Capital + Merchant Finance Limited (in receivership and liquidation) v Perpetual Trust Limited [2016] NZHC 2512 (20 October 2016)

Last Updated: 29 November 2016

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-004602

CIV-2012404-007534 [2016] NZHC 2512

BETWEEN	CAPITAL + MERCHANT FINANCE LIMITED (IN RECEIVERSHIP AND LIQUIDATION) Plaintiff
AND	PERPETUAL TRUST LIMITED Defendant STACE HAMMOND Third Party

Hearing:	24 August 2016
Appearances:	Justin Smith QC and Daniel Nilsson for the Plaintiff Campbell Walker and Thomas Joseph for the Defendant
Judgment:	20 October 2016

_{JUDGMENT OF MOORE J}

This judgment was delivered by me on 20 October 2016 at 4:00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

_Date:

CAPITAL + MERCHANT FINANCE LIMITED (IN RECEIVERSHIP AND LIQUIDATION) v PERPETUAL TRUST LIMITED & ANOR [2016] NZHC 2512 [20 October 2016]

Introduction

[1] This is an interlocutory application by Capital + Merchant Finance Limited (“the plaintiff”) seeking leave to file a second amended statement of claim along with supplementary and amended briefs of evidence. The trial is currently scheduled to begin on 14 November 2016.

[2] This particular matter has a long history and it would serve little purpose for me to rehash the factual background in any great detail. The following brief description will suffice.

Background

[3] The plaintiff is a now defunct finance company. It frequently engaged in the practice of accepting deposits and/or borrowing money from depositors and stockholders secured by the issuing of debenture stock.

[4] In 2002 it entered into an ongoing Debenture Trust Deed (“the Deed”) with Perpetual Trust Limited (“the defendant”) pursuant to which the defendant was appointed trustee of the debenture stock, and tasked with overseeing and future issuances. This Deed was varied in 2006 but the underlying obligations remained the same.

[5] Between 2002 and 2007, the plaintiff made eight separate offers of debenture stock to the public through registered prospectuses. As will become clear, the prospectuses offered in 2006 and 2007 are central to these proceedings.

[6] It also entered into a number of separate financial arrangements over which the defendant also had oversight. These are described at length in the Second Amended Statement of Claim the plaintiff seeks leave to file.

[7] In 2006, the plaintiff entered into a series of conduit financing arrangements with Diversified Mortgage Trust No 1 Limited (“DMT”), a company that issued secured notes in a unit trust and invested the proceeds in authorised investments, and Praesidium Asset Management Limited (“PAM”), the manager of the unit trust

concerned. These conduit financing arrangements involved a number of interparty agreements, including:

(a) a deed relating to the acquisition and administration of loans; (b) a loan participation deed;

(c) a subscription deed;

(d) an income swap agreement.

(together referred to as “the DMT conduit arrangements”).

[8] The details of these agreements are not significant in the context of this claim. It is important to note, however, that the loans arising on the part of the plaintiff were disposed of between October 2006 and October 2007.

[9] In the latter part of 2006, the plaintiff also entered into a series of financing arrangements with Fortress. These included agreements in the following form:

(a) a term loan facility agreement between the plaintiff and Fortress;

(b) a loan asset acquisition facility agreement between Capital Merchants Investments Limited (“CMI”), a related company of the plaintiff’s, and Fortress;

(c) a deed of covenant and subordination between Fortress, the plaintiff and CMI; and

(d) a management and administration deed between the plaintiff and CMI

and Fortress.

(together referred to as “the Fortress arrangements”).

[10] Again, there is no need to delve into the detail of these agreements. Between December 2006 and September 2007, the plaintiff discharged its loans in relation to these agreements as well.

[11] The plaintiff went into receivership in 23 November 2007 and into liquidation on 15 December 2009.

[12] In May 2012, it sent a draft statement of claim to the defendant, and formally initiated these proceedings on 8 August 2012.

The first amended statement of claim

[13] Following a series of delays, an amended statement of claim was filed on 21

February 2014. At the heart of this were two causes of action; breach of contract and negligence. It was alleged that the defendant owed the plaintiff duties pursuant to the Deed, which operated as a contract between the parties, as well as a general duty of care. More specifically, duties were owed:

(a) to exercise reasonable diligence to ascertain whether there had been a breach of the trust deed or of the offer of debt securities and, except where there was no material prejudice, do all things in the defendant’s power to cause any breach to be remedied;

(b) to exercise reasonable diligence to ascertain whether the assets of the borrowing group were likely to be sufficient to discharge the amounts of the debt securities as they became due;

(c) to exercise reasonable care and skill;

(d) not to permit the plaintiff to issue stock in breach of the Deed; and

(e) not to make a statement under cl 13(3) of the Second Schedule to the Securities Regulations 1983 (statement by trustee in registered prospectus that an offer complies with relevant provisions of trust deed) unless reasonably of the opinion that the offer complied.

