LDC Finance Limited v Miller [2016] NZHC 567 (5 April 2016)

	Home \| Databases \| WorldLII \| Search \| Feedback High Court of New Zealand Decisions

BETWEEN

LDC FINANCE LIMITED

First Plaintiff

JANET VERENA WILSON, KAYE DENISE WHALAN, ANGUS IAIN MCNEILL and GRETEL MCNEILL as trustees of the McNeill Family Trust Second Plaintiffs

JANET VERENA WILSON, KAYE DENISE WHALAN and ORS

Third Plaintiffs

ANGUS IAIN MCNEILL and GRETA MCNEIL as trustees of the McNeill

Family Trust, FAWDAN SUBDIVISIONS LIMITED and ROLAND LLOYD FAWCETT, JULIE BETHANY MORTON and PAULETTE FAWCETT as trustees of the Fawcett Family Trust

Fourth Plaintiffs

ANGUS IAIN MCNEILL and GRETEL MCNEILL as trustees of the McNeill Family Trust

Fifth Plaintiffs

IAIN BRUCE SHEPHARD and HEATH LESLIE GAIR as interim liquidators of LDC Finance Limited (In Receivership and Interim Liquidation)

Sixth Plaintiffs

AND

DAVID GORDON MILLER, KEVIN ELLIOTT, CHRISTOPHER JOHN HARDIMAN AND JOHN CHARLES JANETTO

First Defendants

CARRAN MILLER STRAWBRIDGE LIMITED

_{Second Defendant}

Hearing:	2 March 2016
Counsel:	H B Rennie QC and J D Haig for Plaintiffs T H A Spear for First Defendants M C Smith and O L Ostrovsky for Third Defendant O J Meech and E S McCann for Fourth Defendant No appearance for Second Defendant
_Judgment:	_{5 April 2016}

[1] These proceedings have been set down for a six week trial in Nelson, commencing on 4 July 2016. In essence, they involve representative claims by over

800 investors for losses they have incurred as a result of the failure of LDC Finance

11 December 2015 he determined an application by the third defendant for directions as to the mode of trial.²He directed that there was to be a first trial of all but one of the causes of action pleaded in what was then the plaintiffs’ fourth amended statement of claim.³He left open the question of whether there would need to be a second trial on quantum but noted that it appeared to be unlikely.

[3] The first, third and fourth defendants now seek a review of that decision. The matter is urgent because of the impending trial.

(a) LDC itself and the company’s liquidators (first and sixth plaintiffs respectively);

(i) invested in new secured debenture stock and/or unsecured deposits (term deposits or on-call deposits); and/or

(ii) renewed existing investments in secured debenture stock and/or unsecured term deposits; and/or

³Since Judge Matthews’ decision a fifth amended statement of claim has been filed. There are no material differences between that pleading and the fourth amended statement of claim that was before the learned Associate Judge.

⁴Principally because of limitation issues this class has not yet been approved. That is of no moment in relation to the present issues.

(i) invested in new secured debenture stock and/or unsecured deposits (term deposits or on-call deposits); and/or

(ii) renewed existing investments in secured debenture stock and/or unsecured term deposits; and/or

(i) invested in new secured debenture stock and/or unsecured deposits (term deposits or on-call deposits); and/or

(ii) renewed existing investments in secured debenture stock and/or unsecured term deposits; and/or

(e) The fifth plaintiffs, who have been approved to represent a group of persons who not only held investments and deposits with LDC (both secured and unsecured) but were also clients of the second defendant, Carran Miller Strawbridge Limited (Carran Miller), a firm of chartered accountants.

(a) the first defendants, who were the directors of LDC at material times (the directors). Messrs Miller, Elliott and Hardiman were also directors, consultants or employees of Carran Miller, the second defendant;

(b) the second defendant is, as I have said, the chartered accounting firm Carran Miller. The firm is now in liquidation and has taken no steps in the proceedings for some time now;

(c) the third defendant, who is Perpetual Trust Limited (Perpetual), is a trustee company and was the trustee for investors in LDC under the Securities Act 1978;⁵

(d) the fourth defendant, Sherwin Chan & Walshe (SCW) is a chartered accountancy partnership which, at material times, acted as auditor for LDC.

