Mainzeal Property and Construction Limited (in liq) v Yan [2018] NZHC 2522 (5 October 2018)

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BETWEEN	MAINZEAL PROPERTY AND CONSTRUCTION LIMITED (IN LIQ) First Plaintiff
AND	KING FAÇADE (PREVIOUSLY KNOWN AS RICHINA LAND LTD) (IN LIQ) Second Plaintiff
AND	MAINZAL GROUP LIMITED (IN LIQ) Third Plaintiff
AND	ANDREW JAMES BETHELL AND BRIAN MAYO-SMITH Fourth Plaintiffs
AND	RICHARD CILIANG YAN First Defendant
AND	PETER GOMM Second Defendant
AND	RT HON JENNIFER MARY SHIPLEY Third Defendant
AND	CLIVE WILLIAM CHARLES TILBY Fourth Defendant
AND	PAUL DAVID COLLINS Fifth Defendant
AND	SIEW MAY KWAN Sixth Defendant
AND	RICHINA GLOBAL REAL ESTATE LIMITED (IN LIQ) Seventh Defendant
AND	ISOLA VINEYARDS LIMITED (PREVIOUSLY KNOWN AS WAIHEKE VINEYARDS LIMITED) (IN LIQ) _{Eighth Defendant}

Hearing:	4 October 2018
Counsel:	M D O’Brien QC, Z G Kennedy, M D Pascariu, J T Vickers and Y J Lee for the Plaintiffs D J Chisholm QC, T P Mullins and C I Hadlee for the First Defendant J E Hodder QC, M D Arthur and J Marcetic for the Second to Fifth Defendants G P Blanchard QC and J Nolen for the Sixth Defendant
_Judgment:	_{5 October 2018}

[1] In these proceedings a number of claims are advanced by the liquidators of Mainzeal Property and Construction Ltd (in liq) and associated companies, and by the companies themselves. They include claims that the former directors of Mainzeal engaged in what is referred to as reckless trading. Some of the background to the proceedings is set out in my earlier judgment addressing the defendants’ challenge to the admissibility of the evidence to be given by one of the liquidators.¹

[2] The trial is now in its third week, with the expectation that the trial will last for eight weeks. In my earlier judgment, I ruled on the admissibility of the opinion evidence to be given by one of the liquidators, and reached the conclusion that his evidence was generally admissible, but may have contained some inadmissible material, and that I would receive it de bene esse with any requirement to rule on admissibility of such passages to be determined later in the substantive judgment. An approach has subsequently been followed by counsel for the defendants where they have filed memoranda objecting to the evidence to be given by the witnesses for the plaintiffs in the expectation that the same approach will be applied to the subsequent witnesses. That has been the case for all of the witnesses that have been called by the plaintiffs through to the evidence of Mr Trevor Burt. In respect of his proposed

evidence, the defendants say that it should not be led at all. On this occasion, the argument is advanced by Mr Hodder QC for the second to fifth defendants.

[3] After hearing the arguments from Mr Hodder and Mr O’Brien QC for the plaintiffs, I ruled that Mr Burt’s evidence could be led, and I now provide the reasons for that decision.

[4] Mr Burt is an expert in issues of corporate governance. He is an experienced company director, and is called by the plaintiffs to give expert evidence in relation to the reasonableness of decisions made by the directors of Mainzeal in the circumstances that existed at the time.

[5] There are a multitude of issues that have emerged in this case, but they include three main issues, namely:

(a) Whether the decision of the directors of Mainzeal to allow the company to continue trading beyond January 2011, or July 2011, when it is alleged that the company was technically insolvent, breached the requirements of s 135 of the Companies Act 1993.

(b) Whether the creditors of Mainzeal were put in a worse position by the decision to continue trading. The defendants say that, had Mainzeal been placed in liquidation at the earlier date, the creditors would have been put in a worse rather than better position.

(c) Whether the directors breached s 136 of the Companies Act when decisions were made to enter contracts after the dates identified above, and if so whether there should be a different assessment for the purposes of the award of any compensation – namely the loss arising from any such further contracts, rather than arising from the counterfactual net position of creditors.

[6] The proposed evidence of Mr Burt is relevant to the question of potential liability under ss 135 and 136. The basis for the objection is that the plaintiffs have already called corporate governance expert evidence on this matter from Mr Maier, and that Mr Burt’s evidence essentially replicates that which has already been given by Mr Maier.

