilities”, unsecured loan accounts are recorded in the sum of $1,065,139. In the schedule of unsecured loan accounts there is a breakdown of this figure and it includes $823,856 owing to Frankton Gateway Apartments (2003) Limited.

[38] In DFC v McKenzie New Zealand Ltd,8 Tipping J considered the effect of an on-demand obligation. He stated:

It has been the law for centuries that if the contract of loan is silent about repayment the lender’s right to repayment arises at the time the money is advanced and time for limitation purposes commences to run forthwith. The same applies when the obligation to pay is expressed simply as being “on demand”.

Later in the judgment his Honour said:

The true distinction is therefore that if the obligation to repay is expressed as “on demand” simpliciter there is no requirement to make demand and time starts to run from the date the monies were advanced. This is because the law has treated the words “on demand” as adding nothing to the implied promise immediately to repay. In a sense the words “on demand” simply reinforce and declare what the law takes to be implicit anyway. If, however, the parties have either expressly or by necessary implication demonstrated an intention that a demand is required in order to create a liability to repay, time does not start to run until the making of the demand. In the case of a loan on demand simpliciter the demand is not part of the cause of action. The position is otherwise if the demand is intended to be part of the cause of action.

[39] His Honour went on to cite Murphy v Lawrence & Anor.9 In that case it was provided in the loan acknowledgement that pending demand for repayment being made certain instalments were to be paid. This requirement demonstrated an intention by the parties that there be a demand before the principal sum as a whole became payable.

[40] Mr Munro noted that in his affidavit Mr McGlashan said:

At the time I resigned [as a director of the plaintiff], [the plaintiff] had not made demand for repayment of the advances so they had not been repaid.

Mr Munro submits that this implies that the advances were not to be repayable unless demand was made, which did not occur until 1 September 2009. Mr Munro says this evidence is not contradicted by any of the other defendants so should be accepted for the purposes of this application. Even if it were contradicted, that would amount to a dispute on a crucial factual issue which should be resolved at

_trial.

8 _{DFC New Zealand Ltd v McKenzie [1993] 2 NZLR 576.}

9 Murphy v Lawrence & Anor [1960] NZLR 772.

[41] Ms Challis submits that the only record of the terms of the larger advance is the draft deed prepared in 2010 which states that the debtor will repay the advance upon demand free of interest. She says there is no suggestion that this is other than a correct record of agreement made at the time, and no obligations to make any other payments, as in Anchorage Management Ltd v Oldham10 and Murphy v Lawrence, existed in this case.

[42] In my opinion the cause of action to recover the debts accrued when the advances were made. There is no evidence of any agreement being made at the time that takes them outside the position described by Tipping J in DFC v McKenzie – that if the contract of loan is silent about repayment the lender’s right to repayment arises at the time the money is advanced and time for limitation purposes commences to run at that point. Whilst little weight can be given to a draft deed of acknowledgement of debt prepared six years later, it may be noted that it provides for the advances to be repayable upon demand which, again, directs that they are repayable immediately. There is no suggestion that any interest was paid, or payable, in the intervening period, to take the advances outside these principles.

[43] The evidence from Mr McGlashan does not alter this. The same position applies whether the loan terms are silent on an obligation to repay, or the obligation to pay is expressed as being on demand. Mr McGlashan said that demand had not been made so the advances had not been repaid. That does not place the advances outside the description given by Tipping J of loans repayable at once.

[44] I therefore find that the causes of action to recover the advances accrued at the time the advances were made in June and July 2004. Absent subsequent acknowledgement, the claim would be time-barred.

[45] Mr Munro argues that there has been a subsequent acknowledgement of debt with the consequence that the cause of action accrued on and not before the date of that acknowledgement.11

[46] Section 26 of the Limitation Act 1950 provides:

26. Formal provisions as to acknowledgements and part payments –

(1) Every such acknowledgement as aforesaid shall be in writing and shall be signed by the person making the acknowledgement.