[14] I accept that the summary of the alleged breaches of these duties set out at [6] of the defendant’s submissions is a fair and accurate reflection of the case for the plaintiffs as set out in the amended statement of claim. I am grateful to Mr Walker and I largely adopt it here.

[15] The allegations were that the defendant breached its duties in relation to the prospectuses issued in 2006 and 2007 as well in disposing of the loans arising from the DMT conduit and Fortress arrangements in that:

(a) The defendant knew or ought to have known that the DMT and Fortress arrangements did not comply with the trust deed or the terms of offer of debenture stock under the relevant prospectuses because:

(i) they involved the disposal of loans other than for cash equal to the amount of principal and interest outstanding;

(ii) they involved the investment of principal of Capital Secured Stock in investments other than loans made by the plaintiff secured by a mortgage; and

(iii) the disposal would remove or likely remove the benefit of mortgage insurance;

(b) The defendant knew or ought to have known that the 2006 and 2007 prospectuses did not comply with the Deed, because they contemplated that the plaintiff would dispose of insured mortgages pursuant to the DMT and Fortress arrangements.

(c) The defendant also:

(i) failed to ascertain that the DMT and Fortress arrangements gave rise to breaches of the Deed;

(ii) failed to cause any such breach to be remedied or to take other steps under the Deed;

(iii) failed to require the plaintiff to cease issuing stock under the

Deed while it remained in breach;

(iv) failed to exercise reasonable skill and care;

(v) failed to do all things it was empowered to do under the trust deed to prevent CMF issuing the 2006 and 2007 prospectuses; and

(vi) wrongly provided a clause 13(3) statement.

(d) If the defendant had fulfilled its duties, the plaintiff would not have entered into the DMT and Fortress arrangements, the mortgage insurance in respect of the loans transferred pursuant to those arrangements would have remained in place, and the plaintiff would have been placed in receivership or moratorium and ceased to trade on or about 31 December 2006.

(e) Through the defendant’s breaches, the plaintiff has incurred loss in the amount of $93,193,412 (or $45,534,823), being the difference between CMF’s financial position had it ceased to trade on around 31

December 2006 and CMF’s financial position having actually ceased

trading on 29 November 2007.

The plaintiff ’s proposed amendments

[16] In its proposed second amended statement of claim, filed on 15 July 2016, the plaintiff added the following passages:

“Fortress Conduit Arrangements

[56]

...

Particulars

(a) By late September or early October 2006, following the establishment of the DMT Conduit Arrangement, Perpetual knew or ought reasonably to have known that:

(i) CMF was in needs of funds.

(ii) CMF was likely to face significant liability under the DMT Conduit Arrangement to underwrite a shortfall in the $27m capital raising effort expiring on 16 November 2006 under that arrangement.

(iii) CMF was unable to obtain funding from regular lenders, having to resort to seeking funding from Fortress – a lender of last resort.

(iv) CMF was negotiating the Prior Charge Facility, which would result in Fortress having priority over debenture holders in the sum of $18 million.

(v) CMF did not have a firm plan to maintain liquidity in the longer term.

(b) Despite the circumstances set out at (a) above, Perpetual negligently failed to, from late September 2006, take proper steps to procure an independent review of CMF’s financial position and the quality of its loan book.

...

_{Causation and loss}

[59]

...

(c) an independent review of CMF’s financial position (including the quality of its loan book) and its ability or likely ability to meet its obligations to debenture holders as they fell due would have taken place in October and early November 2006.

...

(e) CMF would have been placed in receivership or moratorium and ceased to trade on or about 15 November 2006;

...

(d) As a result of not ceasing to trade on or about 15 November 2006, CMF suffered a reduction in its net financial position of

$94,182,533, being the difference between:

(i) CMF’s net financial position in receivership on about November 2007, including recoveries made in that receivership; and

(ii) CMFs net financial position had it not entered into the DMT and Fortress Conduit Arrangements and entered into receivership or moratorium on or about 15 November 2006.”

[17] The plaintiff accepts that the close of pleadings date has already passed. However, it seeks leave to amend its pleadings by adding the passages above pursuant to r 7.77 of the High Court rules.¹ It argues that it is in the interest of justice to do so, as the passages simply add particulars to the causes of action which have already been pleaded and that no prejudice would be suffered by allowing the pleadings to be amended.

[18] The defendant submits that the additional passage constitutes a fresh cause of action which is time barred, not merely the addition of particular to the existing causes of action. It argues that leave must therefore be declined pursuant to r

7.7(2)(a).

[19] This is the central issue I must determine.

