American Home Assurance Company T/A Chartis v Houghton HC Auckland CIV-2011-404-7152 [2011] NZHC 1723 (2 December 2011)

Last Updated: 7 December 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2011-404-7152}

BETWEEN AMERICAN HOME ASSURANCE COMPANY TRADING AS CHARTIS First Plaintiff

AND T E C SAUNDERS AND OTHERS Second Plaintiff

AND E M HOUGHTON Defendant

Hearing: 2 December 2011

Counsel: MG Ring QC and BJ Burt for First Plaintiff

AR Galbraith QC and MJ McGuigan for Second Plaintiff

AJ Forbes QC and PAB Mills for Defendant

Judgment: 2 December 2011

_{ORAL JUDGMENT OF RODNEY HANSEN J}

Solicitors: Chapman Tripp, P O Box 2206, Auckland 1140 for First Plaintiff Wilson Harle, P O Box 4539, Auckland 1140 for Second Plaintiff Wilson McKay, P O Box 28347, Auckland 1541 for Defendant

AMERICAN HOME ASSURANCE COMPANY V HOUGHTON HC AK CIV-2011-404-7152 2 December

2011

Introduction

[1] In this proceeding the first plaintiff, which trades as Chartis and which I will refer to by that name, and the second plaintiffs, former directors of Feltex Carpets Limited (Feltex), seek a declaration as to the effect of a charge under s 9(1) of the Law Reform Act 1936 over a policy which indemnifies Feltex and its directors against loss (including defence costs) incurred in respect of any securities claim.

[2] The declaration was sought following the judgment of Lang J in Steigrad & ors v BFSL (2007) Limited & ors[1] in which it was held that where an insurer has agreed to provide an indemnity against legal liabilities and defence costs and the maximum amount payable under the policy is a single aggregate limit, the amount charged pursuant to s 9(1) is the whole of the unexhausted policy limit at the date when the event takes place. The consequence of that interpretation is that the charge prevents the insured directors from having access to the policy to meet their defence costs. Lang J made a declaration in those terms in the Steigrad proceeding.

[3] The decision in Steigrad is the subject of appeal. The plaintiffs apply to have this proceeding transferred to the Court of Appeal. Their intention is that it should be heard and determined at the same time as the Steigrad appeal. The defendant abides the decision of the Court on the issue of transfer, although Mr Forbes properly points out that the plaintiffs must make out their case. The defendant also seeks associated orders relating to the payment of his costs for discovery and for the filing of further evidence should transfer be ordered.

Further background

[4] Chartis issued a prospective liability insurance policy to Feltex in 2004. Under the policy Chartis agreed to indemnify Feltex and its directors in respect of loss (including defence costs) incurred in respect of any securities claim. The

_{definition of securities claim extends cover to criminal proceedings or regulatory}

investigation in relation to an investment statement and prospectus issued by Feltex in 2004.

[5] Feltex was placed into receivership and subsequently into liquidation in 2006. In 2008 the defendant, Mr Houghton, issued proceedings in the High Court at Christchurch (the Christchurch proceedings) alleging that the prospectus included untrue statements in terms of the Securities Act 1978 and/or that they were misleading under the Fair Trading Act 1986. He has sued as representative of shareholders and former shareholders in Feltex. As at June 2010, 1,729 shareholders had opted into the proceeding and the total principal claim was calculated to be in excess of $73m excluding interest.

[6] Following delivery of the Steigrad judgment, solicitors acting for Mr Houghton asserted a charge under s 9(1) of the Law Reform Act on his behalf and on behalf of “those whom he represents”. The letter asserting the charge stated in part:

The charge created by s. 9 prevents the defendant from receiving or distributing the proceeds of the insurance policy for any purpose other than the satisfying of the plaintiff’s claim.

...

Unless separately insured for defence costs, the charge under s. 9 prevents the defendant(s) from having access to the insurance money to meet the cost of the defence of these proceedings.

[7] What is stated in the letter is, of course, the proposition enunciated in the Steigrad judgment. It has significant ramifications for the liability insurance industry. They are described in detail in affidavits sworn by the Claims Team Manager of Chartis, Ms Joanna Godfrey, and the Managing Director of Vero Liability Insurance Limited, Mr Adrian Tulloch. They describe how, as a result of the judgment, insurers have been put in the invidious position of having either to refuse to advance defence costs or to run the risk of advancing defence costs as a volunteer. This is said to disturb the commercial basis of insurance policies. Many of those insured no longer have the cover they thought was available when they became a director or undertook particular transactions. Mr Peter Hunter, one of the second plaintiffs, has sworn an affidavit attesting to the implications for him and his

fellow directors as a result of uncertainty over whether his defence costs will be funded.

