McCullagh v Robt. Jones Holdings Limited [2016] NZHC 263 (24 February 2016)

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UNDER	Sections 292, 294, 295 and 296 of the Companies Act 1993
IN THE MATTER OF	the liquidation of NORTHERN CREST INVESTMENTS LIMITED (in liquidation)
BETWEEN	ANTHONY JOHN MCCULLAGH AND STEPHEN MARK LAWRENCE Applicants
AND	ROBT. JONES HOLDINGS LIMITED Respondent

Hearing:	1 December 2015
Counsel:	B P Keene QC & L Van for Applicant D Chesterman for Respondent
_Judgment:	_{24 February 2016}

MCCULLAGH & LAWRENCE v ROBT. JONES HOLDINGS LTD [2016] NZHC 263 [24 February 2016]

[1] The liquidators of Northern Crest Investments Ltd (in liquidation) (Northern Crest) are bringing an originating application under part 19 of the High Court Rules to set aside payments made by that company to the respondent Robert Jones Holdings Ltd (RJH) for being voidable transactions under s 292 of the Companies Act 1993 (the Act). RJH opposes this application.

[2] RJH has applied against the liquidators for particular discovery and for the setting aside of privilege claims. Those applications were dismissed by Associate Judge Bell.¹RJH has filed a High Court review of the Associate Judge’s decision.

[3] Before this Court RJH has sought to amend its notice of opposition to the originating application brought by the liquidators and for leave to adduce further evidence in support of its application for High Court review of Associate Judge Bell’s decision. The liquidators oppose those interlocutory applications.

[4] The issues for the Court to determine are: (a) whether it has jurisdiction to permit amendment of the notice of opposition, and if it does whether to grant such permission; and (b) whether leave should be granted to RJH to adduce further evidence in its High Court review.

[5] The liquidators argue that mandatory requirements imposed by s 294(4) of the Act preclude this Court from allowing any amendment of RJH’s notice of opposition.

[6] Section 294(4) requires full particulars to be set out in a creditor’s notice of objection which must be served within 20 working days after receipt of a liquidator’s notice to set aside a payment to a creditor. Once that period expires a creditor is not entitled to raise fresh grounds of objection. Here the liquidators rely on Richelieu Investments Ltd v Monk Trust Investments Ltd²where Master Faire considered an

_{application for leave by the liquidator to amend a notice issued under
the equivalent}

²Richelieu Investments Ltd v Monk Trust Investments Ltd (2004) 9 NZCLC 263, 526.

provision to s 294(4) under the earlier legislation.³Under the earlier statutory regime a recipient of a liquidator’s notice was required to apply to the Court for an order that the transactions not be set aside. In Richelieu the liquidator’s original notices to set aside did not refer to a term loan contract under which the company in liquidation had guaranteed a loan. The liquidator sought an amendment to the original notice to include this transaction. Master Faire refused to allow the amendment, finding that: (a) the liquidator’s notice to set aside was not a proceeding in terms of the High Court Rules; and (b) the notice did not come within the definition of a pleading for the purposes of the Companies Act 1955 and, therefore, there was no jurisdiction to amend the notice.

[7] The liquidators contend in the present case that this Court should adopt and apply the reasoning in Richelieu to RJH’s application to amend its notice of opposition. Accordingly the liquidators argue that RJH should not be entitled to rely on High Court Rules 1.9 and 7.77 to expand the scope of its notice of opposition.

[8] On the other hand, RJH contends that the amendment of its notice of opposition is allowable under rr 1.9 and 7.77 of the High Court Rules, as the amendments are necessary to determine the real controversy and do not cause the liquidators injury or prejudice, particularly as no trial date has been set.

[9] The proposed amendments are set out in a draft amended notice of opposition dated 24 November 2015 which RJH has provided to the Court (the draft notice). RJH argues that under the Act a liquidator’s procedure for setting aside a transaction that is voidable commences with the issue of a notice under s 294(1). Objection to that notice must be served on the liquidator within 20 working days.⁴If no objection

is filed, the transaction is automatically set aside.⁵If an objection is served then

under s 294(5) the liquidator may apply to the Court to set the objection aside, which is the case here.

