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High Court of New Zealand Decisions |
Last Updated: 25 January 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2010-404-7157
BETWEEN NATIONAL FINANCE 2000 LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
Plaintiff
AND WILLIAM BUCK NEW ZEALAND LIMITED
First Defendant
AND O'HALLORAN COMPANY LIMITED Second Defendant
AND VERO LIABILITY INSURANCE LIMITED AND AMERICAN HOME ASSURANCE COMPANY LIMITED First Third Party
AND AEON NEW ZEALAND Second Third Party
AND COVENANT TRUSTEE COMPANY LIMITED
Third Third Party
Hearing: 7 November 2011
Appearances: No appearance for Plaintiff
B Morley and N Chambers-Penman for First and Second Defendants
M C Harris for Third Third Party
Judgment: 7 December 2011 at 3:00 PM
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me 7 December 2011 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
.....................................................
Registrar/Deputy Registrar
NATIONAL FINANCE 2000 LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) V WILLIAM BUCK NEW ZEALAND LIMITED HC AK CIV-2010-404-7157 7 December 2011
[1] The third third party, Covenant Trustee Company Limited, applies to strike out the claim against it by the first and second defendants. The key question is whether a trustee for debt securities issued to the public owes reasonable diligence duties to the issuer (as opposed to investors) to find out whether breaches of the trust deed have occurred, to take steps to remedy breaches and to ascertain whether the assets of the borrowing group are sufficient to discharge the amounts of the debt securities as they fall due.
[2] The proceeding arises out of the failure of the plaintiff, National Finance
2000 Ltd. It went into receivership in May 2006. It was put into liquidation in August 2008. National Finance provided motor vehicle finance. It raised funds by issuing debt securities to the public. The debt securities were secured under a debenture trust deed.
[3] The first and second defendants are an accounting practice. They were National Finance’s auditors. The second defendant, O’Halloran and Company, was in practice between 2004 and May 2006. The first defendant is a company which took over the practice of the partnership. I refer to both the first and second defendants as ―the auditors‖.
[4] National Finance sues the auditors in contract and in tort for negligence in auditing accounts for September 2004 and March 2005. In short it says that the auditors failed to detect and report breaches of the debenture trust deed provisions as to permissible percentages of total liabilities in relation to total tangible assets and as to the permissible value of related party transactions in relation to total tangible assets. If these breaches had been detected and reported, the trustee would have become aware of the breaches and appointed receivers, would not have consented to an amendment to the trust deed in 2005 and National Finance would not have continued to make more loans to related parties. For the September 2004 audit it
claims damages of $3,472,158.60 and for the March 2005 audit it claims damages of
$687,935.40.
[5] Under s 33(2)(a) of the Securities Act 1978 no debt security shall be offered to the public unless the issuer of the security has appointed a trustee for the security and both the issuer and the trustee have signed a trust deed for the security. National Finance entered into the debenture trust deed dated 14 April 2000 with Covenant Trustee Company Limited, a trustee company, as trustee for members of the public who invested in debt securities issued by National Finance.
[6] The auditors say that Covenant was a concurrent tortfeasor and claim contribution under s 17(1)(c) of the Law Reform Act 1936. Their statement of claim against Covenant as third party alleges that Covenant owed National Finance identical duties under the Securities Act and at common law. It pleads breach of a statutory duty to take care and breach of a duty of care at common law. The duties are framed in terms of the reasonable diligence duties in clause 1 of Schedule 5 of the Securities Regulations 1983:
Duties of trustee
(1) The trustee shall exercise reasonable diligence to ascertain whether or not any breach of the terms of the deed or of the terms of the offer of the debt securities has occurred and, except where it is satisfied that the breach will not materially prejudice the security (if any) of the debt securities or the interests of the holders thereof, shall do all such things as it is empowered to do to cause any breach of those terms to be remedied.
(2) The trustee shall exercise reasonable diligence to ascertain whether or not the assets of the borrowing group that are or may be available, whether by way of security or otherwise, are sufficient or likely to be sufficient to discharge the amounts of the debt securities as they become due.
[7] For both causes of action the alleged breaches of duty by Covenant are essentially that it was aware of the true state of related party transactions including a lack of security over the assets of one related party borrower, but failed to ascertain whether there had been a breach of the trust deed, failed to remedy any breaches of the trust deed, and erred in consenting to an amendment to the trust deed.
[8] Covenant applies to strike out the claim against it, because it says that while it was under the reasonable diligence duties, it did not owe those duties to National Finance. It says that the auditors have not disclosed any reasonable cause of action against it and it cannot be held to be a concurrent tortfeasor.
Strike-out principles
[9] The Court of Appeal stated the established criteria for striking-out in Attorney-General v Prince,1 and the Supreme Court endorsed them in Couch v Attorney-General:2
(a) Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation;
(b) The cause or action or defence must be clearly untenable;
(c) The jurisdiction is to be exercised sparingly and only in clear cases.
This reflects the court’s reluctance to terminate a claim or defence
short of trial;
(d) The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.
(e) The court should be particularly slow to strike out a claim in any developing area of the law, perhaps particularly where a duty of care is alleged in a new situation. There is considerable authority that developments in negligence need to be based on proved rather than hypothetical facts.
[10] Further, it may be appropriate to give the opportunity to amend, where a claim can be saved. In Marshall Futures Ltd v Marshall,3 Tipping J said:
It seems to me that in a case where the plaintiff can undoubtedly start again, being within time, the Court should only strike out if satisfied that on the best view of the facts from the plaintiff's point of view he cannot succeed at law, or alternatively where the pleading is so deficient as to require a de novo start rather than an amendment. As Mr Goddard aptly put it, the question will often be one of degree. The difference, using by analogy the terminology of motor vehicle insurance, is between a pleading which is a total write off and one which is deficient but is capable of effective repair.
1 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267.
2 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
3 Marshall Futures Ltd v Marshall [1992] 1 NZLR 316 (HC) 324.
The trust deed and statutory setting
[11] The only evidence given in support of the application is non-contentious. Covenant’s director has attached a copy of the debenture trust deed of 14 April 2000 plus copies of amendments of 12 September 2002 and 22 March 2005.
[12] National Finance and Covenant are the parties to the trust deed. The trust deed contains a recital that Covenant has agreed to act as trustee for the benefit of the investors (called ―stockholders‖) on the terms and conditions and with the powers and authorities in the deed. Clause 1.1(a) says:
This Trust Deed shall be construed and take effect as a contract and declaration of trust made in New Zealand.