[6] The fifth amended statement of claim pleads 17 individual causes of action. It may conveniently be understood by reference to the following table:

COA	Paragraphs	Plaintiff(s)	Defendant(s)	Cause of action
1	[112]-[115]	6	1	Failure to keep proper accounting records
2	[116]-[124]	1-4 & 6	1	Breach of s 131
3	[125]-[132]	1-4 & 6	1	Breach of s 135
4	[133]-[137]	1-4 & 6	1	Breach of s 136
5	[138]-[145]	1-4 & 6	1	Breach of s 137
6	[146]-[150]	2-4	1	Breach of statutory duty
7	[151]-[160]	5	1&2⁶	Breach of fiduciary duties
8	[161]-[168]	1-5	2	Breach of duty of care
9	[169]-[175]	1	3	Breach of contract
10	[176]-[189]	1-4	3	Breach of duty of care
11	[190]-[203]	2-4	3	Breach of statutory duty
12	[204]-[214]	2-4	3	Breach of trust and equity
13	[215]-[236]	1	4	Breach of contract
14	[237]-[251]	1-4	4	Breach of duty of care
15	[252]-[268]	1-4	4	Negligent misstatement
16	[269]-[281]	1-4	4	Breach of statutory duty
17	[282]-[289]	2-4	3	Breach of statutory duties

⁵LDC operated under a trust deed and it is said that Perpetual was responsible for monitoring

[7] It is agreed that the seventh and 12^thcauses of action should (if necessary) be heard later.

[8] For reasons that will become apparent it is relevant to record at the outset the various pleadings of reliance. Reliance is pleaded specifically in relation to the 10^th,

[9] This cause of action is a breach of duty claim by the first to fourth plaintiffs against the third defendant (Perpetual, the trustee). The reliance pleading is:

187. LDC’s investors relied or were induced to rely on Perpetual at all material times to ensure LDC provided proper and timely disclosure of its financial position and/or breaches of the deed and to take appropriate action to bring an end to LDC’s business.

(b) All investors when completing investor application forms represented and confirmed they:

(i) applied having read LDC’s investment statements, which statements expressly or impliedly included that Perpetual would act in the investors’ interest and would inform them of all matters in respect of the deed that it considered was materially prejudicial to them; and

(iii) in respect of stockholders, that they were deemed to have notice of the provisions of the deed.

(c) Notes to the stock and deposit certificates required to be issued to all investors upon making an investment provided (pursuant to cl 2.11 of the deed): “The holder is entitled to the benefit of and is bound by, and is deemed to have notice of, all the provisions of the Trust Deed (including the conditions).”

188. Had LDC’s true financial position been disclosed and/or its breaches of the deed reported to the investors, LDC’s unsecured investors would have exercised their rights to withdraw their investments prior to its receivership and/or declined to renew existing investments.

[10] This cause of action is a claim by the first to fourth plaintiffs against the fourth defendant (SCW) for breach of a duty of care. The reliance pleading is as follows:

(d) Took new deposits from the public and rolled-over investments. (e) Made loans.

249. The investors relied upon and/or were induced to rely upon on SCW diligently exercising due care in discharging their duties including but not limited to taking due care in respect of audit certificates, the provisions of schedule 6 certificates and approval of financial statements.

(a) Letter dated 8 July 2004 (in respect of the investors who received that letter).

(b) Investment applications completed where all investors stated they had read and relied upon LDC’s investment statements and/or the trust deed and prospectus.

(d) Notes to the stock and deposit certificates required to be issued to all investors upon making an investment provided (pursuant to cl 2.11 of the deed): “The holder is entitled to the benefit of and is bound by, and is deemed to have notice of, all the provisions of the Trust Deed (including the conditions).”

250. The second, third and fourth plaintiffs investors in unsecured on-call deposits and those who reinvested in LDC were denied the ability to make informed decisions about their investment in LDC and consequently did not exercise rights to draw their money on call and left their money in LDC rather than withdrawing it.