(2) Any such acknowledgement or payment as aforesaid may be made by the agent of the person by whom it is required to be made under the last preceding section, and shall be made to the person or to an agent of the person whose title or claim is being acknowledged or, as the case may be, in respect of whose claim the payment is made.

[47] For there to be an acknowledgement in this case sufficient to direct that the cause of action accrued when it was made it must be shown that:

There was an acknowledgement in writing. It was signed by Mr Sullivan or his agent. It was made to FGA or to its agent.

[48] For the acknowledgement in writing and the signature of Mr Sullivan, Mr Munro relies on the accounts for the Trailways Trust to 31 March 2007, to which I have referred already, in conjunction with a deed of appointment of new trustees in the Trailways Trust dated 27 May 2011. This document records the resignation of Mr Sullivan as a trustee, and the appointment of two new trustees to hold office in addition to Mr N R Fitzgerald. The document is signed by Mr Sullivan. In the document Mr Sullivan (and the other trustees) “declare that the investments and property as set out in the schedule hereto shall vest in the said new trustees and continuing trustee absolutely”.

Those assets described in the annual accounts prepared for the trust by

Martin Wakefield & Co Limited chartered accountants, Timaru.

These are the accounts to which I have referred. The accounts themselves are not signed.

[50] Mr Munro argues that the accounts contain an acknowledgement in writing of the larger debt, and that the requirement that the acknowledgement be in writing and signed by Mr Sullivan is satisfied by his execution of the deed of retirement in which the accounts are referred to. Mr Munro then relies on the evidence of Ms L M Taylor, a solicitor employed by his firm who says that the deed and this set of accounts were provided to the solicitors for FGA, on or about 23 December 2011 by the solicitors for Mr Sullivan, during the process of inspecting discovered documents.

[51] Mr Munro has a second, alternative argument. There is a handwritten notation on one of the execution pages of the deed of retirement where Mr Fitzgerald has written “This deed is signed in substitution for a document of like effect completed by the parties in May 2009 which deed has been misplaced.” Mr Munro argues that as Mr Fitzgerald was a party to the deed in 2009 and was at that time the agent or manager of FGA, the acknowledgement by Mr Sullivan was given to FGA through its agent.

[52] Ms Challis submits that the deed of retirement does not amount to an acknowledgement. She points out that the deed refers to “the investments and property as set out in the schedule” and not the debts, and the schedule refers to “those assets described in the annual accounts” and, again, not the debts.

[53] Exhibited to Mr Fitzgerald’s affidavit is a statement dated 11 September 2010 said to have been made by Michelle Fitzgerald, a director of FGA from October

2003. She refers to there having been an advance to the trust from FGA of

$823,855.52 and a further advance of $32,000. In her statement she says that it was not and never has been intended by FGA that Mr Sullivan was to have any personal

responsibility for these advances, beyond the extent of the trust assets at his disposal to satisfy the trust indebtedness. I deal with the possible limitation on Mr Sullivan’s liability later, but in the context of time limitation Ms Challis says this statement does not acknowledge that the debt remains owing as at September 2010, only states that the advances were made.

[54] An acknowledgement in writing need not be contained in a document prepared for that express purpose, so long as the statutory requirements are met.12

_{Nor need there be a promise to pay.}13 _{Rather, it is necessary that the debtor}

recognises the existence of the debt.14 The Court will examine what the document says in order to determine whether or not it is an acknowledgement.15

[55] A signed set of accounts can amount to an acknowledgement for the purposes of s 26 if it contains a record of the debt.16 If the accounts produced in this case were signed there could be no question but that they amount to an acknowledgement. However, they are not. Rather, FGA says that the requirement that the acknowledgement be signed is satisfied by the signed deed which refers to the accounts. It will be recalled that the deed itself does not refer to the liabilities of the

trust, only to the assets shown in the accounts. Section 26 can only be satisfied if Mr Sullivan’s signature on the deed, and the accounts, can be considered together as constituting an acknowledgement. No authority for this proposition was produced.