[13] As a trust deed it is somewhat light on details identifying the property subject to the trust. It is left to inference that the trustee holds the charge it has taken over the assets of the company and the proceeds of the charge on trust for investors. The deed provides for the creation and issue of stock, with repayment secured by a charge taken over company assets enforceable on default. There are extensive provisions imposing obligations on National Finance and its subsidiaries including to pay, not to enter into related party transactions beyond a given limit, to give reports and information for payment by the company, and to pay the trustee’s remuneration for acting as trustee. There is an express indemnity in favour of the trustee. The trustee may retire, but there is no provision for its removal from office against its will. Presumably a trustee could be removed by the court on an application under s 51 of the Trustee Act 1956.
[14] The statutory context for the reasonable diligence duties is the Securities Act
1976 and the Securities Regulations 1983.4 As already noted, under s 33(2) of the Act no debt security shall be offered to the public for subscription unless the issuer of the security has appointed a person as a trustee for the security and both the issuer and the trustee have signed a trust deed relating to the security, and a copy of the
trust deed and any amendments has been registered under the Act.
[15] Under s 45(1) every trust deed shall contain all information and other matters that are required to be included by regulations; and under s 45(2) it shall contain all clauses prescribed by regulations ―as clauses that are deemed to be contained in a trust deed‖. These provisions have effect notwithstanding anything to the contrary in any deed in which they are contained.
[16] Through clause 24, Schedule 5 of the Securities Regulations sets out clauses deemed to be contained in trust deeds for debt securities. They are the reasonable diligence duties in [6] above and other provisions: for the trustee’s power to obtain information, for the trustee or investors holding ten per cent of the securities to requisition meetings, for the issuer to provide monthly reports and certificates, and other information, for half-yearly financial statements to be audited, for financial statements to be given to the trustee, for consultation with the trustee on appointment of the auditor, for the terms of the auditor’s appointment, for the trustee to appoint an independent auditor and for the trustee to engage an expert to assist. The reasonable diligence duties aside, the obligations, disabilities and liabilities tend to fall on the issuer rather than the trustee.
[17] Under s 49 where a trustee is of the opinion after due inquiry that the issuer or guarantor is unlikely to be able to pay all money owing in respect of the securities when it becomes due or the provisions of the trust deed are no longer adequate to give proper protection to the security holders, the trustee may apply to the court for orders. The section confers power to make a wide range of remedial orders, including the appointment of receivers. The court is directed to have regard to the interests of all the creditors of the issuer. Section 49 supplements any enforcement powers given to a trustee in a debenture trust deed.
[18] Under s 62, with qualifications, provisions in a trust deed relating to debt securities shall be void in so far as they would have the effect of exempting a trustee from or indemnifying him or her against liability for breach of trust where he or she fails to show the degree of care and diligence required of him as trustee having regard to the provisions of the trust deed.
[19] Under s 65 any liability that a person might incur under any other rule of law or enactment is saved.
[20] Sections 53 to 53E impose accounting requirements on issuers. Section 53E requires every issuer to ensure that a qualified auditor audits its financial statements at least once a year. Section 50 imposes duties on auditors to report to trustees. Under s 50(4) nothing in the section affects the duties or liability of a trustee.
[21] In Hickman v Turn and Wave Ltd 5 the Court of Appeal described the genesis of the Securities Act:
The purpose and scheme of the Securities Act
[272] The genesis of the Act is described by Farrar and others Company and Securities Law in New Zealand:
[The Securities Act] was introduced in the wake of the collapse of the Securitibank group and the losses suffered by a large number of small retail investors. It is based on investor protection through disclosure. In particular, it is based on the premise that the investing public is entitled to the disclosure of sufficient information on which to make an informed decision...
Whatever type of security is offered, the investor purchases a claim to future cash flows. This claim to future cash flows, which is often uncertain, is usually accompanied by a set of rights ... The intangible nature of such interests makes their offer particularly vulnerable to fraud or over optimism by their promoters, be it innocent or not.
[273] As reflected in the long title to the Act, its purpose was to consolidate and amend the law relating to the offering of securities to the public and to ―extend the application thereof‖. As explained in Morison’s Company and Securities Law:
... For the purposes of any new legislation a definition of
―security‖ was required which would cover more than
merely shares and debentures, but which would allow a degree of precision over the way in which the word
―security‖ was used and understood in commercial practice.
[274] Part 2 of the Act regulates the offer and allotment of securities to the public. By virtue of s 33(1), no security shall be offered to the public for subscription, by or on behalf of an issuer, unless the offer is made in, or accompanied by, a registered prospectus, or authorised advertisement, or investment statement. Where a debt security is
5 Hickman v Turn and Wave Ltd [2011] MZCA 100; [2011] 3 NZLR 318 (CA).
offered to the public, the issuer must appoint a person as trustee in respect of the security and register a trust deed. If there is no registered prospectus, securities cannot be allotted. Any allotment which contravenes the Act in this respect is invalid and of no effect. The purpose of the Act is to protect the investing public.
[22] In Christchurch Pavilion Partnership No 1 v Deloitte & Touche Tohmatsu
Trustee Co Ltd6 the Privy Council said:
The 1978 Act
[7] The Securities Act 1978 represented the response of the New Zealand legislature to the collapse of a group of companies known as the Securitibank Group. When introducing the Bill the then Minister of Justice, the Hon David Thomson, said that:
―The Bill . . . will require commercial entities offering securities to the public to do so by way of a registered prospectus, to appoint an independent person to look after the interests of investors, to keep and disclose adequate financial information and to be subject to official scrutiny.‖
and that
―The Bill is aimed at redressing the balance in favour of the investor, who, in many of the financial collapses in recent years, had had little or no way of ensuring that his investment has been responsibly and properly managed.‖ (See Hansard, 416 New Zealand Parliamentary Debates,
14 December 1977, p 5339.)
[23] Other authorities recognising that the purpose of the act is to protect investors are the High Court’s decision in Re The Pavilions, Christchurch Prospectus; Christchurch Pavilion Partnership No 1 v Deloitte & Touche Tohmatsu Trustee Co Ltd7 and the Court of Appeal’s decision in Re AIC Merchant Finances Ltd.8
Actionable duties
[24] The combined effect of the enactments and the debenture trust deed is to create a number of possible sources for duties, namely:
(a) statute;
6 Christchurch Pavilion Partnership No.1 v Deloitte & touché Tohmatsu Trustee Co Ltd [2002]
3 NZLR 289 (UKPC) at [7].
7 Re The Pavilions, Christchurch Prospectus; Christchurch Pavilion Partnership No.1 v Deloitte
& Touche Tohmatsu Trustee Co Ltd HC Auckland CL65/93 Cartwright J, 8 July 1998 at 21.
