Carey v Smith [2012] NZHC 455 (19 March 2012)

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Carey v Smith [2012] NZHC 455 (19 March 2012)

Last Updated: 22 March 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2011-404-5819 [2012] NZHC 455

BETWEEN GRAHAME AND JANICE CAREY Plaintiff

AND BRUMAC ENTERPRISES LIMITED Second Plaintiff

AND BRUCE JAMES COPELAND SMITH First Defendant

AND INGA MARIANNA DOLK Second Defendant

AND EKO GARDEN LIMITED Third Defendant

Hearing: 27 February 2012

Counsel: N Woods for plaintiffs

R A Edwards for defendants

Judgment: 19 March 2012

_{JUDGMENT OF WINKELMANN J}

This judgment was delivered by me on 19 March 2012 at pursuant to

Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Rice Craig, Papakura for plaintiffs

Edmund Lawler & Associates, St Heliers, Auckland for defendants

Counsel:

_{R A Edwards, Auckland}

CAREY & ANOR v SMITH & ORS HC AK CIV 2011-404-5819 [19 March 2012]

[1] Prior to its liquidation, New Zealand Peat (NZP) was a peat farming company. It farmed peat at several sites in New Zealand, and had its head office in Auckland. The plaintiffs were all shareholders of NZP.

[2] In February 2008 Mr and Mrs Carey, the first plaintiffs, and Brumac Enterprises Ltd, the second plaintiff, entered into an arrangement with NZP to provide finance for the extraction by NZP of 10,000 cubic metres of peat. The financing was achieved through a sale and buy back agreement (the buy back agreement) whereby the plaintiffs purchased 10,000 cubic metres of peat from NZP for $250,000, but gave NZP the right to purchase the peat back at stipulated times at a stipulated price. The purchase price was structured so as to ensure that the plaintiffs received a market rate of return on the $250,000. Because the security for the plaintiffs was the peat, the agreement required NZP to keep the peat in a separate pile in its premises in Ngatea and keep it in good order and condition.

[3] The first and second defendants, Mr Bruce Smith and Ms Ingrid Dolk were also shareholders of NZP. Prior to its liquidation Mr Smith was the managing director, and Ms Dolk the financial director of NZP.

[4] In October 2009 Mr Smith asked the plaintiffs if a sample of the buy back agreement peat (amounting to approximately one truck load) could be taken for testing. That was agreed to. However, as it transpired far more than one truckload was taken. There is a difference in the evidence as to what the precise amount was, Mr Smith claims that 2,195 cubic metres was uplifted while the plaintiffs saying it was more like 7,000 cubic metres. By agreement invoices were generated by the plaintiffs for the 2,195 cubic metres. Those invoices were not paid as liquidation intervened.

[5] On 21 December 2009 NZP was placed in voluntary liquidation. NZP was subject to a general security agreement in favour of the ANZ National Bank, which had been registered in 2002. ANZ has claimed it has a prior security interest over the buy back agreement peat by virtue of that agreement.

[6] Following liquidation the liquidators entered into an operating agreement with the third defendant Eko Garden Ltd (Eko) for the operation of the NZP business. Mr Smith is both a shareholder and director of Eko. Under the operating agreement the operator, Eko, was granted the right to uplift, process and on-sell NZP’s peat. Pursuant to that agreement Eko uplifted peat from the Ngatea site, including, it seems, the buy back agreement peat.

[7] The plaintiffs say that each of the defendants unlawfully dealt with the buy back agreement peat because, aside from the initial truck load, the dealings were not done in accordance with the terms of the buy back agreement. The plaintiffs have issued claims against each defendant in the torts of conversion and trespass, and seek summary judgment on those claims.

[8] In the statement of claim it is alleged that pre-liquidation Mr Smith wrongfully deprived the plaintiffs of 65% of the buy back agreement peat (that is to say, converted it) by selling it to third parties and wrongfully deprived the plaintiffs of the remaining buy back agreement peat by voluntarily liquidating NZP in circumstances where ANZ took possession of the peat pursuant to its general security agreement. The same allegations are made against Ms Dolk with an alternative allegation that she colluded with Mr Smith to take those actions.

[9] The plaintiffs bring an alternative claim against both Mr Smith and Ms Dolk in trespass. It is alleged that Mr Smith personally or by his agents seized and took away approximately 65% of the buy back agreement peat and sold it to third parties, and that after 21 December 2009, he took away the rest of that peat personally or by his agents, and sold it. The same allegations are made against Ms Dolk with an alternative allegation that she colluded with Mr Smith to take those actions.

[10] Claims are also made against the third defendant, Eko, in trespass and conversion in respect of the buy back agreement peat uplifted by Eko pursuant to the Operating Agreement after NZP entered into liquidation.

