Perrott-Hunt v Johnston [2018] NZHC 2678 (17 October 2018)

Last Updated: 19 October 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2015-404-2506 [2018] NZHC 2678

BETWEEN

MATTHEW NEIL PERROTT-HUNT First Plaintiff HUNT FT LIMITED and DEBRA CECILIA HOLTOM Second Plaintiffs

AND

EDWARD ERROL JOHNSTON First Defendant EDWARD JOHNSTON & CO TRUSTEES LIMITED Second Defendant RONALD BRUCE JOHNSON JOHN KAHUKIWA and LAWRENCE PONNIAH (sued as a firm of solicitors practising as CORBAN REVELL) Third Defendants RONALD BRUCE JOHNSON (principal of CENTRAL PARK LEGAL LIMITED) Fourth Defendant (removed) ROSS JAMES FARRON and JAMES ROBERT ARTHUR NASH Fifth Defendants ROSS JAMES FARRON Sixth Defendant Defendant

Hearing:	12 October 2018 at 10:30 am
Appearances:	D Turnbull for the Third Defendants No appearance for proposed third party Appearances of other parties excused
Judgment:	17 October 2018

PERROTT-HUNT v JOHNSTON (No.3) [2018] NZHC 2678 [17 October 2018]

JUDGMENT OF ASSOCIATE JUDGE R M BELL (No 3)

This judgment was delivered by me on 16 October 2018 at 4:55pm

pursuant to Rule 11.5 of the High Court Rules.

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

Deputy Registrar

Solicitors:

Grant S C K Sidnam, Epsom, Auckland, for Plaintiffs

Wotton Kearney (N J Francis/I R Shennan) for the Fourth Defendant Vodanovich Law Ltd (I M Vodanovich), Kumeu, Auckland

McElroys (A Challis), Auckland

Copy for:

R S Pidgeon, Barrister, Auckland, for Plaintiffs S Perese, Barrister, Auckland

[1] In August 2018 Corban Revell, the third defendants, applied for Maurice Hunt to be joined as a third party. He is one of the children of the late Mrs Vao Hunt, but was never a trustee of the Hunt Family Trust. In their draft statement of claim Corban Revell say that he was a de facto trustee and breached fiduciary duties he owed the beneficiaries. They say that they are entitled to look to him for equitable contribution if they are found liable.

[2] When the application was called, Associate Judge Smith noted that the draft pleading alleged that Mr Hunt was adjudicated bankrupt on 10 October 2013 and was discharged on 10 October 2016. He asked whether that discharge barred Corban Revell from suing Mr Hunt. This decision deals with that question.

[3] Leave to join Mr Hunt as a third party is required under r 4.4(2)(b) of the High Court Rules 2016 as more than 10 days have passed since Corban Revell filed its statement of defence. Mr Hunt has not been served yet. The other parties did not wish to be heard on the leave application.

Background

[4] Background can be found in my earlier decisions,¹ but they deal with a different matter – the plaintiffs’ claims against Bruce Johnson after he left Corban Revell in 2011 and set up his own practice, Central Park Legal Ltd. In my first decision, I said:

Parties

[3] The first plaintiff is the administrator of the estate of the late Mrs Vao Hunt, who died on 31 May 2016. The second plaintiffs are the current trustees of the Hunt Family Trust. The original trustees were Mrs Hunt, her daughter Debra Holtom, and Edward Johnston & Co Trustees Limited.

[4] Mr Ed Johnston, the first defendant, is a former lawyer who practised on his own account in West Auckland. He is now in disgrace. He was struck off the rolls as a lawyer and was adjudicated bankrupt. Edward Johnston & Co Trustees Limited, the second defendant, is a corporate trustee associated with Mr Ed Johnston’s former practice.

¹ Perrott-Hunt v Johnston [2017] NZHC 689 and Perrott-Hunt v Johnston [2018] NZHC 2568.

[5] The third defendants are the partners of the firm Corban Revell at the times relevant to this proceeding.

[6] Mr R Farron and Mr R Nash were businessmen who engaged in property development and investment. They have been adjudicated bankrupt.