8 Re AIC Merchant Finances Ltd [1990] 2 NZLR 385 (CA) 391.
(b) equity;
(c) contract; and
(d) tort.
It is helpful to look at the respective sorts of duties that apply as between the issuer, the investors, the auditors and the trustee.
[25] Part of the investors’ protection comes from the responsibilities (i) of the auditor in auditing and reporting to the company and the trustee, and (ii) of the trustee in ensuring that the issuer complies with the terms of the trust deed and that the interests and securities of the investors are protected. These responsibilities have been held to impose actionable duties on trustees and auditors. The decisions in the AIC litigation9 recognised that trustees owe a duty of care to investors in terms of the reasonable diligence duties and that auditors owe a duty of care to the trustee. Having referred to the reasonable diligence duty of a trustee, the Privy Council held:10
Henry J concluded, at p 691, rightly in their Lordships' opinion, that NMLN (the trustee) was in a position of primary responsibility towards the depositors. Not only did it have a power to apply to the Court under s 49 of the Act but it had continuing duties to exercise reasonable diligence to ascertain whether or not (1) any breach of the terms of the trust deed had occurred, (2) the assets of the borrower were likely to be sufficient to repay the deposits as they became due, as well as the right to obtain information from AICS as issuer.
[26] For the AIC case it was not necessary to characterise the trustee’s duty to investors as arising in tort or under some other head of obligation. In Bank of New Zealand v New Zealand Guardian Trust Co Ltd 11 there was a claim against a trustee of a debenture trust deed, which contained an express provision in identical terms to the reasonable diligence duties. Giving the decision of four members of the court,
Gault J said:12
10 Deloitte Haskins & Sells v National Mutual Life Nominees Ltd (PC) at 4 and 7.
11 Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA).
12 At 683-684.
The duty in the present case is that imposed upon the trustee by cl 7.05(e) of the debenture trust deed. There has been no suggestion that the duty on which NAB relies has any other source. The clause does not state to whom the duty is owed by the trustee. It merely imposes the duty to exercise reasonable diligence to ascertain whether there has been any breach of the provisions of the deed by Comsec or any of its charging subsidiaries. It is not argued that the duty does not extend to the stockholders nor that it does not carry the further duty to advise them in the event of a breach being discovered. That duty upon the trustee is enforceable in equity. There is doubtless the same duty in tort.
[27] In a separate judgment Tipping J made the point that the relationship of trustee and beneficiary was the setting in which the duty arose, but that duties of care arose in equity as well as at common law. He said:13
...the relationship of trustee (or fiduciary) and beneficiary is, in a sense, incidental. It provides the setting in which the breach of duty occurs, and with it such tortious proximity or contractual privity as may be necessary. The duty to take care is one which arises as an incident of the relationship, but for the purpose of determining the proper approach to causation and remoteness, it is the failure to take care which is the material dimension, not the fact that the relationship also creates duties of a fiduciary kind.
[28] As the clauses inserted into the present trust deed under s 45 of the Securities Act impose the same duties as in that case, the duties are enforceable by the beneficiaries under the trust deed, that is, the investors, whether the duties are characterised as arising in equity or at common law or under statute.
[29] Others come under actionable duties of care. In Fletcher v National Mutual Life14 Henry J held that in addition to any duties they owe the company in carrying out their auditing functions under the Companies Act, auditors owe a duty of care to the trustee when complying with s 50(2) of the Securities Act, to report to the trustee, if the auditors become aware of any matter that in their opinion is relevant to the exercise of the trustee’s powers. Upholding the High Court’s decision in the Court of Appeal, Casey J said:
In the present case the combination of the Securities Act and the trust deed has created its own kind of special relationship between the directors and the auditor on the one hand and the trustee on the other, forming them into a team to protect the depositors.15
13 At 688.
14 Fletcher v National Mutual Life [1990] 3 NZLR 641 (HC) at 674-675.
15 Deloitte Haskins & Sells v National Mutual Life Nominees Ltd (1991) 3 NZBLC 102,259 (CA)
at 102,265.
The Privy Council also held that the auditors owed a duty of care, but differed from the Court of Appeal on how far the duty extended.16
[30] In Kuwait Bank EC v National Mutual Life Nominees Ltd17 the Privy Council held that directors of an issuer come under a duty of care to a trustee when giving certificates required under a trust deed. That is in addition to the directors’ duties to the company.
Does Covenant owe an actionable duty to National Finance?
[31] So much is established law. The novelty in this case is the auditors’ claim that Covenant as trustee also owed the reasonable diligence duties to National Finance.
[32] Covenant accepts that it owes the investors the reasonable diligence duties but says that it does not owe those duties to National Finance for these reasons:
(a) As the author of its own misfortune, National Finance cannot claim that Covenant owes it a duty to ascertain its breaches of the trust deed and to make it remedy those breaches;
(b) the fact that since the Securities Act was enacted in 1978 no-one has claimed that a trustee owes the issuer such a duty is a good sign that there is no such duty;
(c) imposing such a duty would put the trustee in a conflicted position;
and
(d) as to common law duty of care, there is no proximity and there are policy reasons against imposing a duty. The law will not superimpose a common law duty over a statutory framework.
[33] In opposition to the strike out application, the auditors say:
16 Deloitte Haskins & Sells v National Mutual Life Nominees Ltd [1993] 3 NZLR 1 (PC) at 7.
17 Kuwait Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187 (PC) at 221-222.
(a) Covenant, as trustee, has a general watchdog role. Its role involves it working as part of a team to protect investors. Its responsibilities to investors will be enhanced if it is also held to owe a duty in the same terms to National Finance;
(b) The Securities Act and Securities Regulations do not state to whom the duty is owed. The omission is consistent with an intention not to confine the class of persons to whom the duty is owed. The statutory purpose of protecting investors is served by holding that the duty is also owed to National Finance;
(c) Under s 45 the duty arises from a clause deemed to be part of the deed and is therefore part of a contract between National Finance and Covenant. National Finance’s obligation under the deed to pay Covenant for its work as trustee supports Covenant’s contractual duty to National Finance. As National Finance may enforce the duty against Covenant in contract, it may also enforce it in tort;
(d) There is weakness in the current arrangements for enforcing the trustee’s duty. They refer to a paper by Neville Harris, Finance Company Failures – Observations of the Registrar of Companies:18
Trustee accountability is weak. Shortcomings in the performance of a trustee company are unlikely to be uncovered or pursued by receivers who are appointed by the trustee and who look to trustees for further assignments. We understand receivers are uncertain as to their standing to consider such issues. There is therefore, in practical terms, no real avenue for investors for examination of the performance of trustees or to pursue redress for negligence in the performance of their duties.
