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High Court of New Zealand Decisions |
Last Updated: 13 November 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-003155 [2012] NZHC 2916
BETWEEN BELGRAVE FINANCE LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
Plaintiff
AND RAYMOND TASMAN SCHOFIELD First Defendant
AND SHANE JOSEPH BUCKLEY Second Defendant
AND STEPHEN CHARLES WILLIAM SMITH Third Defendant
AND DAVIDSON ARMSTRONG AND CAMPBELL
Fourth Defendants
AND HAYES KNIGHT Fifth Defendant
Hearing: 31 October 2012
Appearances: R B Stewart QC and M Sumpter for Plaintiff
P J Napier for Fifth Defendant
Judgment: 7 November 2012
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
This judgment was delivered by me on 07.11.12 at 11.00 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date ...................
Solicitors:
Chapman Tripp, Auckland – matt.sumpter@chapmantripp.com / rbstewart@xtra.co.nz
Keegan Alexander, Auckland – pnapier@keegan.co.nz
BELGRAVE FINANCE LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) V RAYMOND TASMAN SCHOFIELD HC AK CIV-2011-404-003155 [7 November 2012]
[1] In this proceeding Belgrave Finance Limited (in receivership and in liquidation) has filed an amended statement of claim pleading six causes of action. The first three causes of action are against the second defendant and the third defendant, former directors of Belgrave Finance, and the first defendant who, though not a director, is said to have been integrally involved in the operation of Belgrave Finance and, in particular, with aspects of the transactions which form the basis of the causes of action.
[2] Against each of the directors Belgrave Finance alleges breach of fiduciary duties said to have been owed to Belgrave Finance, and Mr Schofield is said to have dishonestly assisted them to breach those duties.
[3] The fourth defendant is a firm of solicitors which is alleged to have acted for Belgrave Finance, to have owed it certain fiduciary duties, and to have breached those duties. It is also alleged that the firm provided dishonest assistance in the transactions under scrutiny.
[4] The sixth cause of action is against Hayes Knight, a firm of chartered accountants, which was the auditor of Belgrave Finance for the year ending
31 March 2007. It is alleged to have owed to Belgrave Finance certain duties of care, and to have acted negligently.
[5] Hayes Knight applies to strike out this cause of action, the stated ground being that the sixth cause of action does not plead a reasonably arguable cause of action, as it does not disclose a tenable argument that Hayes Knight’s conduct caused the losses claimed by Belgrave Finance.
[6] Belgrave Finance opposes this application. In its notice of opposition it says the sixth cause of action is, at the very least, reasonably arguable, as Hayes Knight’s pleaded conduct is capable of causing the loss pleaded, and the causal connection between Hayes Knight’s pleaded conduct and Belgrave Finance’s loss is adequately pleaded and particularised. It says that the issue of causation in a negligence claim is a matter of fact unsuitable for determination on the pleadings alone.
[7] Rule 15.1 provides that the Court may strike out all or part of a pleading if it discloses no reasonably arguable cause of action, defence or case appropriate to the nature of the pleading. The principles to be applied by the Court are set out in Attorney-General v Prince;[1] of present relevance they are:
(a) Pleaded facts, whether or not admitted, are assumed to be true. (b) The cause of action or defence must be clearly untenable.
(c) The jurisdiction is to be exercised sparingly, and only in clear cases.
The Court should be reluctant to terminate a claim or defence short of trial.
[8] The issue before me is whether, if liability is established as pleaded, the damages claimed by Belgrave Finance can, as a matter of law, be recovered from Hayes Knight. If they cannot, no reasonably arguable cause of action is disclosed.
[9] The claim against Hayes Knight is set out in paragraphs 53 to 64 of the amended statement of claim dated 17 May 2012. Belgrave Finance pleads the engagement of Hayes Knight as auditor, a duty of care in conducting the audit, specific obligations on Hayes Knight under the New Zealand Institute of Chartered Accountants auditing standards and the Securities Regulations 1983, and knowledge on the part of Hayes Knight that its report would be issued for Belgrave’s 2007 prospectus. Specific requirements of the Securities Act 1978 are said to require certain steps on the part of Hayes Knight.
[10] Then it is said that Hayes Knight prepared an audit report dated 11 July 2007 in which seven representations are made. That audit report was included in the audited financial statements for the year ended 31 March 2007. It is pleaded that the same representations are contained in a letter Hayes Knight wrote to Belgrave Finance’s directors on 8 October 2007.
