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High Court of New Zealand Decisions |
Last Updated: 12 February 2019
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV 2017-404-003101
[2018] NZHC 3439 |
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BETWEEN
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REDWOOD GROUP LIMITED
Plaintiff
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AND
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QUEENSTOWN GATEWAY (5M) LIMITED
First Defendant
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AND
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CRAIG DALLAS GREENWOOD
Second Defendant
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AND
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CQ TRUSTEE COMPANY LIMITED
Third Defendant
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AND
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CLEARMONT (QUEENSTOWN LIMITED)
Fourth Defendant
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Hearing:
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27 & 31 August 2018
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Appearances:
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J W H Little & R J Hollyman for Plaintiff
P Skelton QC & M Greenop for First, Second & Third Defendants P
Watts QC for Fourth Defendant
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Judgment:
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20 December 2018
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JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 20 December 2018 at 3.30pm Pursuant to Rule 11.5 of the High Court Rules
..............................
Registrar/Deputy Registrar
Solicitors:
Harmos Horton Lusk, Auckland Beca & Co, Auckland
Wynn Williams, Auckland
REDWOOD GROUP LIMITED v QUEENSTOWN GATEWAY (5M) LIMITED [2018] NZHC 3439 [20 December 2018]
TABEL OF CONTENTS
Introduction
[1] This decision concerns interlocutory applications by the defendants, Queenstown Gateway 5M Ltd (5M), Craig Greenwood, CQ Trustee Company Ltd (CQT) and Clearmont (Queenstown) Ltd (Clearmont) for orders for security for costs and discovery against the plaintiff, Redwood Group Ltd (Redwood), and by the plaintiff for orders for discovery against the first and third defendants, 5M and CQT.
[2] The plaintiff and the plaintiff’s sole director, Anthony Gapes, are in dispute with Mr Greenwood, CQT and Clearmont, over rights to a property development in Queenstown, the Five Mile Development, owned and operated by 5M. CQT is the legal owner of the shares in 5M. Clearmont owns the shares in CQT. Mr Greenwood is the sole director of 5M and of CQT and, together with Shannon Walsh, is a director of Clearmont. Clearmont is controlled by trusts associated with Mr Greenwood and Mr Walsh.
[3] The plaintiff alleges that it and Clearmont are in a joint venture for the Five Mile Development and that 5M holds its assets and that CQT owns the shares in 5M on trust for the plaintiff and Clearmont in proportions agreed between those parties. The plaintiff alleges that its rights in respect of the Five Mile Development have been substantially eroded by actions taken by 5M at the direction of Clearmont and Mr Greenwood, and that these actions breach the duties of 5M and CQT as trustees to act impartially as between the beneficiaries (Redwood and Clearmont).
[4] The plaintiff has brought proceedings alleging breach of trust by 5M and CQT, dishonest assistance by Mr Greenwood, oppressive and unfairly prejudicial conduct by 5M, and knowing receipt by Clearmont. It seeks equitable compensation from 5M, CQT, and Mr Greenwood, and declarations that would uphold its asserted right to 46.8 per cent of the assets and shares of 5M.
[5] The defendants deny that the plaintiff and Clearmont are in a joint venture for the Five Mile Development and say that the relevant party may be the plaintiff’s predecessor company, Victoria Street West Ltd, which is now in liquidation. The defendants also deny that CQT holds its shares on trust, and say that, in any event, there has been no breach of trust by 5M or CQT.
Interlocutory applications
[6] By notice dated 11 June 2018, the defendants filed an interlocutory application seeking:
(a) Leave to issue a third party notice against Victoria Street West Ltd (in liquidation), the company that formerly traded as Redwood Group Ltd;
(b) An order for security for costs of $150,000 against the plaintiff and an order staying the plaintiff’s proceeding until the security is paid into Court;
(c) Orders for discovery against the plaintiff and for third party discovery against KCM Finance Ltd and its director, Kerry Knight.
[7] By affidavit sworn on 11 June 2018, Gregory Horton of Harmos Horton Lusk, solicitors, supported the defendants’ application.
[8] By notices dated 27 June 2018, the plaintiff opposed the defendants’ application and filed its own interlocutory application seeking orders for discovery against 5M and CQT.
[9] By affidavit sworn on 27 June 2018, Mr Gapes supported the plaintiff’s application and the plaintiff’s opposition to the defendants’ application.
[10] Further affidavits were sworn by Colin McCloy, the liquidator of Victoria Street West, Mr Greenwood, Mr Walsh, Mr Horton, and Mr Gapes.
[11] I heard the defendants’ application on 27 August 2018 and the plaintiff’s application on 31 August 2018. For the reasons given in my interim judgment dated 4 September 2018,1 I granted leave to the defendants to issue a third party notice to Victoria Street West while reserving my decision on the remaining issues raised in the applications.
1 Redwood Group Ltd v Queenstown Gateway (5M) Ltd [2018] NZHC 2311.
[12] Following my interim judgment and adjustments made to the applications at the hearing, the remaining questions for determination are:
(a) Defendants’ application:
(i) Whether the plaintiff should be required to pay security for costs and if so how much;
(ii) Whether the plaintiff should be required to list individually the documents for which it has claimed solicitor-client privilege;
(iii) Whether the Court should make an order for third party discovery against KCM Finance Ltd and its director, Kerry Knight;
(b) Plaintiff’s application:
(i) Whether 5M and CQT should be required to disclose to the plaintiff documents for which 5M and CQT have claimed litigation privilege;
(ii) Whether 5M, CQT and Clearmont should be required to disclose to the plaintiff documents for which Clearmont has claimed solicitor-client privilege and which 5M and CQT have had in their control.