Principles on application for summary judgment

[11] For the plaintiffs to succeed in their application for summary judgment, they must satisfy the court that the defendants have no defence. In Krukziener v Hanover Finance Ltd the Court of Appeal said:[1]

The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11

PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[12] The essential feature of the tort of conversion is the denial by the defendant of the possessory interest or title of the plaintiff in the goods. For a claim of conversion the plaintiffs must show:[2]

(a) The defendants’ conduct was inconsistent with the rights of those entitled to possession (the plaintiffs);

(b) The defendant’s conduct was deliberate; and

(c) The defendant’s conduct was so extensive an encroachment on the rights of the plaintiffs so as to exclude them from use and possession (buy back agreement of the peat).

_{[13] The elements of the cause of action in trespass are:}[3]

(a) Direct physical interference with the goods;

(b) Interference with or infringement of the plaintiff’s possession of the

goods;

(c) It is less clear as to whether the conduct causing the interference must be intended.

Relevant factual background

[14] Affidavits have been filed in support of the application for summary judgment by Mr Brewster and Mr Carey, and in opposition by Ms Dolk and Mr Smith. Apart from a dispute about the quantity of peat that was uplifted in the pre-liquidation period, there is little dispute about the known facts – what is put at issue by the defendants in relation to the factual aspects of the claim is the inferences it is safe and appropriate to draw from those facts in the context of summary judgment.

Pre-liquidation dealings

[15] In about October 2009 Mr Smith sent an email to Mr Brewster, a shareholder and director of the second plaintiff Brumac (and also, from May 2009, a non- executive director of NZP), asking if a sample of the buy back agreement peat could be taken to test how it stood up to storage. Mr Smith said that the intention was, based on the sample, to sell one to two thousand cubic metres to one customer starting in 10 days. In the email he acknowledged that NZP would need to agree payment and security on the pick up with the plaintiffs.

[16] Subsequent to that Mr Smith told Mr Brewster that 300 cubic metres had been uplifted and asked the plaintiffs to send invoices, which they did on 19 October

2009. At some point Mr Brewster received information that there was a digger sitting on top of the pile of buy back agreement peat and travelled to the site to inspect it. Based on his viewing of the peat pile he assessed that closer to 7,000 cubic metres had been removed from the pile, than the 300 cubic metres reported. He called a meeting with Mr Smith to discuss this.

[17] Mr Brewster said that at the meeting Mr Smith appeared embarrassed but said that he would look into it. Later that day Mr Smith sent an email to Mr Brewster saying that he would provide a reconciliation and make payment on 30

November 2009. Again, later on the same day he sent an email to Mr Brewster asking that the plaintiffs generate two invoices for 947.5 cubic metres each (the security interest in the buy back agreement peat being split between the first and second plaintiffs equally). He said that no further peat would be removed from the stock pile until further notice.

[18] Mr Smith’s account of these events is that he did not authorise or direct the removal of the additional peat and only discovered it had been removed once Mr Brewster had brought it to his attention. He said that he did not work on-site, and the Ngatea operations were managed on-site by Mr Alex Field. Accordingly, following Mr Brewster’s approach to him Mr Smith asked Mr Field to measure the volume of peat which had been removed. Mr Field reported that 2,195 cubic metres had been removed.

[19] Mr Smith’s explanation for events is that the peat had mistakenly been loaded out from the buy back peat pile by one of the carrier drivers. The carriers were aware that the buy back peat pile was not to be loaded out and Mr Smith says the drivers were fully briefed on which peat should be uplifted. Mr Smith speculates that one of the employees of the carrier had most likely loaded from the buy back peat pile because it was easier to access than the other pile.

[20] Mr Smith’s account, not contradicted by Mr Brewster, is that Mr Brewster

then challenged Mr Field’s calculation. They then met on site on Sunday 29

November 2009, and using a tape measure, they measured the stock pile in the area where the peat had been removed. They both agreed that approximately 20% of the peat had been removed. The stock pile had originally been agreed to hold 10,000 cubic metres. A reduction of 20% reconciled with the 2,195 cubic metre figure Mr Field had supplied. Mr Smith said that despite his agreement that 20% had been taken, Mr Brewster continued to insist that more than 2,195 cubic metres had been taken.

[21] Ms Dolk has provided an affidavit in which she says that her role in NZP did not include operational matters regarding harvest and processing of peat. She visited the Ngatea site only once or twice a year. She was not involved in, and had no authority to instruct any of the operations managers on when and where they could uplift peat. She was not involved in the uplifting of the buy back agreement peat and did not know from the stock reports and invoices documentation, which particular pile peat had been taken from.

