Mogilin v Jo [2012] NZHC 2006 (13 August 2012)

Last Updated: 19 September 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-001584 [2012] NZHC 2006

BETWEEN ANATOLY MOGILIN First Plaintiff

AND MARFA MOGILIN Second Plaintiff

AND NAM GUEN JO First Defendant

AND MARTINA JHO Second Defendant

Hearing: 12 June 2012

Appearances: Mr Orlov for plaintiffs

Mr Wallace for defendants

Judgment: 13 August 2012

_{JUDGMENT OF ASSOCIATE JUDGE DOOGUE}

This judgment was delivered by me on

13.08.12 at 4.30 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Counsel:

Mr E Orlov, Equity Law, Auckland – [e-mail]

Mr M J Wallace, Bridgeside Chambers, Christchurch – [e-mail]

MOGILIN & Anor V JO & Anor HC AK CIV-2011-404-001584 [13 August 2012]

[1] In this proceeding the plaintiffs bring claims against the defendants arising out of a series of agreements that they entered into in 2010. The matter has been before the Court previously and on 19 August 2011 Heath J issued a decision on an application for a freezing order which the plaintiffs’ sought against the defendants. The general background to the agreements is set out in Heath J’s judgment and I concur, respectfully, with what he said.

[2] The plaintiffs bring proceedings based on pre-contractual misrepresentation, breach of contract, “commercial deceit”, breach of fiduciary duties and breach of trust.

[3] There appear to be two very differing views on each side about the objectives of the transactions which the parties entered into. The plaintiffs had had a judgment entered against them following a claim by the Commissioner of Inland Revenue for an amount of $455,203.69 on 7 December 2007. They say that they were unable to meet the debt and that they were introduced to the defendants by an intermediary. The reason for the introduction was that the defendants, it was thought, might be able to assist the plaintiffs with raising money for their debt. The plaintiffs at the time in question owned a property at Spring Roads, Christchurch which was valued at a sum in excess of $800,000. They were also the proprietors of a company called Eurostile Limited (“Eurostile”) which owned six houses. The houses had been built for the company by a Mr Chernishoff. The plaintiffs’ estimated those properties were worth $800,000. A proposal was made that the plaintiffs would transfer their property at Springs Road to the defendants and as well would execute a transfer of shares in Eurostile to them or their trust.

[4] Ultimately three agreements were entered into which are in writing. A joint venture agreement between the defendants, their trust, SY Trust and the plaintiffs appears to have been the first that was entered into. It recorded that the plaintiffs would acquire 30% of the shares in a company that the defendants’ trust, SY Trust, owned in a company called SY Enterprise Limited (“Enterprise”). The preamble to the agreement recorded that Enterprise owned two patents with a total “market

value” of $5,600,000. In consideration for the shares in Enterprise, the plaintiffs agreed to transfer the Springs Road property and the shares in Eurostile. Each of these assets were stated in the schedule to the “Joint venture agreement” to have a value of $850,000 so that the agreed value of the consideration passing to the defendants was $1,700,000.

[5] That agreement was dated 1 April 2009. The next agreement which is undated but which appears to succeed the April 2009 agreement was expressed to “change the joint venture agreement”. The plaintiffs would now transfer the Springs Road property on the basis that the second defendant would refinance[s] the properties owned by Eurostile together with the Springs Road property. The agreement provided that if the second defendant could not refinance, then the Springs Road property would not be transferred to the second defendant. There is also a provision in the agreement for the plaintiffs to be entitled to lodge a caveat against the title to the Springs Road property. It was recorded that the expectation was that Springs Road would be returned to the plaintiff:

If their agreed joint venture in Russia cannot go ahead.

...

Or if the plaintiffs decide to terminate that joint venture.

[6] It was further agreed that if the transaction did not proceed then the plaintiffs (or more accurately the second plaintiff) would transfer the shares in Enterprise back to the defendants who were to transfer the Springs Road property back to the plaintiffs.

[7] A further agreement was entered into between the parties in terms of which the plaintiffs assigned to the defendants rights of action that they had arising from the construction of the Reserve Close properties, the assignee of which was to be the first defendant.

[8] The plaintiffs’ assert that the true effect of these arrangements was to enable them to raise some money so that they could pay their lawyer a Mr Tee, who has

since been adjudicated bankrupt, to progress a claim that they had against the Inland

Revenue arising out of the debt for $400,000 plus which I mentioned earlier.

