FXHT Fund Managers Ltd (in liq) v Oberholster [2010] NZCA 197 (18 May 2010)

Last Updated: 27 May 2010

IN THE COURT OF APPEAL OF NEW ZEALAND

CA263/2009

[2010] NZCA 197

BETWEEN FXHT FUND MANAGERS LTD (IN LIQUIDATION)
First Appellant

AND PERI FINNIGAN AND BORIS VAN DELDEN AS LIQUIDATORS OF FXHT FUND MANAGERS LTD (IN LIQUIDATION)
Second Appellant

AND DIRK OBERHOLSTER
Respondent

Hearing: 18 March 2010

Court: Arnold, Panckhurst and Harrison JJ

Counsel: G J Thwaite for Appellants
A Gilchrist for Respondent

Judgment: 18 May 2010 at 2.30 pm

JUDGMENT OF THE COURT

1. The appeal and cross-appeal are dismissed.
2. The appellants must pay the respondent costs for a standard appeal on a band A basis, and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Harrison J)

Introduction

[1] FXHT Fund Managers Ltd (FXHT) solicited funds from members of the public for investment in foreign exchange transactions. However, within 18 months the company failed, owing investors in excess of US$900,000.
[2] Dr Dirk Oberholster was one of FXHT’s two directors. Mr Peter Hitchinson was the other director. FXHT’s liquidators sued both directors for losses suffered by investors, alleging numerous breaches of statutory duties. However, the claim against Mr Hitchinson was stayed and the liquidators proceeded against Dr Oberholster alone. Mr Hitchinson is now bankrupt and has been convicted on various charges of fraud relating to FXHT's activities.
[3] The liquidators’ claims fell into two categories: a smaller claim for losses directly attributable to Mr Hitchinson's fraud and a larger claim for losses attributable to a discrete decision to change what was called FXHT’s trading platform from a Swiss to a South African company. Following a trial in the High Court at Whangarei, Venning J found that Dr Oberholster was liable on the fraud claim on the ground that he caused or allowed FXHT’s business to be carried on in a manner likely to create a substantial risk of serious loss to its creditors.[1] The Judge ordered Dr Oberholster to pay compensation in the separate sums of NZ$17,492.50 and US$148,875.75.[2] However, he dismissed the liquidators’ larger claim.[3]
[4] The liquidators appeal, first, against the compensation award on the fraud claim on the ground that it is too low, and, second, against Venning J’s dismissal of the change of trading platform claim. Dr Oberholster does not challenge Venning J’s findings on liability. But he cross-appeals against the compensation award on the ground that it is excessive. We will deal with the appeal and cross-appeal by sequential reference to both claims.
[5] We note that the facts of this case are unique. FXHT had a short life. Its operations were of very limited scope. There was no overt sign of insolvency before its failure. The essence of its business was the receipt of funds and their investment. The total amount invested was small, although individual investments were of great financial significance to each investor, in some cases representing life savings.

Background

[6] Mr Hitchinson and Dr Oberholster are from South Africa. Dr Oberholster emigrated to New Zealand some years ago and is in general practice as a medical practitioner in Whangarei. He also has interests in six companies associated with a family stud farm. The two men met through Mr Hitchinson’s parents who were Dr Oberholster’s patients.
[7] Mr Hitchinson was the driving force behind FXHT’s incorporation in June 2005. Its stated purpose was to manage private clients’ equity investments in foreign exchange markets. Investors’ funds were to be placed in what were called “overseas currency trading platforms”. FXHT employed Mr Hitchinson as its fund manager from March 2006 at an annual salary of $127,680 and its own trader, Mr du Plessis.
[8] Dr Oberholster agreed to become a director of FXHT to assist Mr Hitchinson’s application for New Zealand residency and the company’s establishment. He also agreed to invest $5,000 in FXHT. Venning J found that Dr Oberholster expected the business venture to be successful. However, he did not depend financially upon it, and that was not his reason for participating.[4]
[9] FXHT established itself in an office in Whangarei. Dr Oberholster guaranteed its premises and equipment leases. The company through Mr Hitchinson advertised and attracted local investors who placed varying amounts with it. Almost all investors signed client agreements, entitling them to the first two per cent monthly of income earned and the company to profits above that margin together with commissions. Funds were to be kept in separate client accounts and were returnable to the investor upon demand. A stop loss system was to be implemented, capping an individual investor's total capital loss at ten per cent.
[10] However, FXHT was not successful from the outset, and in order to disguise its failings Mr Hitchinson used money from new investors to pay profits and principal due to existing investors and later misappropriated some investment funds. Dr Oberholster knew nothing of this. As with all operations of this kind, FXHT’s demise was only a matter of time.
[11] In September 2006 Mr Hitchinson and Dr Oberholster resolved to transfer the company's investments from its existing trading platform, FXCH, to a South African entity, FX Active. Two months later Dr Oberholster learned from Mr du Plessis that some investments were unaccounted for and, after confronting Mr Hitchinson, required his resignation as a director and complained to the police.
[12] FXHT was placed in liquidation on 14 December 2006. FX Active then collapsed in early 2007 with the loss of all FXHT funds which had been transferred in 2006. The liquidators’ investigation confirmed Mr Hitchinson’s fraudulent misapplication of investors’ funds. He was convicted in 2009 following a trial in the District Court on six charges of defrauding three FXHT investors of sums totalling US$297,751 and NZ$44,985 and was sentenced to three years and four months imprisonment.
[13] We now address each of the areas of appeal.