[11] In paragraph 62 Belgrave Finance pleads that Hayes Knight breached its pleaded duties to Belgrave Finance in several specified ways, thereby acting
negligently in the auditing of Belgrave Finance’s financial statements, and in making
the representations contained in the audit report and the letter of 8 October.
[12] The statement of claim continues:
Causation and loss
63.1 Belgrave could not have issued the 2007 Prospectus;
63.2 the Trustee inevitably would have placed Belgrave in receivership with no further advances made or deposits taken from 11 July 2007; and
63.3 Belgrave would not have suffered the loss particularised at paragraph 64 below.
64 As a result of Hayes Knight’s negligent conduct, Belgrave suffered loss
and damage.
Particulars
64.1 From 11 July 2007, Belgrave:
(a) advanced funds to borrowers including Schofield, and entities associated with Schofield, totalling approximately
$3,807,654.00; and
(b) received $4,932,294.98 in deposits from Debenture
Stockholders that Belgrave has been unable to repay.
[13] The argument advanced by Mr Napier in support of the fifth defendant’s
application is based on a passage from Price Waterhouse v Kwan:[2]
[27] ... The basis of the claim, save for two allegations of a more direct kind, seemed broadly to be that if the auditors had taken appropriate care at times earlier than those relevant to the Hughes’ investments, the solicitors’ trust account would or should have been closed down. It followed in terms of the Hughes’ allegations that their money would not have been lost, because there would have been no opportunity for the occurrence of the defaults which are later said to have occurred. In couching their claim on this basis, the Hughes claimants were stretching the proper concept of causation in this field beyond breaking point. They were seeking to apply a literal “but for” approach, which is not appropriate in claims based on tortious negligence.
[28] There is a material, indeed a crucial difference between causing a loss and providing the opportunity for its occurrence. The line between these concepts can often be difficult to draw but the distinction is vital. The point was addressed in the judgments delivered in this Court in Sew Hoy & Sons Ltd (in Receivership and in Liquidation) v Coopers & Lybrand [1996] 1
NZLR 392. Plaintiffs in this field must show that the defendant’s act or omission constituted a material and substantial cause of their loss. It is not
enough that such act or omission simply provided the opportunity for the occurrence of the loss.
[14] Mr Napier submits that the claim against Hayes Knight is exactly as described in the first sentence of this passage – if they had taken appropriate care in undertaking their audit and providing consequent documentation, Belgrave Finance would not have issued the prospectus under which further monies were borrowed, would have been placed in receivership, and would not therefore have suffered the losses claimed. Thus Mr Napier submits that this is a pleading based on a literal “but for” approach. In essence the pleading amounts to alleging that Hayes Knight’s pleaded conduct did no more than provide the opportunity for the losses to be incurred, but did not cause them. On the basis of the quoted dictum the argument has clear attraction.
[15] Mr Napier then refers to Scandle v Far North District Council[3] where, at paragraph [29], the Court of Appeal cited with apparent approval the statements by the Court in Price Waterhouse v Kwan. After the portion of that paragraph which I have cited, the Court continued:
[28] ... The concept of materiality denotes that the act or omission must have had a real influence on the occurrence of the loss. The concept of substantiality denotes that the act or omission must have made a more than de minimis or trivial contribution to the occurrence of the loss. Looking at the question in this dual way is both a reminder of the difference between opportunity and cause, and a touchstone for distinguishing between them. In some instances the words used have been material or (as opposed to and) substantial. It is preferable, for the reasons just mentioned, to focus on both concepts for they are each relevant to causation issues. No form of words will ultimately provide an automatic answer to what is essentially a question of commonsense judgment.
[16] Mr Napier says that the conduct of Hayes Knight which is pleaded merely gave an opportunity to Belgrave Finance to continue to trade but was not itself a “more than de minimis or trivial” contribution to the occurrence of the loss, which
was caused in fact by the ongoing operation of the company. As he put it, there was no inevitability in the claimed losses being incurred because of the impugned actions of Hayes Knight. In relation to the advances which Belgrave Finance seeks to recover by way of damages, a decision would have been made in each case on whether to lend, which is not related to the conclusions in the audit.
[17] For Belgrave Finance, Mr Stewart argues first that there is a high threshold for striking out a negligence claim where causation is in issue. He cites in support the following passages from Sew Hoy & Sons Ltd (in receivership and in liquidation) v Coopers & Lybrand.[4] At p 399, per McKay J:
Causation means more than the mere creation of an opportunity to incur loss. The difficulty is in the application of the principle to the particular facts. To say one decides by the application of common sense is not to provide a test, but rather to say it is a jury question. That being so, it must be rare that a Court will be able to strike out an allegation that a particular loss was caused by a particular breach. That can only be appropriate where on the facts alleged the argument for causation is untenable.