[9] At some point, Mr Tee arranged for another lawyer, Mr Withers, to represent the plaintiffs but the plaintiffs say that the first defendant actually instructed Mr Withers and paid his costs. The first plaintiff also says that at the time when all of these matters were under discussion he was suffering from diabetes with quite severe consequences which clouded his judgment and made it hard for him to understand the transactions and concentrate.

[10] It appears that the property at Springs Road was eventually transferred to the defendants but there is a caveat in place preventing further dealings with that property. The shares in Eurostile were also transferred to the defendants. The plaintiffs say that the purport of the transaction was the properties (that is the Springs Road property and Eurostile Limited) were transferred on the understanding that the defendants would borrow monies which would then be leant to the plaintiffs to allow them to continue their legal claim against the IRD. It is further said that the assets were to be held on trust by the defendants and they would not be able to deal with them in their own right.

[11] The plaintiffs essentially are seeking to unwind the transactions. They say that the Court should hold that they were entitled to and did cancel the contracts between themselves and the defendants. They should be entitled to relief by way of a return of property that they passed to the defendants. They further claim that there are alternative bases for the same remedies being granted to them. They say that they were induced to enter into the contracts by fraudulent conduct and representations on the part of the defendants. They say that there was no or no adequate consideration for the transactions. Mr Mogilin claims that the transactions ought not to be binding upon him because of his ill health which resulted in the agreements being entered into as part of an unconscionable bargain. The plaintiffs’ claim that there was no independent legal advice which may be relevant to the unconscionable bargain head of claim.

[12] The plaintiffs seek declarations of constructive and or other trusts and they seek an enquiry as to damages.

[13] It is important to note that the defendants do not accept that there was an underlying or background agreement which was the objective for entering into the arrangements. They say that the plaintiffs entered into the transactions because they wanted to move their wealth out of the jurisdiction because of the difficulties that they were having with the Commissioner of Inland Revenue. That is why assets such as patents in Korea and a Russian fishing venture (which I observe, do not appear to have been mentioned in the joint venture agreements) appealed to the plaintiffs’. I shall make further reference to the position that the defendants take subsequently in this judgement when considering the application for security for costs which they have brought against the plaintiffs.

[14] The defendants have provided discovery but the plaintiffs are not satisfied with it and have filed an application for further and better discovery. They also claim that there has been systematic blocking of the plaintiffs’ rights to discovery and they seek contempt orders against the defendants and also unless orders.

[15] Against that background I turn to the categories of documents in regard to which further and better discovery is sought.

[16] In order to obtain an order pursuant to rule 8.19 directing further discovery the plaintiffs must be able to establish as a starting point that the documents sought are relevant. Relevance is determined by the pleadings. That is to say, the documents that will be discovered must be relevant to a matter which, having regard to the form of the pleadings, will be in dispute between the parties as at trial. Mr Orlov submitted to me that the Court should approach the application on a more liberal basis. He put it to me that the plaintiffs cannot settle their proceedings in final form until they have had discovery and therefore to require them first to plead would not be the correct approach. He said that the relevance of some documents would be to the issue of what damage the plaintiffs had suffered.

[17] Notwithstanding those submissions, it is my view the defendants should only be required to give discovery of documents that are relevant in the sense that I have just described.

[18] The parties approached the argument before me on the basis that the test to be applied is the Peruvian Guano test.[1]

[19] I now turn to the first categories of document in regards to which the plaintiffs seek additional discovery. These documents were identified in a schedule which was annexed to the application for particular discovery. Rather than setting them out in the body of the judgment they have been attached to the judgment in the form of a schedule. The plaintiffs also seek particular discovery in regard to a further group of documents which I will discuss below.

[20] Before I consider the categories of additional discovery which the plaintiffs seek I shall make short reference to principles governing applications of the present kind.

[21] The application is brought pursuant to Rule 8.19 of the High Court Rules which is to the following effect:

[8.19 Order for particular discovery against party after proceeding commenced

If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—

(a) to file an affidavit stating—

(i) whether the documents are or have been in the party's control; and

(ii) if they have been but are no longer in the party's control, the party's best knowledge and belief as to when the documents ceased to be in the party's control and who now has control of them; and

(b) to serve the affidavit on the other party or parties; and

(c) if the documents are in the person's control, to make those documents available for inspection, in accordance with rule

8.27, to the other party or parties.]