Conclusions and orders
[13] For the reasons set out in this judgment, I have reached the following conclusions:
(a) There is credible evidence from which it may reasonably be inferred that the plaintiff will be unable to meet a costs order if it is unsuccessful in its claim, and it would be appropriate to make an order for security for costs in the sum of $100,000 to be paid in three instalments;
(b) It would be inconsistent with the High Court Rules and established authorities to require the plaintiff to list individually the documents for which it has claimed solicitor-client privilege;
(c) The documents for which the defendants seek third party discovery are relevant to the claims the plaintiff makes against the defendants and an order for third party discovery is appropriate;
(d) 5M and CQT should not be required to disclose documents for which they have claimed litigation privilege;
(e) 5M, CQT and Clearmont should not be required to disclose documents for which Clearmont has claimed solicitor-client privilege.
[14] Accordingly, I make the following orders:
(a) The plaintiff is to pay $100,000 as security for costs, such amount to be paid into Court in three instalments as follows:
(i) $30,000 by 4 February 2019;
(ii) $30,000 by 19 March 2019;
(iii) $40,000 by 20 May 2019.
If the payments are not made by 5.00 pm on the above dates, the proceeding is stayed until the costs are paid.
(b) KCM Finance and its director, Kerry Knight, are to:
(i) File an affidavit stating:
Costs and Discovery Orders dated 11 June 2018 (Schedule C) are or have been in their control; and
(ii) Serve the affidavit on the plaintiff and the defendants; and
(iii) If the documents listed in Schedule C are in their control, to make those documents available for inspection by the plaintiff and the defendants in accordance with r 8.27 of the High Court Rules 2016.
Relevant background facts
[15] 5M, which was incorporated in March 2011, owns and operates the Five Mile Development in Queenstown, which includes the Five Mile Centre, a major retail precinct.
[16] Mr Gapes was closely involved in the early stages of the Five Mile Development which were undertaken by Queenstown Gateway Ltd. Initial funding for the Five Mile Development was provided by General Distributors Ltd (Progressive Enterprises) which was granted a first mortgage over the development.
[17] In August 2010, Clearmont agreed to lend Queenstown Gateway up to $2.25 million by way of a junior facility agreement (JFA) to assist in the financing of the Five Mile Development. Clearmont’s loan was secured by a second mortgage over the development. Under the JFA, Clearmont was granted an option to acquire a 35 per cent equity interest in the development.
[18] In February 2013, Queenstown Gateway transferred ownership of the Five Mile Development land to 5M.
[19] Later in 2013, Queenstown Gateway and 5M obtained financing from the ANZ Bank Ltd which was used to repay the loan from Progressive Enterprises. The ANZ became the first secured lender over the development. As part of the financing arrangements with the ANZ, Clearmont was required to provide a guarantee to ANZ.
[20] The arrangements between Queenstown Gateway, 5M and Clearmont for the ownership and control of the Five Mile Development and its assets were set out in a series of letter agreements. These provided, among other things, that Mr Greenwood would join Mr Gapes on the boards of Queenstown Gateway and 5M, and that 5M and Queenstown Gateway would hold the assets of the Five Mile Development on trust for the company then called Redwood Group Ltd and Clearmont, or their nominated entities, in specified proportions. Initially, those proportions were 60 per cent to Redwood and 40 per cent to Clearmont.
[21] Under the letter agreements, it was recognised that Clearmont had an option to be repaid its loan upon demand to 5M under what was termed the Tranche C facility under the JFA, or to convert its debt to equity in 5M at a specified conversion rate.
[22] In May 2014, Clearmont agreed to advance 5M a sum in excess of $800,000 to enable 5M to meet a demand from a creditor. Mr Gapes left the board of 5M and was replaced by Andrew Showler. The shares of 5M were transferred to CQT whose board comprised Mr Greenwood and Mr Showler. The proportions in which Redwood and Clearmont held their assets in the Five Mile Development were adjusted to 52 per cent to Redwood and 48 per cent to Clearmont.
[23] The plaintiff says that the company then called Redwood Group Ltd, by deed of nomination dated 1 October 2014, nominated the plaintiff, then called Barnaby Group Ltd, as the holder of its interests in the Five Mile Development and that on 2 October 2014 Barnaby Group changed its name to Redwood Group Ltd. The defendants deny any knowledge of this nomination and challenge its validity. The defendants do not accept that the plaintiff has succeeded to Redwood’s rights in the Five Mile Development. There is no dispute, however, that the company that previously traded as Redwood Group Ltd changed its name to Victoria Street West Ltd and was later put into liquidation.
[24] In early 2015, the ANZ required Clearmont to perform on its guarantee because of construction contact disputes between 5M and Naylor Love Ltd, the construction company undertaking the development. Clearmont advanced a further $2,000,000 to 5M at an interest rate of 18 per cent per annum, compounding monthly. These funds were advanced under the Tranche C facility and were subject to Clearmont’s option to convert debt into equity.
[25] In January 2015, the proportions in the holdings of assets in the Five Mile Development were further adjusted to 48 per cent to Clearmont, 41.6 per cent to Redwood and 10.4 per cent to the Showler Family Trust.
[26] In late 2015, the proportions in the holdings of assets in the Five Mile Development were further adjusted to 53.2 per cent to Clearmont and 46.8 per cent to Redwood. Mr Showler left the boards of 5M and CQT, leaving Mr Greenwood sole director of both companies.
[27] The plaintiff says that from July 2015 it was in 5M’s best interests to repay the Tranche C debt owing to Clearmont which stood at approximately $2,284,000, but that 5M took no steps to do so then or at various other points in 2015, 2016 and 2017 when it says there were opportunities to do so. The defendants deny that it made business sense to repay the debt at any of those times given the state of the development and 5M’s high debt loading. The defendants say that the plaintiff did not raise the issue of 5M refinancing or repaying the Tranche C debt prior to November 2017. They also say that ANZ consent would have been required and that there was no reasonable prospect of the ANZ consenting to such repayment.