[7] Mr Hodder contended that Mr Burt’s evidence is essentially a duplication of

Mr Maier’s evidence, that it is inconsistent with r 9.7(4) of the High Court Rules 2016 which requires briefs of evidence to avoid repetition, and that it is not substantially helpful in accordance with s 25 of the Evidence Act 2006. He also said that allowing two experts to give evidence on this topic for the plaintiffs would involve a breach of the “equality of arms” principle given that the defendants only proposed to call one expert witness on this topic, Mr Westlake.

Mr Simcock because Mr McLeod’s evidence covers almost all the ground covered in Mr Simcock’s witness statement. Also, because Mr McLeod’s statement was filed later, it seeks to respond to the Commissioner’s witnesses’ statements. We pointed out to Mr Galbraith QC that Mr McLeod’s witness statement contained a great deal of material which repeated what was in

Mr Simcock’s brief. He accepted this and said that it was possible only one of the two would actually be called to give evidence at the trial. We commend any effort to avoid repetitive evidence being given.

[9] In support of the position Mr Hodder referred to the practice of the courts in England and Wales. In JP Morgan Chase Bank v Springwell Navigation Corporation, the High Court held that there had to be very good reason for needing two experts providing a report on the same topic.³That general approach appeared to be followed

²Commissioner of Inland Revenue v BNZ Investments Ltd [2009] NZCA 47, (2009) 19 PRNZ 553.

in Heyward v Plymouth Hospital NHS Trust,⁴and by the Court of Appeal in ES v

[10] Mr Hodder also referred to the “overriding need to ensure that each party is treated fairly and justly in the presentation of its case” and that there would be an infringement of the equality of arms principle if the plaintiffs were allowed to lead essentially repetitive expert evidence on the same topic.⁶There was an unfairness, and a lack of benefit, in calling evidence from multiple experts on the same issue.

Mr Burt, that their evidence was essentially the same, and that accordingly it could not be helpful. He also said that Mr Burt did not have the same extensive experience as

Mr Maier, so that Mr Burt’s evidence would be less helpful. Moreover when it came to the joint expert report Mr Burt had simply taken the same position as Mr Maier demonstrating that he did not add anything of substance.

[12] Mr O’Brien for the plaintiffs emphasised the significant losses suffered by the liquidation of Mainzeal, and the significance of the case. He disputed the suggestion that the practice followed in the New Zealand courts was the same as that followed by the English courts. He referred to the decision of the New Zealand Court of Appeal in Harrison v Banks, which stated that there was no rule that only one expert can give evidence on any one topic.⁷

[13] He referred to one of the authorities identified by Mr Hodder, ES v Chesterfield and North Derbyshire Royal NHS Trust, where the Court permitted more than one expert in obstetrics to be called because the defendants would be giving evidence in defence of the claim, and they were also experts in the field.⁸Mr O’Brien said that

⁸ES v Chesterfield and North Derbyshire Royal Hospital NHS Trust, above n 5.

was similar to the present case where Dame Jenny Shipley, Sir Paul Collins and Messrs

[14] Mr O’Brien identified the particular expertise that Mr Burt had, emphasising that he formed his views independently of Mr Maier, and that he had also participated in the joint expert conference, the report of which has been provided to the Court. He said in these circumstances there could be no objection to his evidence.

[15] I accept that the Court can determine that expert evidence is inadmissible on the ground that, due to it being repetitive of expert evidence already given to the Court, it is not substantially helpful in accordance with s 25 of the Evidence Act. I also accept that evidence that is strictly admissible could be excluded on fairness grounds. The appropriate principle appears to have been addressed by the Court of Appeal in Harrison v Banks in the following way:⁹

[The Judge] referred to what he described as the usual rule that only one expert can give evidence on behalf of one party on any one topic. We do not consider there to be a rule of practice that can be expressed in this way. The Judge does have a general discretion to limit the number of expert witnesses that may be called by any party: r 438(1) of the High Court Rules. That discretion should be exercised, in accordance with r 4, in a way that will secure the just, speedy and inexpensive determination of the proceeding. But there may well be cases, depending upon the nature of the issue upon which the expert evidence is tendered and the extent of any controversy surrounding it, where it may be appropriate to permit more than one expert to give opinion evidence on the same issue.