[22] I accept that the legal position is correctly stated in counsel for the applicant’s

synopsis at paragraph 7 and 8 where he submitted:

7. In Australian Mutual Provident Society v Architectural Windows Ltd [1986] 2 NZLR 190, the Court held that “it is incumbent upon the applicant to satisfy the Court that there are grounds for a belief that such documents or class of documents exists and to specify them accordingly. An application in general terms will not suffice”.

8. The Applicant does not have the burden of proving that the documents sought actually exist. The grounds of belief that the documents sought via the application exist can be established from the evidence, or from the nature or circumstances of the case or from any document filed in the course of the proceedings; see Simunovich Fisheries Ltd v Television New Zealand (No 6) HC Auckland CIV-

2004-404- 3903, 3 August 2007.

9. The Court need only be satisfied that there is a reasonable probability that further documents exist which have not been disclosed in previous affidavits; see Southbourne Investments Ltd v Greenmount Manufacturing Ltd HC CIV-2005-404-6675, 12 June

2008.

[23] I now turn to deal with the documents listed in Appendix A to the notice of application.

Paragraph 1

[24] I deal with the issue of the Kookmin Bank further on in this judgment and I

will not anticipate here what I say at that point.

[25] As to the other documents sought, I would be prepared to accept that the securing of liabilities over the Springs Road property would have relevance to any damages award the plaintiffs might ultimately obtain. However, the plaintiffs have failed to establish that there are grounds for a belief that the defendants have not discharged discovery obligations in full with respect to this group of documents. They have not, for example, provided any evidence of title searches suggesting that

additional mortgages have been registered over the property or that there are caveats in place protecting same. The application for orders in relation to the documents in appendix A, paragraph 1 is dismissed.

Paragraph 2

[26] This category of documents relates to a claim that the plaintiffs/Eurostile have brought against the builder of the properties at Reserve Close. Without accepting the relevance of the files relating to the Chernishoff proceeding, the defendants have obtained the relevant documents which number 299 and will provide copies of these to the plaintiffs. Beyond that, the plaintiffs have not established that they are entitled to any order under r 8.19 and the application will be dismissed so far as it relates to this category.

Paragraph 3

[27] This paragraph relates to documents of the SY trust. The defendants’ position is that these documents are not relevant but they have nonetheless disclosed the deed trust and some financial statements of the trust and also of SY Enterprise Ltd. It was Mr Wallace’s submission that applications for discovery in respect of the trust are misconceived and result from a confusion on the part of the plaintiffs' advisers about the distinction between the trust, which owns the shares in the company, and the company itself. Nonetheless, I note that voluntary disclosure has been made of the annual accounts of SY Enterprise Ltd for 31 March 2008, 2009 and

2010 together with a tax summary as at 31 March 2011. To that extent at least, the plaintiffs have been vindicated in seeking particular discovery.

[28] Mr Orlov considered that there must be documents which related to the value which was attributed to the patents which Enterprise owns. It was self-evident, he submitted, that there would be documents “including valuation and viability studies of the company”.

[29] I accept that anything that throws light upon the valuation of the patent would be relevant in the proceedings. It was after all the patents which were central to the

contract to acquire shares in Enterprise. However, I agree that the plaintiffs are mistaken in attempting to obtain that information from S Y Trust. The Trust is the owner of the shares in the company. The company as a separate entity owns the patent. It is the company which should be the target of any discovery application. I am prepared to treat the application as though it were against Enterprise rather than the Trust. I do not believe that any prejudice will result to the defendants if I proceed in that way.

[30] There is no evidence that the defendants have not disclosed all the relevant documents which might bear upon the issue of the value of the patent. Mr Orlov regarded it as being self-evident that there would be a valuation of the patents otherwise there would be no basis for the value that was attributed to the patents in the contract which the parties entered into. I do not agree. Values at which items are brought into company's accounts can properly be based upon estimates of market value and the amount that the company might have purchased a patent for, to give one example, may be relevant to the value that is attributed to that asset.