[28] The plaintiff also says Clearmont led it to believe Clearmont would not exercise its option to convert debt to equity. Clearmont denies that allegation.
[29] The plaintiff says that in November 2017, it offered a loan to 5M at 0 per cent interest to repay the Tranche C debt. 5M did not accept the proposal which, it said, could not secure ANZ consent.
[30] The plaintiff says it then obtained ANZ consent on specified terms but before those arrangements could be put in place, Clearmont exercised its conversion option, with the result that Clearmont became beneficially entitled to 78.95 per cent of the Five Mile Development and Redwood’s share was reduced to 21.05 per cent.
[31] On 22 December 2017, the plaintiff filed its proceeding against the defendants. The proceeding has been set down for a two-week hearing commencing 17 June 2019.
Defendants’ application for security for costs
[32] The defendants seek an order pursuant to r 5.45 of the High Court Rules 2016 requiring the plaintiff to pay $150,000 into Court as security for costs. Under the Rule, a Judge may, if he or she thinks it just in all the circumstances, order the giving of security for costs if satisfied there is reason to believe that a plaintiff will be unable to pay a defendant’s costs if the plaintiff is unsuccessful in its proceeding.
[33] Three issues arise:
(a) Is there reason to believe the plaintiff will be unable to meet an award of costs against it?
(b) If the answer to (a) is yes, would it be appropriate to make an order for security for costs?
(c) If the answer to (b) is yes, how much security is appropriate?
Is there reason to believe the plaintiff would be unable to meet a costs award?
[34] As Kós J said in Highgate on Broadway Ltd v Devine, whether or not a plaintiff will be able to meet a costs award is essentially a question of fact, and there is no burden of proof or predisposition one way or the other.2 Citing Duffy J in Sharda Holdings Ltd v Gasoline Alley Services Ltd and Quilliam J in Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2), Kós J also said that it is enough if the Court
is satisfied there is credible evidence from which it may reasonably be inferred that the plaintiff will be unable to meet a costs order.3
[35] The defendants, in the affidavits sworn by Mr Horton and in the submissions of Mr Skelton QC for 5M, CQT and Mr Greenwood, and the submissions of Mr Watts QC for Clearmont, say there are strong grounds for believing the plaintiff will be unable to pay the their costs because:
(a) Mr Gapes has a history of operating companies that have either been placed into liquidation or removed from the Companies Register and, as Mr Watts puts it, the plaintiff is a “phoenix” company which Mr Gapes is likely to starve of assets and allow it to fall into liquidation rather than pay costs awarded to the defendants;
(b) The plaintiff relies principally on its entitlement to a beneficial interest in the assets of 5M as demonstrating its ability to meet a costs award but it has yet to be established whether it is the plaintiff or Victoria Street West that is beneficially entitled to the 5M assets;
(c) If the Court finds at the substantive hearing that Victoria Street West rather than the plaintiff is beneficially entitled to the 5M assets, the plaintiff is not a shareholder in Victoria Street West and even if Mr Gapes, as sole shareholder of Victoria Street West, undertakes to cause Victoria Street West to meet any costs award, Victoria Street West’s liabilities to creditors will take priority and will exhaust Victoria Street’s assets;
(d) Mr Gapes has not undertaken to meet any costs award outside of what may be available from 5M and Victoria Street West.
[36] In support of these contentions, the defendants refer to the fact Victoria Street West is in liquidation and has unsecured creditors of several million dollars and to the fact that Mr Gapes is the sole director of two other companies currently in liquidation. In one of his affidavits, Mr Horton exhibited a Companies Officer Search Results which shows that Mr Gapes has been the director of 55 companies that have been removed from the Companies Register. Mr Horton also exhibited a judgment by Associate Judge Bell in which the reference is made to Mr Gapes’ practice of changing the names of companies to keep the Redwood name alive while letting insolvent companies in his group fall by the wayside.4
[37] Mr Skelton refers the Court to Mr McCloy’s affidavit in which the liquidator for Victoria Street West says his predecessor as liquidator had prepared a report showing creditors’ liabilities of $1,407,080 and that he, Mr McCloy, is aware of potential additional creditor claims totalling $2,731,474 plus interest. Mr Skelton also says that even if the validity of the deed of nomination of the plaintiff as the holder of the Redwood interests in the Five Mile Development is upheld at the substantive hearing, Mr McCloy states in his affidavit that he is proposing to commence a proceeding to set aside the nomination as a breach of Mr Gapes’ duties as director of Victoria Street West and a voidable transaction under the Companies Act 1993.
[38] The plaintiff does not respond to the defendants’ allegations about Mr Gapes’ alleged practice of allowing companies to become insolvent. Rather, Mr Gapes in his affidavits and Mr Hollyman, counsel for the plaintiff, say there is no need for the plaintiff to pay security for costs because the plaintiff is confident that if it is unsuccessful it will be able to pay the defendants’ costs given the value of Redwood’s interest in the Five Mile Development. Mr Gapes estimates the value of the development as being $66,000,000, although he notes that a valuation of the development at an earlier stage provided by the defendants during discovery puts the value at $18,965,000. Mr Gapes says that, at a minimum, the plaintiff is entitled to
21.05 per cent of the equity in the development: 21.05 per cent of $66,000,000 is
$13,890,000; 21.05 per cent of $18,965,000 is $3,900,000.
4 Baker v Gilbert [2015] NZHC 3311 at [34].
[39] Mr Gapes’ says he is the sole shareholder in Victoria Street West and that even if the deed of nomination of 1 October 2014 were to be set aside, he is confident that the plaintiff could meet any costs award because the maximum that the liquidator of Victoria Street West could claim of that equity is about $700,000 which Mr Gapes understands is the amount currently owing to Victoria Street West’s creditors.