[18] In the same case (at p 407) Thomas J made observations to the same effect, by reference to March v E & M H Stramare Pty Ltd,[5] and Stapley v Gypsum Mines Ltd,[6] per Lord Reid:
A full grasp of the facts is imperative. Experience has demonstrated time and again that the answer to the question of whether there is a nexus between the breach of the defendant and the loss suffered by the plaintiff and, if so, what it is, then tends to fall into place. Indeed, if the question whether there is a causal connection between the wrong-doing and the damage is to be resolved by the application of common sense, it is difficult to see how that question properly can be approached in advance of the evidence. Common sense thrives on hard facts, not abstractions.
[19] After acknowledging that a claim may be struck out if it is clearly untenable on the pleadings, and the question of law is one which can stand in isolation from the facts giving rise to it, Thomas J continued:
On the pleading the company continued to trade because of the negligent audit and it is too extreme to suggest that no part of the trading losses which ensued were not attributable to the fact that the company continued to trade.
Nor should the question of law be separated from the comprehensive determination of the facts which would result from a hearing. McKay J, in his judgment, fully explores the factual issues and interrelated matrix which will arise, or which is likely to arise, and require determination by the trial Judge on the question of causation. I do not doubt that the evidence or the trial Judge’s findings of fact based on the evidence will provide ready answers to issues which at present appear, at least to a mortal mind, unusually difficult to define and determine. This Court should not be easily led by Galoo in determining the complex question at issue in limine.
[20] Mr Stewart submits that the judgment of the Court of Appeal which correctly sets out the principle I must apply in this case is Sew Hoy. In that case, Sew Hoy (an importer, manufacturer and distributor of clothing) sued its auditor alleging it had been negligent in preparing the company’s accounts showing the company trading profitably, when in fact it was trading at a significant loss. The error made by the auditor was not to identify an overstatement in the value of the company’s stock. Sew Hoy said that if the auditor had properly audited the accounts it would have been able to take steps to avoid or minimise further trading losses but in the event continued to trade with the result that it incurred additional losses in excess of $10m. These losses were the shortfall of assets over liabilities achieved in the receivership, less the estimated shortfall in assets over liabilities at the date the audit was completed.
[21] The strike-out application in Sew Hoy was brought in reliance on Galoo Ltd (in liquidation) v Bright Grahame Murray (a firm),[7] a decision of the English Court of Appeal. Mr Stewart refers first to McKay J at p 396:
... if a company has been in a substantial loss-making situation for a period of two years, and there are no means available to it to change that situation, the only prudent course will in many cases be to cease trading. Matters such as ongoing lease commitments and liability for staff redundancies may affect the situation. If the company is misled by its auditors, as is alleged in this case, into believing that it is trading profitably, and so continues trading, subsequent losses will be inevitable. Those losses may be increased by subsequent imprudent decisions, and to that extent will not be attributable to the auditors. If all that is claimed is the losses which were caused by the very fact of continued trading, and could not reasonably have been avoided, no additional causative link is involved. To prove the amount of those losses, the plaintiff would have to give evidence as to its method of subsequent trading, for example to show that it had traded in the same way as in the previous years in which it had been led to believe it was trading profitably. To the extent that part of the ongoing losses could be attributed
to particular imprudent decisions even given that mistaken belief, the plaintiff would not have established that part of its loss as being caused by the breach.
That is essentially what the company claims in this proceeding. It claims only the losses caused by its decision to continue trading instead of ceasing to trade, not losses which resulted from other causes such as imprudent decisions in the course of trading. It claims that all the losses actually sustained fall into the former category. Whether it will succeed in proving this will be a matter for trial. It may succeed as to only part of its actual losses, or as to losses for a more limited period than has been claimed. The only causative link pleaded is that the losses were caused by the decision to continue to trade, and not to adopt one or more of the other courses available to it. It claims the losses inherent in continuation of trading. It will be limited to the losses proved to have been so caused, to the extent that they exceed the losses that would have been incurred if the audit report had been qualified and the company had made the different decisions it claims that it would have made so that a different sequence of events would have followed.