[56] In my opinion the deed of retirement combined with the accounts referred to in it do sufficiently amount to an acknowledgement of the debt to FGA for the purposes of s 26, for the following reasons. The accounts were referred to in the deed of retirement to identify the investments and property in the trust so that they can vest in the new trustees and the continuing trustee absolutely (see operative clause (a)). By signing the deed Mr Sullivan acknowledged that the assets of the trust are accurately set out in the accounts. There is no suggestion that the liabilities

_{are not accurately set out in the accounts (though they exclude the smaller advance}

12 _{Re Richards [1933] NZLR 55.}

13 _{Arthur Yates & Co Ltd v Whitham [1939] NZLR 470 and Brown v Adams [1939] NZLR 226.}

14 _{Wright v Pepin (1954) 1 WLR 635.}

15 _{Brogan v Public Trust (1915) 34 NZLR 548 and Brown v Adams.}

16 See fn 9, Consolidated Agencies Ltd v Bertram [1965] 1 AC 470.

of $32,000). It would be unrealistic in my view to construe the deed and reference to the accounts as accurately stating the assets but not acknowledging the liabilities of the trust as well. The position differs of course from the situation in Anchorage Management where the accounts themselves were signed and the signatories thereby acknowledged the accuracy of their contents. I do not think the distinction between that situation, and the representation of the financial position of the trust to new trustees by referring to the full accounts of the trust in a deed of retirement, is material. Either way the information that the debt was accepted by the trustees as existing as at the date of the accounts is formally presented as accurate, and signed.

[57] I find, therefore, that Mr Sullivan acknowledged indebtedness of the trust to FGA in the sum of $823,856 on execution of the deed of retirement on 27 May 2011. He may also have done so in May 2009 given the statement by Mr Fitzgerald that the

2011 deed was signed in substitution for an earlier document to similar effect at that time. However, I need not decide that point.

[58] On the evidence of Ms L M Taylor a copy of the deed and the accounts were provided by Mr Sullivan’s secretary to Anthony Harper, solicitors for FGA by email on the day the deed was executed, 27 May 2011. By that means, the acknowledgement was made to the agent of FGA which is sufficient for s 26.

[59] I find therefore that the formal requirements of ss 25-26 of the Limitation Act

1950 have been satisfied, and the cause of action in respect of the debt of $823,856 accrued on 27 May 2011.

Is the liability of Mr Sullivan limited to the assets of the trust?

[60] As already noted, there is no contemporaneously executed document recording the terms of the advance. Ms Challis submits that a limitation of a trustee’s liability to the assets of the trust is entirely usual, and noted that one appears in the unsigned draft acknowledgement of debt prepared in 2010.

[61] Mr Sullivan has not given evidence on this proceeding. Nor has Ms S K Fitzgerald, the second defendant. The third of the three trustees is Mr N R Fitzgerald. In his affidavit in support of these applications he says:

There was no requirement that all of the trustees needed to consent to a particular decision for it to be binding on the trust; it was sufficient to have only one trustee’s signature. I would usually give all instructions on behalf of the trust and would not seek [Mr Sullivan’s] consent. Michelle and I always intended and understood that [Mr Sullivan] was a professional trustee of the Trailways Trust and any liability he had would be limited to the assets of the trust. However I am not aware of any formal documents being signed confirming this position. A copy of Michelle’s statement to this effect is attached as exhibit NF3.

[62] “Michelle” referred to above is Michelle Fitzgerald, a director of FGA at all material times. I have referred to her unsworn statement dated 11 September 2010, above. In it, at paragraph 6, she says:

It was not and never has been intended by Frankton Gateway Apartments (2003) Limited that [Mr Sullivan] was to have any personal responsibility for the advance made to the trust. I did not and do not accept that his liability at any junction should be more than the trust’s assets at its disposal to satisfy the trust’s indebtedness.

[63] This statement is not made in sworn testimony. I can give it little weight.

