Ng v Harkness Law Limited [2014] NZHC 1667 (15 July 2014)

Last Updated: 23 July 2014

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2013-485-1389 [2014] NZHC 1667

BETWEEN	ADRIAN HWEE KIAT NG and ALICIA SOCK HOON GO First Plaintiffs MATTHEW HSUN YEAN LIM Second Plaintiff
AND	HARKNESS LAW LIMITED First Defendant JOHN RENWICK HARKNESS Second Defendant

Hearing:	15 July 2014
Appearances:	S Barter for the Plaintiffs S Shortall and A E Gordon for the Defendants
Judgment:	15 July 2014

_{ORAL JUDGMENT OF ASSOCIATE JUDGE BELL (No 2)}

Solicitors:

Barter & Co, Albany Village, Auckland, for Plaintiffs

MinterEllisonRuddWatts, Wellington, for Defendants

NG and GO v HARKNESS LAW LIMITED [2014] NZHC 1667 [15 July 2014]

[1] This matter is the resumption of the hearing of the defendants’ application for summary judgment and to strike out the plaintiffs’ claims. On 29 April 2014 I gave an interim decision on the plaintiffs’ claims against the defendants under the Fair Trading Act 1986. The plaintiffs have another cause of action. That is for dishonest assistance under the second limb in Barnes v Addy.¹ I did not deal with that cause of action in my earlier decision. Since then, the parties have filed further evidence. The argument has been fuller than the parties would have been able to give at the earlier hearing.

[2] The plaintiffs’ claim is that the first and second defendants gave dishonest assistance to directors and de facto directors of Hunter Gills Road Ltd and Albany Heights Villas Ltd in breaching fiduciary duties which those directors owed to their companies. They say that as a result of the breaches of fiduciary duties by those directors and the dishonest assistance given by the defendants, they have suffered losses and they are entitled to look to the defendants to make good those losses.

Dishonest assistance as a claim of accessory liability

[3] I begin by considering what is involved in a claim for dishonest assistance. I refer to the Court of Appeal’s decision in Fletcher v Eden Refuge Trust,² where the court summarised how Duffy J at first instance characterised the cause of action. There were three ingredients:

(a) money is lost as a result of breach of trust or fiduciary duty;

(b) the defendant has participated in the breach of duty by helping or assisting in some way in those breaches; and

(c) there is dishonesty, objectively assessed, on the part of the defendant.

_{The Court of Appeal followed that approach.}

¹ _{Barnes v Addy (1873-74) LR 9 Ch App 244.}

² Fletcher v Eden Refuge Trust [2012] NZCA 124, [2012] 2 NZLR 227 at [52].

[4] As to the matters to be proved in a claim against a fiduciary for breach of fiduciary duty, the defendants have referred to Tipping J’s decision in Everist v McEvedy:³

To succeed in a claim for breach of fiduciary duty the plaintiff must show three things: first that the defendant owed the plaintiff a fiduciary duty; second that the defendant was in breach of that duty; and third that the plaintiff has suffered a loss arising out of a transaction or circumstance to which the breach was material.

[5] It is necessary, however, to add a further matter. A claim for dishonest assistance, or knowing assistance, under the second limb in Barnes v Addy, is a claim for accessory liability. It is a claim that some person has become involved in wrongdoing by someone else who owes a primary duty. The person owing the primary duty is either a fiduciary or a trustee. The accessory has secondary liability. Therefore, the accessory cannot have any greater liability than the fiduciary or the trustee. There are, of course, added requirements in that the accessory must have the

level of dishonesty laid down in Royal Brunei Airlines Sdn Bhd v Tan,⁴ Westpac New

Zealand Ltd v MAP & Associates Ltd⁵ and Fletcher v Eden Refuge Trust. That may mean that in some cases the alleged assistant may not be liable (because the required dishonesty has not been proved), even though the trustee or fiduciary is liable. But the alleged assistant’s liability cannot be more extensive than that of the trustee or fiduciary.