Arguments on summary judgment

Plaintiffs’ submissions

[22] There is no issue that the taking of the peat beyond the initial sample was unauthorised and contrary to the rights of the plaintiffs’ pursuant to the buy back agreement. It is also common ground that neither Mr Smith nor Ms Dolk worked on site, but rather that their place of work was the Auckland office, and that the Ngatea premises were operated on the ground by Mr Field.

[23] Notwithstanding this the plaintiffs say that the factual material is such that it is an inescapable inference that Mr Smith and Ms Dolk did authorise the uplift of the extra amount of peat, and that their statements to the effect that they were unaware of it and did not authorise it are so improbable that they should be rejected.[4] The reasons that the plaintiffs say that Mr Smith and Ms Dolk’s explanations for the taking of stock are not plausible are as follows:

1. The volume of stock taken was large. They say as much as 8,967 cubic metres was taken prior to liquidation based on the amounts the liquidators reported as present when they took over the site.

2. It is in any case admitted by Mr Smith that the amount taken as at 27

November 2009 was 2,195 cubic metres, which is a large amount in any case.

3. The stock was not just uplifted, it was then shipped to a factory for processing.

4. All of these activities generate invoices and stock reconciliations which are received by Ms Dolk and Mr Smith, who were responsible for managing stock levels and invoicing.

5. No documents in relation to invoicing and stock levels have been disclosed by the defendants although the plaintiffs have requested those documents. The Court may draw a negative inference from this non-disclosure.

6. Despite the knowledge that the stock pile was owned by the plaintiffs, post liquidation, Eko, a company in which Mr Smith had an interest, continued to use the stock pile. This conduct post-liquidation affirms Mr Smith’s conduct prior to liquidation.

7. Through their shareholding in NZP, Mr Smith and Ms Dolk had a motive to deal in the peat inconsistently with the interests of the plaintiffs, particularly in circumstances where NZP was in difficult financial circumstances.

8. Neither the carriers, nor Mr Field have provided evidence to support Ms Dolk and Mr Smith’s account of events, again a fact from which negative inferences may be drawn.

Defendant’s submissions

[24] Ms Edwards for the defendants says that all have reasonably arguable defences to the claims. In respect of the claims against Mr Smith and Ms Dolk the plaintiffs have sued the wrong defendants. Any potential claim should be against NZP because at all times the first and second defendants were acting as officers of NZP. In any case, she says there has been no trespass or conversion by Mr Smith and Ms Dolk in relation to pre-liquidation events as there was no conduct by them in

relation to the buy back agreement peat. A further potential defence is that the actions of the defendants were not causative of the plaintiffs’ loss as the liquidation of NZP and consequent enforcement of ANZ’s prior ranking security were the ultimate cause of loss. Prior to the liquidation NZP offered to reimburse the plaintiffs for the full amount of peat that had been taken, and invoices were issued. Liquidation intervened and it is for that reason they were not paid. After liquidation, it is ANZ’s prior ranking security interest that has deprived the plaintiffs of their interest in the peat, not any action by the defendants.

[25] Finally there is a genuine dispute about the volume of peat taken which effects the quantum of claim and makes summary judgment inappropriate.

[26] As to the claim against Eko, it is said simply that Eko has not converted nor trespassed upon the buy back agreement peat.

Discussion

Pre-liquidation claims

[27] As to the first point raised as an arguable defence, it is said by the defendants that the undisputed evidence is that at all material times Ms Dolk and Mr Smith were acting in their capacity as officers of NZP. Because they did not hold out to anyone that they were acting in a personal capacity there is no reason to pierce the corporate veil. This ground of defence is not a basis upon which the plaintiffs’ application could be successfully resisted. A director has no special status in tort and may be personally liable if the elements of tort are made out against him or her, regardless of

whether the acts constituting the tort were committed on behalf of the company.[5]

[28] The second ground of defence raised on behalf of Mr Smith and Ms Dolk in relation to the pre-liquidation claims has more merit. Mr Smith and Ms Dolk’s account is that they were not involved in, or even aware of, the uplifting of the peat.

_{There is nothing in the documentary record to contradict that account, and indeed the}

general factual background to support it. Both worked away from the site where the peat was stored. Neither were in charge of its day to day operations. Nor is there anything in Mr Smith’s conduct which is inconsistent with his account.

[29] I am not prepared to draw a negative inference from the failure to produce documents recording invoices and stock levels, first because there is nothing to suggest that those documents would tend to prove that Mr Smith and Ms Dolk knew the peat in question had been taken from the wrong pile or that the documents in question would cast light on who directed the uplifting of the peat from the particular pile, if indeed anybody did. Secondly, given the nature of those documents, it seems most likely that they are within the control of the liquidator, and not the defendants. I am also not prepared to draw an adverse inference from the failure to supply an affidavit from Mr Field, or the carrier in involved in the shifting of the peat. The obligation on the defendant in a summary judgment is not to make out the defence, but rather to establish that there is a real question to be tried. Mr Smith and Ms Dolk both have plainly done so in this case. Their account of events is on the face of it, plausible – rather than lacking in credibility, as the plaintiffs would have it.