[8] Another consequence of the Steigrad judgment is said by Ms Godfrey to be that it creates a perverse incentive for claimants to overstate their claims at the outset, in an attempt to prevent the insured defendant from having his or her defence costs advanced. This may result in the insured being unable to advance a meritorious defence.

[9] In the circumstances, both the plaintiffs and the insurance industry as a whole are anxious to support the pending appeal in the Court of Appeal and to do so without going through what the plaintiffs say would be the unnecessary and unhelpful intermediate step of a High Court hearing.

Jurisdiction

[10] Section 7 of the Delcaratory Judgments Act 1908 provides that an application for a declaratory order may be removed into the Court of Appeal on the same basis as specified in s 64 of the Judicature Act 1908.

[11] Section 64(1) of the Judicature Act 1908 confers a discretion on the High Court to order that a proceeding be transferred to the Court of Appeal if the circumstances are “exceptional”. In this context, “exceptional” just means outside the ordinary run of cases.[2]

[12] Section 64 does not prescribe what constitutes exceptional circumstances, but subsection (2) sets out circumstances which may be considered exceptional. Relevant to the present proceeding are s 64(2)(b) and (c):

(b) The proceeding raises one or more issues of considerable public importance that needs to determined urgently if the proceeding is heard and determined by both the High Court and the Court of Appeal:

(c) The proceeding does not raise any question of fact or any significant question of fact, but does raise one or more questions of law that are the subject of conflicting decisions of the High Court.

[13] Section 64(3) lists six mandatory considerations to which the court must have regard in determining whether to exercise its discretion to transfer a proceeding to the Court of Appeal, namely:

(a) the primary purpose of the Court of Appeal as an appellate court;

(b) the desirability of obtaining a determination at first instance and a review of that determination on appeal;

(c) whether a Full Court of the High Court could effectively determine the question in issue;

(d) whether the proceeding raises any question of fact or any significant question of fact;

(e) whether the parties have agreed to the transfer of the proceeding to the

Court of Appeal; and

(f) any other matter that the Judge considers that he or she should have regard to in the public interest.

_{[14] Further relevant considerations which emerge from the cases are:}

The power of removal should only be exercised sparingly, and generally not where prolonged inquiry into facts will be required. Nevertheless, the removal jurisdiction can extend to questions of fact: Re Erebus Royal

_{Commission, Air New Zealand Limited v Mahon;}[3]

The possibility or inevitability of an appeal is not determinative. Even where an appeal is inevitable, the Court of Appeal should ordinarily hear cases only

after a reasoned judgment at first instance: Vector Ltd v Transpower NZ Ltd,[4]

_and

Urgency, and the inability to achieve it if the matter is heard first in the High

Court and then on appeal in the Court of Appeal, is also a relevant consideration: McGechan on Procedure.[5]

[15] Ultimately, however, the decision will turn on the facts of each case. As the

Court of Appeal said in Re Erebus Royal Commission:[6]

“The two-tier pattern (three in the event of an appeal to the Privy Council) is departed from only exceptionally and for clear reason applicable to the particular case”.

[16] Mr Ring submitted that the usual justification for the two-tier system is to avoid the appellate court being asked to determine an issue unnecessarily and prematurely. In this case he submits that neither condition arises. The hearing will not be unnecessary as the Court of Appeal is destined to address and determine the issue in the Steigrad appeal and it would not be premature because the usual expectation of reasoning in the High Court that would provide the framework for appellate consideration is already satisfied in this case.

Decision

[17] I am satisfied that, for the reasons expounded by Mr Ring and supported by Mr Galbraith, the circumstances of this proceeding are exceptional and warrant the removal of the proceeding to the Court of Appeal.

[18] The issue in the present proceeding is identical to the issue in Steigrad. The essential facts are not contentious. The Court of Appeal already has the benefit of a fully reasoned judgment of the High Court on this issue. As Mr Ring submits, there will be no additional benefit derived from a further High Court judgment. And,

_{whatever the outcome in the High Court, a judgment of the Court of Appeal would}

still be required. The practical outcome, if this proceeding were first determined by the High Court, would be that the parties would be put to the delay and expense of effectively relitigating the Steigrad judgment. If the result were the same, an appeal would still be necessary. If the result were different, there would be two conflicting judgments of the High Court which would also require resolution by the Court of Appeal. A much more efficient and effective use of the judicial resources of both courts is for the parties to this proceeding to be heard in the Court of Appeal when the Steigrad appeal is heard. The removal to the Court of Appeal will accordingly avoid the duplication of proceedings in this Court and the possible duplication of proceedings in the Court of Appeal.