[10] RJH contends that once the liquidator makes application to this Court the procedure is no longer governed by the Act, but is instead governed by the High

Court Rules, Part 19 which governs originating applications. Rule 19.2(c) requires any application under s 294(5) of the Act to be by way of an originating application. Subpart (2) of Part 19 governs the procedure for originating applications. Rule 19.10 applies specific rules for interlocutory applications to originating applications. The applicable rules are primarily taken from subpart (2) of Part 7 of the Rules. The applicable rules include r 7.19 (rule as to contents, form and filing of interlocutory applications) and r 7.24 (notices of opposition to interlocutory applications).

[11] Rule 19.10.3 excludes certain rules governing interlocutory applications from applying to originating applications. These are also taken from subpart (2) of Part 7.

[12] RJH acknowledges that sub-part (2) of Part 19 makes no reference to the traditional rules for amending applications and pleadings before the Court, being r

1.9 (amendment of defects and errors) and r 7.77 (filing of amended pleading). RJH submits, therefore, that those rules are neither specifically included not excluded from application to originating applications. RJH goes on to submit that that r 1.93 and r 7.77 must be seen to apply to allow amendment of a notice of opposition to an originating application. In this regard RJH relies on the definition at r 1.3 of “interlocutory application” which is “ ... an application filed in accordance with r

7.19 or r 7.41.” An originating application is filed under r 7.19 and is, therefore, by definition an interlocutory application. RJH refers to the commentary within Sim’s Court Practice on r 1.3 supporting this interpretation as the commentary describes an originating application as a “type of pleading” and as “an interlocutory application”.⁶

[13] RJH argues that two further rules justify the application of rr 1.9 and 7.77 to the amendment of its notice of opposition. First, r 1.4 (application) which confirms that the practice and procedure of the Court in all civil proceedings and interlocutory applications are regulated by the rules. Secondly, r 1.6 (cases not provided for), which provides that a Court must dispose of a case as nearly as may be practicable in accordance with the provisions of the rules effecting any similar case.

[14] RJH argues that under r 1.9 the Court has a very wide discretion to amend. All amendments necessary to determine the real controversy should be made unless

the party applying is acting in bad faith or the amendment would cause injury or prejudice to the opposite party which could not be compensated by costs or otherwise.⁷

[15] RJH further argues that pre-trial amendments are generally dealt with under r

7.77. It acknowledges that whether r 7.77 applies to interlocutory applications is not clear, but notes that the rule does apply to amendments to “pleadings”. RJH then refers to the definition of pleading at r 1.3 as including a statement of claim, statement of defence, reply and counterclaim. RJH submits the definition in r 1.3 is not restricted, given the use of the word “including”. Further, that Sim’s Court

Practice describes an originating application as a “type of pleading”⁸which indicates

a notice of opposition might be covered by r 7.77. RJH also submits that r 7.77 falls under Part 7, which applies to interlocutory applications.

[16] RJH also submits that whether r 7.7 applies or not is of no consequence, since r 1.9 clearly does apply. RJH submits that at the least the Court should have regard to r 7.77 to inform any decision it makes under r 1.9, as the principles applicable to an amendment under r 7.77 are identical to those under r 1.9.⁹

[17] In terms of the merits of the application to amend its notice of opposition RJH submits that as the liquidators filed one of their substantive affidavits sometime after the filing of the originating application and following provision of discovery, it would be unfair to RJH to deprive it of the opportunity to amend its notice of opposition following consideration of the relevant evidence which then became available to it.

[18] RJH submits the amendments are necessary to ensure the determination of the real controversy, as they provide further particulars in relation to grounds already existing within the original notice. Thus, the particulars will assist the Court to focus on and to understand the issues between the parties, as well as also assisting the

[19] RJH submits that there is no prejudice or injury caused to the liquidators by the amendments. First, no trial date is set, which means there is ample time for the liquidators to address any new issues arising in the notice of opposition. Further, RJH submits that it is unlikely any new matters will arise as the amendments merely “clean up and clarify the existing notice of opposition”. In this regard RJH submits that it could possibly have proceeded without amending the notice but it has done so to avoid any complaint from the Court or the liquidators about the extent of the particulars given in the original notice. It submits that it is not for the liquidators to oppose its decision to include further particulars of its grounds of opposition.