251. As a result of SCW’s breach of its duty of care investors represented by the second, third and fourth defendants who determined not to withdraw their investments and renewed their investments have suffered losses in the sum of $13,003,801.66 ($7,566,565.06 principal and $5,437,236.60 accrued to 28 January 2014) ...

[11] This cause of action is a claim for negligent misstatement by the first to fourth plaintiffs against the fourth defendant (SCW). The relevant part is as follows:

260. The investors relied upon and/or were induced to rely upon SCW diligently exercising due care in discharging their duties including but not limited to taking due care in respect of audit certificates, the provision of schedule 6 certificates and approval of financial statements.

(a) Letter dated 8 July 2004 (in respect of the investors who received that letter).

(b) Investment applications completed where all investors stated they had read and relied upon LDC’s investment statements and/or the trust deed and prospectus.

261. If it is found the investors did not rely or sufficiently rely on SCW, in the alternative, Perpetual relied on SCW’s audit and sch 6 reports together with its answers to specific questions.

262. The claim against SCW for breaching its duties of care (as pleaded above) is held on trust by Perpetual for the benefit of the second – fourth plaintiffs.

263. Perpetual has at all material times neglected or declined to bring a claim against SCW for the second – fourth plaintiffs’ benefit and accordingly, the second – fourth defendants [sic] bring the claim as beneficial owners of the claims against SCW.

264. The second, third and fourth plaintiffs investors in unsecured on-call deposits and those who reinvested in LDC were denied the ability to make informed decisions about their investment in LDC and consequently did not exercise rights to draw their money on call and left their money in LDC rather than withdrawing it.

(a) the questions at issue in this proceeding be determined through the following mode of trial:

(i) the named plaintiffs’ claims (or the claims of an alternative group of lead plaintiffs, as approved by the Court) be tried in advance of the balance of the questions at issue in the proceeding; and

(ii) the balance of the questions at issue in the proceeding be tried in one or more subsequent trials, as required;

(b) the plaintiffs whose claims are tried as described in paragraph a.i. above be designated as representatives of those members of the represented group with whom their claims share common issues (such issues to be identified in a list to be compiled by counsel and approved by the Court), to the extent of that commonality, to the intent that the common issues will be res judicata between the defendants and all members of the represented group following the stage 1 judgment[.]

[13] The application was said to be made in reliance on rr 1.2, 4.24 and 10.15 of the High Court Rules and the decision in Houghton v Saunders, where a representative action resulted in a split trial of the kind sought here was approved.⁷

⁷Houghton v Saunders [2012] NZHC 1828, [2012] NZCCLR 31. All of the causes of action in Houghton arose from an allegedly misleading prospectus issued for the initial public offering for Feltex Carpets, and all required proof of reliance. The statements complained of did not, however, mislead as to Feltex’s solvency and disclosure of the true position would not have led to the withdrawal of the offer from the market. Rather, the plaintiffs said that had the misleading

[14] In the decision under review Judge Matthews elaborated upon the defendants’

[6] The principal premise underpinning the arguments on behalf of all the defendants is that although generally the plaintiffs may present their case on the basis they choose, they cannot set up a method of trial that prevents the defendants from ensuring that the Court considers the cases of individual investors, if there are issues which relate to those individual investors. They say that a case presented by representatives allows common issues to be tried, but not individual issues. The principle [sic] individual issues relate to reliance on the defendants. The evidence served for the plaintiffs does not deal with reliance by the plaintiffs on the defendants when they invested. The defendants are entitled, if they wish, to explore with individual plaintiffs the extent, if at all, that they in fact relied on the actions of the defendants.

[10] Their solution is to ask the Court to direct a trial of all the claims by nominated representatives, in full, with those representatives giving evidence, and being selected so that they include investors who are, for example, known to not have considered the company’s accounts or audit reports when deciding to invest. This way, they say, the Court could rule on the issue of what degree of reliance or type of reliance on these documents is sufficient for plaintiffs to succeed.