[64] In the absence of agreement by a creditor to the contrary the liability of a trustee for an advance to a trust is unlimited. The creditor is FGA. Mr Noel Fitzgerald was not a director of FGA, though it seems that in terms of the activities of the company and instructions given to RSM Law, he was largely if not wholly in charge. Mr McGlashan of RSM Law was a director, and undertook the work associated with the transactions in issue in this case, but in his affidavit does not refer to this issue.

[65] The evidence in support of the proposition that the liability of Mr Sullivan is limited to the assets of the Trailways Trust does not satisfy me that this was the case. It comprises a statement in a draft deed of acknowledgement drawn up years after the event, a statement of intention and understanding by Mr Fitzgerald who was not a director of FGA at the time, and an unsworn statement of intention by one of the

directors, on which I can place little weight. There is little probative evidence of any

intention by FGA that Mr Sullivan’s liability was limited as suggested.

Were the advances made with Mr Sullivan’s consent or knowledge?

[66] As noted, Mr Sullivan has not given evidence. I do not therefore have any direct evidence on whether he did or did not know that these advances were being made. The instructions to Mr McGlashan and RSM Law to transfer the monies from FGA to the Trailways Trust were given by Mr Fitzgerald to Mr McGlashan. Mr Fitzgerald says in his affidavit that he signed all the documents relating to the purchase of the Scenic Drive property for which the advances were made, and “as far as I know, Ed was not aware the advances were made”. He also says “As noted above, Ed’s consent was not required in order for me to bind the trust”. Mr McGlashan does not speculate on the state of Mr Sullivan’s knowledge.

[67] The evidence falls well short of satisfying me that Mr Sullivan did not know of these advances.

Mr J R McGlashan

[68] At material times Mr McGlashan was a director of FGA. He was also a partner in RSM Law which acted for FGA and for the Trailways Trust. He accepted instructions to act on behalf of both those entities, and other Fitzgerald family entities, from Mr Noel Fitzgerald and from Ms Michelle Fitzgerald.

[69] In its cause of action against Mr McGlashan FGA pleads that as a director of

FGA he owed duties to the plaintiff under ss 135, 137 and 131 of the Companies Act

1993. Respectively, these provide:

Section 135 prohibits the directors of a company carrying on its business in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Section 137 requires the directors to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances.

Section 131 of the Act requires a director, when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company.

[70] It is pleaded that Mr McGlashan as a director caused FGA to make the advances in issue in this case and thereby acted in breach of his statutory duties and obligations. The conduct impugned is allowing the advances to be made without being documented, ensuring security was provided, or ensuring that interest was payable, and in circumstances where his partner, Mr E O Sullivan was a borrower (Mr Sullivan was a trustee of the Trailways Trust). This conduct is then described in four ways. In three of these ways, the pleading exactly mirrors, respectively, ss 135,

137 and 131. In a fourth way, the conduct is described as being reckless and imprudent.

[71] Then it is said as a result of the directors’ duties being breached, FGA has suffered loss. The loss claimed is restitution or compensation pursuant to s 301 of the Companies Act in the amount of the two advances. Interest is also claimed from the dates of the advances to the date of judgment.

[72] The pleading lacks precision. It pleads three specific statutory duties and three ways in which it is said that the duties were, respectively, breached. To that extent it is a straight-forward and clearly pleaded claim for breach of statutory duties. However, into the mix is added the context of Mr E O Sullivan being a borrower, and a general allegation that Mr McGlashan’s conduct was reckless and imprudent. In argument it emerged that FGA maintains that the claim is for breach of fiduciary duty, presumably because of this general addition to the pleadings, and the pleaded context of Mr Sullivan being a partner of Mr McGlashan, but this is mixed in with the otherwise clearly pleaded allegations of breach of statutory duties. This led, not surprisingly, to argument about whether the claim is for breach of statutory duty, to which a six year limitation period would apply, or for breach of a fiduciary duty, to which, arguably, it may not. Plainly it was open to FGA to plead against Mr McGlashan that he owed specific fiduciary duties as a director, in pleaded circumstances, and that he breached them in pleaded ways. This has not occurred.