[20] I have carefully considered the draft notice. I accept RJH’s submission that the draft notice provides fuller and better particulars of RJH’s grounds of opposition to the liquidators’ originating application. However, even if it went further than that I would not consider that the proposed amendments should be refused.

[21] I am satisfied that once the liquidators engage Court process in accordance with s 294(5) of the Act by filing an originating application in this Court, all the procedural requirements and powers of this Court come into play. This is to be seen from the fact the nature of the application to be brought under s 294(5) of the Act is specified by r 19.2(c) of the High Court Rules rather than in the Act itself, which prescribes that the application be made by way of an originating application.

[22] I see no reason why an originating application made in reliance on s 294(5)

of the Act should be treated any differently from other originating applications.

[23] Whilst the High Court Rules make no express provision for amending either an originating application or the notice of opposition that is filed in response to it, I see no basis for finding that there is no jurisdiction to do so.

[24] The form of a notice of opposition to an originating application is analogous to that of a statement of defence in an ordinary proceeding in the sense that the notice of opposition is the document that frames the basis of the case for an opposing party. Rule 1.9 and r 7.77 each recognise that if a Court is to be able to determine

the real controversy between the parties, amendment to the document that frames either the case against one party or the opposition to that case is at times essential. There is no policy reason for treating proceedings brought by way or originating application differently from ordinary proceedings in this regard.

[25] It would be a nonsense if neither an applicant in an originating application nor a respondent filing a notice of opposition to that application could not later make amendments to their documents simply because the rules make no express provision for that to be done. Rule 1.6 is relevant here given the similarity between a notice of opposition and a statement of defence as outlined above.

[26] In the present case, there can be no prejudice to the liquidators here if the amendments are made as no trial date has been set. Furthermore, it is only reasonable that RJH, once in receipt of additional evidence from the liquidators and having the benefit of discovery from the liquidators, should be permitted to amend the notice of opposition now that it is better informed. This is a common occurrence in litigation.

[27] I am satisfied that RJH has made out a strong case for being permitted to amend its notice of opposition in accordance with the draft notice. I do not accept the liquidators’ argument that s 294(4) of the Act and the restriction on the amendment of notices issued under the Act¹⁰can impact on a respondent in proceedings commenced in this Court making what are reasonable, and from its perspective necessary amendments to the document that frames its opposition to the liquidators’ case.

[28] RJH should therefore file and serve its amended notice of opposition within

Adducing further evidence for High Court review of Associate Judge’s decision

[29] The application before the Associate Judge was for further and better discovery and to determine certain claims for privilege and therefore non-disclosure of discovered material.

[30] RJH contended that the further and better discovery was relevant to its defence against having the subject payments set aside under s 292 of the Act. The Associate Judge decided that the defence lacked merit and therefore he refused to order further and better discovery.

[31] RJH asserts that it was caught by surprise by the Associate Judge proceeding to assess and determine the merits of its defence as part of the application for discovery. RJH maintains that the parties were agreed among themselves that RJH would file no evidence until after discovery was completed. Accordingly, at the time of the application for further and better discovery RJH had not filed evidence to support its defence. This was in contrast to the liquidators who had filed evidence in support of their s 292 application.

[32] Faced now with the Associate Judge’s finding that the defence lacked merit, RJH wants to adduce new evidence that demonstrates the strength of its defence. The new evidence is given in the affidavit of Greg Loveridge affirmed on 6 August

[33] The liquidators contend that it is not in the interests of justice that the new evidence of RJH be admitted. They submit that generally review applications are carried out on the basis of the material before the Court and that the proposed new evidence has not met the tests of relevance or cogency. However, no supporting authorities are referred to.