Paragraph 4

[31] The defendants’ position is that discovery has already been provided of the files held by the solicitor who acted, Mr Murray Withers. I note that the application refers to the "full file" which was suggestive of the fact that parts of the file have been withheld. I do not accept that there is any basis for the Court to conclude that the defendants have failed to discover documents that they ought to have and this part of the application is dismissed.

Paragraph 5

[32] It would appear that the defendants have taken steps to develop the Springs

Road property as a ginseng farm. The plaintiffs seek:

All correspondence between the defendants and investors relating to transferring the land in to a ginseng farm.

[33] It is not clear to me whether the use of the term "transferring the land" is used in the sense of conveying the land for that purpose. If that is the intended sense, I

would not be prepared to accept that there has been a failure to make proper discovery. Nor is it clear that development of the property as a ginseng farm will involve a transfer of the land on which the project is to be developed. It could just as readily be retained by the defendants.

[34] I have considered whether documentation relating to the development of a ginseng farm might not be relevant to calculations of any profits that the defendants derived from the farm while being in possession of it, allegedly, as trustees for the plaintiffs. However, even taking such a point of view, plans and budgets and the like

– even if they were prepared – are not relevant in the discovery sense because they do not represent profits actually earned.

[35] In addition to the categories of documents contained in the schedule to the plaintiffs' application for particular discovery, additional categories of documents were identified by counsel for the plaintiffs in the synopsis which he filed for the hearing. Mr Wallace for the defendants replied concerning those categories in his synopsis. It is to these categories of documents that I turn next.

[36] In his synopsis of submissions, counsel for the plaintiff submitted:

4. The following additional documents the plaintiffs claim are relevant to allow the Plaintiffs to assess the quantum of damages;
   

(i) The Second Defendant obtained funds from Westpac Bank over Eurostile Limited. The loan application documents discovered show that the sum of $570,000.00 was borrowed over Eurostile. The money was used to acquire a property at

42 McCarthy Street, Hoon Hay, Christchurch. Documents relating to the property at 42 McCarthy Street have not been

discovered;

(ii) The Defendants have provided incomplete documents in relation to monies belonging to Eurostile. From Eurostile’s bank account it can be seen that monies have been transferred to S.Y. Trust and the the First Defendant but no document explaining why this was done have been provided. Examples of these are that in December 2010 Eurostile Limited received a cash loan for the sum of $499,500.00 as a result of refinancing. The sum of $46,000.00 was transferred directly into the account of S.Y. Trust on 21 December

2010. On 12 January 2012, the sum of $30,000.00 was loaned to the First Defendant;

(iii) From the documents discovered, it is clear that the First Defendant obtained valuation for 1543 Springs Road, Lincoln ostensibly for a Kookmin Bank. No bank statements have been provided as to disclose the extent of borrowing over the property. Under such circumstances it is impossible for the Plaintiffs to quantify the damages suffered by them;

(iv) Five out of six properties belonging to Eurostile have been sold by the Defendants. No reasons have been given as to why the properties had to be sold as the properties were generating rental income of $70,720.00 and when the mortgage repayments were only $60,678.53 leaving a surplus of around $10,000.00 per year.

(v) The Plaintiffs files relating to the Plaintiffs claim against Mr.

Chernishoff have only recently been discovered despite having requested for the files on numerous occasions previously;

(vi) Surprisingly, the same Solicitor, Mr. Withers was acting for both the Plaintiffs and the Defendants relating to the transaction of the property and Eurostile Limited. The Defendant’s Solicitor’s full file have not been discovered nor listed as privileged. Documents involving correspondence, notes on the drafting of agreement amongst others have not been discovered;

(vii) The Defendant’s received a yacht called (“Volante”) as a result of the sale of 17 Reserve Close being one of the properties belonging to Eurostile Limited. No documents have been disclosed as to what became of the yacht and whose name it was transferred into.

[37] Mr Wallace for the defendants has responded in each case and I now deal with the categories identified.

Group (a)

[38] The plaintiffs’ allegation is that $570,000 was borrowed from Westpac by Eurostile and that was used to purchase a property at 42 McCarthy Street, Hoon Hay, Christchurch. No evidence was referred to which might support that belief. The matter is therefore to be approached on the basis of enquiring whether an inference to the effect in question is justified.

