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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV
2007-404-000990
BETWEEN TOTARA INVESTMENTS LIMITED
Plaintiff
AND ABOOTH LIMITED
First Defendant
AND OTHER DEFENDANTS
as set out in Schedules A and B attached to
the statement of claim
Second to one hundred and twenty first
defendants
Hearing: 26-27 November 2007
Counsel: C T Walker and N C Khouri for plaintiff
P J Dale for Investor Group defendants
F A Darlow for Lee Salmon Long defendants
M H Morrison and
K F Stolberger for Lowndes Jordan defendants
A C Challis for first third parties
R G Simpson and
B A Ng for second third party
Judgment: 4 March 2009 at 5:15pm
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 4 March 2009 at 5:15pm,
pursuant to Rule 11.5
of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Gilbert Walker, PO Box
1595, Auckland 1140
Grove Darlow, PO Box 2882, Auckland 1140
Lee Salmon Long, PO Box 2026, Auckland1010
Lowndes Jordan, PO Box 5966,
Auckland 1141
McElroys, PO Box 835, Auckland 1140
Bell Gully, PO Box 4199, Auckland 1140
Counsel:
P J Dale, Barrister, PO Box 130,
Auckland 1010
TOTARA INVESTMENTS LIMITED V ABOOTH LIMITED & ANOR HC AK CIV 2007-404-000990 4 March
2009
AND ROWAN JOHN CHAPMAN,
GEOFFREY
DONALD CAMPBELL WALKER,
TERENCE FRANCIS MCGRATH,
MARTIN VICTOR RICHARDSON AND
TIMOTHY JOSEPH GOLDFINCH
First Third Parties
AND RUSSELL MCVEAGH
Second Third Party
AND HARTLEY CLENDON VINCENT
First Fourth Party
AND JOHN MILES KENRICK BROWN AND
PATRICK HOWARD CASTLE
Second Fourth Parties
AND KEVIN ANDREW SCHWASS
Third
Fourth Party
Introduction and overview
[1] The plaintiff Totara Investments Limited (Totara) sues as assignee of the
interests
of lenders under term loan agreements. It alleges that each of the 121
defendants entered into one or more loan agreements with the
assignors Bank of
New York International Bank of Geneva (BNYIMBG) or Armour Fidelity Limited
(AFL). The sums sought from the
various defendants total approximately
$197,775,000.
[2] The loan agreements were part of an investment scheme into which
the
defendants entered at differing times between 1995 and 1997. Totara is associated
with the promoters of the schemes and most
of the companies through which the
schemes were implemented (not including BNYIMBG).
[3] The defendants deny liability under
the loan agreements on various grounds,
including that no agreements were in fact entered into with the alleged assignors, no
money
was advanced, the agreed process for effecting the loans was not followed,
and the loan agreements have not been validly assigned.
[4] The defendants have divided into three groups. The majority, for
convenience, are collectively called the
investor group. Two small groups of
defendants, again for convenience, are collectively described by reference to the law
firms representing them as the Lowndes Jordan defendants and the Lee Salmon Long
defendants. The shareholders of the Lowndes Jordan
defendants are members of the
chartered accountancy firm Gosling Chapman, which was involved in establishing
the investment schemes
and marketing them to their clients (the majority of the
investor group were their clients). The Lee Salmon Long defendants have joined the
Gosling Chapman partners and solicitors instructed to review the
investors'
contractual obligations (Russell McVeagh) as third parties. Russell McVeagh has
joined directors of certain of the investor
companies as fourth parties.
[5] The investor group and the Lowndes Jordan defendants have applied for
security for costs.
The investor group have not proceeded with their application,
having reached an agreement with Totara. The Lowndes Jordan defendants
seek an
order that Totara give security for $300,000. Totara opposes that application on the
grounds both that the applicants had
not established that there is reason to believe
Totara is unable to pay costs, and that the merits are so strongly in favour of it
that
the Court should exercise its discretion not to grant the security.
[6] The investor group and, the Lowndes Jordan defendants
(supported by the
third parties) also seek an order that the proceeding be given a category 3
classification for cost purposes having
regard to its complexity. This is also opposed
by Totara.
Background
[7] The defendants are all loss attributing qualifying
companies (LAQCs) for
taxation purposes. They were incorporated with $100 capital specifically for the
purpose of investing in either
of two investment schemes (known as the Digi-Tech
Investment Scheme and the NZIL Investment Scheme). The schemes involved the
acquisition
of shares in one or other of two highly speculative companies, Digi-Tech
Communications Limited and New Zealand Investments Limited.
The transactions
were structured with a view to providing tax advantages to high earning individuals
through their shareholding in
the investor LAQCs.
[8] The schemes were promoted by a merchant banker Milloy Reid Tong &
Company Limited (MRT) (subsequently
renamed Milloy Reid Wong & Company
Limited (MRW)). The principals of MRT/MRW, Mr J A Reid and Mr H Milloy, are
the directors and
ultimate beneficial owners of the vendor companies N-Tech
Limited and St Lucia Investments Limited.
[9] The investment schemes
arose out of an approach by MRT to Gosling
Chapman. MRT's initial proposal was revised with input from Gosling Chapman to
follow
the structure of a previous investment scheme that Gosling Chapman had
introduced to its clients.
[10] The schemes had several
components:
a) First, the investor agreed to purchase the shares under a long term
agreement which required
the investor to pay a deposit, modest annual
instalments (1%) towards the purchase price, and the majority of the
purchase price after ten years.
b) Secondly, the investor had the ability to take out a "loss of profits"
insurance policy against the risk that the shares did not reach a target
value set at a level approximating
the purchase price by the time the
last (and major) instalment was due.
c) Thirdly, the investor was able
to borrow the majority (96%) of the
substantial premium payable for the insurance policy. These loans
were intended to be non-recourse for the investors. The investors
agreed to assign their rights to complete the share
purchase and
benefits of the insurance policy to the lender in return for the lender's
promise not to
sue if the securities did not cover the amount of the
loan.
[11] As proposed to investors, the schemes appeared
to offer no (or low) risk
investments with significant tax advantages:
a) The investors exposure appeared to be limited
to their initial cash
payments for the deposit under the share purchase agreement and their
contribution
(4%) towards the insurance premium, plus the small
annual instalments payable under the share purchase agreement
pending the ultimate settlement.
b) This outlay was expected to be more than offset by the intended tax
advantage to the shareholders
of the investor companies, namely tax
deductibility for the total premium in the first year.
c) Although
the overall tax effectiveness was uncertain (there was a
prospect that proceeds of the insurance policy could be taxable
in the
hands of the investors), the schemes allowed the investors to walk
away, leaving the policy with
the lender, if it was not worth their
while to complete the purchase.