[40] Mr Hollyman submits that the defendants have provided no realistic basis for their claim that the deed of nomination was not validly made on 1 October 2014 and refers to evidence adduced by Mr Gapes and former employees of Redwood Group that the deed was made on that date. He also says that since there has been no action by the liquidators of Victoria Street West to challenge the deed of nomination, that possibility can be put aside. Mr Hollyman also refers to Mr Gapes’ confidence that the plaintiff could meet any costs award even if the deed of nomination was not held to have been validly made and that Mr Gapes has undertaken to cause Victoria Street West to pay any costs award against the plaintiff once all other creditors have been paid.
[41] The plaintiff will be liable to pay the defendants’ costs if it is unsuccessful in its proceeding. Lack of success could come about if:
(a) The Court finds that the deed of nomination of 1 October 2014 was not validly made, with the result that the plaintiff would have no beneficial rights to the 5M assets; or
(b) The Court upholds the validity of the deed of nomination but dismisses the plaintiff’s claims that there have been breaches of trust, dishonest assistance, oppressive and unfairly prejudicial conduct, and knowing receipt, and does not disturb the proportions held by Redwood and Clearmont in the 5M assets following Clearmont’s exercise of its conversion rights: 78.95 per cent for Clearmont and 21.05 per cent for the plaintiff.
[42] In the former case, the only source offered by the plaintiff and Mr Gapes for meeting a costs award is the value of the 5M assets that would be held by Victoria Street West. Assuming the Court does not disturb the proportions of 78.95 per cent for Clearmont and 21.05 for Redwood – that is, Victoria Street West, and, for reasons of prudence, using the lower figure used by Mr Gapes to assess the equity in the Five Mile Development of $18,965,000, Victoria Street West’s share of those assets would be $3,900,000. According to the figures in Mr McCloy’s affidavit, which directly contradict Mr Gapes’ estimate of $700,000 for outstanding creditors’ claims, the value that Victoria Street West would receive from a full realisation of the 5M assets would be exhausted by the claims of creditors which Mr Gapes acknowledges have priority and which Mr McCloy says total over $4,100,000. Under that scenario, therefore, it would seem likely that the plaintiff would be unable to meet the defendants’ costs.
[43] In the latter case, and leaving aside any questions about the plaintiff’s ability to realise the value of the 5M assets, the plaintiff would have $3,900,000 at its disposal. If its right to that value was unchallenged, the plaintiff would be able to meet the defendants’ costs. However, Mr McCloy has said on oath that he is proposing to commence proceedings to set aside the deed of nomination which, if successful, would likely result in the value of the 5M assets ending up with Victoria Street West regardless. Mr Skelton submitted that there is a high likelihood that any such proceeding by the liquidator would be successful because the nomination was made for no consideration and was to the detriment of Victoria Street West’s creditors.
[44] The Court does not have sufficient information to reach a view on the prospects of the liquidator succeeding in an action to set aside the deed of nomination. However, I consider it is appropriate for the Court to take into account the real possibility that such an action will be brought and may succeed.
[45] In the light of the evidence of the assets likely to be available to the plaintiff if it is unsuccessful in its claim and the evidence of the liquidator’s intention to set aside the deed of nomination if its validity is upheld, it may reasonably be inferred under either of the above scenarios that the plaintiff will be unable to meet the defendants’ costs.
[46] The answer, therefore, to the issue in [33](a) is “Yes”.
Would it be appropriate to make an order for security for costs?
[47] In McLachlan v MEL Network Ltd, the Court of Appeal held that the discretion to order security for costs, once a Judge is satisfied there is reason to believe a plaintiff will be unable to pay a defendant’s costs, is unfettered by constructing “principles” from the facts of previous cases and that what is required is a careful assessment of the circumstances of the particular case.5 The Court of Appeal also held that the rule contemplates the possibility that an order for security for costs may, in effect, prevent a plaintiff from pursuing its claim but said that in such a case an order should be made only after careful consideration and in a case which has little chance of success.6 On the other hand, the Court also said the interests of defendants also have to be weighed and that defendants must be protected from being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.7
[48] In the present case, the plaintiff does not say that an order of security for costs would have the effect of preventing the plaintiff from bringing its claim. While Mr Skelton described the plaintiff’s claim as “speculative” the defendants have not said the litigation is unjustified or that it is over-complicated and unnecessarily protracted.
[49] In the circumstances of this case, and bearing in mind the caution expressed by the Court of Appeal in McLachlan about constructing principles from previous cases, I do not consider it useful to go through a list of specific considerations such as those identified in Nikau Holdings v Bank of New Zealand and developed in Highgate on Broadway when considering whether it would be just in the circumstances to order security to be paid. Rather, I consider it more useful to consider the merits of the respective cases and the conduct of the parties that led to the plaintiff’s proceeding.
[50] Mr Skelton and Mr Watts say the merits lie firmly with the defendants, even leaving aside the validity of the deed of nomination. In particular, they say:
5 McLachlan v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA) at [13-[14].
6 At [15].
7 At [16].
(a) Even if the deed of nomination is held to be valid, there is a high likelihood it will be set aside.
(b) The plaintiff, or more particularly Mr Gapes, is largely responsible for the position in which the plaintiff and Mr Gapes find themselves. It was Mr Gapes’ actions that caused the creditor’s demand to be made on 5M in May 2014 and which led to the ANZ’s insistence that Mr Gapes leave the 5M board and which required an additional input of funds by Clearmont and led to a reduction of the plaintiff’s beneficial entitlement in 5M. The plaintiff also failed to manage the Naylor Love contract which led to substantial cost overruns, successful contract claims by Naylor Love, the ANZ calling on its guarantee and a further reduction of the plaintiff’s beneficial entitlement in 5M.