[19] It is also of importance to ensure that the issue is authoritatively determined as a matter of urgency. The Steigrad ruling has caused uncertainty and consternation in the insurance industry and practical problems for insurers and insured alike. Early clarification of the issue is desirable.

[20] These considerations leave me in no doubt that this is one of the exceptional cases which justify removal of the proceeding to the Court of Appeal.

Costs

[21] Mr Forbes asks that an order transferring the proceeding to the Court of Appeal be associated with an order directing the defendants’ costs to be met by Chartis on an indemnity basis. He refers to s 13 of the Declaratory Judgments Act

1908 which provides that the costs of any action, summons or appeal under the Act shall be at the discretion of the Court. Mr Forbes says his client has only a nominal interest in this proceeding and has no particular interest in arguing the case himself. Although a party in a representative capacity to the Christchurch proceedings, in respect of which I understand funding arrangements are in place, there is no equivalent arrangement in relation to this proceeding.

[22] I am not without sympathy for Mr Houghton’s position, but I do not think it would be appropriate for me to make the order he seeks at this stage. The usual rule, of course, is that costs follow the event and, except in unusual circumstances, it is

rare for costs to be determined in advance. It is undoubtedly the case that the Court of Appeal will be better placed to determine the issue after the case has been determined. It is equally the case that if there is an argument for indemnity costs to be ordered in advance, such an order should be made by the Court of Appeal and not by this Court.

Discovery

[23] Mr Forbes further seeks an order requiring the first plaintiff to make discovery of the following documents:

(a) An unredacted copy of the prospectus liability insurance policy disclosing the indemnity limit under the prospectus liability insurance policy;

(b) Disclosing the amount of defence costs advanced for the benefit of the second plaintiffs and Joan Withers under the prospectus liability insurance policy;

(c) Disclosing the reinsurance arrangements it has in place for the prospectus liability insurance policy;

(d) Disclosing its current financial position; and

(e) Exhibiting the second plaintiffs’ proposal to the first plaintiff for the

prospectus liability insurance policy.

[24] Mr Forbes explains that the defendant’s purpose in seeking discovery of these documents is to obtain reassurance that the policy is sufficient to meet some, if not all, of the claim and that Chartis is in a position to indemnify the second plaintiffs if required. In short, the defendant wants to be reassured that in participating in the appeal he is not engaging in what Mr Forbes described as an academic exercise. For that purpose, he has indicated that it would be sufficient if he were to receive an assurance in some form from Chartis as to its capacity to meet the claims.

[25] In my view, an assurance is the most that the defendant can expect. It is clear, and Mr Forbes did not attempt to argue otherwise, that the question of the indemnity limit and the capacity of Chartis to meet claims is irrelevant to the issue arising in this proceeding which reduces simply to one of statutory interpretation. I decline to make the discovery orders sought.

Evidence

[26] Mr Forbes seeks also an order that the defendant have leave to file further evidence directed to some of the arguments that it intends to advance in this proceeding. It is unnecessary for me to review those arguments. Provided the evidence has relevance, I would not wish to place any restrictions on what may be filed. Accordingly, I make an order giving leave to the defendant to file within ten days any further evidence relevant to the issues arising in the proceeding.

[27] Mr Forbes says that may not provide sufficient time for the defendant to assemble all of the relevant evidence. If that is the case, the defendant should apply to the Court of Appeal for leave to file further evidence. All parties agree that it is vitally important that the hearing in the Court of Appeal takes place as soon as possible. A hearing in February has been indicated for the Steigrad appeal. The filing of evidence should not prejudice the hearing of this proceeding in the Court of Appeal at the same time as the Steigrad appeal.

Other parties

[28] I record that shortly before the hearing a memorandum was filed by Mr TJ Castle as the counsel for two directors of a finance company facing charges under the Securities Act 1978. He gave notice of their support for the removal of the proceeding and that it is likely that he would seek leave to be heard in the proceeding.

Result

[29] I make an order transferring this proceeding to the Court of Appeal pursuant to s 7 of the Declaratory Judgments Act 1908 and s 64 of the Judicature Act 1908 and order the defendant to file within 10 days any further evidence relevant to the issues arising in the proceeding.

---

[1] Steigrad & ors v BFSL (2007) Limited & ors HC Auckland Civ-2011-404-611, 15 September

2011, Lang J.

[2] Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2005] 1 NZLR 145 (PC) at [25(1)].

[3] Re Erebus Royal Commission, Air New Zealand Ltd v Mahon [1981] 1 NZLR 614 (CA) at 616.
[4] _{Vector Ltd v Transpower NZ Ltd (2000) 14 PRNZ 240.}
[5] _{McGechan on Procedure J64.01(2)(h).}
[6] Ibid, above n 3, at 616.