The relevant law

[20] The applicable law in this case is uncontroversial. It centres around rule 7.77 of the High Court Rules, which relevantly provides:

“(1) A party may before trial file an amended pleading and serve a copy of it on the other party or parties.

(2) An amended pleading may introduce, as an alternative or otherwise,—

(a) relief in respect of a fresh cause of action, which is not statute barred; or

(b) a fresh ground of defence.

(3) An amended pleading may introduce a fresh cause of action whether or not that cause of action has arisen since the filing of the statement of claim.

(4) If a cause of action has arisen since the filing of the statement of claim, it may be added only by leave of the court. If leave is granted, the amended pleading must be treated, for the purposes of the law of limitation

1. The proposed second amended statement of claim also contains a number of smaller amendments, none of which are important for this purposes of this application.

defences, as having been filed on the date of the filing of the application for leave to introduce that cause of action.

(5) Subclause (4) overrides subclause (1).”

[21] Having arisen after the close of the pleadings date, the leave of the Court is required for the plaintiff to file the second amended statement of claim regardless of how the changes contained within it are interpreted.²

[22] If, however, this Court agrees with the defendant’s submission that the changes in the second amended statement of claim constitute a fresh cause of action, it is accepted that this cause of action would be statute barred by s 4 of the Limitation Act 1950 given that it had to have accrued by late 2007 when the plaintiff was put into receivership. The six year time limit would therefore have expired.

[23] The test for determining whether a cause of action is fresh is set out in Transpower New Zealand Ltd v Todd Energy Ltd.³ To this end it is useful to set out the comments of the Court of Appeal in full:

“(a) A cause of action is a factual situation the existence of which entitles one person to obtain a legal remedy against another (Letang v Cooper [1964] EWCA Civ 5; [1965] 1 QB 232 at 242— 243 (CA) per Diplock LJ);

(b) Only material facts are taken into account and the selection of those facts “is made at the highest level of abstraction” (Paragon Finance plc v D B Thakerar & Co (a firm) [1998] EWCA Civ 1249; [1999] 1 All ER 400 at 405(CA) per Millett LJ);

(c) The test of whether an amended pleading is “fresh” is whether it is

something “essentially different” (Chilcott v Goss [1995] 1 NZLR

263 at 273(CA) citing Smith v Wilkins & Davies Construction Co

Ltd [1958] NZLR 958 at 961(SC) per McCarthy J). Whether there is such a change is a question of degree. The change in character could be brought about by alterations in matters of law, or of fact, or both; and

(d) A plaintiff will not be permitted, after the period of limitations has run, to set up a new case “varying so substantially” from the previous pleadings that it would involve investigation of factual or legal matters, or both, “different from what have already been raised and of which no fair warning has been given” (Chilcott at 273 noting that this test from Harris v Raggatt [1965] VicRp 100; [1965] VR 779 at 785(SC) per Sholl J was adopted in Gabites v Australasian T & G Mutual Life Assurance Society Ltd [1968] NZLR 1145 at 1151(CA)).”

² _{Rule 7.7 of the High Court Rules.}

³ Transpower New Zealand Ltd v Todd Energy Ltd [2007] NZCA 302.

[24] The Court elaborated upon these comments in Commerce Commission v Visy Board.⁴ It stated that for an amendment to constitute a new cause of action there had to be a change in the legal basis for the claim. Although this could, in theory, be brought about by the addition of new facts, this would only be the case if the new facts are so fundamental as to change the essence of the case against the defendant. If the underlying legal claims are the same, and are simply bolstered by the addition

or substitution of a new fact that is unlikely to amount to a new cause of action.

[25] What I take from these observations is that the correct test is whether the amended claim is “essentially different” from what has already been pleaded. Quintessentially this is a question of fact and degree and there is unlikely to be a bright dividing line.

Analysis

[26] I have considered the cases cited by both parties in considering the appropriate conclusion and I thank counsel for providing them.⁵ I consider that two are particularly instructive.

[27] In Collins v Hertfordshire County Council, an action was brought against a hospital alleging that it caused the death of a patient through negligent mismanagement. The original pleading claimed that the hospital was negligent in three different ways: in administering its drug administration system and in not supervising a junior surgeon and visiting surgeon in the procurement and administration of drugs. In the course of the trial, the plaintiff sought leave to include a fourth allegation that the hospital’s pharmacist had also been negligent in approving the drug that caused the patient’s death. An objection was raised on

_{limitation grounds.}

⁴ _{Commerce Commission v Visy Board [2012] NZCA 383 at [146] to [147].}

⁵ Collins v Hertfordshire County Council [1947] 1 KB 598; Smith v Wilkins and Davies Construction Company Ltd [1958] NZLR 959; Attorney-General v Carter [2003] NZCA 48; [2003] 2 NZLR 160 (CA); Blackmount Forests Ltd & Ors v Trinity Foundation (Services No 2) Ltd & Anor HC Auckland, 9 June 2008; Smith v Singleton [2015] NZHC 1643; Body Corporate 89408 v MacRitchie [2016] NZHC 844.