What the case is about

[7] In 2009 Mrs Hunt was a widow living in a freehold family home at Grey Lynn. She was unsophisticated in legal and commercial matters. Mr Ed Johnston was the family lawyer. On Mr Ed Johnston’s advice she established the Hunt Family Trust and transferred the family home to the family trust. He encouraged the trustees to use the equity in the family home as security to raise funds to purchase other properties. This venture into property investment has been disastrous for the Hunt family. They lost money. They were unable to service the mortgage on the Grey Lynn home. It was sold up under a mortgagee’s sale.

[8] The Trust’s investment activity involved two properties: one at Edwin Freeman Place, West Auckland, and the other at Cedar Drive, Paraparaumu. Mr Ed Johnston owned 31 Edwin Freeman Place. Mr Johnston did not act for the trustees on the purchase. Instead he referred Mrs Hunt and Mrs Holtom to Mr Bruce Johnson at Corban Revell, and he arranged for another law firm to act for Ed Johnston & Co Trustees Limited on the purchase. The purchase took place in 2009.

[9] Mr Ed Johnston persuaded the trustees to buy the property at Cedar Drive, Paraparaumu. That belonged to the parents of Mr Ross Farron. Other lawyers acted for the trustees on the purchase of the Cedar Drive property. Mr Bruce Johnson and Corban Revel did not.

[10] In 2011 the Hunt Family Trustees sold the Edwin Freeman Place property. Another law practice acted for the trustees on the sale. Mr Bruce Johnson, still a partner of Corban Revell, acted for the purchaser, R J Ranui Limited, a company associated with Mr Ross Farron. The sale settled in early June 2011.

[11] In 2011 the Hunt Family Trustees also sold the Cedar Drive property. The law firm that acted on the sale of the Edwin Freeman Place property also acted for the trustees on the sale of the Cedar Drive property. The purchaser of the Cedar Drive property was Khyber Investments 2010 Limited. Mr Ed Johnston was the director and shareholder of Khyber Investments 2010 Limited.² The lawyer who acted for Khyber on the purchase was Bruce Johnson, while he was still a partner of Corban Revell. This sale also settled in early June 2011.

[12] On the sale of the Edwin Freeman Place property, the trustees as vendors left money in by way of a registered second mortgage. The advance was never repaid. While Mr Farron guaranteed the payment, he was insolvent. The guarantee was worthless. Similarly, on the sale of the Cedar Rise property

² On some documents the company is referred to as Khyber Holdings Ltd.

the trustees as vendors left money in by way of a registered mortgage over Edwin Freeman Place, which was not repaid.³

This proceeding

[13] This proceeding started in October 2015. The statement of claim alleged that both as partner of Corban Revell and as principal of Central Park Legal Limited, Bruce Johnson breached fiduciary duties to the plaintiffs, not only in the purchase of the Edwin Freeman Place property, but also when acting for the purchasers of Edwin Freeman Place and Cedar Drive. The claim is unusual as it involves allegations that when he acted for the purchasers Mr Johnson acted contrary to the interests of the plaintiffs when they had independent lawyers acting for them.

Corban Revell’s pleaded claim against Maurice Hunt

[5] Corban Revell’s draft statement of claim against Mr Hunt says that the plaintiffs are suing them for unlawful means conspiracy, for a subsidiary conspiracy and for breach of fiduciary duty. The breach of fiduciary duty is said to be that, while a salaried partner of Corban Revell, Mr Bruce Johnson misused confidential information relating to the Hunt Family Trust and the Hunt family by divulging that information to Mr Farron, Mr Nash, and entities associated with them, and gave inadequate advice about the trust’s purchase of the Edwin Freeman Place property and the wisdom of that transaction.

[6] Corban Revell have denied liability. As part of their defence, they have pleaded that Maurice Hunt acted on the plaintiffs’ behalf, that the Hunt Family trustees authorised Mr Hunt to act for them and the plaintiffs are bound by his acts and omissions. Corban Revell say that if they did breach any of the duties alleged by the plaintiffs, the trustees caused or contributed to their losses by their own negligence and by the negligent acts of Mr Hunt, for which the trustees are legally responsible.