(1) Losses attributable to Mr Hitchinson's fraud

[14] Venning J found that Dr Oberholster committed two breaches of duty as a director on the fraud claim essentially of the same nature (a number of other allegations of breach were dismissed). The first breach was of s 135(b) of the Companies Act 1993 (all statutory references are to that Act unless otherwise stated) which materially provides:

A director of a company must not—

...

(b) Cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company's creditors.

The second breach was of s 137 in failing “when exercising powers or performing duties as a director, to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances...”. The Judge found Dr Oberholster liable under s 137 for largely the same conduct that fell within s 135.[5]

[15] The High Court’s jurisdiction to make a compensation order is found in s 301 which materially provides:

(1) If, in the course of the liquidation of a company, it appears to the Court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the Court may, on the application of the liquidator or a creditor or shareholder,—

(a) Inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and

(b) Order that person—

(i) To repay or restore the money or property or any part of it with interest at a rate the Court thinks just; or

(ii) To contribute such sum to the assets of the company by way of compensation as the Court thinks just; or

(c) Where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the Court thinks just to the creditor.

[16] Neither the liquidators nor Dr Oberholster challenge Venning J’s finding on liability on the fraud claim. However, the following passages from his judgment are relevant to the compensation award:

[61] As the test is objective it can make no difference when determining liability under s 135 that Dr Oberholster was innocent and unaware of Mr Hitchinson’s fraud. The question is what the reasonably prudent director in Dr Oberholster’s shoes would have done. Mr Hitchinson was able to carry out his fraudulent activity because he was left to run the business of the company without sufficient control by Dr Oberholster.

[62] Even accepting the reasonable constraints on a non-executive director of a small business with only two directors, and allowing for a degree of informality, Dr Oberholster’s actions in this case fall well short of what could reasonably be expected of a director.

...

[67] The indictment alleges Mr Hitchinson committed the frauds between April and November 2006. Dr Oberholster became involved in the company in December 2005, and was effectively acting as a director and directly involved from January 2006 until November 2006. By March or April 2006, it could reasonably have been expected that Dr Oberholster would have ensured reporting systems would be in place. He failed to do so. The first defalcations/frauds by Mr Hitchinson occurred on 4 April 2006.

[68] Dr Oberholster failed to carry out his responsibilities as a director properly. He let Mr Hitchinson have free rein over the running of the company. While he acted promptly when he found out about the fraud that was too late. Dr Oberholster took no steps to regularise or record the financial position of the company. Dr Oberholster effectively stood by and accepted Mr Hitchinson’s assurances that all was well without testing them in any way. Dr Oberholster did not act as a reasonably prudent director would. His casual inquiries were not enough. Dr Oberholster caused, or at least allowed Mr Hitchinson to run [FXHT] in such a way that there was a substantial risk of loss to the investors as creditors of the company.