Limitation Act

[73] Ms Challis submits that if the pleading is for breach of statutory duty, a six year limitation period applies from the date the cause of action accrued. Similarly, any tortious duties of care created by the three sections are also subject to the six year limitation period. She submits that breaches of equitable duties which are analogous to tortious duties, as here, because they allege, in essence, a failure to take reasonable care rather than any true breach of fiduciary duty, are similarly limited. As the claims are essentially tortious the cause of action accrued when damage was first suffered which was more than de minimis. Ms Challis argues that the cause of action accrued when the advances were made because FGA did not at that point receive rights that it should have had, namely to full documentation of the advances,

suitable security, and interest. Ms Challis refers to Baker v Ollard & Bentley17 and D

W Moore & Co Ltd v Ferrier,18 as authority for the proposition that in cases similar to the present the loss is suffered when the impugned actions of the solicitor took place, because it was at that point that the plaintiffs did not receive the rights that they should have received.

[74] Mr Munro submits that the breaches of his express duties by Mr McGlashan are equally a breach of his fiduciary duties to the company.

[75] Mr Munro refers to Blanchett v Keshvara.19 In that case, a company of which the defendant was a director advanced a sum of money, apparently without security or any written loan agreement or terms as to payment of interest or repayment, to a company of which the defendant was also a director. The borrower was a wholly owned subsidiary of another company of which the defendant was the sole shareholder and director at the time. On this fact situation, the Judge said:

It is difficult to imagine a clearer case of a breach of fiduciary duty or breach of the duty to act in good faith and in the best interests of the company by a company director.

17 _{Baker v Ollard & Bentley (1982) 126 SJ 593.}

18 _{D W Moore & Co Ltd v Ferrier (1998) 1 WLR 267.}

19 Blanchett v Keshvara HC Auckland CIV-2010-404-1282 13 September 2011, Venning J.

[76] Alternatively, Mr Munro submits that if I take the view that the limitation period in s 4 should be applied by analogy to FGA’s equitable claim, then also by analogy to tort the cause of action only accrued when damage was caused. He relied on Gilbert v Shanahan,20 where the Court concluded that loss did not occur until an event occurs which converts potential liability into an actual liability. He submits that whilst there was potential liability at the time the loans were made, it was not

certain then that FGA would lose any of its money; financial loss was possible but not certain. He submits that loss was arguably sustained when the Scenic Drive property was sold in February 2007; if not it was sustained when the demand for repayment of the advances was issued on 1 September 2009.

[77] In respect of these submissions Ms Challis says that the Scenic Drive property was sold for a sum below the amount required to clear the first mortgage so the lack of security over that property made no difference as nothing would have been received by FGA even if it had held a mortgage.

[78] Dealing with the last point first, that might be the case if FGA’s complaint was that a second mortgage was not taken over the Scenic Drive property, but its complaint is wider: that the loan was not even documented, nor interest made payable, let alone secured, and the complaint about lack of security is not confined to lack of a mortgage over the property being purchased by the trust.

[79] In my view, loss was not suffered at the time the Scenic Drive property was sold without repayment; that was the date on which one possible source of funding became unavailable, but the trustees’ personal liability for the debt (there being no limitation of liability clause, see above) remained. Nor can it be determined on the evidence before me that the loss was suffered when the advances were made; it may be that the trust had ample funds from which to repay at that point, including for example the Scenic Drive property. At a trial that may prove not to be the case, but I cannot speculate. In my opinion the loss was suffered when the debt became

_{irrecoverable, namely when the trustees failed to meet the demand for payment.}

20 Gilbert v Shanahan [1998] 3 NZLR 528.

[80] It follows, therefore, that the claim in tort is not time-barred. Further, a claim for breach of fiduciary duty can be clearly and explicitly pleaded as a separate cause of action. Such a claim is apparent on the pleading to a degree, but unsatisfactorily so.