[7] The draft statement of claim describes transactions in which Maurice Hunt was involved. First, 20 Cedar Drive, Paraparaumu. That property belonged to Mr Farron’s parents. In September 2009, Mr Hunt agreed with Mr Farron that the family trust would buy the Cedar Drive property for a fee of $20,000. To fund the purchase, the family trust borrowed $340,000 from the ASB Bank. That was in addition to $400,000

3. This was to be a third mortgage but was changed by a variation to become secured under the second mortgage.

which the trustees had borrowed from the ASB to purchase the Edwin Freeman Place property in September 2009. Corban Revell did not act for the family trustees or any other party on the purchase of the Cedar Drive property. There was a memorandum of variation of agreement between Mr Farron’s parents as vendors, Mr Maurice Hunt or nominee as purchasers, and Mr Ross Farron and Mr Nash as guarantors. It recorded that Mr Hunt, who had become involved in business ventures with Mr Farron and Mr Nash, wanted to assist them in their present financial problems which were said to be short-term. Mr Hunt as nominee agreed to buy Cedar Drive for $340,000 in return for a fee of $20,000. Mr Farron and Mr Nash would be responsible for repaying the family trust’s loan to the ASB Bank. Mr Farron’s parents were entitled to live in the Cedar Drive property rent-free, paying all outgoings except the mortgage. Mr Farron and Mr Nash would as soon as possible (and no later than one year after the purchase) buy the Cedar Drive back from the Hunt Family Trust for the net purchase price. In short, this was a warehousing agreement. Mr Hunt nominated the Hunt Family Trustees as purchasers of Cedar Drive. Settlement of the purchase took place in December 2009.

[8] Next, the sales of Edwin Freeman Place and Cedar Drive. In January 2011 Mr Farron and Mr Hunt agreed that Mr Farron and Mr Nash would buy the Edwin Freeman Place and Cedar Drive properties from the trustees. Mr Farron’s company, R J Ranui Ltd, bought Edwin Freeman Place. Khyber Investments (2010) Ltd, a company related to Mr Ed Johnstone, bought Cedar Drive. In June 2011 the Hunt Family trustees settled the sale of Edwin Freeman Place to R J Ranui Ltd for $300,000 with the Hunt Family Trust leaving in vendor finance of approximately $124,000. The trustees sold Cedar Drive to Khyber for $445,000 and agreed to leave in vendor finance of approximately $80,000. The vendor finance was secured by a registered second mortgage over Edwin Freeman Place and personal guarantees by Mr Farron.

[9] In 2011 Mr Hunt, Mr Farron and Mr Nash entered into two property ventures together:

(a) A property at 4/6 Averill Road, Papakura, known as the Selwyn Centre, and
(b) A property at 31 Railway Avenue, Lower Hutt.

[10] They needed finance to buy and develop the Selwyn Centre. Loans were obtained from non-bank lenders. The security was the Hunt Family Trust property at Home Street, Grey Lynn, and Edwin Freeman Place, which by this stage was owned by R J Ranui Ltd. On 18 July 2011, Mr Hunt replaced Mr Farron as the director of R J Ranui Ltd. Mr Farron went bankrupt on 26 July 2011. Mr Bruce Johnson left Corban Revell in August 2011 and began sole practice on 1 September 2011 under his company, Central Park Legal Ltd.

[11] On 13 September 2011, Mr Hunt sent Davenports, the lawyers then acting for the trustees, an email which indicated that equity out of Edwin Freeman Place was required to do another deal. Mr Hunt had organised a $50,000 fee for the trustees, repayable on the on-sale of the property. He wanted Davenports to release the second mortgage over the Edwin Freeman Place so that refinancing could occur.

[12] On 26 September Davenports sent Mr Hunt and Mrs Holtom an email seeking confirmation that the trustees agreed to Davenports discharging the second mortgage to allow the refinancing to occur and for alternative security to be registered in its place.

[13] On 29 September 2011, Mr Farron sent an email to Davenports, copied to Mr Hunt, with various proposals for the family trust. There were other communications. On 6 October 2011, Davenports wrote to the trustees recording that they had agreed to advance $50,000 as a loan advance provided by a second mortgage over Home Street to Mr Hunt’s company, Millbrook Road Developments Ltd, to enable Millbrook to pay the deposit to buy the Selwyn Centre, that Mr Hunt would be buying the Selwyn Centre, making some minor cosmetic refurbishments, letting the Centre and on-selling it at a significant profit. Mr Hunt had indicated to Davenports that he already had a purchaser willing to buy once the works were completed. After settlement the $50,000 advance would be cleared in full. Mr Hunt intended to assist the family trustees to reduce and clear the first and second mortgages over Home Street. Davenports were not advising the trustees on the commercial viability of the transaction and the trustees would need to make their own enquiries in that regard.
[14] About the same time, the Hunt Family Trustees refinanced loans over Home Street. In October 2011 they entered into a term loan with Nimrod Nominees Ltd for a second mortgage over Home Street for the principal sum of $66,000 repayable after six months with 22 per cent interest per annum. The trustees provided those funds to Millbrook to buy the Selwyn Centre. The trustees also took a term loan for $360,000 from ASAP Finance Ltd for six months at an interest rate of 9.95 per cent per annum with first mortgage security over Home Street with guarantees by the trustees and Mr Hunt.