Trustee accountability can be enhanced by holding that trustees owe a duty to the issuer. Although receivers appointed by trustees might be loathe to bite the hands that feed them, the duty to the issuer can be
enforced through claims for contribution, as in this proceeding;
18 2007/2008 Financial review of the Ministry of Economic Development: Report of the
Commerce Committee, House of Representatives – Appendix B.
(e) In response to the argument that a trustee will be conflicted if it is held to owe a duty to both the issuer and the investors, they say that the duties owed are in the same terms and there is no conflict;
(f) In response to the argument that National Finance is the author of its own misfortune and therefore cannot be owed a duty by the trustee to protect it against its own breaches of the trust deed, the knowledge of directors of National Finance is not to be attributed to the company as they were arguably dishonest and fraudulent. Counsel advised that the Serious Fraud Office had brought dishonesty charges under the Crimes Act against a director and the company accountant and there had been convictions and sentences. Two other directors faced charges under the Securities Act and the Financial Reporting Act; and
(g) As to a common law duty of care, there is proximity and there are no policy reasons against imposing a duty of care.
[34] The auditors also raise the preliminary objection that the claim that Covenant owed a duty to National Finance raises a new question as to duty of care, where it would not be safe to determine the scope of the duty until there had been a full hearing on the facts. In Gartside v Sheffield Young & Ellis19 Cooke P said:
The case came before the High Court on a motion by the defendants to strike out the statement of claim as not disclosing a cause of action. In his judgment Thorp J cited authorities to the effect that, as he put it, the jurisdiction is to be sparingly applied, so that if the Court is in doubt whether a claim may lie the application must be dismissed, but that if a claim depends upon a question of law capable of decision on the material before the Court, the Court should determine that question, even though extensive and substantial argument may be necessary to resolve it.
The Judge confessed to having been tempted to take the easy path of declining at this stage of the proceedings to rule on a controversial point of law. But he regarded the case as a good example of how it is occasionally possible to isolate a pure and vital question of law so that it can properly be determined on such an application; and he thought it his duty to determine it. Rightly he said that the allegations in the statement of claim should be assumed to be factually correct: they might be amplified at a hearing of the action but they should be taken, as pleaded, to give fair notice of the
19 Gartside v Sheffield Young & Ellis [1983] NZCA 37; [1983] NZLR 37 (CA) 39.
substance of the plaintiff's claim. In the result he decided that the claim was untenable and should be struck out.
In arguing the appeal counsel for the appellant a little unexpectedly put in the forefront and devoted considerable time to an attempt to persuade this Court to be less resolute than Thorp J. It was argued that we should vacate the Judge's careful and comprehensive judgment on the ground that he should never have attempted to decide the issue of law in vacuo: that any grappling with the issue of principle should be postponed. Like other Courts this Court has said often enough that caution is essential before a case can safely be treated as suitable for threshold argument of fundamental questions. But here the issue of principle stands out as plainly as anyone could wish. Thinking that it would be less than responsible to succumb to the other approach, I turn to the issue which the Judge was prepared to face.
[35] As in that case, the issue of principle is plain. It can be decided at the threshold stage, without requiring a hearing of evidence to determine whether Covenant owed the duties to National Finance. On this application the facts alleged by the auditors are assumed to be true. The duty question can be answered on those assumed facts. I have received very able assistance from the parties and have sufficient information on which to come to a clear view. With the judges in Gartside, I decline to take the easy path.
[36] For their contribution claim the auditors say that Covenant owed National Finance duties in tort. No doubt they did so to claim contribution as alleged concurrent tortfeasors under the Law Reform Act. However, today it is now arguable that equitable contribution may be available among concurrent wrongdoers when there is a co-ordinate liability to make good a single loss, even though the claims against them are under different heads of obligation, and not in tort alone.
Following the decision of the High Court of Australia in Burke v Lfot Pty Ltd,20 in
Altimarloch Joint Venture Ltd v Moorhouse (No 2),21 Wild J held that equitable contribution was available where one defendant was sued in tort and another for misrepresentation under s 6 of Contractual Remedies Act, a contractual head of liability.22 Their liabilities were held to be co-ordinate. A claim for equitable contribution is just as much a claim for contribution as a claim under s 17(1)(c) of
the Law Reform Act and can give grounds for joining a third party under r 4.4(1)(a)
20 Burke v Lfot Pty Ltd [2002] HCA 17; (1972) 209 CLR 282.
21 Altimarloch Joint Venture Ltd v Moorhouse (No 2) HC Blenheim CIV-2005-406-91, 23 March
2009 at [41]-[50]. The point was not considered on appeal: Vining Realty Group Ltd v
Moorhouse [2010] NZCA 104 at [123].
22 Under s 6(1)(b) liability in tort is excluded.
of the High Court Rules. Because equitable contribution is arguably available when the heads of liability are different, other possible heads of liability can be considered, as well as the pleaded causes of action in tort. If there is a basis for National Finance to sue Covenant for breach of duty, even though that duty is not in tort, the auditors should be given the opportunity to amend so as to rely on that duty. Accordingly, the inquiry whether Covenant owed a duty to National Finance is not confined to considering the principles of tort law.
[37] The terms of the reasonable diligence duties are clearly directed at investor protection. The first duty’s saving for breaches that will not materially prejudice the security of debt securities or the interests of their holders and the second duty’s reference to assets available to discharge amounts of the debt securities as they fall due show that the purpose of the provisions is to benefit investors. They have an interest in these duties being followed. As beneficiaries of the trust they have standing to enforce these duties. The duties are imposed on the trustee as trustee. Under Bank of New Zealand v New Zealand Guardian Trust Co Ltd the duties are enforceable in equity for breach of trust and at common law for breach of a duty of care.
[38] In this case there are many provisions that make it clear in exercising the powers and discretions given in the trust deed the trustee is to act in the investors’ interests.