[39] It does appear that at some point Eurostile or Martina Jho in fact purchased a property at McCarthy Street for $610,000. It also appears that on 16 December 2010 approximately Ms Jho borrowed $500,000 from SBS Bank. There is no explicit evidence or any inference available from the evidence that the Eurostile funds were used to purchase 42 McCarthy Street. There is a solicitor’s statement which relates to this approximate period which is said to be concerned with “refinancing” which shows a loan advance from SBS Bank on 21 December 2010 in the sum of $499,750. I would be prepared to infer that that is the net amount of the loan money obtained from SBS Bank pursuant to the loan agreement dated 16 December 2010 to which I have made reference. However those sums were applied:

To repay loan to SBS $450,653.56.

[40] That is the funds appear to be associated with a refinancing of a loan which Eurostile was required to repay to SBS. $46,000 from the approximately $500,000 borrowed from SBS Bank in December 2010 was paid to the SY Trust which is a trust of which the two defendants are trustees. Given that the bulk of the money was apparently used to refinance an existing loan, no inference arises that it was used for a bit purchase of 42 McCarthy Street. For these reasons I decline to make the order sought.

Group (b)

[41] This head of discovery is linked to the first one that I have just considered and centres on the transfer of the sum of $46,000 to SY Trust out of the advance from SBS Bank for approximately $500,000. The plaintiff says that “no document explaining why this was done has been provided”. The defendants submit that because there is no document provided does not necessarily prove that there was any document. There may not have been any document to discover. I agree, and there will no order in relation to this category of documents.

Group (c)

[42] This category of documents is concerned with the fact that the first defendant

(admittedly) obtained a valuation of Springs Road the purpose of which was

connected with a possible loan from Kookmin Bank. In the application as it relates to this part the statement is made:

No bank statements have been provided as to disclose the extent of the borrowing over the property.

[43] It is correct that the valuation contained a loan recommendation. But I am not prepared to infer on such a slender basis that Kookmin actually provided an advance to the defendants in relation to which there are probably documents in existence and that the defendants have failed to make discovery of documents in the category. I therefore decline to make the orders sought under this head.

Group (d)

[44] Under this heading counsel's synopsis refers to the fact that 5 to 6 properties belonging to Eurostile have been sold, that they were generating a rental income and that "(n)o reasons have been given as to why the properties had to be sold..."

[45] I agree with Mr Wallace that it resembles a question that might be asked in interrogatories. No order will be made in relation to this group.

Group (e)

[46] This category relates to files concerning the claim against Mr Chernishoff which have now been provided. No order will be made in relation to this group.

Group (f)

[47] It is not disputed that Mr Withers acted on the transfer of the Springs Road property and the shares in Eurostile. It is asserted that Mr Withers file has not been disclosed. There is no evidence to support that view and it cannot reasonably be inferred that such is the case. I decline to make an order with regard to this category as well.

Group (g)

[48] This category relates to Eurostile’s selling 17 Reserve Close to one Robyn Willis or nominee which was transacted on or about 14 December 2010. As part of the further terms of sale, the agreement contained a provision that the deposit of $100,000 on the transaction would be paid by the transfer of a yacht called Volante “at present moored in Akaroa Harbour”. The plaintiffs’ say that no documents have been disclosed as to what became of the yacht and whose name it was transferred into. In his submissions Mr Orlov said that there must be a bill of sale or a registry entry confirming the transfer of the yacht. The plaintiffs did not produce any evidence on this point. I am not prepared to accept that there would be any bill of sale etc as Mr Orlov submitted. There should however be some documents relating to this yacht. One particular category which I suggested which would have a direct bearing on the value of the yacht are documents relating to any insurance held over the vessel. I would be prepared to conclude that it is reasonably likely that there is insurance and that Eurostile will have had the vessel insured, even if temporarily, while it arranged to dispose of the vessel, assuming that it did so. Alternatively if it has retained the vessel I would assume that it holds insurance over the vessel. I direct that the defendants are to discover any documents in their custody, power, possession or control which relate to this vessel.

Application for security for costs order

[49] The defendants have applied for security for costs. The plaintiffs are resident out of New Zealand and accordingly r 5.5(1)(a) applies. It also seems likely that r 5.45(1)(b) of the Rules also applies in that they will be unable to pay the costs of the defendants if they are unsuccessful in their proceedings.

[50] The Court is required by reason of r 5.45(2) to consider whether it is just in all the circumstances to order the giving of security for costs.