Was there a breach of Mr McGlashan’s duty of care?

[81] Ms Challis submits that FGA cannot establish a breach of Mr McGlashan’s

duties of care because:

The decision to invest in Scenic Drive was thought, at the time, to be advantageous to the Fitzgerald entities, and the wisdom of hindsight is irrelevant.

Mr McGlashan received specific instructions from Mr Fitzgerald on behalf of FGA that security was not required.

the other directors of FGA were aware, or ought to have been aware, of the advances and did not raise any concerns that would or should have put Mr McGlashan on notice that security ought to be required.

[82] Whilst I accept that the breach alleged is to be assessed at the time it is said to have occurred, the evidence before me stops well short of leaving me satisfied that the claim could not succeed at trial. It is important to remember that Mr McGlashan is sued as a director not as a solicitor, and it is his duties to the company of which he was a director that are in issue. However it appears, at least, that he was the director who took responsibility for conducting the legal work the company required and I am satisfied that it is arguable – and I need put the point no higher than that – that he breached the duties to the company which he is alleged to have had. On the evidence before me it appears that Mr Fitzgerald made decisions for the company, though he was not a director, and it is arguable that Mr McGlashan simply accepted his instructions based on those decisions. In his own affidavit the only evidence he gives of bringing an independent mind to bear on the decisions made in relation to these transactions was that he agreed that the Scenic Drive purchase was a wise investment for the Fitzgerald entities. Accepting that to be so, for present purposes,

does not assist Mr McGlashan’s position. The wisdom of the investment is not precisely or solely in issue. It is the decision of FGA to advance monies unsecured, undocumented and without interest to enable the trust to make that investment that is impugned.

[83] The issues between FGA and Mr McGlashan cannot be determined on a strike-out or summary judgment application and must go to trial.

J R McGlashan, E O Sullivan, R Vincent, G Fanning, K McKenzie and

J Wallace

[84] The fifth defendant parties are the partners in RSM Law. FGA pleads that the firm acted as solicitors for and advisors to FGA and the Trailways Trust and owed to each specified fiduciary duties. It is said that the fifth defendant’s personal interests conflicted with the interest of its client FGA, and the duties it owed to FGA, because Mr E O Sullivan was a trustee of the Trailways Trust and therefore a borrower of the monies advanced. He had interests in relation to the advances that were in conflict with the interests of FGA as lender. Further, it is said that the firm owed duties and obligations to FGA which conflicted with the duties and obligations they owed to the Trailways Trust for which they were also acting as solicitors.

[85] FGA alleges that:

The firm failed to obtain authority from the directors (other than Mr

McGlashan) to effect the advances FGA made to the trust.

The firm acted on the instructions of Mr Fitzgerald (a trustee of the trust) and father of the sole shareholder of FGA.

The firm failed to advise FGA to seek legal advice in connection with the advances, independent of the advice they gave to the trust.

The firm failed to advise FGA that the advances should be documented, secured and subject to commercial interest rates.

In acting for the trust on the sale of the Scenic Drive property to another company called Mountain Blue Properties Limited, the firm failed to ensure that the advances made by FGA to fund its purchase

_{were repaid.}

[86] The first point made for the firm is comparatively straight-forward – the evidence is that the firm did not act for the trust on the sale of the Scenic Drive property to Mountain Blue Properties Limited. Accordingly paragraph 30.5 of the second amended statement of claim should be struck out.