[6] Fiduciary duties can be enforced only by those to whom the duties are owed. The ordinary principle is that a non-beneficiary cannot enforce a fiduciary duty owed by a fiduciary or trustee. That becomes relevant when it is necessary to consider to whom directors owe their duties. Accordingly there is an issue in this case whether the fiduciary duties were owed to the plaintiffs. The question to be addressed is whether the plaintiffs are able to run a claim for dishonest assistance if any fiduciary

_{duties were not owed to them.}

³ _{Everist v McEvedy [1996] 3 NZLR 348 (HC) at 355.}

⁴ _{Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC).}

⁵ Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751.

Directors’ fiduciary duties

[7] It is necessary to consider what fiduciary duties are owed by directors of companies. It is well-established that directors are in a fiduciary relationship with companies. Directors owe companies a number of duties by virtue of their directorships, but not all duties are fiduciary.

[8] There are some fiduciary duties that are clearly recognised. I summarise them:

(a) the no-conflict rule – a director must not, in any matter falling within the scope of his or her directorship, have a personal interest or an inconsistent engagement with third parties;

(b) the no-profit rule – directors must not use their position for their own

or a third party’s advantage; and

(c) the misappropriation rule - directors must not appropriate a company’s property for their own benefit or the benefit of a third party.

[9] I regard those as the core fiduciary duties that directors owe to the company. They are owed whether the company is solvent or not, even though in many cases the duties are enforced by liquidators after companies have gone into liquidation by reason of insolvency. Insolvency may be the occasion for enforcement of those duties, but it is not the ground for their existence.

[10] I also accept that there may be other duties owed by directors that can be characterised as “fiduciary” and which extend more widely than these core fiduciary obligations. For example, the duty to exercise powers in the best interests of the company and the duty to use powers only for the purpose for which they were conferred. These correspond to the statutory duties under ss 131 and 133 of the Companies Act 1993. Case law has increasingly come to recognise those duties as

also being fiduciary in nature.⁶ Any conduct which is in breach of the core fiduciary duties may also breach the duties under ss 131 and 133, but I will also assume that conduct outside those core duties, in breach of ss 131 and 133, may also go to fiduciary duty.

[11] The duty to exercise powers in the best interests of the company can require directors to take account of the interests of creditors – particularly in times of actual or apprehended insolvency. Cooke J recognised that, for the purpose of New Zealand law, in Nicholson v Permakraft NZ Ltd.⁷ It has also been recognised in later decisions of the Court of Appeal, especially Sojourner v Robb.⁸

[12] To understand whether the plaintiffs have standing, it is helpful for this case to identify different groups of people.

[13] First, there are the plaintiffs. They are creditors of the company and are entitled to claim in the liquidation. It is common ground that for the purpose of this hearing they have suffered losses. They made payments to both companies under the option programmes. It is arguable for the plaintiffs that they have suffered losses as a result of breaches of fiduciary duty by the directors.

[14] Next are the companies – Hunter Gills Road Ltd and Albany Heights Villas Ltd. They are the companies to whom the plaintiffs made their option payments. These companies were intended to carry out proposed developments at 125 Gills Road, Albany. Hunter Gills Road Ltd held title to land temporarily but on-sold it. It did not carry out the development and has not repaid the plaintiffs or others who made option payments, as it was contractually obliged to do. Albany Heights Villas Ltd never had title to the land and has never repaid the money paid to it. Both companies were corporate trustees of trading trusts. Both are in liquidation.

[15] There are the directors and de facto directors. They are Mr Paul Bublitz, Mr Chris Cook, Mr Peter Chevin and Mr Roderick Nielsen. Mr Cook was the only

⁶ See for example the decisions in The Bell Group litigation: Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 39 WAR 1 (SC) and Westpac Banking Corporation v Bell Group Ltd (in liq) [2012] WASCA 157, (2012) 44 WAR 1.