[39] The reference to ―breach of trust‖ in s 62 of the Securities Act :
...any provision of a deed or contract relating to debt securities or participatory securities shall be void in so far as it would have the effect of exempting a trustee or statutory supervisor thereof from or indemnifying him or her against liability for breach of trust where he or she fails to show the degree of care and diligence required of him or her as trustee or statutory supervisor having regard to the provisions of any deed conferring on him or her any powers, authorities, or discretions...(emphasis added)
is consistent with the trustee owing a duty to beneficiaries of the trust required under s 33(2). For fullness, I add that ―breach of trust‖ is not to be read as excluding a concurrent claim for breach of a duty of care at common law. As Tipping J explained in Bank of New Zealand v New Zealand Guardian Trust Co Ltd, the trust
relationship provides the setting in which the duty of care arises. It is immaterial whether a breach of the duty is pleaded in equity or common law. The bar on exemptions and on indemnities applies, no matter how the investor frames his claim. The statutory purpose is not to be defeated by the niceties of pleading.
Breach of statutory duty
[40] The auditors’ first cause of action is founded on the reasonable diligence duties inserted in the trust deed. While they say that the cause of action is for breach of statutory duty, it is more properly a cause of action founded on breach of a term inserted in a deed by statute. In X (Minors) v Bedfordshire County Council23 Lord
Browne-Wilkinson said of the cause of action for breach of statutory duty:24
The basic proposition is that in the ordinary case a breach of statutory duty does not, by itself, give rise to any private law cause of action. However, a private law cause of action will arise if it can be shown, as a matter of construction of the statute, that the statutory duty was imposed for the protection of a limited class of the public and that Parliament intended to confer on members of that class a private right of action for breach of the duty.
[41] Where Parliament has created a duty by inserting it as a term of a deed, it is clear that Parliament intended to create a duty enforceable by a private law cause of action. To identify the class of members of the public entitled to enforce the duty, it is necessary to have regard to the statutory purpose, to relevant provisions of the statute and to the nature of the document that Parliament required the clauses to be inserted into. Other provisions of the deed, which the parties were free to negotiate and which are not regulated by statute, might give other private law causes of action. They cannot, however, found a cause of action based on breach of statutory duty.
[42] The general purpose of the Securities Act is investor protection. The reason for requiring a trust deed is to give investors a measure of control over the issuer. The trustee’s function under the statute is to make sure that the issuer complies with the trust deed and that the investors’ interests are adequately protected. The duties
enforceable under clauses inserted in the deed under s 46(2) set the trustee’s function
23 X (Minors) v Bedfordshire County Council [1995] 2 AC 633 (HL).
24 At 731.
and the trustee’s standard of care. Under the statute, the duties are exclusively for the protection of investors. National Finance is not within the limited class contemplated by Parliament as entitled to enforce the duty. It cannot sue for breach of statutory duty.
Duty of care at common law
[43] Covenant says that a trustee owes the duties of reasonable diligence only to
investors. It refers to the Court of Appeal’s decision in Attorney-General v Carter.25
After referring to the speech of Lord Browne-Wilkinson in X (Minors) v
Bedfordshire County Council,26 the Court said:
We respectfully agree with this approach. It is consistent with, indeed the logical culmination of, a developing trend to place increasing emphasis on the terms of relevant legislation when, in a common law negligence case, that legislation is central to the relationship between the parties. The trend of authority has also regarded the legislative environment as informing the duty of care question rather than as providing an alternative basis upon which a claim for negligence might be maintained. As noted above, a negligence claim can logically be brought as one for breach of statutory duty only if there is a statutory duty to take care.
[44] Covenant also refers to dicta in Deloitte Haskins Sells v National Mutual Life Nominees Ltd27 against superimposing a common law duty of care upon a statutory framework. Covenant says that, following this approach, National Finance cannot allege a common law duty of care owed to it as that would go beyond the statutory purpose.
[45] However, the statutory provisions impose only a minimum of obligations. Section 65 saves liabilities under other rules of law. Section 65 recognises that it is open to parties to trusts for debt securities to make other arrangements that impose liabilities that go beyond those imposed under the act. Such liabilities can arise under enforceable contracts or when an assumption of responsibility gives rise to a
duty of care in tort.
25 Attorney-General v Carter [2003] 2 NZLR 172 (CA) at [41]-[43].
26 X (Minors) v Bedfordshire County Council [1995] 2 AC 633 (HL) at 730-731 and 732.
27 Deloitte Haskins Sells v National Mutual Life Nominees Ltd (PC) at 7.
[46] National Finance can have a legitimate interest in Covenant’s performance of its due diligence duties. As the body paying the trustee’s remuneration, it has an interest in seeing that the services it pays for are carried out. A finance company keen to uphold its reputation for sound investments may be anxious that its trustee is seen to be up to the mark as an assurance for investors. These concerns are not within the purpose of s 45(2) of the Securities Act, but they are interests which a finance company can try to protect by arrangements saved under s 65.
[47] If a finance company fails, it also has an interest in the enforcement of the trustee’s duties. On failure a finance company typically goes into receivership, liquidation or some other form of insolvent administration. Control of the company passes from directors and management to insolvency practitioners concerned to recover for creditors. If failures by a trustee in its reasonable diligence duties have resulted in the company not being able to pay its investors, the company, now controlled by insolvency practitioners, has a legitimate interest in seeking recovery of compensation to put it in funds to pay its investors.
[48] The question here is whether there are arrangements saved under s 65 which National Finance can invoke. Under the trust deed National Finance is required to pay Covenant’s remuneration. National Finance can hold Covenant to a standard of performance because of the arrangements made in the trust deed. The only provisions setting Covenant’s standard of performance are the reasonable diligence duties inserted under s 46. The trust deed is more than a deed conferring property on a trustee subject to powers, authorities and discretions governed by trust law. It also imposes reciprocal obligations on Covenant and National Finance. It is a contract, as provided in clause 1.1(a). Covenant owed National Finance a contractual duty to exercise reasonable diligence under the duties inserted by s 46. National Finance can sue Covenant in contract for losses alleged to arise from Covenant’s alleged failures to use reasonable diligence under the duties inserted in the deed.