[22] Mr Stewart says that this mandate applies to the necessary factual analysis that will be undertaken at trial of this proceeding. The pleading asserts that subsequent to receipt of the audit report and related documents from Hayes Knight, Belgrave Finance advanced funds to borrowers and received funds on deposits from debenture stockholders – or, though not stated in so many words, continued to trade as a finance company because, as Mr Stewart put it, that is what finance companies do. These steps are alleged in paragraph 64 to be a result of Hayes Knight’s negligent conduct. Mr Stewart submits that they are losses which were caused, in the wording of McKay J in Sew Hoy, by the very fact of continued trading. They are not losses which resulted from other causes such as imprudent decisions in the course of trading. He acknowledges that the plaintiff will have to prove these contentions at trial but says that if proved the losses claimed are the recoverable consequence of Hayes Knight’s negligence.
[23] Mr Stewart draws further support for his argument from McKay J at p 400:
... The plaintiff asserts that the negligence of the defendant caused its decision to continue trading in what was in fact a substantial loss-making situation, and that this decision was in itself a cause of loss. I see nothing untenable or unarguable in that situation. Only the losses so caused are claimed. No other causative links are relied upon, so it is unnecessary to plead other links. What has been pleaded will, if established, be sufficient to support a claim to damages. ...
And at p 401:
I conclude, therefore, that the statement of claim in its present form is sufficient to disclose an arguable case that the negligent acts alleged were causative of the decision to continue trading, that such trading resulted in further losses, and that but for the alleged negligence the plaintiff would have taken steps to avoid or minimise those further losses.
The Judge went on to require further particulars of the steps the plaintiff would have taken to avoid or minimise those further losses.
[24] Mr Stewart then refers to the judgment of Thomas J at p 411:
... The company has gone beyond the “but for” situation. Its essential contention is that the auditors’ negligent audit confirmed the profitability of the company as shown in its annual accounts and that, as a result, the company decided to continue to trade in such a way as to incur further ongoing trading losses. Certainly, such a formulation can be phrased in the “but for” manner. But the causation can also be positively asserted in that the auditor’s breach caused the company to refrain from taking the necessary steps to avoid the ongoing trading losses.
Standing back and examining the bare facts – bare because they are restricted to the pleading – it seems to me that, as a matter of common sense, the requisite causal connection exists. It is true that no simple or direct nexus between the breach and the trading losses may be advanced. But the nexus can none the less be traced by reference to a series of steps. The causation may better be described as a chain rather than a link and has been foreshadowed in my earlier observations relating to Galoo. The auditor’s breach caused the company to believe that it was operating profitably. This mistaken belief in turn led it to continue to trade in a way which was in fact unprofitable. It did not take the steps which it would otherwise have taken to cease trading or reverse or minimise the ongoing trading losses because it did not know those steps were required. If it had not continued to trade in the way which it did, based on the mistaken belief that the company was trading profitably, and had obtained the opportunity to cease trading or reverse or minimise the ongoing trading losses, it would not have incurred the further losses and deficit in its assets which resulted. Without doubt this chain of effects provides a tenable causal connection.
[25] Mr Stewart says that this is the approach which this Court must take to this application. Although in Sew Hoy the losses claimed were the trading losses of a manufacturing company, the losses claimed in this case are two elements of the trading operation of Belgrave Finance. Those elements (irrecoverable advances and loans which cannot be repaid) must be reflected both in the profit and loss account, and in the balance sheet, having a significant detrimental effect on both. They are therefore encompassed within the concept of trading losses as that term might be
understood in relation to the operation of a finance company, or for that matter a bank. If on the evidence it can be shown that the claimed monies were received, and the stated advances were made, within the course of carrying out the business of Belgrave Finance in the same way it was carried out in the year ended 2007, that is, as observed by the auditor, the auditor’s negligence can be demonstrated to have brought that about. That is an issue for trial, not an issue to be decided on an application to strike out.
Discussion
[26] On first reading paragraph 64, it was not immediately apparent to me that Belgrave Finance was alleging that the advances and receipts specified were trading losses, nor that they were losses arising from carrying on the business of Belgrave Finance in the same way it had been carried on in the year to 31 March 2007, for which Hayes Knight was the auditor. The former of these points was perhaps evident on analysis, though would benefit from being expressly stated. The latter is not specifically pleaded. Indeed, the claims against the other defendants all relate to loans made directly or indirectly to entities associated with the first defendant. The pleading in paragraph 64, however, refers to advances “to borrowers including Schofield and entities associated with Schofield” and therefore has the appearance of encompassing loans within different categories to other borrowers, possibly wholly outside the compass of Mr Schofield. Nothing in paragraph 64 gives any indication of whether that was the normal operation of Belgrave Finance in the year ending
31 March 2007, or not. Nor is it pleaded that the sums received as deposits followed the pattern in the 2007 financial year.