[16] Rule 438 is now to be found in r 7.17, and concerns directions given for a proceeding. Rule 4 is now found in r 1.2, and states that the objective of the rules is to secure the just, speedy and inexpensive determination of proceedings. I accept that as a general presumption it might be sensible to limit the parties to one expert each on any given topic when directions are given for a case, but subject to the circumstances of that case.

[17] Under the New Zealand approach, a Judge is able to assess whether a second expert is substantially helpful or not. That more flexible approach is also consistent

with the comments of the Court of Appeal in Commissioner of Inland Revenue v BNZ Investments Ltd where the Court noted that there should be an effort to avoid repetitive expert evidence.¹⁰

[18] A key issue in the present case is whether the directors of Mainzeal acted in breach of their duties under s 135 of the Companies Act by allowing the company to continue trading notwithstanding that it is alleged to have been technically insolvent. The plaintiffs say the directors breached their duties in doing so from 31 January 2011, or 31 July 2011 at the latest.

[19] Whilst the defendants dispute that Mainzeal was technically insolvent they also say that, even if that was the case, the decision to continue trading did not breach s 135 given the potentially profitable character of the business and the expectation of support from related parties, particularly the Richina Pacific group of companies in China.

[125] In determining whether a business risk is legitimate, a number of considerations may be material:-

3. No-one suggests that a company must cease trading the moment it becomes insolvent (in a balance sheet sense). Such a cessation of business may inflict serious loss on creditors and, where there is a probability of salvage, such loss can fairly be regarded as unnecessary. The cases, however, make it perfectly clear that there are limits to the extent to which directors can trade companies while they are insolvent (in the balance sheet sense to which I referred) in the hope that things will improve. In most of the cases, the time allowance has been limited, a matter of months.

[21] The defendants say that here the circumstances are such that it was not illegitimate to continue to trade. Mainzeal was associated with a wider group that had substantial assets, and could reasonably depend on the wider group for support if that proved necessary. And, they say, the company itself was potentially trading profitably.

The plaintiffs do not accept that, and emphasise that the technical insolvency meant that the directors were risking the creditors funds and not the shareholders funds.

[22] The ultimate issue for the Court involves a difficult question of degree. There is no authority directly on point on precisely these circumstances, and in the end the Court will be required to go back to first principles, the particular formulation of the requirements of s 135, and the previous authorities.

[23] I found the evidence of Mr Maier of substantial help. I also found his cross- examination of substantial help. I expect to receive similar substantial help from

Mr Westlake. Mr Burt appears also to be a person very well qualified to give expert evidence on this difficult issue. It may well cover very similar ground to Mr Maier, but that does not mean that I will not find it substantially helpful. If I am wrong, his evidence will not be given weight in the final assessment.

[24] To the extent that the principle is directly relevant, I do not accept the argument advanced by Mr Hodder concerning equality of arms. Both the plaintiffs and the defendants are well resourced parties, and have been allowed to call the evidence they wish to call to advance their respective cases. In the case of the defendants, apart from

the expert evidence of Mr Westlake and Mr Graham, each of the directors themselves will be giving evidence. That will include evidence from Dame Jenny Shipley, a former Prime Minister of New Zealand, and Sir Paul Collins, a very well-known and experienced company director. I do not know Messrs Tilby, Gomm or Yan so well by reputation, but expect them to also have relevant experience. I also note that the first, and second to fifth defendants are separately represented, meaning that the plaintiffs’ experts have faced at least two sets of cross-examination from senior counsel (and occasionally three given the sixth defendant is also separately represented), albeit that there has been appropriate cooperation between counsel to prevent duplication. In these circumstances to contend that allowing the plaintiffs to call two rather than one corporate governance expert involves unfair inequality of arms seems unrealistic.

[25] I do not understand this issue to have been raised at previous directions conferences. Mr Burt has duly prepared and served a brief of evidence, and he has also participated in the joint expert conference, the results of which have been

provided to the Court. The objection is taken on the eve of him giving evidence, and my ruling was made to accommodate his travel plans. Taking the point now does not assist the efficient management of this proceeding. Neither will Mr Burt’s evidence lengthen the trial. It is anticipated it will take one day. The trial is now anticipated to take eight weeks.

[26] For these reasons, I concluded that the evidence of Mr Burt is properly led by the plaintiffs. Receipt of his evidence is subject to any particular objection to specific passages, which is received de bene esse as with the other witnesses for the plaintiffs.

High Court of New Zealand Decisions

Mainzeal Property and Construction Limited (in liq) v Yan [2018] NZHC 2522 (5 October 2018)