Limitation Act 1950

[87] Ms Challis submits that the remaining claims against the firm are statute- barred for the same reasons that the claims against Mr McGlashan are statute-barred namely that the causes of action accrued at the time the advances were made which was more than six years before the proceeding was issued. Ms Challis submits that although pleaded as a claim for breach of fiduciary duties, they are actually alleged breaches of tortious duties of care by persons who happened to stand in a fiduciary relationship with the plaintiff. Ms Challis submits that on analysis the claims are for failure to take reasonable care rather than failing to act with undivided loyalty which

is necessary for a true fiduciary duty to exist.21 That being the case the applicable

limitation period is the same as it would have been had the claim been made in tort rather than in equity.22

[88] Ms Challis submits that there was no requirement for RSM Law to recommend obtaining independent advice because Mr Sullivan, who was a professional trustee of the trust and not beneficially interested under it, did not personally benefit and in any event did not have knowledge the advance was made. She also says that at least three of the four directors as well as the agent for FGA Mr Fitzgerald consented to the advances being made, so FGA had informed consent that RSM Law was acting for the trust and for FGA in relation to the advances.

_{Ms Challis submits there is no evidence that the failure to recommend to FGA that it}

21 _{Butler, Equity in Trusts in New Zealand (2}nd _{ed) 2009 at paragraph 17.3.14.}

22 Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664;

Marsh v Attorney-General [2010] 2 NZLR 683.

obtain independent advice has in any way caused or contributed to its losses because there is no evidence that it would have obtained advice or, had it done so, would have made the advances on different terms, or would not have made them at all. Advice was offered by RSM Law, but ignored.

[89] Ms Challis submits that on careful analysis the pleading does not support a breach of a fiduciary duty because neither Mr Sullivan nor Mr McGlashan stood to gain personally. Rather, the firm acted where there was a conflict of interest between two clients, FGA and the trust. This should be treated as a claim in negligence.23

[90] On that basis Ms Challis submits that the limitation period applying to actions for tort should apply and the cause of action accrued when the advances were made – her reasoning is the same as in the case of the claim against Mr McGlashan.

[91] Mr Munro takes issue with Ms Challis’s contention that Mrs Sullivan did not have knowledge the advance was made, and her contention that the three directors of FGA consented to the advances being made. He submits that the same limitation issues apply to RSM Law as applied to Mr McGlashan, and that the cause of action against the firm accrued against each at the same time.

[92] I have found that in relation to Mr McGlashan the losses alleged by FGA were suffered when FGA’s demand for repayment was made and not met and, accordingly, the claims against him were made within six years of this proceeding being issued and thus are not statute-barred.

[93] It is the date on which FGA suffered the losses which also governs the limitation issue in relation to RSM Law. Because my finding on this point brings the claims within time, whether in tort or for breach of fiduciary duty, the contention that the claims against RSM Law are statute-barred fails.

_{Did the fifth defendants breach their duty of care?}

23 Philip Shayle-George v Stratford

[94] Ms Challis submits that allegations by FGA are fundamentally flawed and amendments could not remedy the flaws:

Failing to obtain authority for FGA’s directors to effect the advances (other than Mr McGlashan): Ms Challis submits that at least two other directors knew, as did FGA’s agent Noel Fitzgerald.

Acted on Mr Fitzgerald’s instructions: Ms Challis says he was FGA’s authorised agent and manager and RSM Law was entitled to rely on his instructions.

Failing to advise FGA to seek independent legal advice: Ms Challis says there was no obligation to do so because of the knowledge of the other directors (above) and Mr Sullivan not benefiting in any way personally from the making of the advance.

Failing to advise FGA that the advances should be documented, secured and subject to commercial interest rates: Ms Challis says that the evidence shows RSM Law did advise FGA that the loan should be documented in a deed of acknowledgement of debt but was instructed it was not necessary; the Ashburton Building Society already had a first ranking mortgage so FGA’s mortgage, if it had been granted, would have been second-ranking and would not have led to the recovery of the advances when the property was sold, and in relation to interest, that as the advances were made to a related entity there is no evidence that FGA would have advanced on commercial interest rates even if advised to do so.

[95] For those reasons Ms Challis says that the claim against RSM Law cannot succeed.