[11] All other issues relating to the actions of the defendants would be tried as well. Trial in this way would conclude the cases for the named plaintiffs, would create a res judicata in relation to the findings of the Court on other aspects of the case, and would provide guidance to the parties in relation to the outcome of the cases of the remaining plaintiffs. A second trial would follow to decide all remaining issues of individual reliance, as well as issues relating to causation and quantum. This is the method adopted in Houghton v Saunders.

[15] The Judge’s reasons for declining to order the mode of trial sought by the defendants can broadly be summarised as follows.

[16] First, while noting that adopting the Houghton split-trial model as a “blueprint” had some attraction, he was concerned that the cost and delay of a second trial would prejudice the investors here, who were described as being of increasing age and, in some cases, frailty. A signal difference between the present

_{case and Houghton was that the LDC investors had expressed a very
firm wish not to}

statements not been made, the list price for the share issues would have been much less than what the original investors paid.

have a two-stage trial “and to take the issue of reliance head on by proving each of the particulars pleaded, which they say must be sufficient in this case for the plaintiffs to succeed”.⁹

[17] Similarly, while the Judge noted that the absence of proof of individual reliance proved fatal on appeal for the representative plaintiff in Boyd Knight v Perdue, the plaintiffs’ position here has been taken in full knowledge of what the difficulties in that case had been and they wished still to proceed with a single trial.¹⁰

reliance might not always be required. Moreover, the outcome in that case showed that choosing to proceed at trial on the basis that individual investor plaintiffs did not need to prove specific reliance created a risk to the plaintiffs, not to the defendants.

[18] Thirdly, the Judge noted the practical problems arising from a staged trial in the present case. In that respect he said:

[47] It seems to me that the inevitable consequence of the defendants’ position in relation on how reliance should be proved, namely that there should be a subjective inquiry into the degree of reliance of each plaintiff, is that each and every plaintiff would need to give evidence. That in itself undermines the whole basis of using a representative action to try the plaintiffs’ claims, though as I have said all the defendants disavow any need to call all the plaintiffs. Their answer to this point is that if certain plaintiffs are called the judgment of the Court will give a clear guide on what reliance is sufficient, and what is not. From that the defendants seems to suggest consideration can be given to how to deal with the other plaintiffs.

[48] It is completely unclear to me how that can practically occur, apart from calling those plaintiffs one by one to give evidence. I cannot see how, by any other means, it could be shown that any given plaintiff, who has not given evidence at the trial, could be classified into the group of plaintiffs whose reliance has been established, or excluded from that classification, without examination of the facts surrounding that plaintiff’s investing steps. And how could that occur other than hearing each plaintiff’s evidence?

[49] Thus the inquiry goes full circle. If there has to be some inquiry on whether every plaintiff does or does not fit into the position established by the Court after considering the cases of the nominated plaintiffs, there is very

¹⁰Boyd Knight v Perdue [1999] 2 NZLR 278 (CA). In that case the plaintiffs brought a representative action against auditors of the failed finance company Burbery Finance. The auditors admitted they had breached the duty of care owed to investors when providing their audit report for inclusion in Burbery’s 11^thprospectus pursuant to cl 36 of the second schedule to the Securities Regulations 1983. Whether or not the investors could establish causation depended on the scope of the duty, and whether it was a duty to inform or to advise.

substantial scope for argument in relation to every plaintiff which could only be resolved, in the end, by each plaintiff giving evidence. It is not difficult to foresee a situation where after judgment there is significant disagreement on how all the other plaintiffs should be treated. If the result of the trial is to find that all or any of the defendants’ conduct fell short of the required standards, their exposure to the losses suffered by the plaintiffs will be substantial, and certainly sufficient to encourage argument in relation to the eligibility of each plaintiff who has not given evidence in the trial to recover that plaintiff’s lost investment. So I do not see how proceeding under the Houghton model would best try this case.

[19] Most fundamentally, Judge Matthews said that in order for the defendants’ application to succeed they needed to show some manifest disadvantage to them from proceeding in the way preferred by the plaintiffs. Looked at logically, he said that they had failed to identify any such disadvantage.