⁷ _{Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) at 249.}

⁸ Sojourner v Robb [2007] NZCA 493, [2008] 1 NZLR 751.

one recorded in the Companies Office records as a director, but it is arguable for the plaintiffs that the other three were de facto directors within s 126(1)(a) of the Companies Act. These are the men behind the entities which were established to promote and carry out the developments at Gills Road. All of them had what was referred to in the Hunter Sterling agreement as “baggage”. That baggage was significant liabilities against each of them. It was unstated in the Hunter Sterling agreement but common ground here, that Mr Bublitz had been a director of a failed finance company; Mr Chevin was on his third bankruptcy; Mr Nielsen was bankrupt and living in Las Vegas, Nevada, United States of America; at relevant times Mr Cook lived in south-east Asia.

[16] There are the liquidators. They are now Mr Grant and Mr Gilbert. They are known to be liquidators who will pursue the interests of creditors in cases of insolvent liquidations. There is no suggestion that they would not be competent or willing to enforce claims against the directors or against those who had dishonestly assisted directors.

[17] Finally there are the defendants. The remaining defendants are the incorporated law practice and its principal, Mr Harkness. The allegation against them is that they assisted Mr Bublitz and other directors in breaching the fiduciary duties they owed the companies.

Can the plaintiffs say that the directors owed them fiduciary duties?

[18] The question is whether people other than the liquidators are able to enforce the alleged breaches of fiduciary duty committed not only by directors but also by the defendants as alleged dishonest assistants.

[19] There is a line of decisions showing that directors owe duties only to their companies, not to creditors, and that fiduciary duties are not directly enforceable by creditors of the company but can only be enforced in the interests of creditors through the company or liquidators of the company. The defendants’ submissions

outlined a number. Cartwright J reviewed some in Enterprise Nationale der

Siderurgie v Mestrom.⁹

[20] In Re Wincham Shipbuilding, Boiler, and Salt Company (Poole, Jackson and

Whyte’s case), Sir George Jessel MR said:¹⁰

But directors are not trustees for the creditors of the company. The creditors have certain rights against a company and its members, but they have no greater rights against the directors than against any other members of the company. They have only those statutory rights against the members which are given them in the winding-up.

[21] In Bath v Standard Land Company Ltd, Cozens-Hardy MR said:¹¹

I base my decision upon the broad principle that directors stand in a fiduciary position only to the company, not to creditors of the company, not even to individual shareholders of the company, still less to strangers dealing with the company. This principle applies equally whether the relation between the company and the stranger is one purely of contract, such as principal and agent, or is one of trustee and cestui que trust.

[22] A more recent decision in the same vein is Yukong Line Ltd of Korea v

Rendsburg Investments Corp of Liberia, where Toulson J held:¹²

Where a director, or person having the management, of an insolvent company acts in breach of his duty to the company by causing assets of the company to be transferred in disregard of the interests of its creditor or creditors, under English law he is answerable through the scheme which Parliament has provided. In my judgment he does not owe a direct fiduciary duty towards an individual creditor, nor is an individual creditor entitled to sue for breach of the fiduciary duty owed by the director to the company.

[23] In Kuwait Asia Bank EC v National Mutual Life Nominees Ltd, the Privy

Council stated:¹³

Two general principles may first be stated. (1) A director does not by reason only of his position as director owe any duty to creditors or to trustees for creditors of the company. (2) A shareholder does not by reason only of his position as shareholder owe any duty to anybody.

⁹ _{Enterprise Nationale der Siderurgie v Mestrom HC Auckland CP236/97, 1 June 1999.}

¹⁰ Re Wincham Shipbuilding, Boiler, and Salt Company (Poole, Jackson and Whyte’s case) (1878)

_{9 Ch D 322 (CA) at 328-9.}

¹¹ _{Bath v Standard Land Company Ltd [1911] 1 Ch 618 (CA) at 627.}

¹² Yukong Line Ltd of Korea v Rendsburg Investments Corp of Liberia [1998] 1 WLR 294 (QB) at

_312.

¹³ Kuwait Asia Bank EC v National Life Mutual Nominees Ltd [1990] 3 NZLR 513 (PC) at 529.