[15] On 18 October 2011 R J Ranui Ltd, owner of Edwin Freeman Place, took a term loan for $35,000 from Ginger Corporation for three months loan for the principal sum of $35,000, with a facility fee of $2,500, at a default interest rate of 37 per cent per annum, secured by a second registered mortgage over Edwin Freeman Place and a personal guarantee by Mr Hunt. Ginger’s funds were to be used to buy and develop the Selwyn Centre.

[16] On 20 October, Davenports sent Mr Hunt and Mrs Holtom an email saying that they were uncomfortable with providing the trustees with independent legal advice about the discharge of the trust’s second mortgage over Edwin Freeman Place without repayments being made, and for the trust mortgage to be re-registered shortly afterwards, and that the transaction would significantly impact on the family trust’s security over Edwin Freeman Place. Mr Hunt sent a copy of that email to Mr Farron, Mr Nash and Mr Bruce Johnson. Mr Johnson replied on the same day by email, saying that he was willing to prepare documents to allow a discharge of the trust’s second mortgage over Edwin Freeman Place, provided the trustees acknowledged that he was not acting for the trustees, that he was preparing the documents only for R J Ranui Ltd, and that they had received independent legal advice.

[17] On 25 October, Mr Hunt brought the trustees to Bruce Johnson’s offices to sign the documents. These were acknowledgments of independent advice, acknowledgment that Mr Johnson had not acted for them but for R J Ranui Limited, and A&I forms and authority to discharge the second mortgage. The mortgage was discharged on 26 October and Ginger’s second mortgage was registered in its place.
[18] On those pleaded facts, Corban Revell say that Mr Hunt assumed the role of a de facto trustee for the Hunt Family Trust. They refer in particular to the agreement to buy Cedar Drive for a fee of $20,000, obtaining a further loan from the ASB to buy Cedar Drive, arranging for the Hunt Family Trust to enter into an onerous credit agreement with Nimrod to provide funds for Millbrook to buy and develop the Selwyn Centre, and arranging the release of the second mortgage to allow R J Ranui Ltd to secure funding from Ginger to fund Millbrook for the purchase and development of the Selwyn Centre. As a de facto trustee, Mr Hunt had fiduciary duties which he breached by arranging these transactions with the family trust when they were for his personal advantage. On that basis, contribution is sought.

The contribution claim

[19] For their contribution claim, Corban Revell say that if they are liable to the Hunt Family Trustees, Maurice Hunt is liable to them as well. Their liability is co- ordinate and Corban Revell should not carry the liability alone. Maurice Hunt should also pay something towards that liability: 100 per cent of whatever they are ordered to pay. Contribution claims under s 17 of the Law Reform Act 1936 may be made only if the liabilities of the wrongdoers are in tort. Here the contribution claim is not made under the Law Reform Act. While Corban Revell is sued in tort, it claims contribution for its alleged liability for breach of fiduciary duty. It says that Mr Maurice Hunt is also liable for breach of fiduciary duty. Those are breaches of obligations in equity. Its claim is for equitable contribution.

[20] For this decision, I assume that if the Hunt Family Trustees had sued Maurice Hunt before he was adjudicated bankrupt they would establish that he was liable to them for breach of fiduciary duty. I also assume that his breaches of fiduciary duty caused the same damage for which the Hunt Family Trustees allege that Corban Revell are liable.

[21] Contribution at equity is available only if there is coordinate liability – both wrongdoers are under a common obligation to the victim. Corban Revell may have difficulties on this point, but that is better left to trial. I cannot say that it is unarguable.
[22] I assume that there are no limitation difficulties. Section 34 of the Limitation Act 2010 sets a two-year time limit for contribution claims. Time to make a contribution claim runs from when the first wrongdoer’s liability is quantified by an agreement, award or judgment. It does not matter that the victim’s claim against the second wrongdoer is time-barred.⁴ So far, Corban Revell’s liability has not been established and therefore time has not started to run under s 34.