The application in respect of post-liquidation dealings

[30] It is relevant to consideration of the post-liquidation claims that the plaintiffs’ property interest in the buy back agreement peat was a security interest. The Personal Property Security Act 1999 defines “security interest” as follows:

(1) In this Act, unless the context otherwise requires, the term security interest—

(a) Means an interest in personal property created or provided for by a transaction that in substance secures payment or performance of an obligation, without regard to—

(i) The form of the transaction; and

(ii) The identity of the person who has title to the collateral; and

(b) Includes an interest created or provided for by a transfer of an account receivable or chattel paper, a lease for a term of more than 1 year, and a commercial consignment (whether or not the transfer, lease, or consignment secures payment or performance of an obligation).

[31] It seems likely that as the defendants submit, the plaintiffs’ interest in the buy back agreement peat was a purchase money security interest. Purchase money security interest is defined in s 16(1) as follows:

(a) Means -

(i) A security interest taken in collateral by a seller to the extent that it secures the obligation to pay all or part of the collateral's purchase price; or

(ii) A security interest taken in collateral by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights; or

(iii) The interest of a lessor of goods under a lease for a term of more than 1 year; or

(iv) The interest of a consignor who delivers goods to a consignee under a commercial consignment; but

(b) Does not include a transaction of sale and lease back to the seller.

[32] To achieve the “super priority” accorded purchase money security interests under the Act, the security interest needs to be perfected within 10 days.[6] In this case the security interest was not registered at all. Section 66(a) provides that a perfected security interest has priority over an unperfected security interest in the same collateral. In this case the ANZ’s general security agreement was perfected and it is clear from correspondence produced in support of the application for

summary judgment that it claims priority to the plaintiffs’ interest in the buy back agreement peat. It is also clear that liquidators have dealt with the buy back agreement peat on the basis that it is the ANZ, rather than the plaintiffs, who have the prior ranking security interest in that peat.

[33] In relation to the trespass cause of action against all defendants, there is clearly an issue as to whether the plaintiffs had a right to possession of the peat following liquidation, or whether it was in possession of the prior ranking security holder. Mr Smith says that Eko dealt with the peat following liquidation on the

_{assurance from the liquidator that the buy back agreement peat formed part of the}

inventory of NZP. Unless the plaintiffs can show that their interest in the buy back

agreement peat ranked prior to ANZ’s, they face difficulties with this claim.

[34] Similarly in respect of the conversion cause of action against Eko, there is an issue as to whether the dealings with the peat post-liquidation were inconsistent with the rights of the plaintiffs, given ANZ’s claim to a prior ranking.

[35] The claim in conversion against Mr Smith and Ms Dolk is made on a different basis – that they placed the company into voluntary liquidation, and it was that act which amounted to the conversion, because liquidation caused the ANZ to take possession of the peat pursuant to the general security agreement.

[36] This is a novel claim which faces considerable difficulties. The evidence of Mr Smith is that all shareholders, including the plaintiffs, voted in favour of the motion “that as the company is unable to pay its debts it be put in liquidation”. The plaintiffs can therefore be said to have consented to the liquidation. Moreover the passing of that resolution cannot in any sense be said to amount to conduct inconsistent with the rights of the plaintiffs. The rights of the plaintiffs’ to the buy back agreement peat fell to be determined in accordance with the written agreement and the application of the general law. The plaintiffs’ true difficulty was that they had a purchase money security interest which they could have perfected through registration, but which they failed to register.

[37] I do not propose to consider the other points raised by way of defence. Those I have addressed are sufficient to dispose of the application. For the reasons I have given, the plaintiffs’ applications for summary judgment are declined. Costs are reserved. I propose to convene a telephone conference to discuss timetabling of this proceeding through to trial. I ask that the Registry allocate a time for that conference.

Winkelmann J

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[1] _{Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26].}
[2] Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Brookers, Wellington, 2009), at _547-569.

[3] Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Brookers, Wellington, 2009), at

543-547.

[4] Citing Eng Mee Yong v Letchumanan [1980] AC 331 at 341.

[5] Body Corporate 202254 v Taylor [2008] NZCA 317, [2009] 2 NZLR 17 (CA); Williams v Natural Life Foods [1998] 1 WLR 830 (HL); Standard Chartered Bank v Pakistan Shipping Corp (No 2) [2003] 1 AC 959 (HL).

[6] Personal Property Securities Act 1999, s 73.