The second proposition is not material to this case. The Privy Council referred to older cases: Ferguson v Wilson,¹⁴ the judgment of Sir George Jessel MR in Poole, Jackson and Whyte’s case,¹⁵ and Wilson v Lord Bury.¹⁶

[24] The same point as to the limits on the rights of creditors becomes apparent in the judgment of Cooke J in Nicholson v Permakraft (NZ) Ltd:¹⁷

(iii) The duties of directors are owed to the company. On the facts of particular cases this may require the directors to consider inter alia the interests of creditors. For instance creditors are entitled to consideration, in my opinion, if the company is insolvent, or near-insolvent, or of doubtful solvency, or if a contemplated payment or other course of action would jeopardise its solvency.

He was making it clear that the duties were owed to the company, even though they required the directors to take into account the interests of creditors. Having stated that directors owe duties to the company, he went on:¹⁸

(iv) The foregoing principles relate to actions by the company against directors, whether or not in truth brought by the liquidator. It does not exclude the possibility of an action by a particular creditor against the directors or the company for breach of a particular duty of care arising on ordinary negligence principles.

He recognised there that a claim by creditors against directors might be possible if liability could be established on ordinary negligence principles, but in doing so he accepted that a claim for breach of duties owed by directors to the company was enforceable only by the company, not by outsiders.

[25] In Sojourner v Robb,¹⁹ the Court of Appeal cited Gummow J in Re New

World Alliance Pty Ltd:²⁰

It is clear that the duty to take into account the interests of creditors is merely a restriction on the right of shareholders to ratify breaches of the duty owed to the company. The restriction is similar to that found in cases involving fraud on the minority. Where a company is insolvent or nearing insolvency, the creditors are to be seen as having a direct interest in the company and

¹⁴ _{Ferguson v Wilson (1866) LR 2 Ch App 77.}

¹⁵ _{Above n 10.}

¹⁶ _{Wilson v Lord Bury (1880) 5 QBD 518 (CA).}

¹⁷ _{Above n 7, at 249.}

¹⁸ _{At 250.}

¹⁹ _{Above n 8, at [25].}

²⁰ Re New World Alliance Pty Ltd (1994) 51 FCR 425 at 444-445.

that interest cannot be overridden by the shareholders. This restriction does not, in the absence of any conferral of such a right by statute, confer upon creditors any general law right against former directors of the company to recover losses suffered by those creditors ... the result is that there is a duty of imperfect obligation owed to creditors, one which the creditors cannot enforce save to the extent that the company acts on its own motion or through a liquidator.

(Emphasis added)

[26] The context for these decisions was claims or potential claims between creditors and directors. The matter here is different because the question is whether, instead of suing directors, the creditors can sue people for giving dishonest assistance to directors to breach their fiduciary duties.

[27] I come back to the point I made earlier that a claim for dishonest assistance is one of secondary liability, for being an accessory to someone else’s wrongdoing. The accessory cannot be answerable for wrongdoing to a greater extent than the principal. If the directors or de facto directors could not be sued by the creditors for breach of fiduciary duty, then similarly in my judgment the defendants cannot be sued by creditors for giving dishonest assistance to those directors.

[28] In response, Mr Barter submits that I should still allow the claim to run against the defendants, notwithstanding the difficulties I have endeavoured to explain. He refers to s 301 of the Companies Act and to a decision of Heath J in Benton v Priore.²¹ He accepts that s 301, a procedural provision, allows a creditor of a company in liquidation to make claims for breaches of duty against a limited class of people,²² which does not include those in the position of the defendants, that is, people accused of giving dishonest assistance to directors breaching fiduciary duties. He submits that equity should be allowed to operate more widely. Mr Barter submits that there was clear proximity between the plaintiffs as creditors and the directors and that by virtue of that proximity and the foreseeability of the plaintiffs’ loss, equity should be able to give the creditors a claim for breaches of fiduciary duty in

_{which the defendants are alleged to be complicit. Mr Barter relies on the absence of}

²¹ _{Benton v Priore [2003] 1 NZLR 564 (HC).}

²² Companies Act, s 301: “a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company.”

authority on the question before this court as being an opportunity for this court to allow the matter to run and to be decided at a final hearing.