[12] The defendants entered into the share
purchase agreements, the insurance
contracts and the loan agreements between 1995 and 1997. The investments took
place in five stages
(tranches) in the Digi-Tech scheme and three in the NZIL
scheme. At that point the investors knew that the insurance cover and loans
were
being arranged overseas, but had not been given detail as to how that was to happen.
The loan agreements named the lender as
Bank of New York Inter Maritime Bank,
Geneva (BNYIMBG). Totara says the BNYIMBG entered into these loan
agreements as fiduciary
agent for the true lender Asian Growth Fund Limited
(AGFL), a Hong Kong company associated with the scheme. The loan agreements
made
provision for nomination of a substitute lender. Armour Fidelity Limited (a
company incorporated in the Bahamas) (AFL) was nominated
as the lender for the
later (4th and 5th) tranches of the Digi-Tech scheme and for the tranches of the NZIL
scheme.
[13] Regrettably,
the schemes did not work out as originally proposed. The
anticipated tax advantages did not eventuate. The transactions were
examined by the
Inland Revenue Department. It emerged that the insurance and loan arrangements
were effected by circular paper transactions
through an agent in Hong Kong, using
"transferable certificates of deposit" (TCDs) as promissory notes, rather than by
actual money
transfers. The investors' cash contributions towards the premiums
were used to pay fees of various persons involved in the design
and implementation
of the schemes. The Inland Revenue Department eventually formed the view that
the structure amounted to tax avoidance.
[14] Investors stopped paying instalments on the purchase price, and started
questioning aspects of the investment scheme. Some
cancelled their share purchase
agreements on the grounds of misrepresentation. The vendors of the shares
responded by cancelling
the share purchase agreements for actual or anticipatory
breach.
[15] Gosling Chapman laid a complaint with the Serious Fraud
Office, saying that
it and its investor clients had been deceived into believing they were dealing with a
substantial insurer and
substantial lender, and were unaware of the circularity of
funding. Mr Reid and three other individuals associated with the scheme
were
prosecuted on charges of conspiracy to defraud the investors and the Commissioner
of Inland Revenue. They were acquitted after
a lengthy trial in which the nature of
the schemes were examined in depth in the judgment of the trial judge, Fogarty J
who made
findings as to the nature of the schemes as summarised in paragraphs [10]
and [11] above.
[16] In 2005, following the dismissal
of the prosecution, the vendor companies,
N-Tech and St Lucia, issued proceedings against all investor companies for alleged
breach
of the share purchase agreements (the N-Tech proceeding). This proceeding
has been consolidated with the N-Tech proceeding since
hearing of these
applications.
[17] On 2 February 2007, AFL and Totara entered into an agreement for Totara to
purchase debts
due to AFL under the loan agreements. The purchase price was
US$12,419 together with a defined share of amounts that Totara recovered.
The
same day they signed a deed under which AFL assigned its rights under the loan
agreement to Totara.
[18] On 15 February 2007, AGFL and Totara similarly entered into an agreement
for Totara to purchase the debt due to AGFL (or BNYIMBG as AGFL's fiduciary
agent) and a deed of assignment of these debts. The agreement and deed were
identical to those between AFL and Totara, save for the
cash component of the
purchase price which was US$12,546.
[19] In this proceeding, Totara seeks to recover the purported advances
under the
assigned loan agreements.
The Lowndes Jordan defendants
The Lowndes Jordan defendants comprise Fickling Limited
(23rd defendant),
[20]
Kinu Limited (34th defendant), Parrish Limited (52nd defendant), Ricfin Limited (60th
defendant) and Otitori
Investments Limited (107th defendant). The first four named
invested in one or more of five investment tranches of the Digi-Tech
scheme. The
last named invested in the first of the three investment tranches of the NZIL scheme.
Fickling and Parrish are alleged
to have entered into loan agreements with
BNYIMBG, Kinu, Ricfin and Otiotori with AFL. The claims against them total
$12,657,000.
The application for security for costs
[21] The Lowndes Jordan defendants' application was brought under the
forerunner to
r 5.45(1)(b) of the High Court Rules which came into force on
1 February 2009 (superseding the previous r 60(1)(b)). There
is no material
difference between the rules. It is common ground that the Lowndes Jordan
defendants must satisfy the Court that
there is reason to believe Totara will be unable
to pay their costs if it is unsuccessful, and that the Court then has a general
discretion
whether or not to award security and as to the quantum of any award.
[22] The Lowndes Jordan defendants acknowledge
that there is little direct
evidence as to Totara's financial position but says that the evidence that is available,
and the inferences
capable of being drawn from it, are sufficient to give the Court
"reason to believe". They contend that the merits of the case favour
them, and that
the complexity and potential costs justify security in the sum of $60,000 each (for a
total of $300,000) up to completion
of discovery, and potentially a further award in
respect of subsequent costs.
[23] Totara argues that the application should
be dismissed. It says that the
Lowndes Jordan defendants have not established reason to believe that it cannot pay
their
costs. It contends that the limited information relied on by the defendants does
not provide evidence of Totara's ability to pay.
It says that the facts from which the
Court has been invited to draw inferences are historic (most relate to the period 1998
to
2000) and do not help the Court to decide Totara's ability to pay now. Totara also
takes issue with the probative value of the Lowndes
Jordan defendants' evidence. In
the alternative, it says that in the circumstances of the case the Court should exercise
its discretion
to decline an order.
General principles
[24] The need for an applicant to provide "reason to believe" that the plaintiff is
unable to pay has been recognised in many cases as a threshold test. It is also well
accepted that once satisfied as to that threshold
requirement, the Court has a very
broad discretion. This can be seen from the classic exposition of the approach that
the Court must
take in the Court of Appeal's decision in A S McLachlan v MEL
Network Limited (2002) 16 PRNZ 747 at paras [13] and [14]:
[13] Rule 60(1)(b) High Court rules provides that where the Court is
satisfied, on the
application of a defendant, that there is reason to believe that
the plaintiff will be unable to pay costs if unsuccessful,
"the Court may, if it
thinks fit in all the circumstances, order the giving of security for costs".
Whether or not
to order security and, if so, the quantum are discretionary.
They are matters for the Judge if he or she thinks fit in all
the circumstances.
The discretion is not to be fettered by constructing "principles" from the
facts of previous cases.
[14] While collections of authorities such as that in the judgment of
Master Williams in Nikau Holdings Ltd v
Bank of New Zealand (1992) 5
PRNZ 430, can be of assistance, they cannot substitute for a careful
assessment of the circumstances of the particular case. It is
not a matter of
going through a check list of so-called principles. That creates a risk that a
factor accorded weight
in a particular case will be given disproportionate
weight, or even treated as a requirement for the making or refusing of
an
order, in quite different circumstances.
Is there reason to believe Totara will be unable to pay costs
[25] Before
turning to consider the evidence on which the Lowndes Jordan
defendants rely, some comment is needed on the nature of the exercise
the Court
must undertake in answering the threshold question.