The effect of Maurice Hunt’s discharge from bankruptcy

[23] Instead, the question turns on the effect of Mr Hunt’s discharge from bankruptcy in October 2016. Section 304 of the Insolvency Act 2006 says:

(1) On discharge, the bankrupt is released from all debts provable in the bankruptcy except those listed in subsection (2).
(2) The bankrupt is not released from the following debts:

(a) any debt or liability incurred by fraud or fraudulent breach of trust to which the bankrupt was a party:

...

[24] Under s 231(1), a provable debt is a debt or liability that a creditor of a bankrupt may prove in a bankruptcy. Liability in equity for causing loss may be the subject of a claim in bankruptcy, including a claim for loss from breach of fiduciary duty.

[25] Corban Revell say that Mr Hunt’s liability for breach of fiduciary duty was not a provable debt when he was adjudged bankrupt in 2013. They argue that a claim for contribution will only accrue when judgment is given against them for any liability to the Hunt trustees. Because a court has not yet pronounced them liable, Mr Hunt could not have been liable to a contribution claim by them when he was adjudicated bankrupt. There was no provable debt in his bankruptcy and the discharge does not bar them from claiming contribution if they are found liable after his discharge.

4. See s 34(2)(b): “contribution from a third person... who is, or would if sued in time by (the victim) have been liable to (the victim) in a coordinate way...” (Emphasis added).

[26] There are two reasons for not accepting that argument. First it ignores the fact that under s 304 Maurice Hunt was discharged from liability to the Hunt family trustees. For a contribution claim both wrongdoers need to be liable to the victim. If one is not liable, they cannot be required to contribute to the other wrongdoer’s liability. That is clearly recognised in contribution claims between concurrent tortfeasors under s 17 of the Law Reform Act 1936.⁵ On Corban Revell’s case Maurice Hunt’s alleged breaches of duty took place before he was adjudicated bankrupt. The Hunt family trustees could make a claim in his bankruptcy for his breaches of duty. The fact they did not is irrelevant. In 2016 he was released from any liability for those breaches of duty on his discharge from bankruptcy. That release works whether the trustees or Corban Revell sue him. He can no longer be sued for those breaches.

[27] Second, an accrued cause of action is not required for a provable debt in bankruptcy. Creditors may claim, even though their claims are contingent and causes of action may not have accrued before the debtor is made bankrupt. Section 251 of the Insolvency Act makes this clear:

If a creditor’s claim is subject to a contingency or is for damages, or if, for some other reason, the amount of the claim is uncertain, the Assignee may estimate the amount of the claim.

(Emphasis added)

The case law recognises this too: see Commissioner of Inland Revenue v Duncan, Lord Hoffmann’s discussion of quantifying cross-claims in insolvency set-off in Stein v Blake, and the recognition of future tort claims in liquidations in Re T & N Ltd and Re Salamanca Investments Ltd.⁶ These were insolvency cases, where the relevant legislation did not match the Insolvency Act 2006, but they reflect the general principle of insolvency law that the debts of the bankrupt are treated as ascertained and his assets distributed among the creditors on adjudication. It is also seen in insolvency set-off, conversion of debts in foreign currencies and acceleration of liabilities.

5. George Wimpey & Co Ltd v British Overseas Airways Corporation [1955] AC 169 (HL), Waitapu v R H Tregoweth Ltd [1975] 2 NZLR 218 (SC), Blair & Co Ltd v Queenstown Lakes District Council [2010] NZSC 44, [2010] 3 NZLR 17 and Lee v Whangarei District Council [2018] NZHC 899.
6. Commissioner of Inland Revenue v Duncan [2007] NZCA 235, [2007] 3 NZLR 360, Stein v Blake [1996] AC 243 at 252, Re T & N Ltd [2005] EWHC 2870, [2006] 1 WLR 1728 and Re Salamanca Investments Ltd [2015] NZHC 572, [2015] 3 NZLR 411.