[29] In my view, Mr Barter is asking the court to disregard the nature of the claim for dishonest assistance, which is one for accessory liability only. He is asking the court to hold that those giving dishonest assistance can have wider liability than the actual fiduciaries. For reasons I have tried to spell out, I am unable to accept that the cause of action should be expanded in the way that he has invited. That would run against the line of authority I have already referred to, showing that, in the absence of statutory provision, companies and liquidators alone are able to enforce directors’ fiduciary duties.

[30] For completeness, I also indicate that there might be special circumstances when a creditor might bring a proceeding where a liquidator wrongfully refuses to make a claim available to the company. By “special circumstances” I mean circumstances contemplated in decisions such as Hayim v Citibank²³ and Roberts v Gill & Co.²⁴ I have in mind cases where a liquidator may be colluding with directors of the company and refuse to bring claims against them. In those circumstances,

particularly where it is difficult under current Companies Act provisions to remove a liquidator,²⁵ there might be reasons for allowing a creditor to bring a claim on behalf of creditors generally. But there is nothing in the circumstances of this case to suggest that the liquidators would not bring the claim which the plaintiffs are now asserting against the defendants. These liquidators are not people whom anyone would suspect of being in collusion with either the directors or the defendants.

[31] Accordingly, on what is essentially a strike-out basis, I find that the plaintiffs do not have standing to bring a claim for dishonest assistance against these defendants. That does not mean that the second cause of action could not be brought

_{by the liquidators.}

²³ _{Hayim v Citibank [1987] AC 730 (PC) at 748.}

²⁴ _{Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240 at [46].}

²⁵ See McMahon v Ah Sam [2014] NZHC 659.

The substantive merits of a dishonest assistance claim

[32] In case I have erred in this decision, I set out briefly my views on the substantive merits. They may be of some assistance to the parties. This part of the decision is obiter.

[33] The plaintiffs try to tread carefully with their allegations against the defendants for dishonest assistance. Mr Barter submits that they are not accusing Mr Harkness of fraudulent conduct. Notwithstanding that, I treat the allegations against the defendants as claims of reprehensible conduct. I will approach the matter in the same way as I did for the allegations in the Fair Trading Act cause of action.²⁶

I regard the claim of dishonest assistance in breaching fiduciary duties as requiring

the same elements of clarity of allegation, particulars, and cogency of case. The allegation of dishonest assistance has been clearly made. It may be that the pleadings could be improved by separating out the allegations of knowledge from the allegations of assistance.

[34] On cogency of case, I would not rule against the plaintiffs. In cases such as this, plaintiffs can usually proceed only by circumstantial evidence. They do not have direct evidence of the defendants’ knowledge. But there is, in my view, sufficient circumstantial evidence to found a case for suspicion. In stating that there is a case for suspicion, I am adopting the knowledge test stated by the Supreme

Court in Westpac New Zealand Ltd v MAP & Associates.²⁷ There is a combination of

factors. By itself each factor might not raise concern but it is their combination that, in my view, would cause someone in the place of the defendants to be suspicious of the propriety of the directors’ conduct.

[35] The first factor is that the contractual arrangements with purchasers (which Mr Harkness drafted) were unusual. The scheme as a whole was an unusual way of selling lots off the plan. Normal safeguards, identified by Mr Nolan, to protect purchasers against the scheme not proceeding such as stakeholder provisions were

_{missing. On this, Mr Harkness carries responsibility for the interpretation which he}

²⁶ _{Ng v Harkness Law Ltd [2014] NZHC 850 at [40]- [45].}

²⁷ Above n 5, at [27].

presses upon the court, that there were to be no stakeholder provisions. He was aware then – and this is clear from his evidence – that there were not to be stakeholder provisions so that funds could be used instead of being held for purchasers.

[36] The next factor is that the people behind the project – Messrs Bublitz, Nielsen, Cook and Chevin – were all carrying baggage. Mr Harkness knew of that baggage by reason of the schedule to the Hunter Sterling agreement.