[69] Under s 135 the risk must be of serious loss. In this case, apart from ordinary trade creditors who might have been exposed to loss, the investors were the principal contingent creditors who faced the risk of serious loss. There are a limited number of investors. Each invested significant sums of money through [FXHT]. In the circumstances, it was not enough for Dr Oberholster to take the view, as he did, that the investors could check and monitor their investments on line. Unless the company had systems in place, there was always a substantial risk of serious loss to the invested funds. Dr Oberholster took no positive steps to ensure the investors’ money was kept separate from the company’s bank account.

[70] As Mr Hitchinson’s actions show, it was not difficult to misapply the money.

[71] I conclude that by allowing Mr Hitchinson to operate the business without adequate supervision, and by failing to ensure proper reporting systems (even monthly profit/loss and cashflow reports) were put in place, Dr Oberholster caused or allowed the business of [FXHT] to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

[17] The liquidators’ claims for losses attributable to Mr Hitchinson’s dishonesty were for NZ$44,985 and US$297,751 respectively.[6] In fixing compensation, Venning J applied the standard approach of considering the deterioration in the company’s financial position between the dates of breach and liquidation and then taking account of causation, culpability and the duration of trading.[7] He adopted 31 March 2006 as the date of commencement of Dr Oberholster’s breach.[8] By that date, the Judge found, Dr Oberholster would have been put on inquiry as to the validity of the business and the associated risks to the security of the investors’ funds if there had been regular reporting.[9] In particular, if he had acted, Dr Oberholster would have learned that FXHT was not earning sufficient funds to meet its outgoings.
[18] Venning J was satisfied that there was a causative link between Dr Oberholster’s failure to discharge his duties and the losses due to Mr Hitchinson’s dishonesty. As the Judge observed:

[118] ... The longer that Dr Oberholster allowed Mr Hitchinson to operate the company effectively unsupervised, the more opportunity Mr Hitchinson had to misuse the clients’ funds. Dr Oberholster must be held responsible, at least in part, in relation to the losses sustained and the associated liability incurred by the company as a consequence.

[19] Venning J then considered culpability. He was satisfied that Mr Hitchinson was the principal offender who benefitted personally from misapplying the funds; by comparison Dr Oberholster received nothing. Thus his culpability was less than that of Mr Hitchinson.[10] The Judge concluded:

[120] ... Dr Oberholster was initially just less than a 50 percent shareholder and one of two directors. In my judgment, in relation to the money lost through Mr Hitchinson’s dishonesty Dr Oberholster’s liability should be capped at about that level of involvement, namely one half of the losses... Dr Oberholster should contribute one half of the sums identified as misappropriated by Mr Hitchinson in the indictment ... namely NZ $17,492.50 and US$148,875.75.

[20] Mr Gregory Thwaite for the liquidators challenges Venning J’s compensation decision on the fraud claim on three grounds.

(a) Read Investment

[21] First, Mr Thwaite submits that Venning J erred in excluding from the compensation award an amount of $10,000 paid by Mr Ivan Read directly to Mr Hitchinson. The Judge held that Dr Oberholster was not responsible for that sum because Mr Read decided to pay Mr Hitchinson directly, rather than FXHT.[11]
[22] Mr Thwaite submits that Venning J should have included Mr Read’s payment by adopting the “broad brush” approach identified in Mason v Lewis.[12] He says that FXHT “served as an umbrella to provide an illusion of competence, professionalism and success” and that without it people like Mr Read would not have paid money either to Mr Hitchinson or his company. Mr Read deserves, Mr Thwaite says, to be treated as a customer of FXHT when the amount of loss is calculated. He portrays the diversion of Mr Read’s money to Mr Hitchinson as “a technicality”.
[23] We agree with Venning J. Mr Read was neither an investor in or creditor of FXHT. He was a creditor of Mr Hitchinson, entitled to prove in his bankrupt estate. He has no right to participate in a compensation award made against a director of a company of which he was never a creditor.
[24] Mr Thwaite has misconstrued the reference in Mason v Lewis to a “broad brush” approach. This Court was describing the generalised nature of a discretionary power under s 301 to do what is just and fair; in other words, to view the claim broadly once jurisdiction is established and the qualifying elements of causation, culpability and duration of trading are considered. The Court was not suggesting that a Judge was entitled to ignore whether the claim included a component for which the company was not indebted.
[25] We add that Venning J did not find that Mr Hitchinson misappropriated Mr Read’s funds and that Mr Thwaite himself confirmed before this Court that Mr Hitchinson was acquitted on a charge of defrauding Mr Read.