[34] The liquidators also contend that RJH has not challenged certain key paragraphs of the judgment of the Associate Judge and submits therefore that his finding that the further discovery was not relevant and was unnecessary remains sound. They further contend that the proposed new evidence is fanciful as the

inferences that RJH would have the Court draw from this evidence are speculative and no more than supposition.

[35] This review is governed by r 2.3 of the High Court Rules. That rule applies in respect of any order or decision that is made by an Associate Judge in chambers. Rule 7.34(1) provides that "[a]n interlocutory application for which a hearing is required must be heard in chambers unless a Judge otherwise directs." Therefore unless Judge Bell made any specific direction to the contrary, his decision on the interlocutory application is deemed to have been made in chambers.

(4) If the order or decision being reviewed was made following a defended hearing and is supported by documented reasons,—

(b) the Judge may, if he or she thinks it is in the interests of justice, rehear the whole or part of the evidence or receive further evidence.

[37] In Perriam v Wilkes Woolford J described the approach under r 2.3(4) to a review following a defended hearing as being “essentially appellate.”¹¹However, this was said in the context of considering the approach to a review of a decision of an Associate Judge striking out a statement of claim. Woolford J was not considering the test to be applied for the admission of further evidence.

[38] In the present case both RJH and the liquidators have referred to the threshold tests of relevance and cogency of the proposed further evidence, which are the tests that are applied in applications to adduce further evidence on appeal. However, the rule for the admission of evidence on appeal is quite different from r 2.3(4).

(1) Without leave, a party to an appeal may adduce further evidence on a question of fact if the evidence is necessary to determine an interlocutory application that relates to the appeal.

(2) In all other cases, a party to an appeal may adduce further evidence only with the leave of the court.

(3) The court may grant leave only if there are special reasons for hearing the evidence. An example of a special reason is that the evidence relates to matters that have arisen after the date of the decision appealed against and that are or may be relevant to the determination of the appeal.

(4) Further evidence under this rule must be given by affidavit, unless the court otherwise directs.

[40] When r 2.3(4) is contrasted with r 20.16 it is clear to me that the threshold requirement for the admission of further evidence in a review under r 2.3(4) is lower than is the case under r 20.16. For this reason I consider that whilst relevance and cogency are helpful factors the level of relevance and cogency that must be satisfied when the consideration is under r 2.3(4) is lower than is the case with appeals. Thus the relevant case-law under r 20.16 and the former r 716 should not automatically be applied when to a review under r 2.3(4). This approach is consistent with that taken

[41] In the present case RJH complains that the Associate Judge assessed the merits of its defence at a time when it had no opportunity to present the evidence that it would rely upon to support that defence. Whilst the Associate Judge said he would approach the application making assumptions as to the defence in RJH’s favour there is extensive discussion in the judgment about the liquidators’ evidence and the factual submissions that they make in support of the payments to RJH being voidable under s 292 of the Act. It appears, therefore, that the Associate Judge may have been influenced by the liquidators’ evidence. Had RJH been given the opportunity to put the evidence it then had available to it in support of its defence so as to show why it needed the further discovery the Associate Judge may not have been so influenced by the liquidators’ factual arguments.

[42] When a decision-maker can have regard to only one party’s factual evidence, and when through no fault of the opposing party it has no evidence before the decision-maker to counter that evidence, the procedural fairness of the decision comes into doubt. If RJH is obliged to proceed with its review of the Associate Judge’s decision without the benefit of the evidence it relies upon to support its defence the potential for compounding the procedural unfairness of an evidentially unbalanced hearing is real. For this reason I consider that this is a case where it is in the interests of justice for the further evidence, which RJH seeks to adduce, to be admitted at the review hearing.

[45] As the successful party RJH is entitled to costs. I see no basis for departing from the general principle that costs follow the event. If the parties cannot agree on the quantum of costs they should file costs memoranda within 15 working days of the delivery of this judgment.

High Court of New Zealand Decisions

McCullagh v Robt. Jones Holdings Limited [2016] NZHC 263 (24 February 2016)