[26] In Concorde Enterprises Limited v Anthony Motors (Hutt) Limited
(No. 2)
[1977] 1 NZLR 516 approach the question as follows (at p 519):
There can no doubt that the onus under the section rests on the applicant,
that
is, the defendant. By the very nature of the application, however, the
defendant cannot be expected to produce
anything very conclusive in the
way of proof. It has no access at this stage to the plaintiff's books of account
or other records, and can do not more than point to the surrounding
circumstances. In the majority of cases it is found
that the plaintiff is in
liquidation or receivership which has an obvious significance of its own.
But that is
not always the case, and it is not the case here. I think that what
the statute contemplates is that there should be credible
(that is, believable)
evidence of surrounding circumstances from which it may reasonably be
inferred that the
company will be unable to pay the costs. This does not, of
course, amount to proof that the company will, in fact, be unable
to pay
them.
[27] The difficulty that an applicant has in producing anything conclusive by way
of proof was picked
up in New Zealand Kiwifruit Marketing Board v Maheatataka
Coolpak Limited (1993) 7 PRNZ 209. In this case Thomas J referred to, and I infer
accepted, the approach taken by Quillam J in Concorde in the following passage (at
p 211):
"The learned Judge sought credible evidence of surrounding circumstances
from which it might reasonably
be inferred that the company would be
unable to pay the costs."
[28] NZ Kiwi Fruit Marketing Board is perhaps better
known for its finding that
there must be some evidential foundation or indication to support "reason to believe"
before the Court
is justified in drawing an adverse inference from a plaintiff's failure
to respond to a request to furnish details of its financial
position (a matter I will
address shortly). However it is clear from both Concorde Enterprises Limited and
NZ Kiwifruit Marketing
Board that an applicant does not have to prove inability to
pay in the normal civil sense, and that in the absence of direct evidence,
it can be
sufficient to adduce evidence of surrounding circumstances from which an inference
of inability to pay can reasonably be
drawn. I turn to consider the evidence.
Discussion security for costs
[29] Mr G D Walker, a director of the fifty-second
defendant, Parrish Limited
(one of the Lowndes Jordan defendants), has filed several affidavits in support of the
application. He
has also formally produced, by way of background, an affidavit
sworn and filed in support of an application for security for costs
in the related N-
Tech proceeding.
[30] This evidence shows that Totara is one of several companies related by way
of directorship
or shareholding to the interests of the directors of MRT/MRW, Mr
Reid and Mr Milloy. Mr Walker lists the companies in a schedule
to the Lowndes
Jordan defendants' statement of defence. The related companies include N-Tech and
St Lucia (vendors of the shares
under the schemes), and Digi-Tech and NZIL (the
companies whose shares were being sold). Mr Walker also contends that Mr Reid is
the ultimate beneficial owner of AFL (one of the lenders), and is a director of a
company which is one of the corporate directors
of AGFL (for which BNYIMBG
claims it was acting as fiduciary lender).
[31] The specific evidence which the Lowndes Jordan defendants
say gives reason
to believe Totara will be unable to pay costs can be broken down into the following:
a) First, Totara's
limited capital base. It was incorporated in
March 1996 with a share capital of $1,000. There have been no
increases of share capital since then;
b) Secondly, Totara's only known activities have been to acquire
and
hold shares in Escalator Advertising Limited (EAL) (one of two start
up companies put into the
NZIL scheme) and to enter into the debt
factoring arrangements which underlie the assignments of the loan
agreements on which Totara now sues. An information memorandum
prepared for the marketing of the NZIL scheme
contained a
relationship chart showing that Totara was to acquire 65 million
shares (or 65% of the
total shareholding) in EAL. A newspaper report
of the sale of these shares in late 1999 or early 2000, for a nominal
$1
consideration, has not been challenged or explained by Totara; and
c) Thirdly, a lack of any financial
base for Totara's parent NZIL (a share
capital of only $750, a trading loss for its only income producing asset
prior to its sale in 1999), and an absence of any apparent assets in its
grandparent St Lucia, coupled
with Totara's relationship to the
companies involved in the scheme and associated with Mr Reid. Mr
Walker
contended that the Court could infer from this evidence that
Totara was a shell company, used merely as a vehicle to
recover the
loans.
[32] Counsel for Totara submitted that the Court should reject all of this
"evidence":
a) He acknowledged Totara's limited capital base,
but submitted that
told the Court nothing about Totara's ability to pay from sources other
than shareholder
capital;
b) He said that the disposal of the shares in EAL also did not inform the
Court one way or another
on any other assets that Totara had at that
time, or more relevantly as at the date of the application. He noted
that the defendants had provided no evidential basis for Mr Walker's
statement that the acquisition of
the shares in EAL and entry into the
debt factoring arrangements were Totara's only activity in recent
years;
c) He argued that the financial position of NZIL and St Lucia was
irrelevant but, notwithstanding
that, such evidence as there was of
their financial position was not only out of date but also incomplete;
d) He submitted that criticisms in 1998 and 1999 of NZIL's
performance, in correspondence from the accountant
for one of the
investors, should be viewed with scepticism. The parties were by that
time in dispute,
and it was in the investors' interests to criticise the
performance to justify delay or compromise of a payment then
due;
e) He challenged Mr Walker's assertion that Totara had no material net
worth or independent means
following sale of the EAL shares. He
pointed to the reference in the report of the sale to it being part of an
offset arrangement. He also challenged Mr Walker's reliance on
information as to the negligible value
of EAL shares, obtained from a
director of one of the other Lowndes Jordan defendants who
independently
held shares in EAL. He said that the other directors
could have provided direct evidence on the point, and that Mr
Walker's evidence should be disregarded in the absence of such direct
evidence; and
f)
He submitted that the defendants had simply failed to establish reason
to believe.
[33] There is no doubt that
the direct evidence is very limited. I accept that each
of the matters on which the defendants rely are open to the criticisms advanced
by
counsel for Totara. However, I do not accept that that necessarily means that the
defendants have not crossed the threshold. I
must still consider those matters (and the
criticisms) in light of the nature of the claim and the surrounding circumstances.
[34]
The following factors satisfy me that there is reason to believe Totara will be
unable to pay costs if unsuccessful:
a)
It is unquestionable that both Totara and its parent NZIL have only a
nominal capital base. This suggests that
they needed to borrow to
acquire the assets that were put into them as part of the investments
schemes
(the 65 million shares in EAL which went into Totara, and
the 80% of the ordinary shares in Fruehauf Pacific Limited
and 65%
of ordinary shares in Euston Holdings Limited which went into
NZIL);
b) It is
apparent from the NZIL information memorandum that the
shareholding in Fruehauf was intended to provide an operating
income during the development of EAL's and Euston's products, and
that the prospect of substantial
increase in value of NZIL's assets
would only come from significant commercial success of those
unproven
products;
c) Totara does not dispute that the shares in EAL were sold for nominal
consideration of $1 in mid to late 1999.