(b) Correct test

[26] Second, and more substantively, Mr Thwaite submits that Venning J adopted the incorrect test when fixing compensation. He submits that the standard approach to causation applied by Venning J is inappropriate. He says that the stricter fiduciary approach should have been adopted.[13] Mr Thwaite submits that the standard approach is applicable to what he calls “the standard scenario”, such as where a manufacturing or supply company continues in operation even though outgoings exceed income. However, it is inapplicable, he says, where the director’s fault lies in allowing the company to transfer to a third party, like another director, assets which it had been administering.
[27] Mr Thwaite’s submissions on this point were detailed. But they seem to spring from Venning J's finding that Dr Oberholster’s breach of duty was operative from about 31 March 2006. Mr Thwaite extrapolates from this conclusion that action by Dr Oberholster on or about that date would have led to FXHT shutting down its business immediately. Thus, Mr Hitchinson’s subsequent thefts, starting on 4 April 2006, would not have occurred. He says that on this “but for” approach Dr Oberholster should have been ordered to pay compensation equal to 90 per cent of the investors’ losses caused by Mr Hitchinson’s fraud.
[28] There is a short answer to Mr Thwaite’s submission. It lies in identifying the conceptual nature of the duty breached by Dr Oberholster. If the duty is of a truly fiduciary nature – that of loyalty or fidelity – then liability is strict and the “but for” test applies, effectively reversing the onus onto the delinquent director to prove that the loss would have been caused regardless of the breach.[14] However, if the breach is of a general duty of care, akin to one arising in common law rather than equity, then the less onerous orthodox or standard principles of causation apply, placing the onus throughout on the plaintiff to prove the necessary causal nexus or link or, in other words, that his loss is attributable to the director's breach.
[29] Accordingly, Fogarty J in Sojourner applied the fiduciary measure of causation once he found that the directors had committed a breach of a strictly fiduciary duty owed under s 131 to act in good faith and in what the director believed to be the company’s best interests. However, the liquidators’ s 131 claim failed in this case. In following Sojourner, Venning J described the nature of this statutory duty as one of loyalty arising out of the fiduciary relationship which directors owe to a company, their principal.[15] It prohibits a director putting his own interests ahead of the company.[16] Venning J dismissed the liquidators’ s 131 argument after carefully considering the evidence;[17] he was satisfied that Dr Oberholster acted in good faith.
[30] The liquidators have not appealed that finding. They have no factual or legal foundation for submitting that Dr Oberholster breached a fiduciary obligation, requiring a strict standard of causation and imposition of the fiduciary measure of damages. Instead they are bound by Venning J’s findings.[18] Mason v Lewis discussed the ambit and purpose of s 135.[19] While s 135 is described in its heading as “reckless trading”, its essence is of a failure to exercise reasonable care in the particular circumstances. Dr Oberholster’s breach of the s 137 duty to exercise reasonable care, diligence and skill is of the same nature, as Venning J found.[20]
[31] We are satisfied that Venning J applied the correct test of causation by adopting the standard or orthodox approach following his finding of Dr Oberholster’s breach of ss 135 and 137.