(c) The result of the above actions plus the need to progress the development and 5M’s debt loading meant that it did not make commercial sense to repay the Tranche C facility debt earlier as the plaintiff says should have happened. Therefore, the plaintiff will not be able to establish any breach of duty by 5M and CQT as trustees because it will not be able to prove that 5M had adequate funds to repay Clearmont while continuing to progress the development or prove that repaying Clearmont would have been a better use of 5M’s funds or that the ANZ would have given its consent.
(d) Despite the plaintiff saying there were opportunities in 2015, 2016 and 2017 for 5M to repay the Tranche C debt, it did not raise the possibility of refinancing the debt until November 2017. And if it had raised that possibility, it would still have been open to Clearmont to have exercised its conversion option at such times, albeit with reduced impact on Redwood’s share of the beneficial entitlement to 5M’s assets.
(e) The only concrete proposal from the plaintiff to repay the Tranche C debt via Fenton Projects was contrary to the loan agreement with the ANZ because it was not on an arm’s-length, normal commercial basis,
and the ANZ subsequently confirmed that the loan proposal was not acceptable.
[51] For the plaintiff, Mr Hollyman submits that the merits of the respective cases are more evenly balanced than defendants’ counsel suggest. In particular he says:
(a) The validity of the deed of nomination is not really at issue. The defendants’ insinuations of fraud have been answered by Mr Gapes’ swearing on oath that he signed the deed on 1 October 2014 and by the affidavits of one Redwood employee that she witnessed Mr Gapes signing the deed on that date and of a former employee that he believes he would have been involved in the deed’s preparation on the preceding day, even if he has no precise memory of those events. Mr Hollyman also says the defendants have known of the deed since October 2016 but only raised an issue about it when the plaintiff brought its proceeding.
(b) The defendants do not deny there were opportunities for 5M to repay the Tranche C debt in 2015, 2016 and 2017.
(c) While not denying that the Fenton Projects loan did not accord with the conditions of the ANZ loan agreement, there was still an opportunity for the plaintiff to put forward a proposal that satisfied the ANZ’s conditions and that opportunity was denied to the plaintiff by Clearmont’s exercise of its conversion option without regard to the interests of or its obligations to the plaintiff.
[52] It is not possible or appropriate to reach a firm view on the merits of the respective cases at this preliminary stage. In particular, I do not consider I have sufficient information to reach a view on the validity of the deed of nomination. Resolution of that issue is likely to turn on whether the Court accepts that Mr Gapes made the nomination on 1 October 2014 as he has sworn in his affidavit and for which he has supporting affidavits from others. In their affidavits of 5 July 2018,
Mr Greenwood and Mr Walsh effectively question Mr Gapes’ veracity, saying they had no knowledge of the deed of nomination until September 2016 and that Mr Gapes had been equivocal in his discussions with Mr Walsh prior to that date about which of Mr Gapes’ companies held the beneficial interest in the 5M assets.
[53] Putting to one side the validity of the deed of nomination, I also consider that I do not have sufficient information to reach a view about the state of the development and the other demands on 5M in 2015 – 2017 to assess whether it was or was not commercially sensible and consistent with the 5M’s obligations to Clearmont and Redwood for it to have repaid the Tranche C debt earlier and thereby to have preserved, or at least reduced the impact on Redwood’s percentage beneficial entitlement to the 5M assets. Nor was I addressed in any detail on the scope and contents of the duties of 5M and CQT (if the latter is held to be a trustee) to the plaintiff in the circumstances of the Five Mile development.
[54] That said, the defendants’ assertions that it would not have been commercially sensible or consistent with the 5M’s obligations to Clearmont and Redwood for it to have repaid the Tranche C debt earlier appear to be supported by the history of the Five Mile Development as it appears from the pleadings and the affidavits. Nor is this aspect of the defendants’ case seriously challenged by the plaintiff whose claim and supporting evidence are focused on the preservation of its position rather than the business needs of 5M and its creditors.
[55] For these reasons and without coming to a conclusive view on the merits of the plaintiff’s claims, I assess the balance on the merits to favour the defendants.
[56] It is also appropriate to take into account Mr Gapes’ history as a company director, in particular the recent history of Victoria Street West and the other two companies of which he is a director and which are currently in liquidation, as well as the longer history of 55 companies of which Mr Gapes has been a director being removed from the Companies Register. Section s 50 of the Evidence Act 2006 precludes reliance on Associate Judge Bell’s findings in Baker v Gilbert alone to prove Mr Horton’s allegations about Mr Gapes’ practice of allowing companies to fold while he moves on. However, the Companies Officer Search Results corroborate the point.
[57] Mr Gapes is entitled, within the requirements of the Companies Act and other regulatory requirements, to use company structures to protect his own interests and to minimise his exposure to others. There can be no question of using the security for costs mechanism to penalise Mr Gapes for doing so. However, it is relevant for the Court to take that history into account when deciding whether to exercise its discretion to require security in this case. This is particularly so when Mr Gapes has not offered to cover any award of costs outside of the 5M assets as they may be available to the plaintiff or Victoria Street West.
[58] I am satisfied that if the plaintiff’s claim is unsuccessful there is a reasonably high prospect there will be no funds available to meet a costs award unless an order for security is made. In that case and given my assessment that the balance on the merits is considerably in favour of the defendants, I find that it is appropriate in the circumstances of this case to make an order for security for costs.
[59] The answer, therefore, to the issue in [33](b) is “Yes”.
How much security is appropriate?
[60] The defendants propose security be set at $150,000. As set out in Mr Horton’s affidavit, that figure is based on the separate representation of the first to third defendants, 5M, CQT and Mr Greenwood, and of the fourth defendant, Clearmont at a two-week hearing as set down by Associate Judge Andrew in his case management conference minute dated 12 June 2018. The calculation is based on costs being set on a 2B basis with a reasonable allowance for disbursements. The defendants propose that security be paid in a single sum and for the proceeding to be stayed until that sum is paid into Court but Mr Skelton also acknowledges the possibility of two staged payments of 50 per cent of the estimated costs.