The newspaper article
produced by the defendants refers to the transaction as an "offset
deal". Although it is not known if this was related to the original
purchase (and hence, potentially, debt in relation to that purchase) the
best scenario for Totara would appear to be that
the offset cleared any
debt. The result is the disposal of the only known asset;
d) The ability of NZIL, to support Totara
in any other activity seems
unlikely. It was formed as a vehicle for the investment scheme. For
that reason it is reasonable
to infer that the only assets that went into it
were those disclosed to investors. It had no share capital from which
to
fund the acquisition of the shares in Fruehauf Pacific Limited or
Euston Holdings Limited. It is a reasonable inference
that the
acquisitions were funded by debt. The evidence of operating losses
leading to the sale of the shareholding for
a nominal $1 is 1999
suggests, again, that at best NZIL cleared any acquisition debt. NZIL
continues to hold shares in
Euston, but as Fruehauf was to provide the
income to develop Euston's battery technology it seems likely that
development
was put on hold. I also note that Mr Milloy did not
challenge or even comment on a statement by the accountant for one
of the investors in February 2000 that there appeared to be no
economical potential for the technology;
e) The overall conclusion
to be drawn is that Totara and NZIL were
dependent on borrowing to acquire their assets, and there is a
possibility at
least that some of that borrowing has not yet been
repaid. It is noteworthy that Mr Reid has sworn three affidavits in
opposition in this proceeding but not contested these assertions of
fact. He is not required to do so, but the consequence of
failing to do
so is that the evidence stands unchallenged;
f) The fact that Totara agreed to pay in the order of US$25,000
for the
assignment of the loan contract does not assist one way or the other.
Such information as is available
suggests a likelihood of the money
being borrowed, but even if there is no debt component, the asset will
have no value if Totara does not succeed; and
g) This limited information gains some strength, in my view, from
the
circumstances of the litigation. Fogarty J commented in his
judgments on the Serious Fraud
Office prosecutions on the highly
speculative nature of the investments schemes and the fact that they
were tax rather than commercially driven. Most of the corporate
entities involved appear to have been created for
the purposes of the
schemes. Certainly there is nothing to suggest that Totara had any life
apart from
them. The commercial probability is that this has
continued to be the case. N-Tech and St Lucia cancelled the
share
purchase agreements in 2001. The fact that they took no steps until
June 2006 is understandable
in that Mr Reid's attention was no doubt
focused on his successful defence of the Serious Fraud Office
prosecution. In my view it is likely that all activity in the companies
was put on hold until Mr Reid could see his
way clear. This view is
supported by the fact that both AFL and AGFL were removed from
their respective
company registers (AFL in April 2003 and AGFL in
December 2005) and were not reinstated until December 2006 and
February 2007 respectively. I note that Mr Reid has not given
evidence of any other activity of Totara
in his affidavits in opposition.
[35] In coming to this view I have put to one side evidence of the financial
position of St
Lucia. The defendants invited me to take into account the existence of
a general security over that company's assets in favour of another "Reid interest",
and the fact that there was no land registered in
St Lucia's name. Quite apart from
the point raised by counsel for Totara that St Lucia's position was irrelevant, the
existence of
a general security does not tell anything about an ability to pay costs:
Concorde. Similarly, the absence of any land holding is
a neutral factor.
[36] Counsel for the Lowndes Jordan defendants also invited me to draw an
adverse inference from the fact that
Totara had reached an agreement in this
proceeding with the investor group and with other defendants in the N-Tech
proceeding over
provision of security. Such an inference is available. However,
without more detail being available as to the source of the payment
it seems to be a
neutral factor (counsel for the investor group invited me to treat it in this way). On
the one hand it suggests
acceptance that the threshold test could be met, and on the
other hand it indicates an ability to pay and a wish to have the proceeding
move
ahead. I do not have the information before me to take this point further.
[37] The last matter to be addressed is the Lowndes
Jordan defendants'
submission that I should draw an adverse inference from Totara's failure to respond
to requests for evidence of
its ability to meet costs. It is firmly established that such
an inference can only be drawn where the applicant has established
an evidential
basis. The following passages from the judgment in NZ Kiwifruit Marketing Board
are apposite (at pages 212 and 213):
The question is always whether it is appropriate to draw an adverse inference
against the plaintiff because of his
or her silence as to their financial
position. Whether it is appropriate is a question which can only be
determined
having regard to the material before the Court in each case.
...
I consider that the question whether it is appropriate
to treat the absence of
any evidence by the plaintiff in response to an insubstantial challenge to his
or her means
by the defendant is to be determined by having regard to the
character of litigation generally.
...
For the
rule to apply, therefore, I believe that something more is required
before it can be said that there is "reason to believe"
that the plaintiff will be
unable to pay the successful defendant's Court costs. The plaintiff must be
outside the
usual run of plaintiffs. It follows that it is not enough for the
defendant to challenge the plaintiff's ability to pay costs
and then seek
security for those costs relying upon the plaintiff's refusal or failure to
furnish details of his financial
position. There must be some evidential
foundation in indication to support the charge that there is reason to believe
that the plaintiff will be unable to pay costs before the Court is justified in
drawing an adverse inference from the
absence of a positive response from
the plaintiff.
[38] I have set out above the factors which have persuaded me that the
circumstances of this case put Totara "outside the usual run of plaintiffs". In the
circumstances of this case I consider that it
was appropriate for Mr Reid to respond
to the defendants' requests. Although the failure to do so is not a compelling factor,
it
is a matter which I take into account.
Should the Court exercise its discretion?
[39] Counsel accepted that the Court has a
wide discretion on whether or not to
order security. Although the Court will have regard to factors which regularly arise,
the discretion
will be exercised in accordance with the circumstances of the case. In
this case counsel focused their argument on the respective
merits of the cases,
although counsel for the Lowndes Jordan defendants also referred generally to the
need to balance the interests
of the parties. I will address that point first, before
moving on to discuss merits and any other matters in this case relevant to the
exercise of the discretion.
Balancing of
interests
[40] The Court has to keep in mind, in deciding whether or not to award security,
that an order (particularly a substantial
one) could prevent a plaintiff from pursuing a
legitimate case. The counter-balancing interest is a defendant's interest not to be
put
to a potentially unrecoverable cost in defending uncertain or unjustified litigation.
The Court's approach to this exercise can
be found in the oft quoted passage from
the Court of Appeal's decision in A S McLachlan Limited at paras [15] and [16]:
[15]
The rule itself contemplates an order for security where the plaintiff
will be unable to meet an adverse award of costs.