(c) Discretion

[32] Third, Mr Thwaite submits that Venning J erred in exercising a statutory discretion. He invokes each of the orthodox justifications for appellate interference. He submits that the Judge was wrong in principle to set Dr Oberholster’s liability at 50 per cent because that overlooks or ignores his ability as one member of a two-director board to exercise real control, leading to 100 per cent liability rather than putting half the loss and half of the culpability upon the investors; that he failed to take account of a relevant factor, namely that if appropriate steps had been taken by early April 2006 none of the money would have been stolen; and that his assessment was plainly wrong because it failed to recognise fully the loss to honest people who had invested large parts of their life savings.
[33] Mr Thwaite’s argument misconstrues s 301. The High Court’s discretion is to order the restoration of money or payment of a contribution towards the assets of a company “by way of compensation” as the Court considers just. While this power is phrased in traditional terms of a discretion, it is not to be exercised on an arbitrary basis. In cases such as Mason v Lewis this Court has identified the principles to be applied.[21] Ultimately, however, as Mason v Lewis has also recognised, the inquiry is “notoriously fact-specific”.[22]
[34] Mr Thwaite has not identified any error within the reasoning process adopted by Venning J; he simply challenges the final amount awarded. On one view of the case, as Mr Andrew Gilchrist submits for Dr Oberholster, the Judge’s approach was arguably generous to the investors. Mr Hitchinson’s dishonesty was the primary, operative or underlying cause of the investors’ losses.
[35] In causative terms, Dr Oberholster’s negligence was secondary, by creating the opportunity or at least making it easier for Mr Hitchinson to commit his frauds, as the Judge found.[23] The “but for” test of causation is not of itself normally sufficient under New Zealand law to constitute the necessary causal nexus between breach and loss to justify an award of common law damages.[24] Similarly, as the Judge found, Dr Oberholster’s culpability was very much secondary to that of Mr Hitchinson.
[36] Venning J was, however, entitled to take all factors into account in fixing Dr Oberholster’s liability at 50 per cent. He was entitled to take into account the nature and extent of Dr Oberholster’s financial interest in FXHT. He was entitled to consider an award made in arguably analogous factual circumstances as a comparison or reference point.[25] He was plainly aware that a consequence of the award of 50 per cent of the company’s losses would be borne by the investors. But he was not wrong for that reason.
[37] Similarly, as Mr Gilchrist correctly points out and as Venning J accepted,[26] there is no probability that Mr Hitchinson would have been deterred from committing the frauds even if Dr Oberholster had properly discharged his legal duty. Similarly also, a several, rather than joint, approach to the directors’ liability was appropriate, with an apportionment accordingly. Nevertheless, the apportionment was properly classified as “significant” and given weight accordingly.[27]
[38] It should not be overlooked, as Mr Gilchrist submits, that most of the investors were drawn to the company because of their direct relationship with Mr Hitchinson; many did not meet Dr Oberholster and some did not know of his involvement. The investors placed their trust and confidence in Mr Hitchinson personally. It would not be “just” to award an amount of compensation that treated Dr Oberholster as personal underwriter of their commercial decisions. Contrary to Mr Thwaite’s submission, the assessment of culpability is as between the directors, not as between the directors jointly and the investors.[28]
[39] It follows that we are not prepared to interfere with Venning J’s award following what was a “notoriously fact specific” inquiry in the absence of Mr Thwaite’s identification of any error of principle. It must also follow that we dismiss Dr Oberholster’s cross-appeal. We infer that it was advanced for essentially strategic reasons, to act as a counterpoint to the liquidators’ appeal. We have already taken express account of Mr Gilchrist’s principal arguments when dismissing the appeal.
[40] Mr Gilchrist advances an additional ground for the cross-appeal. It emerged more prominently in oral argument than in his written synopsis. He submits that Venning J failed to take appropriate account of Dr Oberholster’s means.
[41] The conceptual basis for taking any account of a director’s means seems problematic. This element does not fit easily within the principled framework discussed in Mason v Lewis. However, circumstances might possibly arise where a Judge, when fixing a “just” compensation payment, may conclude that some allowance should be made in favour of a negligent director who has suffered a significant personal financial loss on a company’s failure as a result of the misconduct of a fellow director.
[42] That situation did not arise here. Dr Oberholster’s financial participation in FXHT was limited to an investment or call on shares of $5,000. His loss only arises by virtue of the Court’s order to pay compensation to the liquidators. Moreover, Dr Oberholster’s evidence about his means was careful, to say the least, and not informative. Like Venning J,[29] we are not satisfied that his means are relevant to this inquiry.
[43] Accordingly, the liquidators’ appeal and Dr Oberholster’s cross-appeal on compensation are dismissed.

(2) Losses attributable to the trading platform change

[44] The liquidators’ claim for compensation for losses attributable to the company’s decision to change its trading platform, calculated by Venning J at between US$463,540 and US$510,200,[30] is much the larger in financial terms but occupied a relatively minor part of Mr Thwaite’s written synopsis.
[45] The liquidators sued Dr Oberholster on the trading platform claim on the same variety of grounds advanced in support of the fraud claim. Venning J dismissed the former claim when dealing with the liquidators’ allegation of Dr Oberholster’s breach of s 135 because:

[73] The transfer of the trading platform was a positive business decision. The investors’ funds were initially invested through a European trading platform. Although it was referred to as FOREX Swiss, it was noted in the documents as FXCH and ... seems to have been based in Salzburg, Austria. In September 2006, the investors’ funds were withdrawn from FXCH, and [FXHT] decided to use FX Active in South Africa as the trading platform.