[20] Applications for review were filed by not only the third defendants but also the first and the fourth. Although the three applications are quite lengthy and contain some differences between them, the alleged errors identified in the Associate Judge’s decision are, essentially:

(a) his finding that there was no “manifest disadvantage” to the defendants from the plaintiffs running the case in the way they wish; and

[21] That said, however the defendants were not entirely ad idem as to the preferred mode of trial. In particular, Mr Spear for the first defendants submitted that the directors’ preference would be:

[22] As I understand it, however, the first defendants’ position has been somewhat ameliorated by the more recently reached agreement that the seventh cause of action should be heard later.

[23] The Judge’s decision was reached after an oral hearing and was fully reasoned. The review is thus by way of rehearing. Counsel were agreed that the appellate approach articulated in Austin Nichols applied.¹¹

[24] That said, however, counsel did not directly address me on the nature of the decision under review. As Austin Nichols makes clear, the type of decision can make a difference to the approach to be taken. In particular, the appellate/review threshold is higher where the decision involves the exercise of discretion.

[25] Case management decisions about the manner in which a trial is to be conducted seem to me to be inherently discretionary. If that is so, then the onus would be on the defendants to show that the Judge was plainly wrong, in the sense of acting on a wrong principle, failing to take some relevant matter into account or taking into account some irrelevant matter. But as it happens, it does not matter if the decision at issue here is of some other kind, and some more liberal approach on review is required. That is because my own assessment of the issues accords entirely

[26] The defendants’ principal argument on review continued to be that certain of the causes of action required proof of specific reliance (and causation) and that those aspects of the claims could not be determined other than on an individual, plaintiff by plaintiff basis. They submitted that to hold a trial of the sort ordered by the Associate Judge disadvantages them because it cuts across the approach taken to representative actions in New Zealand that was endorsed by the Supreme Court in

(a) the order cannot confer a right of action on a member of the represented class who would not otherwise have been able to assert a claim in separate proceedings and cannot bar a defence otherwise available in a separate action;

(b) there must be a common issue of fact or law of significance for each member of the class represented; and

(c) it must be for the benefit of the other members of the class that the plaintiff is able to sue in a representative capacity.¹³

[27] Here, the defendants said that holding a trial in which questions of individual reliance could not be explored would infringe the first of these rules because it would have the effect of barring a “defence” that would be available if the claims proceeded on an individual basis. The argument was articulated in this way by Mr Smith, for the third defendant:

Proceeding on “representative proof” in relation to individual issues does exactly that. If an individual plaintiff did not actually rely or would not actually have acted as the plaintiffs allege in their pleading, the plaintiffs’ “representative proof” seeks to give them a cause of action they would not otherwise have. If an individual plaintiff did rely or would have acted as the plaintiffs allege, but the plaintiffs’ “representative proof” fails, they will potentially be deprived of a cause of action.

Plainly, in the former type of case, the defendants are prejudiced if the trial is set up so as to deprive them of the evidence of the individual plaintiff in question. Equally plainly, it is not to the benefit of the individual plaintiffs in the latter type of case if they are deprived of the opportunity to give evidence themselves. The Associate Judge erred in concluding otherwise.

¹²_{Credit Suisse Private Equity LLC v Houghton [2014]
NZSC 37; [2014] 1 NZLR 541 at [53].}

[28] Like the learned Associate Judge, however, I am unable to accept the logic of those propositions. To the extent that reliance is an essential element of a particular cause of action it must be proved by the plaintiffs. It is not a matter of defence. And self-evidently, the plaintiffs are content, and actively wish, to proceed on the basis for which they now contend. If it transpires that proof of individual reliance is required, then they may be in difficulty. But any such difficulty will be to the defendants’ benefit; the decision in Boyd makes that demonstrably clear. The same reasoning pertains to issues of causation; all risk lies with the plaintiffs and it is one that they have willingly assumed.