That must be taken as
contemplating also that an order for substantial security may, in effect,
prevent the plaintiff
from pursuing the claim. An order having that effect
should be made only after careful consideration and in a case in which
the
claim has little chance of success. Access to the Courts for a genuine
plaintiff is not lightly to be denied.
[16] Of course, the interest of defendants must also be weighed. They
must be protected against being drawn into
unjustified litigation, particularly
where it is over-complicated and unnecessarily protracted.
[41] Totara has not said
that it cannot or will not pursue this claim if a substantial
award of costs was made. Nevertheless, that must clearly be a possibility
if the
award is substantial. As against that, Totara has elected to purchase these loans, and
embark on this litigation. That is
clearly a decision made by Mr Reid, and no doubt
he will commit his resources to the litigation if he has confidence in it. However,
it
is self-evident that unless there is an order for security, support from the Reid
interests is unlikely to extend to meeting defendants'
costs if Totara is unsuccessful.
[42] I take into account that Totara has acquired the rights under the loan
agreements for a
total sum just under US$25,000. It has chosen to sue all 121
defendants together, and is seeking to recover a sum in the order of
$197,000,000.
[43] The Lowndes Jordan defendants claim they have been victims of deception
and misrepresentation in relation
to key components of the schemes (as to there
being an independent and substantial lender and an independent and substantial
insurer).
Whether they genuinely expected the schemes to have a commercial
viability, or whether the commercial viability was a bonus over
the tax advantages
that were being sought, may still be a consideration in the case, notwithstanding the
clear view of Fogarty J
in the criminal prosecutions that the schemes were tax
driven. Whichever it is the defendants will be put to substantial costs in
defending
the claims and, if they prove their allegations, may well have a defence to the claims.
[44] Counsel for Totara submitted
that I should regard this application as tactical,
having regard to the relationship between the Lowndes Jordan defendants and the
Gosling Chapman partners. I do see a distinction between these defendants and the
investor group by reason of the Gosling Chapman
knowledge of the schemes but that
does not necessarily mean that these defendants cannot succeed at all, so as to make
the application
tactical.
[45] This balancing of interests inevitably brings in considerations of the
respective merits of the claim, to which
I will turn next. However, I consider that the
fact that Totara is related to other parties to the schemes and has voluntarily acquired
these debts and chosen to pursue them is a factor in favour of the exercise of the
discretion.
Merits
[46] The Court will
endeavour to weigh the merits of the claim, whilst recognising
that there is a limit as to what it can find at an interlocutory stage:
A S McLachlan
Limited at para [21]:
... At best, in such a complex matter, assessment at the interlocutory stage
can be no more than impression
and cannot be a definite indicator of the
ultimate outcome after trial.
[47] Totara's case is that these are simple
claims under properly assigned loan
agreements.
[48] The Lowndes Jordan defendants argue that it is far from a straightforward
claim. They have raised serious allegations of deception and misrepresentation in
relation to the structure of the schemes which
will need to be considered against a
complex background of international commercial entities. The principal matters of
alleged deception
or misrepresentation are:
a) That the lender in each of the schemes was an independent bank of
substance
(and that the insurer was similarly an entity of substance).
The defendants say the BNYIMBG would have been such
a lender but
the alleged fiduciary arrangement between BNYIMBG and AGFL (in
respect of the first
three tranches of the Digi-Tech scheme) and the
substitution of AFL as lender, coupled with the use of TCDs which
were not binding on the lender until the funds came back to it (the
circular transaction), completely
altered their understanding of the
structure of the scheme and effectively undermined its effectiveness;
and
b) That there was a lack of disclosure of AGFL as a principal lender in
respect of
the first three tranches of the Digi-Tech scheme, of the
temporary involvement of another Reid interest, Mei Shing
Trading
Limited, as lender in the first tranche of the Digi-Tech scheme, and of
the lack of substance
and independence in respect of both AGFL/Mei
Shing Trading Limited) and AFL.
[49] The defendants argue that
the following defences are available as a
consequence of the alleged deceptions and misrepresentations:
i) Loan
agreements were not entered into;
ii) Alternatively, loan funds were not in fact advanced; and
iii) As a further alternative, loan funds were not advanced as
agreed (and to their detriment).
[50]
The defendants also say that they have a defence based on invalidity of the
assignments. Totara pleads that it has received a valid
assignment from BNYIMBG
or AFL. The defendants contend that:
a) Totara is unable to show that it has a valid assignment
from
BNYIMBG (the only assignment documents are from AGFL and the
relationship between BNYIMBG and AGFL
has not yet been fully
explained or proven by documents); and
b) Although evidence has been produced of
an assignment from AFL to
Totara, the nomination of AFL as a substitute lender was invalid
(because it
was not a lender of similar substance to BNYIMBG) and
has not created any binding obligations between AFL and the
defendants.
[51] It is clear from the documents before the Court that BNYIMBG was put
forward by the promoters of
the scheme as the lender, and a lender of substance. It
is also apparent from the documents that BNYIMBG and AGFL were in discussions
about a fiduciary lending arrangement at least two months before the drawdown of
the first tranche under the Digi-Tech scheme, under
which BNYIMBG was to have
no risk.
[52] There is a dispute as to whether Gosling Chapman knew of this proposed
fiduciary arrangement.
Mr Reid says that he told Mr Russel of Gosling Chapman in
March 1995 (prior to drawdown of the first Digi-Tech tranche). He has also
given
evidence that Gosling Chapman was aware of the temporary lending arrangement in
respect of the first Digi-Tech tranche.
He says that he told Mr Russel that
BNYIMBG was not in a position to make the loans for the first Digi-Tech tranche
prior to 31 March 1995 and that Mr Russel told
him that the investors in that tranche
had to have a drawdown before 31 March and Mr Reid should take such steps as
were needed to
effect that. To that extent, Totara would say that at least Gosling
Chapman, and hence the Lowndes Jordan defendants, knew of the
introduction of
Mei Shing Trading Limited as a temporary lender.
[53] The defendants also say that the insurance arrangements
were similarly
lacking in substance, referring to findings to that effect by Fogarty J in the
prosecution. Totara answers this by
pointing to the fact that certificates of insurance
were issued, and a Gosling Chapman partner (Mr McGrath) visited the Netherlands
office of the insurer and Fogarty J's finding (para [177] of the acquittal judgment)
that the Gosling Chapman partners had notice
of the close relationship between the
insurer and the bank, and thus that there would be a circular transaction between the
two paper
companies.
[54] The defendants rely heavily on the fact that BNYIMBG did not sign loan
agreements until some time after the alleged
advances. Totara's response is that it
has explained the circumstances of the first tranche (the need for the temporary
lender),
and acknowledges that documents for the second and third Digi-Tech
tranches could have been entered into later but says that timing
of execution was not
critical as it was clear that there was an agreement in place.