[61] Mr Hollyman submits for the plaintiff that if security is to be set, the sum should be set at no more than $65,000 and should be staged in three payments: 15 per cent, 15 per cent and 70 per cent with the final payment due a month before trial. Mr Hollyman submits that almost half the sum sought has been claimed as costs for Clearmont and so should be set aside and that, in any event, the defendants have been operating as a single team, with virtually identical statements of defence and one set
of submissions filed in support of the defendants’ interlocutory application and one filed in opposition to the plaintiff’s application. He also submits that the costs should be directed at covering the defendants’ future costs and not at recovering costs incurred to date.
[62] In Nikau Holdings, Master Williams QC identified a number of factors which may affect the amount of the security, including the amount and the nature of the relief claimed, the nature of the proceeding and the complexity and novelty of the issues and the estimate length of the hearing. He also said that the amount should neither be illusory nor oppressive.8
[63] Mr Skelton says Mr Gapes’ estimate of $66,000,000 as the value of the equity of the Five Mile Development is relevant when setting costs. However, the defendants themselves say that figure is not reliable. However, even using the figure of
$18,965,000 in the May 2017 valuation, the value of the Five Mile Development is substantial and, as a consequence, so too are the value and importance of the proceeding to the parties.
[64] Since the plaintiff has chosen to make separate claims against each of the defendants, I do not see the case for separating out the costs of Clearmont. I take Mr Hollyman’s point about the closeness in the way the defendants have conducted their defence to date, but, as became apparent at the hearing, that does not necessarily result in identical cases or greater efficiency. Even so, I accept that setting costs on the assumption of the preparation of two separate defences would be artificial. For that reason, I propose to discount the defendant’s estimate of costs by one-third, without precluding the defendants, if successful, later claiming scale costs for fully separate defences based on actual costs incurred. On the other hand, given the amount of work undertaken to date and the fact that the risk of the plaintiff being unable to meet a costs award applies equally to those costs, I do not exclude costs for steps already taken.
8 Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430 (HC) at 438 and 439.
[65] For the above reasons, I set security for costs at $100,000. That amount appropriately reflects the nature and importance of the issues at stake in a major property development without being oppressive. I agree that staging of costs is appropriate, but at a more incentivising rate than that proposed by Mr Hollyman. Having regard to the timetable set by Associate Judge Andrew, security should be paid in three instalments of:
(a) $30,000 by 4 February 2019, the close of pleadings date;
(b) $30,000 by 19 March 2019, the date for filing and serving the plaintiff’s briefs of evidence; and
(c) $40,000 by 20 May 2019, which is approximately one month before 17 June 2019, the date the hearing is to commence, and three days before the pre-trial conference set down for 23 May 2019.
[66] I agree with Mr Skelton that further court time to ensure compliance with this timetable should be avoided. Accordingly, I have ordered that if the payments are not made by 5.00 pm on the designated days the proceeding is stayed until the costs are paid.
Defendants’ claim for individual listing of privileged documents
[67] The defendants seek orders pursuant to r 8.16(1) and (3) of the High Court Rules that the plaintiff lists individually each document for which privilege is claimed.
[68] In Mr Gapes’ affidavit of documents, as amended by his affidavit of 27 June 2018, the plaintiff claims privilege for:
All documents created between 2013 and 2018 containing confidential communications between the plaintiff and its legal advisers and counsel for the purposes of obtaining professional legal services. I refer to these documents as documents subject to solicitor-client privilege.
All documents created between 2017 and 2018 containing communications between the plaintiff, its legal advisers, counsel and others for the purposes of this proceeding. I refer to these as documents subject to litigation privilege.
[69] As originally framed, the defendants’ application sought individual listing of all documents for which the plaintiff had claimed privilege: that is, documents subject to both solicitor-client privilege and documents subject to litigation privilege. At the hearing, however, Mr Watts said that the defendants accepted that it has been well- established in New Zealand that group listing of documents subject to litigation privilege is permitted. Accordingly, the defendants limit the claim for individual listing to documents subject to solicitor-client privilege and not subject to litigation privilege.
[70] Mr Hollyman says that the High Court Rules allow for group listing of both categories of privileged documents and there is no basis for making the differentiation for which Mr Watts contended.
[71] Rule 8.15 requires parties to a proceeding to file and serve an affidavit of documents that complies with the rule, subject to any modifications or directions contained in a discovery order. Rule 18.5(2)(e) requires parties to a proceeding to list or otherwise identify the documents required to be discovered in a schedule that complies with r 18.6 and Part 2 of Schedule 9 of the Rules.
[72] Rule 8.16(1) – (3) provides:
(1) The schedule referred to in rule 8.15(2)(e) must, in accordance with that discovery order, list or otherwise identify documents that –
(a) are in the control of the party giving discovery and for which the party does not claim privilege or confidentiality;
(b) are in the control of the party giving discovery for which privilege is claimed, stating the nature of the privilege claimed;
(c) are in the control of the party giving discovery for which confidentiality is claimed, stating the nature and extent of the confidentiality,
(d) have been, but are no longer, in the control of the party giving discovery, stating when the documents ceased to be in that control, and the person who now has control of them;
(e) have not been in the control of the party giving discovery but which that party knows wold be discoverable if that party has control of them.
(2) Subject to Part 2 of Schedule 9, documents of the same nature falling within subclause (1)(b), (d) or (e) may be described as a group or groups.
(3) The description of documents for which privilege is claimed under subclause (1)(b) must be sufficient to inform the other parties of the basis on which each document is included in a group under subclause (2).
[73] Clause 7(1) of the listing and exchange protocol in Part 2 of Schedule 9 sets out the format of document descriptions to be used in discovery and stipulates that the description of a document should state its document ID, date, document type, author, recipient, parent document ID (where applicable) and privilege category where claimed.