[49] The auditors have not pleaded breach of contract. As noted already that is no doubt because they thought that contribution against Covenant could only be claimed under the Law Reform Act. There may also be limitation issues: the third party notice was issued on 9 May 2011. The auditors’ statement of claim against Covenant
refers to alleged knowledge and omissions of Covenant going back more than six years before the issue of proceedings against Covenant. The parties did not address on limitation issues. There is insufficient information to decide the strike out application on limitation issues. However, Covenant’s contractual duty to National Finance to exercise reasonable diligence leads to the question whether Covenant owed National Finance a concurrent duty in tort. In principle there is no objection to concurrent claims under different heads of liability. In Bank of New Zealand v New Zealand Guardian Trust Co Ltd, the Court of Appeal accepted that a trustee of a trust deed for debt securities could owe a duty of care founded in equity and a duty of care founded in common law. The Court of Appeal has followed the decision of the
House of Lords in Henderson v Merrett Syndicates Ltd28 that a contracting party may
sue in tort when a cause of action in negligence is available concurrently: Riddell v Porteous,29 Allison v KPMG Peat Marwick,30 Price Waterhouse v Kwan.31 The contractual relationship between National Finance and Covenant assists in establishing whether there is also a duty of care in tort. In Henderson v Merrett Syndicates Ltd32 Lord Goff drew on Hedley Byrne & Co Ltd v Heller & Partners
Ltd33 to show that in relationships akin to contract as well as in contractual
relationships, the assumption of responsibility by someone with special skills to provide services to someone relying on them gives rise to a duty of care in tort. Lord Goff held that once a case is identified as falling within the Hedley Byrne principle there should be no need to embark upon any further enquiry whether it is fair, just
and reasonable to impose liability for economic loss.34
[50] In Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd35 Glazebrook J
stated the test for determining a duty of care at common law:
The ultimate question when deciding whether a duty of care should be recognised in New Zealand is whether, in the light of all the circumstances of the case, it is just and reasonable that such a duty be imposed. The focus is on two broad fields of inquiry but these provide only a framework rather than a straitjacket. The first area of inquiry is as to the degree of proximity or
28 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL).
29 Riddell v Porteous [1999] 1 NZLR 1 (CA) at 9.
30 Allison v KPMG Peat Marwick [2000] 1 NZLR 560 (CA) at 582.
31 Price Waterhouse v Kwan [2000] 3 NZLR 39 (CA) at 44.
32 Henderson v Merrett Syndicates Ltd at 178-181.
33 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL 4; [1964] AC 465 (HL).
34 Henderson v Merrett Syndicates Ltd at 181.
35 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA) at [58].
relationship between the parties. The second is whether there are other wider policy considerations that tend to negative or restrict or strengthen the existence of a duty in the particular class of case. At this second stage, the Court's inquiry is concerned with the effect of the recognition of a duty on other legal duties and, more generally, on society.
[51] In the light of Lord Goff’s dictum, the establishment of the requisite special relationship and the assumption of responsibility ought to save proceeding through a prolonged consideration whether there is proximity and whether there are wider policy factors that support or count against a duty of care. For fullness, I record that the contractual relationship between Covenant and National Finance gives rise to the required proximity.
[52] In case it is required, I also check the imposition of a duty of care against wider policy considerations. The wider policy considerations are:
(i) the author of its own misfortune objection,
(ii) whether a trustee’s duty of care to the issuer will erode the
protection intended for the investors under the Securities Act;
(iii) whether imposition of a duty of care enhances trustee accountability, and
(iv) whether the duty imposed on the trustee is congruent with duties imposed on others involved in the enforcement of the trust deed.
Author of its own misfortune
[53] The objection runs that as National Finance did not comply with the trust deed, it cannot sue Covenant because it inflicted the losses on itself. The objection that the author of his own misfortune cannot sue others for his loss has its place in some parts of tort law. In claims for defective buildings, Lord Wilberforce
recognised it in Anns v Merton London Borough Council:36
A reasonable man in the position of the inspector must realise that if the foundations are covered in without adequate depth or strength as required by the bylaws, injury to safety or health may be suffered by owners or occupiers of the house. The duty is owed to them — not of course to a negligent building owner, the source of his own loss. . .(emphasis added)
[54] It has been recognised and applied in England in Acrecrest Ltd v W S Hattrell
& Partners,37 Dennis v Charnwood Borough Council,38 Cynat Products v Landbuild (Investment and Property) Ltd,39 Governors of the Peabody Donation Fund v Sir Lindsay Parkinson Co Ltd,40 Investors in Industry Commercial Properties Ltd v South Bedfordshire District Council41 and Richardson v West Lindsey District Council42 and in New Zealand in J W Harris & Son Ltd v Demolition & Roading Contractors (NZ) Ltd,43 and Three Meade Street Ltd v Rotorua District Council.44
[55] Generally in those cases the objection was applied in claims against local authorities by building contractors or developers. A rationale was that they could engage their own consultants to supervise design and construction for compliance with building standards. The local authority should not be held responsible to claimants in those cases as they were responsible for the breaches, the source of their own loss. However that rationale has not been applied in favour of consultants who were engaged to monitor and supervise construction for compliance with building standards. That distinguishing point applies here. While Covenant has responsibilities imposed on it by statute directed at protecting a section of the public (the investors), in contract it has also undertaken to National Finance to exercise reasonable diligence and in tort law it has assumed responsibility to National Finance similarly. National Finance’s breaches of the trust deed do not give Covenant a defence when Covenant was responsible to National Finance in contract
and in tort for ascertaining if it had breached its responsibilities to investors.
36 Anns v Merton-London Borough Council [1977] UKHL 4; [1978] AC 728 (HL) at 758.
37 Acrecrest Ltd v W S Hattrell & Partners [1983] 1 All ER 17 (EWCA).
38 Dennis v Charnwood Borough Council [1982] 3 All ER 486 (EWCA).
39 Cynat Products v Landbuild (Investment and Property) Ltd [1984] 3 All ER 513 (EWCA).
41 Investors in Industry Commercial Properties Ltd v South Bedfordshire District Council [1986]
1 All ER 787 (EWCA).
42 Richardson v West Lindsey District Council [1990] 1 All ER 296 (EWCA).
43 J W Harris & Son Ltd v Demolition & Roading Contractors (NZ) Ltd [1979] 2 NZLR 166 (SC)
at 178.
44 Three Meade Street Ltd v Rotorua District Council [2005] 1 NZLR 504 (HC) at [54].
[56] The point becomes clear when the auditors’ responsibilities are considered. Putting aside questions of contributory negligence, it would not be a complete defence to a claim against the auditors by National Finance that the company was responsible for the breaches of the trust deed that the auditors failed to detect. National Finance had engaged the auditors to check whether it had breached. The
―author of its own misfortune‖ objection no more applies to Covenant than to the auditors.