[51] One of the leading authorities in this area A S McLachlan Ld v MEL Network Ltd[2] determined that one of the relevant factors that ought to be considered when deciding such an application is the strength of the plaintiff’s case. This is not an easy task to carry out at an interlocutory stage but I shall attempt to make such an assessment.

[52] The first point is that the legal arrangements entered into between the plaintiffs and the defendants are convoluted. On one level, they appear to have as their objective an exchange of assets of broadly equivalent value which would result in the plaintiffs’ quitting ownership of their real estate interests and acquiring in their place intellectual property rights and access to business opportunities in Russia.

[53] On the other hand, there is an unconventional borrowing arrangement which is not wholly consistent with the transaction as one for the purposes which I have described. The plaintiffs needed to raise money to contest the litigation with the Commission of Inland Revenue but they say that they could not raise money conventionally because of the fact that they had a major judgment against them and therefore they were compelled to enter into the arrangement they did with the defendants who would take their properties under agreement but only for the purpose of enabling them, the defendants, to refinance the liabilities over those properties and, presumably, raise fresh borrowed funds which would be used for the purposes of the litigation the plaintiffs were involved in.

[54] Not only is the plaintiffs’ case convoluted at a factual level but it exhibits signs of over-elaboration consistent with taking a strained approach to finding a wide variety of causes of action. Instead of the plaintiffs’ statement of claim containing a concise, clear set of pleadings that focuses on one or two principal causes of action, they have adopted a “shotgun” approach. This is not an encouraging augury for success on their part.

[55] There is also a further aspect present which is that the defendants will no doubt be raising at the trial allegations that the plaintiffs’ primary purpose was to

_{move their wealth offshore because of the claims that the Commission of Inland}

Revenue was pressing them with. This may cause them some difficulty so far as they are seeking equitable relief. Further, the difficulties they will have with their proceedings at trial are added to by the fact that they have pleaded fraud against the defendants and will have to prove fraud at the trial, at least if the present causes of action in the statement of claim are all continued with. Proving fraud requires evidence of a high standard.

[56] It is difficult to form an assessment of what defences might be available to the defendants apart from putting the plaintiffs to the proof of their claim, the statement of defence largely consisting of bare denials. They admit that the plaintiffs executed transfers to them of the Springs Road property and shares in Eurostile. They apparently deny that as part of the arrangements they or either of them agreed to provide financial assistance so that the plaintiffs could complete their litigation. They also deny the further allegation made by the plaintiffs that the first defendant could use the Spring Road property as security for any loans about he

would transfer that property back to the plaintiffs after “the loan is cleared”.[3] I note

that the defendants apparently accepted that they signed a joint-venture agreement dated 1 April 2007 and the agreement to change the terms of the joint-venture.[4]

However while they admit that they executed the documents, they deny that each of them is a contract.

[57] Elsewhere[5] the first defendant takes the position that the position has changed since the transactions were first entered into between the plaintiffs and the defendants. He asserts that the plaintiffs did receive a transfer of 30% of shares in SY Enterprise Ltd pursuant to the transactions that are the subject of the proceeding. He exhibits to his affidavit a share transfer form evidencing a transfer of the shares to the plaintiff's daughter Natalie.

[58] In summary, it would appear that the defendants contention is that the transaction viewed overall involved the plaintiffs transferring their property at Lake Road and their company Eurostile to the defendants in return for 30% of the shares

_{in SY Enterprise Ltd and that was the extent of their contractual obligations. They}

also admit that they have agreed to help the plaintiffs arrange the necessary funding for their legal disputes but they deny any contractual obligation to assist. It is not clear how this explanation can be reconciled with the variation to the joint venture agreement which the parties executed. It is a difficult document to understand. The text of that document is unclear and to the extent that it can be understood and it appears to have conflicting objectives.

[59] Mr Orlov considered that the matter was straightforward and that it was plain that the plaintiffs had lost all of the property and received nothing in return. In the light of the deposition by Mr Jo that the plaintiffs did in fact receive the 30% shareholding in SY Enterprise Ltd, matters might not be quite so straightforward. I notice that in the course of his submissions, Mr Orlov referred to a lack of consideration or an adequacy of consideration to support the agreement that the defendants entered into with the plaintiffs. Insufficiency of consideration is not a

ground upon which the Court would conclude that the contract is not enforceable.[6]

A submission that there was a complete absence of consideration may not succeed in the face of the fact that the defendants promised to transfer the shares as part of the contractual arrangements.