[55] The defendants place considerable weight
on the circular transactions with
the TCDs, and the fact that they were not signed before they returned to the original
issuer (whether
that was BNYIMBG or AFL). As against that, Totara argues that the
defendants (or more particularly Gosling Chapman), knew of the
circularity of the
transactions. It contends that the circularity did not alter the fact of the advance. In
that respect Totara has
produced evidence that the various loans were recorded in the
books of the lenders or their agents.
[56] The defendants question
whether BNYIMBG has ever signed a fiduciary
agreement with AGFL (a document signed by AGLF has been produced but Totara
is still
waiting for a Swiss bank that is the successor to BNYIMBG Bank Hapoalim
(Switzerland) Limited - to advise whether or not it holds
a copy signed by
BNYIMBG. Totara contends that it does not need the executed fiduciary agreement
to prove the arrangement. The defendants
says that they may well be a matter for
Swiss law, and that at this point there is no evidence of an assignment from
BNYIMBG to Totara
(as already mentioned, the assignment document in respect of
the first three tranches of the Digi-Tech loan is from AGFL to Totara).
[57] The merits may well vary between different tranches. Defences advanced in
respect of the first Digi-Tech tranche (involving
BNYIMBG) may not be available in
respect of later tranches involving AFL. For example, Totara notes that the
defendants do
not contest that AFL signed the loan agreements in respect of the
fourth and fifth Digi-Tech tranches and the NZIL tranches. The
defendants limit
their defences in respect of the AFL loan agreements to the contention that AFL was
neither a lender of substance
nor an independent party, and was not validly
nominated as substitute lender. They rely on comments by Fogarty J in his costs
judgment
following the prosecution to the effect that there was "plenty of evidence
of deceptive correspondence" by which Mr Reid was going
to considerable lengths
to hide his ultimate ownership and control of the whole structure (at para [36]).
[58] Finally, as already
said, the Lowndes Jordan defendants are in a different
category to the investor group generally. It seems likely that they will be
found to
have a greater knowledge of the structure of the schemes. However, that is not to
say that they will not be able to show
they were misled by some of the matters they
are advancing.
[59] It will be readily apparent from the summary of arguments just given that this
is not a case of
a straight-forward recovery of money under loan agreements.
Counsel for both parties took me through the evidence in support of their
respective
propositions in detail. I am not in a position, however, to come to any firm
conclusions one way or the other in the
various arguments. There may well be
further documents bearing on these issues (discovery was not complete at the time of
the application).
It is almost certain that there will need to be extensive oral
evidence about many of these issues.
[60] Although many of
the same facts were traversed in the SFO prosecution, the
findings in that case will not bind the parties to this proceeding. The
issues are
different, and different findings of facts in relation to them are possible. There will
need to be legal argument on a
number of the issues.
[61] In summary, I can only say at this stage that the outcome of Totara's claim is
uncertain at least.
There must be a clear risk of costs against it.
Other factors
[62] Counsel for the Lowndes Jordan defendants also submitted
that this was not a
case where Totara could claim that impecuniosity resulted from the defendants'
actions, or that there was any
basis for declining to order security on the grounds of
delay. Neither aspect was advanced by counsel for Totara. Neither aspect
is a factor
in my decision.
Conclusion
[63] Weighing the various matters to which I have referred I come to the view that
this is an appropriate case for the Court to exercise its discretion and award security
for costs.
Quantum
[64] Again it is
well established that the quantum of security is a matter for the
Court's discretion, to be decided in the circumstances of the case:
A S McLachlan at
para [13].
[65] At the time of filing their application the Lowndes Jordan defendants sought
a total of $300,000,
or $60,000 per defendant, up to completion of discovery. At the
hearing counsel varied that and sought security up to the time
of setting down. I take
that to mean, in practical terms, to the completion of the interlocutory steps. The
defendants argue that
this sum is justified having regard to:
a) The claim against them of $12,657,000 in the context of the overall
claim for $197,775,000 sought from all 121 defendants.
b) The factual and legal complexity occasioned by
Totara's decision to
sue all defendants in one proceeding, notwithstanding that it has
separate claims
against them with differing circumstances and
documentation as between the various tranches and potentially
different personal circumstances affecting each defendant.
c) An exclusive jurisdiction clause in the loan
agreements which
stipulates that they to be governed by and construed in accordance
with Swiss law.
They say that this will require evidence as to the
status and effect of the loan agreements (taking into account the
various matters being raised by the defendants) according to Swiss
law. There may also be costs associated
with seeking relevant
documentation from bank Hapoalim (Switzerland) Limited.
d) The size of the discovery
process, given that the issues have already
been the subject of a five week criminal trial involving many
witnesses and volumes of documents, as well as separate
investigations and dispute proceedings involving the
Inland Revenue
Department and many of the defendants.
e) The likelihood of a very lengthy trial (although
that is more a matter
for further security in due course).
f) The probable costs payable if Totara is
unsuccessful (which will also
be influenced by a further element of this application, namely the
appropriate cost category for the proceeding).
[66] Counsel for Totara submitted that the amounts sought were excessive. He
argued that an appropriate starting point would be
the assessment made for security
in the related N-Tech proceeding where allowance was made for overlap or
community of interest (Norfolk
Trustee Company Limited v Tattersfield Securities
Limited HC AK CIV 2004-404-3668, 30 March 2005, Priestley J), and an
assessment
was made on costs for discovery on a group basis with allowance for
additional examination of each defendant's position. Counsel
also submitted that
security should take into account the sum ordered in the N-Tech proceeding up to
completion of discovery (as
the scope of discovery was largely the same) and should
extend up to setting down. He submitted that this warranted a further figure
of
approximately $20,000.
[67] There can be no doubt that Totara's decision to sue all defendants in the one
proceeding adds
complexity to the management of the case. On the other hand, it
also allows defendants with common or overlapping interests to join
together and
share costs, at least to the extent of the common or overlapping interests.
[68] I accept readily that there will
be a very substantial amount of documentation
to review in relation to the establishment of the schemes and the dealings between
a
range of parties both in New Zealand and overseas, the steps taken in the
implementation of the schemes (again both here in New
Zealand and overseas), the
issues that arose leading to cancellation of the share purchase agreements, and events
since then leading
to the assignments to Totara. I accept that there may also be
discovery issues relating to BNYIMBG (although the information to date
suggests
that any reluctance to provide documents may stem from practical issues such as
locating documents rather than an unwillingness
to assist or resistance on a matter of
principle).
[69] I am also conscious that there will be a degree of overlap (particularly
in
relation to discovery) with work already undertaken in the N-Tech proceeding.
Allowance is needed for the fact that that discovery
is likely to have been largely
completed, and discovery in this proceeding will focus on documents specifically
related to issues
in connection with the loan agreements rather than the extensive
backgrounds to the scheme. Having said that, I anticipate that there
will still be a lot
of work involved in identifying and extracting further documents specifically related
to the loan agreements
and the issues in this proceeding.