[74] Dr Oberholster was aware of and participated in the decision to change to the South African platform, FX Active. Dr Oberholster said Mr Hitchinson advised him that it would be more effective and recommended the change because they were having some problems with the Swiss platform. Dr Oberholster said he made inquiries about the platforms available, and was told there could be a change to either a South African or US platform. Dr Oberholster initially thought it would be better to go with the US platform because it was bigger but was told by Mr Hitchinson and Mr du Plessis that the South African platform was just as good and they could obtain a better rate of return from the South African platform. Dr Oberholster accepted their recommendation. The meeting where that decision was made took about 10 minutes from Dr Oberholster’s point of view. Dr Oberholster was not provided with any written material about FX Active, but located and saw the website for the company. Mr Hitchinson and Mr du Plessis were more familiar with the issue and had carried out research on the different trading platforms before the meeting. Dr Oberholster relied on Mr Hitchinson and Mr du Plessis’ advice on the issue, particularly as they said they had used FX Active in the past.

[75] Dr Oberholster understood that the decision to change platforms was necessary because the existing platform was not performing. The decision to change, in those circumstances was, prima facie, a reasonable and legitimate business decision. The decision to change to the South African (as opposed to the alternative United States) platform was driven by the better profit margins offered by the South African platform. Again, that was a reasonable business decision.

...

[82] Viewed objectively, the decision to transfer the trading platform to FX Active was a justified business decision. The company had to use overseas foreign exchange platforms for trading. It changed from one platform in Europe to one in South Africa. The nature of the business did not change. The client agreements provided that [FXHT] could change the trading platform. The decision to change the platform was not a breach of s 135.

[46] Mr Thwaite advances two primary grounds in support of this part of the appeal.

(a) Section 131

[47] First, and primarily, Mr Thwaite submits that Venning J erred in dismissing the liquidators’ cause of action for breach of Dr Oberholster's duty of good faith.[31] (The Judge’s reasoning suggests that the arguments advanced by Mr Thwaite in the High Court on s 131 were of a different character from those upon which he now relies.) Mr Thwaite seeks to draw an analogy between these facts and the circumstances of Sojourner, where Fogarty J, upheld by the Court of Appeal, found a breach of s 131. In particular, he submits that Dr Oberholster should have consulted FXHT’s solicitor and implemented advice from its accountant before agreeing to change the currency trading platform to FX Active; that Dr Oberholster did not display a proper understanding of legal requirements; that he failed to act in the best interests of the company which in this case required the protection of creditors who predominantly are the investors; and that (faintly) there was an element of self-dealing.
[48] We do not accept this submission. The facts of Sojourner are a long way from this case. Liability was imposed upon the directors in Sojourner for breach of s 131 because they sold the core business and associated assets to another company, described by the Court of Appeal as a “phoenix” company, at a substantial undervalue.[32] The directors owned the shares in both. One purpose of the transaction was to defeat creditors of the first company. It was a classic case of self-dealing, and acting contrary to good faith and the interests of the first company, including those of creditors.[33] The directors’ interests conflicted with the first company when selling its assets to the phoenix company which they owned.[34] That was why Fogarty J gave weight to the directors’ failure to seek professional advice on their legal obligations.[35]
[49] None of these features was present when FXHT resolved to change its currency trading platform to FX Active. It is true that Dr Oberholster stood in the relationship of a fiduciary to his principal, the company. But it is trite that not every duty owed is fiduciary in nature. In making a business decision about the trading platform, the nature of Dr Oberholster’s duty was to exercise the degree of skill, care and diligence expected of a reasonable director. There was no evidence of an additional factor of self-interest influencing Dr Oberholster’s decision such that he might have breached the traditional fiduciary obligation of loyalty or fidelity. In its absence, Dr Oberholster could not be found liable for acting in bad faith or contrary to the company’s interests.