[60] It cannot be overlooked, though, that the plaintiffs have also brought a claim to have the transactions set aside because it is unconscionable.

[61] The next matter that I consider is the financial position of the plaintiffs. There is no doubt that they will be unlikely to be able to meet the defendants costs. Mr Orlov’s contention on their behalf was that they find themselves in an impecunious position because of misrepresentations on the part of the defendants (although they rather seemed to be breach of oral agreements rather than misrepresentations in the strict sense). Against that, there is the undeniable fact that the defendants came into possession of their property by means of voluntary transfers of the Springs Road property and the shares in Eurostile. These were imprudent transactions for the plaintiffs to enter into because at a stroke they

_{relinquished valuable property rights and substituted for them contractual rights}

against defendants who they apparently hardly knew. The Court may in due course conclude that these contractual arrangements were exactly the sort of transaction that you might expect a person to enter into when the other side to the transactions had taken advantage of his health and other difficulties.

[62] Looking at matters overall, I do not consider that this is a case where there are substantial indications that the defendants have been the cause of the plaintiffs impecuniosity.

[63] Any views that I have on this subject is of course provisional. The allegations of the causes of impecuniosity which the plaintiffs brought forward seem to be based upon the fact that they no longer own the property at the Springs Road and they have transferred the shares in Eurostile. In each case the transferee declines to return them. In place of the property just mentioned, the plaintiffs have acquired shares in the company that owns patents. It may prove that the bargain was not a good one or was not appropriate to persons at the stage of life that the plaintiffs had reached. It may also be that deciding to exchange secure types of assets for rights which are of a more debatable value, was not a wise judgement. Certainly, the type of property that they now own does not seem to be particularly liquid in character. However, those consequences are not to be laid at the feet of the defendants, unless the defendants acted culpably in inducing the plaintiffs to enter into the transactions. Stating the problem that way, focuses attention on the cause of action which asserts that the transaction was an unconscionable one and should be set aside. That in turn requires consideration of the grounds upon which the plaintiffs say that in the case of the first plaintiff that the defendants took advantage of his inability to properly manage his affairs because of ill-health. It is unlikely that a claim of this kind will succeed unless there is cogent evidence supporting the plaintiffs’ claim. It is unlikely that the Court will accept the uncorroborated evidence of the first plaintiff on its face. There would need to be both proof of significant ill-health and evidence supporting the view that a person labouring under the difficulties which the plaintiff was would be particularly vulnerable. I accept that at this early stage of the proceedings such evidence may not be to hand. That makes it difficult to evaluate the strength of the plaintiffs’ claim and to assess the matter of and what degree, if at

all, the defendants took advantage of the situation resulting in the plaintiffs becoming impecunious.

[64] The plaintiffs case might have been assisted if it had been the case that there was no rational explanation for them entering into the transactions. However, as I have noted, there is at least a suggestion that the advantage of the transactions from the plaintiffs’ perspective would have been that their property would have been placed beyond the reach of the Commissioner of Inland Revenue. This is a view of the facts which is not without some support. It appears that in February 2010 the plaintiffs sought advice from Murray Withers which deals with this precise concern. Mr Withers in a letter that he wrote on 17 February 2010 recorded that one of the matters that had been suggested was that the plaintiff sought to shift “the value of total assets offshore”. The purchase of the shares in Enterprise perhaps demonstrates that the plaintiff were not minded to take the advice that Mr Withers gave them about the undesirability of taking such steps.

[65] I readily accept that I do not have a complete picture of the evidence that may ultimately be brought forward should this matter go to trial and that the Judge who determines the matter might come to quite a different view. I am, though, required to make such assessment as I can at this relatively early point in the proceedings. When I do so, I am left with substantial doubt about whether the defendants’ actions indeed caused the plaintiffs’ impecuniosity.

[66] My conclusion is that the plaintiffs’ impecuniosity should not stand in the way of the making of an order. However as the Court is required to make an order that is just in all the circumstances, their impecuniosity should be taken into account as one of the factors to be balanced when determining what level of security for costs ought to be ordered.