[57] The auditors also argue that directors and the company accountant of National Finance had been fraudulent. Their knowledge could not be attributed to the company so as to allow the ―source of its own loss‖ to apply. At best that argument could only apply in cases of dishonesty. I am not confident that the inability to attribute certain knowledge to the company is relevant to the ―author of its own misfortune‖ objection. Covenant’s reasonable diligence duty is to ascertain whether any breach of the trust deed has occurred. The company may be in breach of the trust deed whether or not knowledge of company officers can be attributed to it. In my judgment the objection is better answered by taking into account the responsibilities Covenant had assumed to National Finance.
Whether a trustee’s duty of care to the issuer will erode the protection intended for investors under the Securities Act
[58] Covenant’s argument is imposing on it a duty to National Finance as well as to the investors will weaken its ability to act in the investors’ interests. The auditors’ response is that those difficulties should not arise as the same duties are owed, albeit to National Finance as well as to the investors, and the terms of those duties are directed at the protection of investors. The auditors’ response is correct as far as it goes. It may also be added that as Covenant assumed responsibility to National Finance, it can hardly complain. If it wanted to avoid these difficulties it should have disclaimed responsibility. However, there is a practical point in Covenant’s objection. Counsel tendered copies of news reports of finance companies in difficulties or going into receivership. They contained press releases by the companies’ directors, which typically expressed deep disappointment at the trustee’s decision to call in receivers and alleged that the trustee had taken an overly conservative view and was not acting in the interests of investors. Directors had
tried to ward off receiverships with alternative proposals to allow the companies to recover.
[59] In that context it is not hard to envisage that companies faced with possible receivership might invoke the reasonable diligence duties as grounds to contest a trustee’s exercise of powers under the trust deed. Arguments would arise whether breaches of the trust deed would materially prejudice the investors’ security and whether assets were sufficient to discharge secured debt. The terms of the duties will not be in dispute but the way that the duty should be carried out will be – particularly in remedying breaches. Covenant’s argument is that in these situations it should act only with a view to the interests of investors and it should not be diverted from that by arguments from the company that it owes those duties to the company so that the company can influence how the duty is discharged. The risk for trustees is that the companies might claim some added leverage out of the duties owed to them. The point cannot be dismissed. The question is how much weight to give to it. Trustees will be aware that the purpose of their reasonable diligence duties is to protect investors. They should be able to recognise that when the company raises arguments how they should exercise their powers, those arguments have no greater weight simply because the companies will be able to assert that the trustee owes those duties to it as well as the investors.
[60] Auditors are in a comparable position. They owe duties to investors and to the company. The content of the duties overlaps, if it is not the same. In the case of auditors, the point raised by Covenant does not stand in the way of their owing the same duties to both investors and the company. In the case of trustees the point is not significant enough to count against a duty of care notwithstanding the assumption of responsibility.
Whether imposition of a duty of care enhances trustee accountability
[61] At present trustee accountability is weak. Taking proceedings against a corporate trustee is daunting for individual investors because of the complexity of the issues, the difficulties of investigation, their inexperience in such litigation, the expense and length of proceedings and the risk that any return will not be
commensurate with the effort required to bring a claim. Group claims are still relatively uncommon.
[62] Trustee accountability will be enhanced if trustees are found to owe a duty of care to the issuer of a debt security. Once the issuer fails and goes into some form of insolvent administration (including receivership), it will come under the control of insolvency practitioners acting in the interests of creditors. Receivers, liquidators and administrators are likely to have better access to relevant documents (they will take over the company records), better access to appropriate legal and accounting advice and may be better resourced. Insolvency practitioners tend to be experienced in litigation and able to make sound assessments of litigation risks. Litigation by them is more likely to be economic, with the costs of litigation spread over all the investors.
[63] Even if the auditors are correct that receivers may be shy of suing trustees who appoint them, I accept that auditors who are sued for breach of duty to the debt issuer will be strongly motivated to have others joined to the proceeding to contribute to any liability they might be under. Claims against auditors tend to be for significant sums. Auditors tend to be well resourced and to have access to high quality advice and representation. Allowing contribution claims based on a trustee’s breach of duty owed to the debt issuer will enhance trustee accountability.
[64] Against this, Covenant refers to the Securities Trustees and Statutory Supervisors Act 2011, which came into force on 1 October 2011. One of the purposes of the act is to enhance trustee accountability. Section 3 says:
The purpose of this Act is to protect the interests of security holders, and of residents of retirement villages, and to enhance investor confidence in financial markets and retirement villages, by—
(a) requiring persons who wish to be appointed as trustees or statutory supervisors to be capable of effectively performing the functions of trustees or statutory supervisors; and
(b) requiring trustees and statutory supervisors to perform their functions effectively; and
(c) enabling trustees and statutory supervisors to be held accountable for any failure to perform their functions effectively.
[65] Section 42 provides for the court to make compensation orders against trustees:
(1) The High Court may, on application by the FMA, a security holder, or a resident, order a licensee to pay compensation to any security holder or resident (the aggrieved person) if the court is satisfied that—
(a) the licensee has contravened a licensee obligation; and
(b) the contravention has caused loss or damage to the aggrieved person.
(2) The court may make a compensation order whether or not any aggrieved person is a party to the proceeding.
(3) The court may make any order it thinks just to compensate an aggrieved person in whole or in part for the loss or damage.
[66] The FMA is the Financial Markets Authority. The definition of ―licensee‖ includes a trustee of a debt security.45 ―Licensee obligation‖ includes an obligation imposed on a licensee under a trust deed (one sort of governing document) and under the Securities Act.46 Covenant’s argument is that because trustee accountability is now enhanced by the FMA’s ability to take proceedings to recover compensation for investors, there is less need to rely on a duty owed to the debt issuer. While s 43 and the associated provisions of the Securities Trustees and Statutory Supervisors Act are Parliament’s response to the problem of weak trustee accountability, that does not mean that other ways of holding trustees to account should be rejected. Section 43 supplements private law remedies because private law remedies may be inadequate. That is not a reason for declining to strengthen private law remedies. Further, the effectiveness of s 43 may turn on the resources that the FMA has available to bring applications under the section. Enhancing private law remedies saves having recourse to public authorities to take action.
Whether the duty imposed on the trustee is congruent with duties imposed on others involved in the operation of the trust deed.
[67] The conduct of directors, auditors and the trustee is likely to come under scrutiny when a debt issuer fails, leaving investors unpaid. Each of them may have
45 Section 2 definitions of ―licensee‖ and ―trustee‖, and definition of ―trustee‖ in s 2 of Securities
Act.