[70] Counsel for the Lowndes Jordan defendants submitted that as these five
defendants were
owned or controlled by different combinations of existing or former
partners of Gosling Chapman they had joined in a common defence
and instructed
their present solicitors. He submitted, and I accept, that the role of Gosling
Chapman in these schemes and the
aftermath of them, and the relationship between
Gosling Chapman's partners and these defendants, puts these defendants into a
different
position to the investor group. I accept that in practical terms it is not
realistic to expect these defendants to join in with the
defences of the other
defendants.
[71] Counsel for the Lowndes Jordan defendants has provided a schedule of
estimated costs for
one defendant calculated on a category 3 daily rate and a C time
banding. The calculation commences with allowance for preparation
and filing of a
statement of defence, and includes provision for one amended pleading and
interrogatories in addition to the usual
items for discovery. It anticipates up to seven
interlocutory applications as well as a number of case management conferences. On
that basis it is said that scale costs would amount to $185,452.50, plus disbursements
(filing fees) of $3,180. Counsel has also
set out a table for estimated actual costs of
$350,500. These calculations assume an identical claim against each of the five
defendants, in which case a separate costs award in favour
of each would be
unlikely. However, counsel makes the point that the defendants' positions are not
identical in that the four defendants
in the Digi-Tech scheme are sued in respect of
either the first or the second to fourth tranches, and one defendant is sued in respect
of the NZIL scheme. He submits that some further provision would be justified in
considering separate issues arising under those
differing claims.
[72] I accept that potential scale costs (and, in some circumstances, potential
actual costs) can be taken
into account in the exercise of the discretion. However,
such calculations are only a guide, and one of the factors that can be taken
into
account. I did not understand counsel to argue otherwise.
[73] Not surprisingly, counsel for the Lowndes Jordan defendants
has claimed for
every likely interlocutory step. It is possible, but by no means certain, that all of the
itemised steps will be
required. This litigation has been fought strenuously.
Nevertheless I consider it is unlikely that a total of seven applications
would be
brought and argued. The time allowance for applications on the defendants'
calculation is 40.75 days on a band C time
allocation. The scale costs would drop
back significantly if only three applications were argued (and I would have thought
that this
would be closer to the mark than the seven projected). C time banding may
also not be appropriate for each application. That would
have to be assessed in
respect of each application. This uncertainty of prediction is no doubt a reason for
scale costs being a guide
only.
[74] The second factor which influences potential scale costs considerably is the
cost category. The defendants say that
I should assess likely scale costs using a
category 3 daily rate rather than the standard category 2. I have still to address the
argument on recategorisation, but see that as being more relevant to the trial stage of
this proceeding. For the purposes of forming
a view on a potential scale costs for
this interlocutory stage I consider that the complexity lies more in the number of
parties
and the potential for different individual positions and the management of
defences, rather than complexity of legal issues. This
factual complexity, which in
my view is far greater for the investor group than the comparatively small Lowndes
Jordan defendant
group, can in my view be adequately dealt with by assessing
potential costs on a C time band. Taking that approach, and discounting
for a lesser
number of applications, some of which may not warrant C banding, I consider that
potential scale costs for a defendant
to complete the interlocutory phase more likely
to be in the order of $80,000 - $90,000.
[75] I do not overlook the possibility
of costs of obtaining opinion on Swiss law in
relation to the position and liability of BNYIMBG. Whilst accepting the submission
of counsel for Totara that this is more likely to be a significant cost in trial
preparation rather than in the interlocutory stage,
and noting that there are no
estimates of the cost required, I can still anticipate that there will be both a time
factor involved
for briefing of Swiss lawyers, and costs in obtaining at least
preliminary advice to guide the defendants in the preparation of their
case.
[76] I also take into account the following factors:
a) There are likely to be some cost savings available
to the Lowndes
Jordan defendants by virtue of being part of a wider defendant group
with a commonality
of interest.
b) Although the Lowndes Jordan defendants have slightly differing
positions in respect of
the tranches of their individual investments, the
majority of the issues will again be common. I do not see their costs
as being the equivalent of three separate defendants as suggested by
their counsel.
c) There is clearly some duplication with the (now
consolidated) N-Tech
proceeding. Much of the discovery is likely to have been undertaken
in that proceeding.
The only element in this proceeding which, to my
knowledge, is new is the fiduciary lender issue.
d) The
knowledge of the principals of the Lowndes Jordan defendants
(the Gosling Chapman partners) will greatly assist their
solicitors and
counsel in the preparation of their defences.
e) Issues as between defendants and third
parties, or between third and
fourth parties, may well have been factored into the defendants'
calculation
of scale costs (particularly in relation to applications) but
are not necessarily or wholly matters which should be
visited on a
plaintiff.
f) The key difference between the application for security in the N-Tech
proceeding and in this proceeding is the very substantial and
particularised statement of defence filed by
the Lowndes Jordan
defendants. Although that defence very helpfully points up the range
and complexity
of legal and factual issues, it also demonstrates the
point I have already made that these defendants, by virtue of
their
knowledge, are in far better position that other defendants in
assembling and analysing the
information in these interlocutory
phases.
g) By reason of the knowledge of their principals, the merits
of the
defences of the Lowndes Jordan defendants appear to be weaker than
those of the investor group,
thus putting these defendants in a slightly
different risk category in relation to costs.
Decision
[77] Weighing
all of these matters, I consider that an appropriate sum, additional
to the security ordered in the N-Tech proceeding, is a total
of $75,000. I order
Totara to pay further security for these five Lowndes Jordan defendants in the total
sum of $75,000 (or $15,000
each). I direct that Totara make payment within 21 days
or such further time as the Court may allow on application by Totara.
[78]
The Lowndes Jordan defendants sought an order that the proceeding be
stayed until any security is provided. As the proceeding has
been continuing in the
regrettably long time that it has taken to deliver this judgment, I do not consider a
stay to be appropriate
without taking into account what has taken place since the
hearing. I reserve leave for the Lowndes Jordan defendants to bring this
aspect of
the application back before the Court if the security is not paid as directed.
Recategorisation
[79] At the first
case management conference on 17 April 2007 the proceeding
was given a category 2 classification for the purposes of costs. The investor
group
has applied for reclassification as category 3. That application is supported by the
Lowndes Jordan defendants and by the third
parties. It is opposed by Totara.
[80] The issue of categorisation is now covered by r 14.3 of the High Court Rules
(previously
r 48).
[81] Rule 14.3(2) provides:
14.3 Categorisation of proceedings
(2) The court may at any time determine
in advance a proceeding's
category, which applies to all subsequent determinations of costs in the
proceeding, unless
there are special reasons to the contrary.