[27] This point is important. Reference to the quotes from the judgment of
McKay J plainly demonstrates this; as his Honour said at p 401:
If it is intended to claim that the loss was caused by continuing to trade in the same manner as before, this should be stated. If there were changes in the manner of trading, the pleading should make clear whether the changes are also claimed to have been caused by the alleged negligence, or whether they are claimed not to have added to the actual trading loss. In either case they should be identified.
Reference should be made to the full paragraph cited in [21] above.
[28] In Sew Hoy, it appears that the company had an established pattern of trading which was causing it to run at a loss. Because that was not identified, the same pattern of trading continued and so did the losses. The auditor’s breach caused the company to believe that it was operating profitably, when it was not. Therefore the auditor’s breach led the company to carry on as it had, not to take the steps which it would otherwise have taken, of ceasing to trade or by some means reversing or minimising the ongoing trading losses. Without knowing about them, when it should have, it did not take those steps. The key point is that the company continued to trade in the way which it had, based on the mistaken belief.
[29] In my opinion the claim in this case differs from the claim under consideration in Price Waterhouse v Kwan. In that case, losses to investors were under consideration. Their allegation was that they would not have invested their money in the solicitor’s trust account had that trust account been appropriately audited, as this would have resulted in the trust account being closed down. At a superficial level there are parallels between the position in that case, and the present one. In this case, however, the company itself sues the auditors on the basis that but for their breach of duty it would not have continued to trade as it had when they were reviewing its operations. The difference is that in Price Waterhouse v Kwan, the auditor’s negligence created a situation in which the plaintiffs continued to invest their money, but did not cause them to do so, whereas in Sew Hoy the auditor’s negligence caused ongoing losses to be incurred by the plaintiff carrying on its business as it had before. The present case is said to be in the latter category, so Price Waterhouse v Kwan is distinguishable.
[30] In my opinion the pleading against Hayes Knight can remain provided it is amended to show that it is a claim derived from the auditor’s actions in this way – as Thomas J put it, a chain rather than a link. I accept that even as it stands, the pleading against Hayes Knight, seen in the context of the statement of claim as a whole, by which liability for losses caused by loans to the first defendant or related parties are said to be the responsibility of those who ran the company and those who advised it, may be seen as similar to the claim in Sew Hoy where the auditor’s negligence directly caused the company to continue to trade in an unprofitable way. However, Belgrave must clearly plead relevant facts to show that the losses claimed
were the result of the decision to continue to trade, the chain of consequences approach described by Thomas J (above [24]).
[31] Belgrave pleads in paragraph 62 the breaches of Hayes Knight’s duties on which it relies. However, it does not then plead that these caused it to continue to trade in the manner it had during the year of the audit, citing (perhaps) the actions set out in paragraph 64 as instances of so doing. The issuing of the prospectus (pleaded inversely in paragraph 63.1) may in fact be the first in a sequence, followed by the advances and receipts referred to in paragraph 64.1. It is necessary that this is pleaded as one set of immediate consequences of the alleged breaches. There is another, and presumably simultaneous, consequence, the action (or inaction) of the trustee. It, too, should be pleaded as a consequence of the alleged breaches.
[32] The next link in the chain is the losses that are said to have resulted from these consequences, namely the irrecoverable advances and the liability that cannot be satisfied.
[33] These sequential links in the chain of causation are crucial as they align the claim with the judgment in Sew Hoy. Without the pleading of these links the cause of action has the appearance of the breaches of duty creating a situation in which the three events pleaded in paragraph 63 would not have occurred, which is not acceptable.
[34] The application to strike out the sixth cause of action is therefore dismissed. The plaintiff is directed to file an amended statement of claim in accordance with this judgment. I reserve leave to apply for further directions in accordance with this judgment, if implementation raises any issues.
[35] Costs are reserved; if not agreed, submissions not exceeding three pages may be filed within five working days. My present view is that as both sides have
enjoyed a measure of success, costs should lie where they fall.
J G Matthews
Associate Judge
[1] Attorney-General v Prince [1998] 1 NZLR 262.
[2] Price Waterhouse v Kwan [2000] 3 NZLR 39 (CA).
[3] Scandle v Far North District Council [2012] NZCA 52.
[4] Sew Hoy & Sons Ltd (in receivership and in liquidation) v Coopers & Lybrand [1996] 1 NZLR 392.
[5] March v E & M H Stramary Pty Ltd [1991] HCA 12; (1991) 171 CLR 506.
[6] Stapley v Gypsum Mines Ltd [1953] UKHL 4; [1953] AC 663.
[7] Galoo Ltd (in liquidation) v Bright Grahame Murray (a firm) [1994] 1 WLR 1360.
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