[67] After reviewing these factors, I conclude that an appropriate order for costs would be to require the plaintiffs to pay the sum of $25,000 in two tranches of

$12,500. The first instalment of the security for costs is to be paid not later than one month after the date of this judgment and is to be followed by the second amount

four months thereafter (that is five months from the date of this judgment). Security

is to be paid to the Registrar of the High Court on the usual terms. The parties have leave to apply for further directions as to the implementation of this order by memorandum.

Change of venue

[68] The next issue concerns what is the appropriate Registry at which these proceedings ought to be located from this point forward and where the venue for trial should be.

[69] The defendants now seek to have the proceedings dealt with in Christchurch. This application engages r 5.1(5).

[70] Those rules respectively provide as relevant:

5.1 Identification of proper registry

(1) The proper registry of the court, for the purposes of rules

5.25 and 19.7, is,—

(a) when a sole defendant is resident or has a principal place of business in New Zealand, the registry of the court nearest to the residence or principal place of business of the defendant, but when there are 2 or more defendants, the proper registry is determined by reference to the first-named defendant who is resident or has a principal place of business in New Zealand:

.........

(5) If it appears to a Judge, on application made, that a different registry of the court would be more convenient to the parties, he or she may direct that the statement of claim or all documents be transferred to that registry and that registry becomes the proper registry.

Compare: 1908 No 89 Schedule 2 r 107

[71] The plaintiffs are based in Australia. As Mr Wallace pointed out they will have to return to New Zealand for the trial and whether they travel to Auckland or Christchurch is not likely to make any difference to them financially or in terms of convenience. The defendants are resident in Christchurch as is their counsel. The only countervailing reason why the proceedings would be tried in Auckland is because counsel for the plaintiffs is based in Auckland. Overall that is not a

sufficient factor to influence my decision that the proper Court for trial should be in

Christchurch.

[72] I make orders accordingly.

Contempt

[73] The plaintiffs allege that the defendants are in contempt of court orders directing discovery and they seek the imposition of fines of $5000 on each of the defendants. The basis of the application in summary was that the plaintiffs asserted that there had been a flagrant failure on the part of the defendants to give the discovery that was required.

[74] I do not accept that this is an appropriate case where contempt all other orders is required. The assumption that there has been widespread disregard by the parties and their legal advisors of the obligations to provide discovery is misplaced. The outcome of the application for particular discovery is consistent with that view. I propose to dismiss that application.

Next steps

[75] I direct that the registrar of the High Court at Christchurch is to arrange a case management conference at the earliest convenient date. The agenda for the conference is to include the following matters in addition to those which the judge presiding considers are relevant:

1. review of what of any further interlocutory matters are to be dealt with;
   
2. estimation of trial duration and estimate of number of witnesses to be called by each side;
   

c) allocation of a trial date and directions as to the pre-trial program;

[76] So far as costs are concerned, counsel are to file and serve memoranda on

_{that topic not exceeding five pages within 14 days of the date of this judgment.}

J.P. Doogue

Associate Judge

Appendix “A”

[1] 1. All documents detailing all transactions relating to 1543 Springs Road, Lincoln (“the property”) from the date of the transfer of the property until to date especially but not limited to:

(a) Kookmin Bank and other banks;

(b) Money received from any borrowings over the property and paid into any bank accounts controlled by the Defendant or companies controlled by the Defendants;

(c) All refinancing, mortgage and other security documents.

[2] All documents relating to the Chernishoff claim including all files and instructions held by lawyers and accountants;

[3] All documents relating to SY Trust including valuation and viability studies of the company, balance sheets, company records and other financial documents including especially the valuation of the patent and documents relating to the patent.

[4] The full file of all lawyers and accountants who acted for the Defendants in relation to the transfer of 1543 Lincoln Road, Lincoln and Eurostile Limited to the Defendants.

[5] All correspondence between the Defendants and investors relating to transferring the land into a ginseng farm

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[1] Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1883) 11 QBD 55 (CA).

[2] A S McLachlan Ld v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA)
[3] _{The quotation is from paragraph 12 of the statement of claim.}
[4] Paragraph 16 statement of defence.
[5] Paragraph 6 of affidavit by a first defendant's sworn on March 2012.

[6] See for examples the discussion in Burrows, Finn and Todd Law of Contract in New Zealand (4th

Ed), page 120.