[74] Clause 9 of Schedule 9 provides:
9 Privilege
(1) Parties must agree on any specific privilege requirements for listing and exchange;
(2) Documents for which privilege is claimed may be group listed in accordance with rule 8.16(2);
(3) Documents must be given a description in accordance with clause 7(1), unless the description discloses information contained in a communication for which privilege is claimed;
(4) The parent document ID information must be noted in the list if the privilege relates to part of a document group.
[75] I agree with Mr Hollyman that there is nothing in the Rules to suggest a difference in the listing requirements for documents subject to solicitor-client privilege and documents subject to litigation privilege. The same requirements apply in both cases, including the requirement to state the nature of the privilege claimed.
[76] I also agree with Mr Hollyman and Mr Watts that there is a lack of clarity about what the Rules require for documents that may be group listed. On their face, r 18.16(3) and cl 7 and 9 of Schedule 9 would seem to require that any group listing of privileged documents must nonetheless:
(a) Provide sufficient information to inform the other parties of the basis on which “each document” is included the group;
(b) Meet the format requirements stipulated in Clause 7(1); that is, that each document be identified by document ID, date, document type, author and recipient.
[77] That might would suggest that even a group listing would need to list documents individually.
[78] As Mr Watts says, the practice has been to interpret r 8.16 in the light of the Court of Appeal’s decision in Guardian Royal Exchange Assurance of New Zealand Ltd v Stuart, and in particular to the following passage in the decision of Tompkins J:9
An affidavit of documents serves two objects. For documents discovered in the first part of the first schedule, it enables disclosure of their nature and significance so that the party seeking discovery can decide whether to seek production. It also enables the Court to order their production and to ensure that such order is enforced.
For documents discovered in the second part it enables the party seeking discovery to become aware of the documents for which privilege is claimed and to judge whether that claim should be challenged. This object will only be achieved if the documents are described with sufficient particularity.
For this reason, the documents discovered in the second part of the first schedule should be described with at least the same degree of particularity as those in the first part. Some categories need not be listed document by document. This will be so where there can be no challenge to the privilege such as:
“Correspondence between the defendant and its solicitors.”
In all other cases, the documents should be described in a way that informs the party seeking discovery and the Court of the nature of the document, the date it came into existence, the person who created it and the person to whom it is addressed, if any.
[79] I agree with Mr Watts that even though Guardian Royal Exchange predated the High Court Rules 2016 and was decided under the less detailed provisions of the 1985 Code of Civil Procedure, its principles still apply.10
[80] Mr Watts submits, however, that Tompkins J’s observations, particularly his reference to “Correspondence between the defendant and its solicitors”, were intended to apply only to litigation privilege and should not be taken as being equally applicable to documents for which solicitor-client is claimed. Mr Watts refers me to a line of decisions from the Supreme Courts of South Australia and Western Australia and to a first-instance decision from Hong Kong which, he says, provide the rationale for requiring a more particular listing of documents for which solicitor-client is claimed.11
[81] I do not accept that submission. I do not consider it is supported by Guardian Royal Exchange itself or by Kadlunga and the other Australian cases to which Mr Watts referred.
[82] Guardian Royal Exchange concerned a contest over the adequacy of the description of documents for which litigation privilege had been claimed. The question at issue was whether expert reports commissioned by Guardian Royal Exchange into the causes of a fire in respect of which insurance cover had been declined were adequately described in the second part of the affidavit of documents to enable the other party to assess whether the claim to privilege had been properly made. Central to that question was whether the documents had been prepared for the purpose of obtaining legal advice in anticipation of litigation.
10 See Attorney-General v Wang New Zealand Ltd (1990) 2 PRNZ 245; Vanda Investments Ltd v Logan HC Dunedin CIV-2009-412-219, 27 November 2009, at [10].
11 Kadlunga Properties v Electricity Trust of South Australia (1985) 39 SASR 410 (SASCFC); Boase v Seven Network (Operations) Ltd [2005] WASC 174; Lampson Australia Pty Ltd v Fortescue Metals Group [2010] WASC 217; Kong Wah Holdings Ltd (In liq) No 2 v Hongkong and Shanghai Banking Corp Ltd [2007] HKCFI 1056.
[83] There is an important distinction between communications between solicitor and client, where privilege does not depend on whether litigation is in prospect, and communications involving documents commissioned by the client or the lawyer from a third party where the question of whether the documents have been prepared for the purposes of litigation is likely to determine whether the communications are privileged. As Cooke J said in Guardian Royal Exchange:12
... there is a broad distinction between, on the one hand, confidential communications between client and solicitor (or barrister) for the purpose of obtaining or giving professional advice, and, on the other, the preparation of a report, whether internal in an organisation or from an outside source, wholly or partly for the purpose for the purpose of submission to legal advisers.
[84] And as Richardson J said in the same decision:13
But there is all the difference in the world between confidential communications between a solicitor and his client designed to encourage a candid flow of information and advice between them and the preparation by third parties of material for multiple purposes, one only of which is for consideration by the solicitor for apprehended litigation.
[85] However, there is no suggestion in either of those statements or in Tompkin J’s observations quoted at [78] that there is a distinction in terms of privilege between correspondence between solicitor and client when litigation is in prospect and correspondence between solicitor and client outside the litigation context. I consider that all members of the Court of Appeal in Guardian Royal Exchange were of the view that all communications directly between solicitor and client, whether prepared in contemplation of litigation or outside the context of litigation, are covered by solicitor- client privilege. For that reason, I conclude that no distinction was intended to be made in that decision between solicitor-client privilege and litigation privilege where the documents in question are communications directly between solicitor and client.