[82] Counsel for the second third party submitted that the Court, when fixing
categorisation
of a proceeding, must consider a range of factors including:
a) Whether the case is out of ordinary run of High Court
litigation, with
the length of hearing likely to reflect complexity of the issues;
b) Whether there
are conceptually difficult issues of law and fact;
c) Whether there is a considerable amount of money involved; and
d) Whether
the case has considerable public significance and the
commercial community has a significant interest in it.
In
support of these propositions he referred to Bage Investments Limited v
Commissioner of Inland Revenue (2000) 14 PRNZ 300; Scottwood Charitable Trust
v Bank of New Zealand (HC HAM M159/92; M160/92; CP12/95; CP13/95,
15 November 2001, Morris J) and Vela
Fishing Limited v Commissioner of Inland
Revenue (2000) 19 NZTC 15, 997). As there is no challenge from other counsel to
these principles, I adopt them for this application.
[83] It was common
ground that the parties seeking reclassification have to
demonstrate special reasons for changing an earlier classification.
[84]
Category 3 classification is given for proceedings which, because of their
complexity or significance, require counsel to have
special skill and experience in
the High Court (r 14.3(1)). Counsel for the investor group submitted that there were
several factors
in this proceeding which warranted the overview of senior counsel,
and which amounted to special reasons for changing the initial
category 2
classification (which anticipates a proceeding of average complexity requiring
counsel of skill and experience considered
average in the High Court).
[85] All counsel in support of the application agreed with the submission that the
case warranted
senior counsel overview and direction. The factors advanced by
counsel for the defendants were:
a) The amount involved,
as a consequence of joinder of all defendants
into the one proceeding, but the potentially different position of each
of the defendants (the claims arise out of agreements with defendants
individually);
b)
The factual complexity of the transactions; and
c) Difficult legal issues arising out of the circular and artificial
nature of
the transactions (and the consequences in terms of tax avoidance), the
complication of having
to construe the agreements in accordance with
Swiss law (and potentially other conflict of law issues arising through
involvement of parties in other jurisdictions), and the complicating
effect of the fiduciary lending
arrangement between BNYIMBG and
AGFL.
[86] Counsel for the third parties identified as further factors applicable
to their
clients the significance of the claim (the prospect that defendants would seek to
recover the total of the individual defendants'
claims from them and reputational
issues) and the additional complexity added by the overlay of the third and fourth
party claims
(for negligence and breach of directors duties respectively). In
particular, counsel for the second third party (Russell
McVeagh) submitted that this
was a cynical proceeding by a "stranger" plaintiff (Totara as assignee) which
appeared merely to be
targeting the third parties as "deep pockets" given that the
defendants were all $100 LAQCs. He submitted that liquidation of any
investor
companies was unlikely to see an end to the claims. The liquidator of one LAQC is
still suing the third parties. He submitted
that there was an argument that both the
directors of the LAQCs and any liquidators would be in breach of duty not to do so.
[87]
Counsel for Totara submitted that the claims, including the underlying third
and fourth party claims, when analysed, were not
particularly complex. He agreed
that the matters raised by the defendants/third parties were really time rather than
complexity issues.
He said these could be addressed on a case by case basis by a C
banding.
[88] Counsel for Totara also argued that it was not
appropriate to think of this as a
tax case (which tend, due to their complexity, to be given a category 3
classification), and that
the better analogy was with a leaky building claim. He
submitted that the conflicts of laws issues being posed by the defendants
and third
parties were not raised on the pleadings and should be disregarded, at least at this
point. He submitted that the better
approach was to leave the category 2
classification to stand, and review the appropriateness of a category 3 classification
as and
when proper circumstances arose.
[89] There is a case, in my view, for reclassification to category 3, once past the
interlocutory
stages. I form this view based on the following:
a) The case is complex factually, legally and logistically. Although a lot
of work has already
been done to identify and explain the various
transactions comprising the investment schemes, that has largely been
done in the SFO prosecutions and the parties to this proceeding have
not had on opportunity to put
their case on a number of the matters
addressed in the judgments in that case. In particular the
circumstances of individual defendants have not been examined.
b) Whilst accepting that this is not "a
tax case" it nevertheless involves
consideration of commercial structures and transactions which are
seen to give the complexity warranting category 3 classification in tax
cases. In particular, the Court will
need to consider the purpose and
effect of the schemes, both in principle and in fact, and come to
conclusions as to the impermissible circularity of funds which
eliminated the intended tax benefits.
c) I do
not accept that the appropriate analogy is with leaky building
cases. They tend to deal with well-known issues and roles.
d) It seems likely that there will be difficult issues of conflict of laws at
some point, given the provision for the agreements
to be governed by
Swiss law, and it may be necessary to consider the effect of the
claimed deception and misrepresentation
of New Zealand investors by
reference to Swiss law. It also seems likely that the nature and actions
of other foreign entities,
crossing jurisdictions, will have to be taken
into account.
e) Further factual and legal complexity is introduced by the
issues over
the fiduciary arrangements between BNYIMBG and AGFL, and by
the circumstances of the assignments to Totara.
f) Whilst each of the aspects of case, when considered independently,
may not necessarily warrant the specialised skill
or experience of
category 3, the combination of all of them in the one proceeding does
in my view warrant that higher level
of skill and experience,
particularly as the case is prepared for trial.
g) The logistics of managing a multi-party, multi-level
case, with
substantial inter-relationship between the various parties, also
warrants the higher level of skill and experience.
h) The proceeding warrants the overview and direction of senior counsel
taking into account all of these factors.
i)
Counsel for the defendants/third parties estimate that the length of
time that will be required to hear this proceeding is
likely to be in the
order of six weeks. I accept that this is a factor pointing towards the
need for special skill and
experience (in the management of a lengthy
trial).
j) Although not compelling, I also consider that there is
likely to be a
general public interest in a proceeding such as this in these economic
times.
[90]
Counsel for Totara invited me to treat this as an appropriate category 2
classification because it would still be possible to
reclassify particular stages as
category 3. The converse can of course apply if I reclassify as category 3. That
general categorisation
does not stop the Court treating a particular step (for example,
a straightforward discovery application) as requiring counsel of
only average skill
and experience. In my view that is the more appropriate course in this case.
[91] Both sides invited me
to treat the position of the other as tactical. I am sure
that there are some tactical considerations involved, but I do not see
this as a basis
for deciding the matter one way or the other.
[92] I am satisfied that special reasons exist, and that the
proceeding should be
reclassified generally as category 3 for the purposes of r 14.3 of the High Court
Rules.
Costs
[93] Counsel ask that costs of this application be reserved, and
addressed
following issue of my decision. Counsel are to file memoranda (or preferably a joint
memorandum) with proposals for dealing
with costs.
____________________
Associate Judge Abbott
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