(b) Sections 135 and 137

[50] Second, Mr Thwaite submits that the losses suffered by investors as a result of the transfer of funds to FX Active were caused by Dr Oberholster’s breaches of ss 135 and 137 as found by Venning J on the fraud claim. Mr Thwaite does not submit that the Judge erred in dismissing the trading platform claim under ss 135 and 137. Instead he submits there is a direct causative link between Dr Oberholster’s failure to monitor FXHT from 31 March 2006 and the loss suffered through the change to FX Active after October 2006. That is because, he says, Dr Oberholster would have closed down the operation in April 2006 if he had discovered the irregularities in holding investors funds because there was the potential for fraud.
[51] Mr Thwaite did not develop the factual basis for this argument (again, it was not apparently advanced in this way in the High Court or the subject of a finding there). It must fail on the facts. In particular, contrary to Mr Thwaite’s submission, there is no evidential foundation for concluding that Dr Oberholster would have shut down FXHT in April 2006. Venning J found that Dr Oberholster’s failure to impose the requisite controls created an opportunity for Mr Hitchinson to commit frauds;[36] that is, while an appropriate system would not necessarily have prevented the fraud, it would have made that more difficult and may have limited the occasions and extent of the frauds.[37] As noted above,[38] this was again an expression of the “but for” test for causation, which is not sufficient of itself to establish the necessary causal link.
[52] Moreover, Dr Oberholster’s failure to implement an appropriate monitoring system was unrelated to FXHT’s decision taken in September 2006 to change trading platforms. The absence of the requisite controls from April had no bearing upon a conscious decision, in which both directors participated, made some months later. There was no causative nexus between the omission and the act. The company’s resolution to change to FX Active was a new or intervening cause of loss. The loss was too remote from the breach in April 2006, even if it was of an ongoing nature; the directors’ decision to change the trading platform, not the absence of an effective control system, was the sole operative cause of loss.
[53] Mr Thwaite’s other grounds of appeal constituted relatively minor challenges to Venning J’s assessment of compensation on the trading platform change claim if he was wrong on liability. However, it is unnecessary to address these arguments given our conclusion that the liquidators’ substantive challenge on liability must fail.

Result

[54] The liquidators’ appeal and Dr Oberholster’s cross-appeal are dismissed.
[55] The liquidators are ordered, nevertheless, to pay costs to Dr Oberholster for a standard appeal on a band A basis together with usual disbursements. The appeal was the principal step taken in this Court and occupied most of the argument. We are satisfied that Dr Oberholster would not have cross-appealed but for the liquidators’ appeal.

Solicitors:
Gregory J Thwaite, Auckland, for Appellants
Urlich McNab Kilpatrick, Whangarei, for Respondent

---

[1] FXHT Fund Managers Ltd v Oberholster HC Whangarei CIV-2007-488-285, 9 April 2009 at [71].
[2] At [120].
[3] At [100].
[4] At [2].
[5] At [97].
[6] At [113].
[7] At [114]. See Mason v Lewis [2006] 3 NZLR 225 (CA) at [109] and [110].
[8] At [116].
[9] At [117].
[10] At [119].
[11] At [120].
[12] Mason v Lewis at [118].

[13] Sojourner v Robb [2006] 3 NZLR 808 (Sojourner (HC)), upheld by this Court in Sojourner v Robb [2008] 1 NZLR 751 (Sojourner (CA)).

[14] Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA), discussed in Sojourner (HC) at [151] – [157].
[15] At [17] –[18].
[16] At [19].
[17] At [20] – [26].
[18] At [61] – [71], set out at [16] above.
[19] Mason v Lewis at [44] – [52].
[20] At [97].
[21] Mason v Lewis at [107] – [118].
[22] Ibid, at [107].
[23] At [117].
[24] Bank of New Zealand v New Zealand Guardian Trust Co Ltd at 681.
[25] At [117].
[26] At [66].
[27] Mason v Lewis at [115].
[28] Ibid, at [116].
[29] At [122].
[30] At [134].
[31] At [17] – [29].
[32] Sojourner (CA) at [31].
[33] Ibid, at [25].
[34] Ibid, at [27].
[35] Sojourner (HC) at [103]-[106].
[36] At [63] – [64].
[37] At [66] and [117].
[38] At [34].