[28] On his adjudication Maurice Hunt had done everything that might make him liable for breaches of fiduciary duty. The trustees could claim for their losses in his bankruptcy. Corban Revell’s ability to claim contribution turned on their being found liable to the trustees. Their claim was contingent because they had not been found liable when Maurice Hunt was adjudged bankrupt, but that contingency does not stand in the way of a potential liability for contribution counting as a provable debt in his bankruptcy and being discharged under s 304.

[29] Accordingly, Mr Hunt’s liability for contribution has been discharged unless one of the exceptions under s 304 of the Insolvency Act applies.

The fraud exception to s 304

[30] Corban Revell rely on s 304(2)(a) to say that they are entitled to claim contribution because Mr Hunt was liable to the trustees of the Hunt Family Trust for fraud or fraudulent breach of trust. Corban Revell say that they do not have to allege actual dishonesty by Mr Hunt. It is sufficient if they show “equitable fraud”. For that they rely on commentary, a passage in Heath and Whale Insolvency Law in New Zealand, and FT Investments Ltd v Klisser.⁷ The passage in Heath and Whale says that the court has interpreted fraud in other legislation to include equitable fraud which encompasses breach of fiduciary duty. Cases under s 28 of the Limitation Act 1950 are referred to. “Fraud” in the Insolvency Act should be interpreted in the same way.

[31] I do not accept that fraud and fraudulent breach of trust in s 304 of the Insolvency Act 2006 can be equated with “equitable fraud” as that term was used in cases under s 28 of the Limitation Act 1950. Section 28 provided for extensions of time for bringing proceedings where a defendant had fraudulently concealed a cause of action. Fraudulent concealment was held to mean not only actively concealing a cause of action, but also failing to disclose a cause of action when the defendant was under an affirmative duty of disclosure to the plaintiff.⁸ Section 304 of the Insolvency

7. Heath and Whale Insolvency Law in New Zealand, para 9.17; FT Investments Ltd v Klisser [2009] NZHC 1995; [2010] 2 NZLR 217 (HC).
8. See Inca NZ Ltd v Autoscript NZ Ltd [1979] 2 NZLR 700, Matai Industries Ltd v Jensen [1988] NZHC 205; [1989] 1 NZLR 525 and Renie Gibson Family Trustee (2016) Ltd v Westpac Banking Corporation [2018] NZHC 974.

Act has a different purpose from a limitation statute. An important purpose of bankruptcy is to discharge insolvents of their debts and liabilities so that they may make a fresh start without being dogged by creditors for matters going back before their adjudication. Parliament has however provided exceptions, one being liability incurred by fraud or fraudulent breach of trust. The obvious intention is that debtors should still be exposed to liability for their dishonesty, notwithstanding their discharge. Bankruptcy is a consequence of insolvency which may arise from all manner of causes. In many cases debtors’ conduct may be open to justified censure. But unless they have been fraudulent (or the matter falls in one of the other exceptions under s 304), their discharge releases them from liability from all claims. It should not matter that for some causes of action equity uses “equitable fraud” as a label for fixing liability, if the debtor was not in fact dishonest.

[32] Stevens J’s judgment in FT Investments Ltd v Klisser does not change this position. Admittedly, Stevens J did refer to the passage in Heath and Whale, but when his judgment is read as a whole, it is clear that he used “fraud” in the sense of actual dishonesty. In that case leave under s 76(2) of the Insolvency Act was sought to continue a proceeding against a bankrupt after adjudication. One of the plaintiff’s grounds for continuing the proceeding after adjudication was that it wanted to establish fraud on the part of the defendant so that his liability would not be discharged under s 304 of the Insolvency Act. Stevens J held that the case as pleaded met the requirements of s 304(2)(a). The case pleaded actual dishonesty on the part of the bankrupt.⁹ He referred to and followed the discussion of dishonesty in the Privy Council’s decision in Royal Brunei Airlines Sdn Bhd v Tan.¹⁰ After referring to earlier bankruptcy legislation, he said:¹¹

And:¹²

But it is important to note that the term ‘fraud’ has remained throughout all amendments to the original provision.

It is noteworthy that, when the legislature originally determined the extent of the exception, it was based upon the general concept of fraud. The legislation did not choose to refer to the technical forms of action. Had that been the

⁹ FT Investments Ltd v Klisser [2009] NZHC 1995; [2010] 2 NZLR 217 (HC) at [42], [46].

¹⁰ Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378 (PC) at 389.

¹¹ At [50].

¹² At [51].

case, reference would undoubtedly have been made to deceit, which was a common way of precluding fraud.