46 Definitions of ―licensee obligation‖ and ―governing document‖ in s 2 of Securities Act.
to account if their conduct has caused losses to the investors. The investors’ losses come from the company’s inability to pay its debts owing under the trust deed. That insolvency is also the damage the company may suffer when directors, auditors and trustees breach their duties.
[68] Investors can enforce duties owed to them by each of these groups: the directors (Kuwait Bank EC v National Mutual Life Nominees Ltd), the auditors (Deloitte Haskins & Sells v National Mutual Life Nominees Ltd) and the trustee (Bank of New Zealand v New Zealand Guardian Trust Co Ltd). But proceedings by individual investors are a weak and inefficient means of enforcing those duties. A more effective way of enforcing those duties is to allow the company to bring claims. Recovery by the company will provide funds to pay investors in compensation for their losses. There is no dispute that the company can enforce duties owed to it by directors under the Companies Act 1993 and duties in contract and in tort owed to it by auditors. If the company is the body enforcing the duties, it is incongruent if it can enforce duties directed at ensuring the company’s adherence to the trust deed against directors and auditors, but not against trustees.
[69] In summary on wider policy considerations, the only matter that might count against imposing a duty of care is the risk of the company misusing the duty as leverage in arguments how the trustee should exercise its powers, but that is not significant enough to warrant not imposing a duty of care, once the trustee has assumed responsibility to the company. The ―source of its own misfortune‖ objection is irrelevant. The other considerations support the imposition of a duty of care.
[70] Whether the matter is examined by way of the shorter approach adopted by Lord Goff in Henderson v Merrett Syndicates Ltd of finding a duty of care once there is an assumption of responsibility for the provision of services, or the longer route of establishing proximity and then considering wider policy considerations, the auditors have an arguable case that Covenant owed National Finance duties of care in terms of the reasonable diligence duties. The basis for the duty of care is the assumption of responsibility in a contractual relationship, a source of liability saved under s 65.
Indemnity issue – a possible defence?
[71] Clause 9.5 of the trust deed says:
Without prejudice to the right of indemnity by law given to trustees the Trustee and every Receiver attorney agent or other person appointed by the Trustee under this Deed shall be indemnified out of the Charged Assets in respect of all liabilities and expenses incurred in the execution or purported execution of the powers and trusts hereof and against all actions costs and demands in respect of any matter or thing done or omitted relating hereto other than a claim arising out of the wilful default or wilful breach of trust and the Trustee may retain and pay out of any moneys in its hand arising from the trusts of this Deed all sums necessary to effect such indemnity and also the remuneration and disbursements of the Trustee as herein provided and the Trustee shall have a charge on the Charged Assets for all money payable to it under this clause or otherwise howsoever arising out of or in connection with this Deed or the issue of the Stock.
[72] The operation of this clause may impinge on the effectiveness of any duty of care owed by the trustee to the company. The difficulties do not arise when investors sue the trustee for breach of the reasonable diligence duties. If the trustee has breached those duties and as a result there is a shortfall in company assets so that the investors cannot be paid in full, the indemnity will be worthless because there will be no assets from which the trustee can recoup any payments it has made under its liability to investors. But if the company successfully sues the trustee for breach of the reasonable diligence duties and the trustee meets the judgment, the company will have funds from which it can honour the indemnity. There may be associated arguments whether the right of indemnity can be invoked prospectively, that is, ahead of payment, as a shield to the company’s claim. The parties’ submissions did not explore these set off issues. As National Finance is in liquidation, presumably mutual credit and set off under s 310 of the Companies Act apply, following the
principles explained by Lord Hoffmann in Stein v Blake.47
[73] The auditors point to the exception for a claim arising out of wilful default or wilful breach of trust. They say that they have a case that the trustee’s conduct is within the exception. If they do have such a case, it is not apparent on the pleadings. If the auditors intend to run a case that the trustee was guilty of wilful default or wilful breach of trust, they will need to give full particulars in their pleadings, be
they statement of claim or reply to a statement of defence. Such allegations cannot be left to be inferred. They must be specific, pointed and relevant.48
[74] Section 62 (1) requires consideration. An indemnity does not apply if the trustee has incurred liability for breach of trust for not using due care. If ―breach of trust‖ is read as applying only to claims in equity against a trustee for not taking care, then it will not apply to any claim by National Finance against Covenant, because they are made in contract or in tort, common law heads of liability. Giving
―breach of trust‖ a narrow meaning does not meet the purpose of the provision. It is intended not to allow trustees to invoke indemnities when they have failed to exercise due care and diligence, so that company assets will be available for investors rather than the trustee. To meet that purpose breach of trust should be taken as meaning breach of a term in the trust deed, whether the claim is made in equity or not. On that interpretation, s 62 may prevent Covenant relying on clause
9.5 in the trust deed. For the present application the clause does not give Covenant a watertight defence or grounds to strike out the claim for breach of duty at common law.
Conclusion
[75] Covenant has shown that the auditors do not have a tenable cause of action for contribution based on breach of statutory duty, but it has not shown that it did not owe National Finance a duty of care for a claim in negligence at common law. The auditors’ first cause of action against Covenant will be struck out. Covenant set out to knock out both causes of action, so that it would be removed from the proceeding. It has not succeeded. The auditors’ claim is reduced to one cause of action, but remains on foot. Having succeeded, the auditors are entitled to costs.
[76] Under r 2.3 of the High Court Rules, the time for filing and serving an application for review of this decision is five working days from the decision, unless a judge directs otherwise. Given the importance of the issues in this application, I do not regard five working days as adequate time in which either party could obtain full advice from counsel, consider the matter, give instructions, and apply for review.
That is more the case at this time of year. This is an appropriate case to extend time under r 2.3(2).
[77] I make these orders:
(a) The auditors’ first cause of action against Covenant for breach of statutory duty, in paragraphs 10 to 20 of the statement of claim, is struck out, but the rest of the statement of claim is not;
(b) Covenant will pay the auditors costs on the strike out application. If the parties are unable to agree costs, memoranda may be filed; and
(c) Any application for review of this decision may be filed and served no later than 20 January 2012.
[78] On costs, the starting point is that costs are category 2 band B and any party who wishes to argue otherwise has the onus of persuasion. Provisionally I see no reason for increased costs under r 14.6 or reduced costs under r 14.7. However, I would be open to argument that, given the novelty of the issue and its importance to both parties, the time for preparation under step 4.14 should be adjusted.
[79] I have given a separate minute dealing with case management issues.
...........................................
Associate Judge R M Bell
Solicitors:
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