[29] My view that the Judge was not wrong (and, indeed, was right) in the orders he made is fortified when the pleadings of “reliance” pleading in this case are examined more closely and seen in their wider context. I have set out the relevant paragraphs from the fifth amended statement of claim above. The following points can be noted:

(a) each of the 10^th, 14^thand 15^thcauses of action are pleaded by the company itself (the first plaintiff) as well as by the representative plaintiffs. No reason has been, or can be, advanced as to why the first plaintiff is not entitled to go to trial on the whole of its claims. Aspects of reliance and loss will, therefore, need to be explored at the first trial regardless;¹⁴

(b) individual proof of reliance and causation would not, in any event, seem to be required if it is established that, absent the relevant breach or breaches, LDC would not or could not have continued in operation (which is what is alleged);¹⁵

(c) in relation to the tenth cause of action, the plaintiffs’ case is that they knew about the existence of the Trustee (Perpetual, the third

¹⁵This is one of the features that distinguishes the present claims from those in Houghton.

to the necessary degree that they relied on Perpetual carefully performing its Trustee functions;

(d) where the relevant loss pleaded is a loss of chance (the chance to make informed decisions about whether to withdraw the investments), reliance and causation is capable of proof on a representative basis; and

(e) on a worst case scenario (which the plaintiffs do not accept will exist) there are just two causes of action which involve a pleading of reliance that might present difficulties in terms of proof. Those causes of action (the 14^thand the 15^th) are pleaded only against the fourth defendant. To permit those two causes of action, and the interests of only one of the defendants to dictate the shape of the whole trial

[30] Finally, and like Judge Matthews, I am also unable to accept that the staged approach adopted by the High Court in Houghton (and approved by the Court of Appeal) is in any sense mandatory or even in the nature of “guidelines” (as submitted by the defendants). The Supreme Court in Credit Suisse (which related to a different stage of the same litigation) made it clear that, provided the parameters of representative actions are complied with, the rest is a matter of case management for

the trial court. For example, at [58] the Chief Justice and Anderson J said:¹⁶

[58] Although the appellants argued that two-step litigation was mandated by the Court of Appeal in its 18 December 2009 decision, we are unable to read the remarks of the Court of Appeal as other than a reference to the staging of the representative proceeding. The passage relied upon by the appellants follows on from the Court’s explanation that the “relatively low threshold” now applied to a representative order was “consistent with r 1.2 of the High Court Rules” and that “such an order allows proceedings to be conducted in an efficient manner and avoiding their multiplication by the need (in this case) for at least 800 separate filings” and (in opt-in form) “protects members of the represented group against a limitation bar arising after the date of their election to opt in to the proceeding”. Both these benefits, which the Court treated as allowing the Court to respond to the justice of the case, would be lost if the passage relied on by the appellants is

¹⁶Credit Suisse Private Equity LLC v Houghton, above n 12 (emphasis added; footnotes omitted).

The Chief Justice and Anderson J dissented on the limitation issues, which are not relevant in the present case.

read in any sense other than as approving staging of the proceeding properly constituted as a representative action[.] ...

[59] The decision in our view envisages that in the proceedings for damages properly instituted on a representative basis, questions of relief or other individual matters may require staged hearing and modification of the terms of representation for those whose claims are within the existing proceeding. The court has ample authority under the Rules and in its inherent jurisdiction to ensure that such staging or decoupling through severance or joinder of parties serves the interests of justice.

[31] It is plain from reading Associate Judge Matthews’ decision that he was mindful of the different interests at play and the need to balance them. He was clearly conscious of, and applied, the overarching r 1.2 principles. And as noted at the outset, the Judge has had the signal advantage of managing this litigation from the outset. It seems to me that, provided there was compliance with the required approach to representative actions (which in my view there was) it was entirely open to him to make a case management decision that he considered best suited the different circumstances of the present case. And as I have indicated, my own view of the matter accords with his in any event.

[32] The applications for review are dismissed accordingly. Costs should follow the event. Memoranda may be submitted if agreement cannot be reached.

High Court of New Zealand Decisions

LDC Finance Limited v Miller [2016] NZHC 567 (5 April 2016)