[37] The companies were corporate trustees for trading trusts. That is a way of establishing a business which in itself would cause concern as to adequate protection for external creditors.

[38] The project was under-capitalised – that is apparent from the Hunter Sterling agreement.

[39] The purchasers were not New Zealanders. The project was marketed in south-east Asia. I accept the plaintiffs’ submission that marketing the scheme in south-east Asia enabled those promoting the scheme to do so without complying with New Zealand legislation, such as the Securities Act 1978, intended for the protection of investors.

[40] Mr Harkness was aware that the purchasers were without legal advice.

[41] That combination of circumstances would be enough to create a sense of suspicion in the mind of the ordinary, honest person that this was a scheme which was likely to cause loss to those who dealt with the companies. Whether the suspicion amounts to strong suspicion under the judgment of the Supreme Court in Westpac v MAP is a trial issue. For summary judgment purposes, I consider that the plaintiffs have done enough groundwork to say that the matter can properly run to hearing.

[42] The judgment of the Privy Council in Royal Brunei Airlines v Tan²⁸ makes it clear that those alleged to have given dishonest assistance cannot set their own standards of honesty. The ordinary standards of honesty apply. There is a potential risk for lawyers who are accustomed to put the interests of their clients first and to put to one side whatever misgivings they might have. Most times that would be the correct course. But the risk for lawyers is that it may create a moral blindness. It may mean that lawyers may not be alert to a client who will be a risk to others; they may not be alive to the question that the client may be up to no good.

[43] For the second part of the knowledge test in Westpac v MAP, the deliberate decision not to enquire, there is this question: if Mr Harkness refused to ask questions, was it because of a professional habit of not wishing to judge the interests of his client? If so, he may not have turned his attention to something which would put him alive to the true state of affairs.

[44] The aspect which gives the plaintiffs their strongest claim that the actions of the defendants amounted to dishonest assistance goes to dealing with the funds that were paid into the defendants’ trust account. Mr Harkness says that he paid the money out on instructions. It may be that the money was paid out directly to his clients. The money was available to be used for corporate purposes. If the money was so applied, he may be able to say that he did not know how the funds were applied later. His evidence is not that he paid the money only to his clients, but that he paid it out on instructions. The instructions came not just from those who held office as directors but by others as well. His evidence does not elaborate on where the money went. He has not provided trust account statements. Mr Ng has attached an extract from some trust account records; and those indicate that the payments did not always go to the client. Mr Harkness’ silence on where the funds actually went to is in itself a cause for concern.

[45] Another worrying factor is that for about a year now the liquidators have been pressing Mr Harkness to hand over records, pursuant to proper requests made under s 261 of the Companies Act. Only now has Mr Harkness agreed to comply

_{with those demands.}

²⁸ Above n 4.

[46] Overall there is a combination of circumstances that leaves me with the impression that while the plaintiffs themselves may not have standing, an appropriate plaintiff with standing (such as the liquidators) may have a case for dishonest assistance against the defendants.

Outcome

[47] I make it clear that my decision is limited. I am only deciding that the plaintiffs cannot sue the defendants for dishonest assistance given to the directors in breach of their fiduciary duties to the company. I have not held that other plaintiffs with standing, such as liquidators, cannot sue on that cause of action. And I have not held that the defendants cannot be sued for giving dishonest assistance to the companies if the companies owed any fiduciary duties to the plaintiffs. The plaintiffs have not pleaded those causes of action and they are not within the scope of my decision.

[48] I make an order striking out the second cause of action based on dishonest assistance, only on the ground that the plaintiffs are not the correct people to bring a claim for dishonest assistance.

[49] In my first decision I made a declaration on the summary judgment application that the claim for breach of the Fair Trading Act could not succeed. Although I have decided this case only on the question of standing, I also give the defendants summary judgment on the dishonest assistance cause of action.

[50] Memoranda for costs are to be filed. It up to the defendants when they file their submissions, but it should be no later than one month from today. The plaintiffs are to file and serve their submissions on costs within two weeks of the defendants’ submissions. I will then decide costs on the papers.

..........................................

Associate Judge R M Bell