[96] Mr Munro says that the knowledge of other directors is in contention; that RSM Law cannot defend their position on the basis of instructions from Mr Fitzgerald, when he was personally benefiting from the advances to the detriment of FGA for which they also acted. Mr Munro says it is not factually correct to

contend that RSM Law was instructed that documentation in a deed of acknowledgement of debt was not required – this issue only arose in 2010 by which point FGA was in liquidation and had made demand for repayment.

[97] Mr Munro says that there are factual disputes in relation to a security being available for the advances and in relation to whether or not the advances would or could have been made on commercial interest rates.

[98] Mr Munro identified a range of factual issues which he says are either in dispute or require further evidence before they can be determined.

[99] I am not satisfied that RSM Law has established to the requisite standard for summary judgment to be entered, or for the proceeding to be struck out, that FGA cannot establish a breach by RSM Law of their duty of care to FGA. In endeavouring to undertake an analysis on an item by item basis of each element of the firm’s actions which is impugned, it is important to view the overall factual position which is established and the gaps in the facts as presented. The firm acted for FGA and the Trailways Trust, which were both entities within the Fitzgerald family. One of its partners was a trustee of the trust; one was a director of FGA. The firm accepted instructions from Mr Noel Fitzgerald who was not a director of FGA and was one, only, of the trustees. There is no evidence about agreements, or even discussions between the directors or between the trustees, let alone resolutions of FGA or the trust. There is no evidence from Mr Sullivan of his knowledge or involvement. There is scant evidence from Mr McGlashan. There is no evidence from any of the other partners of the firm. There is no evidence from the other trustee, Ms S K Fitzgerald. There is little evidence about the loan transaction itself: the purchase price of the Scenic Drive property is known, but not the amount of the first mortgage nor whether, therefore, the trust contributed any equity or borrowed the entire balance of the price from the company. In short, the matrix of fact is incomplete to the point where it may fairly be described as patchy at best. To the extent that any conclusions can be drawn from the evidence as it stands, it seems the Fitzgerald family’s affairs were run by Mr Noel Fitzgerald and Ms Michelle Fitzgerald as they saw fit, that Messrs Sullivan and McGlashan were prepared to go along with what they said without bringing to bear any significant degree of

independent thought, and that the firm was prepared to act on their instructions with scant recognition of the responsibilities two of its partners held to two of the entities for which they acted, by receiving instructions through the informal means of Mr Fitzgerald, and possibly also Ms Fitzgerald, deciding how they would like their family entities’ affairs ordered.

[100] The picture that would emerge at trial from properly tested evidence may differ materially from this and I do not exclude the possibility that after a thorough examination of the facts a court may find that the firm did not owe the fiduciary duties alleged, and did not fall below the standard of care required. However, on an application for summary judgment by the firm, or to strike out the proceeding, that is not the point. Both applications fail.

Outcome

[101] The application for summary judgment by Mr Sullivan is dismissed. However, the cause of action is now found to have arisen on 27 May 2011, after this proceeding was issued. The cause of action against Mr Sullivan forms part of the opening paragraphs of the statement of claim so there are no readily identifiable paragraphs to strike out. Further, the claim is time-barred as to the sum of $32,000. The preferable course is to stay the proceeding against Mr Sullivan until the claim is repleaded as an identified separate cause of action accruing on 27 May 2011. For this, leave is required under r 7.77(4). An application is to be made within 15 working days. If consent is endorsed, an order will be made on the papers. The claim against Mr Sullivan is stayed in the meantime.

[102] The application for summary judgment by Mr McGlashan, and his application to strike out the proceeding against him, are dismissed.

[103] The application by RSM Law for summary judgment is dismissed. Its application to strike out the proceeding succeeds in small measure: paragraph 30.5 of the second amended statement of claim is struck out.

[104] The plaintiff is entitled to costs against all defendants on a 2B basis with

_{disbursements to be fixed by the Registrar, in the absence of agreement.}

J G Matthews

_{Associate Judge}

Solicitors:

Anthony Harper Lawyers (C R Vinnell), PO Box 2646, Christchurch. [e-mail]

McElroys, PO Box 835, Auckland 1140. [e-mail]