[28] Hilbery J reached the following conclusion:⁶

“In this case the cause of action relied upon by the plaintiff and which is upon the writ is that the death of the plaintiff’s husband was the result of the negligence of the defendants in and about the conduct of their hospital. That is the negligence alleged – negligence in and about the conduct of the hospital. In the statement of claim, what is elaborated is by way of particulars of that negligence. As particulars of the negligence, the persons for whom it is alleged that the hospital is vicariously responsible are named. It is said, first, with regard to Mr Hunt, and secondly, with regard to Miss Knight, and in addition, it is alleged that there was a defective and negligent system. But the allegations of Miss Knight’s negligence and Mr Hunt’s negligence are only particulars of the cause of action, which is negligence in the management and control of the hospital. The alleged negligence of the pharmacist was not a new cause of action; it was a new particular: that is all.”

[29] As Mr Smith QC points out, this rationale was adopted in New Zealand in Smith v Wilkins & Davies Construction Co Ltd, which involved a claim for negligence in failing to provide a safe system of work resulting in injury to the plaintiff. Several days prior to trial, the plaintiff sought to file an amended statement of claim by replacing the majority of its factual obligations as to how the system of work was deficient. In response, McCarthy J commented:⁷

“The claim against the defendant here is founded on breach of the duty thrown on an employer to take reasonable care not to subject his employees to unnecessary risk. That general duty has subdivisions, one of which is the duty to provide, in appropriate cases, a safe system of work... Here under, para. 4(a), a failure in the duty to provide a safe system is alleged. That failure is detailed in a number of sub-allegations. These subdivisions have now been altered, but the main character of the substantial allegation remains. The claim is still one founded on the duty of an employer to take proper care for the safety of his servants and it still embodies, as the branch of that particular duty relied on, the assertion that there was a failure to provide a safe system of work. It is to be observed that no alteration has been made in the facts in para. 3. There is admittedly an alteration in the facts behind the sub-allegations in para. 4. But that, as I see it, amounts to no more than an alteration in particulars and circumstances.”

[30] I consider that the proposed changes in this case fall squarely within the same category of alterations. The claim in this case is founded upon the duties owed, through the Deed and in tort, by the defendant to exercise reasonable care and skill in overseeing the plaintiff’s affairs and ensuring it remained compliant with the Deed

_{and the allegation that the defendant failed to meet its duties.}

⁶ _{At 621.}

⁷ At 961.

[31] This remains the case with the proposed second amended statement of claim. As in Collins and Smith what has been added is a new allegation as to the manner in which the defendant failed to exercise reasonable care and skill; in effect a new “sub- allegation” or particular. Now it is simply alleged that in addition to the previous breaches the defendant failed to procure an independent review of the plaintiff’s liquidity where a reasonably skilled trustee would have done so.

[32] The factual background which underpins the case remains the same. I also accept Mr Smiths’ submission that the head of loss remains the same. It is still the loss of a chance of greater recovery as a result of earlier cessation of business and appointment of receivers. All that has changed, and even then only slightly, is the alleged time at which the plaintiff would have ceased to trade.

[33] While I accept Mr Walker’s submission that the causation issues have shifted somewhat with the addition of the new particulars, I am not persuaded that this makes the case against the defendant essentially different from what was pleaded before.

[34] I thus consider that the changes contained in the second amended pleading do not amount to a fresh cause of action. Accordingly there is no question of it being time or statute barred.

[35] I consider that it is in the interests of justice for leave to be granted for the second amended statement of claim to be filed past the close of pleadings date. This would allow the real controversy between the parties to be put before the Court. The defendant does not argue it will encounter significant prejudice and I accept that the additional evidence arising from these claims will be entirely in the form of expert briefs. I also grant the plaintiffs leave to file the supplementary and amended briefs of evidence pursuant to r 9.8 of the High Court Rules.

Result

[36] The application for leave is granted.

Costs

[37] At first glance, I see merit in the defendant’s argument that the plaintiff should be ordered to pay the wasted costs it has incurred in preparing and serving briefs in response to the case as it was pleaded in the first amended statement of claim; to whatever extent this is now redundant. However, I accept the plaintiff’s argument that this issue is best determined following trial when the full extent of this

_{redundancy will be clear.}

Moore J

Solicitors/Counsel: LeeSalmonLong, Auckland Gilbert Walker, Auckland Mr Smith QC, Wellington Mr Walker, Auckland