He was satisfied that the case alleged actual dishonesty by the bankrupt and he allowed the allegation of fraud to stand, even though liability was alleged in equity, rather than at common law. His decision does not support Corban Revell’s argument that under s 304(2)(a) of the Insolvency Act liability for conduct not involving actual dishonesty can survive a discharge in bankruptcy.

[33] Responsibly Corban Revell cited cases going against them: The Fish Man Ltd (in liq) v Hadfield and Templeton Insurance Ltd v Brunswick.¹³ Both cases held that s 304(2)(a) and its English equivalent require actual dishonesty. Accordingly if Corban Revell wish to claim against Maurice Hunt for a liability that has survived his discharge under s 304(2)(a), they will need to plead and prove actual dishonesty on his part, no matter what cause of action they allege against him.

[34] If Corban Revell are to allege actual dishonesty by Maurice Hunt they need to do so properly. I repeat part of my judgment of 24 September:¹⁴

In Ng v Harkness Law Ltd¹⁵I referred to the Court of Appeal’s decision in Schmidt v Pepper New Zealand (Custodians) Ltd¹⁶ and to the Supreme Court’s decision in Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd:¹⁷

[41] Where a cause of action involves fraud, dishonesty or other reprehensible conduct as one of the matters to be proved, plaintiffs are required to make sure that they have a proper basis for alleging fraud, to plead it clearly and to give adequate particulars. The Court of Appeal stated the standard approach in Schmidt v Pepper New Zealand (Custodians) Ltd:

[15] Allegations of fraud or dishonesty are very serious. They must be pleaded with care and particularity. As the authors of Bullen & Leake & Jacobs Precedents of Pleadings emphasise, counsel must

13. The Fish Man Ltd (in liq) v Hadfield [2016] NZHC 1750 and Templeton Insurance Ltd v Brunswick [2012] EWHC 1522 (Ch).

¹⁴ Perrott-Hunt v Johnston [2018] NZHC 2568 at [14]- [15].

¹⁵ Ng v Harkness Law Ltd [2014] NZHC 850 at [41]–[42].

16. Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15]. For the responsibility of counsel in alleging fraud or other reprehensible conduct, see X v Y [2000] 2 NZLR 748 (HC) at [58] and the Lawyers and Conveyancers (Lawyers: Conduct and Client Care) Rules 2008, r 13.8.
17. Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94; [2013] 1 NZLR 804.

not draft any originating process or pleading containing any allegation of fraud unless they have reasonably credible material which, as it stands, establishes a prima facie case of fraud – that is, material of such a character which would lead to the conclusion that serious allegations could properly be based upon it. Fraud cannot be left to be inferred from the facts – fraudulent conduct must be distinctly alleged and as distinctly proved. General allegations, however strong the words may appear to be, are insufficient to amount to a proper allegation of fraud.

[42] In a different context (a proceeding to set aside a judgment on the grounds that it was fraudulently obtained), the Supreme Court has taken a similar position on allegations of fraud, saying that “the plaintiff’s claim of fraud must be one that is fully and precisely pleaded and particularised and of sufficient apparent cogency that it should go to trial.” It also indicated that the adequacy and cogency of the pleadings could be tested by a strike-out application under r 15.1 of the High Court Rules:

So where a defendant in a proceeding involving the fraud exception applies to strike it out, the plaintiff is required to discharge the onus of showing it has a case with an evidential foundation amounting to a prima facie case of fraud.

In particular, I take note that in the Supreme Court, McGrath J emphasised the need for claims of fraud to be fully and concisely pleaded and particularised and of sufficient apparent cogency that it should go to trial. He indicated that fraud allegations could be tested by a strike-out application where the plaintiff would have the onus of showing an evidential foundation amounting to a prima facie case of fraud.¹⁸

[35] While the proposed statement of claim pleads a claim for breaches of fiduciary duty to the trustees, it does not allege actual dishonesty by Maurice Hunt. It does not meet the requirements for a pleading of fraud. Corban Revell should have the opportunity to prepare a fresh pleading to see if they can meet those requirements. The hearing is adjourned to Friday 19 October 2018 at 2.15 pm for that purpose. If the proposed pleading is sound, further case management directions may be given.

[36] The hearing is adjourned accordingly.




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

Associate Judge R M Bell

¹⁸ At [33].