[86] Kadlunga was another case about the adequacy of the description of documents in respect of which litigation privilege had been asserted. It also concerned reports commissioned from third parties and whether those reports had been prepared for the
purposes of litigation. In his decision, White J noted that mistakes can be made as to the scope of the privilege and its applicability to particular documents and for that reason he emphasised the need for documents to be described adequately. However, he also emphasised that what is required in describing discovered documents will vary from case to case depending on the nature of the document and particular ground of privilege claimed. It was in the circumstances of that case, where timing of report preparation was likely to indicate whether a particular report had been prepared for the purposes of litigation, that the Court held that giving the dates that individual documents had been prepared was required.14
[87] As Dunningham J observed in Tierny v Earthquake Commission,15 date ranges for categories of documents are relevant to whether litigation privilege can properly be claimed. Timing of document preparation is usually of less relevance, however, in correspondence between solicitor and client outside of the litigation context. For that reason, it is arguable that there is a greater need for more particularised listing in the case of documents subject to litigation privilege than those subject only to solicitor- client privilege – which it the reverse of Mr Watts’ contention.
[88] I accept there may be occasions when a particularised listing of correspondence between solicitor and client is required, for example to enable the other parties to a proceeding to assess whether correspondence was genuinely “for the purposes of requesting, obtaining or giving professional legal services” – as the scope of legal professional privilege is described in s 54 of the Evidence Act 2006. Simunovich Fisheries Ltd v Television New Zealand Ltd is an example.16 However, I am not persuaded this is one of those cases, notwithstanding Mr Watts’ hypothesis that there might be correspondence from the plaintiff’s solicitors to the plaintiff forwarding a document prepared by a third party that would not be protected by solicitor-client privilege.
[89] Mr Watts acknowledged that one of the defendants’ objectives is to ascertain whether there were communications between the plaintiff or Mr Gates and their
15 Tierny v Earthquake Commission [2014] NZHC 2941 at [26].
16 Simunovich Fisheries Ltd v Television New Zealand Ltd [2008] NZCA 350 at [160].
solicitors that would indicate when the deed of nomination might have been prepared. However, even if there were such correspondence, it would likely be described in general terms, even in an individual listing, in order not to compromise the purpose for which privilege is claimed. In that case, the individual listing would not assist the defendants or the Court to assess whether a claim to privilege for that correspondence had been validly made – which, as Tompkins J made clear in Guardian Royal Exchange, is the object of listing documents for which privilege is claimed. In this respect, I conclude that the defendants’ objective is collateral to the purposes for which listing is required.
[90] For the above reasons, I do not accept the defendants’ contention that the plaintiff should be required to list individually the documents in respect of which solicitor-client privilege has been claimed.
Application for third party discovery
[91] The defendants seek third party discovery against KCM Finance Ltd and its director, Kerry Knight, in respect of all documentation sent or received between Kerry Knight or KCM Finance on the one hand and the plaintiff, Mr Gapes or Fenton Projects on the other between 1 September 2017 and 1 December 2017 with respect to the terms and conditions upon which KCM Finance would provide finance to the plaintiff or Fenton Projects.
[92] In his affidavit sworn on 11 June 2018, Mr Horton says the documents sought are relevant to the question of the terms and conditions upon which funding was available to Fenton Projects for the purpose of refinancing 5M’s debt to Claremont and that this question is relevant to whether the debt could have been repaid at an earlier date and, in that regard, to whether the finance would be on an arm’s length, normal commercial basis and acceptable to the ANZ whose consent would have been required.
[93] Mr Hollyman says there is no issue or relevant question in the proceeding about whether the loan finance was being secured or provided on an arm’s length, normal commercial basis and that the finance that Mr Gapes offered through Fenton Projects, was never suggested as being on an arm’s length basis because the offer was expressed
to be “fully postponed and subordinated” and would attract 0 per cent interest. Mr Hollyman also says that the only documents relevant to whether the loan was being secured or provided on an arm’s length, normal commercial basis are communications between Fenton Projects and 5M and that all such documents relevant to that issue – being the relevant loan documents and the correspondence between the plaintiff, Mr Gapes and Fenton Projects on the one hand and the defendants and the ANZ on the other have already been discovered in Mr Gapes’ affidavit sworn on 12 June 2018.
[94] As the Court of Appeal said in Chatfield & Co Ltd v Commissioner of Inland Revenue, the relevance of a document for discovery purposes must be assessed with regard to the pleaded claim.17
[95] As part of the narrative in its statement of claim in support of its claims for breach of trust, dishonest assistance, oppressive and unfairly prejudicial conduct and knowing receipt, the plaintiff alleges that:
(a) On 3 November 2017, the plaintiff offered a 0 per cent fully subordinated loan to 5M to repay the Tranche C facility debt to Clearmont;
(b) Clearmont refused that offer and claimed that the ANZ would not consent;
(c) After the plaintiff contacted the ANZ directly, the ANZ told the plaintiff by letter that it was open to a refinancing the Tranche C facility provided it was on an arm’s length, normal commercial basis with a lender with which the ANZ had an existing relationship;
(d) Some three weeks after the plaintiff had made its offer but before it had heard back from the ANZ, Clearmont exercised its option to convert the debt into equity.
[96] The inference to be drawn from that narrative is that Clearmont acted unreasonably in not accepting the plaintiff’s offer – before the plaintiff and therefore Clearmont had had advice of the ANZ’s position. The substance of the plaintiff’s offer is relevant to the reasonableness or otherwise of Clearmont’s stance and therefore to the plaintiff’s claims against Clearmont and the other defendants. The fact that the ANZ subsequently confirmed Clearmont’s assessment and set conditions that the plaintiff’s offer did not meet does not change the relevance of the original offer to the assessment of the reasonableness or otherwise of Clearmont’s stance.
[97] The plaintiff does not deny that its re-financing offer involved Fenton Projects, KCM Finance and Mr Knight. The documents the defendants seek concern those parties’ involvement in the proposal that the plaintiff put to Clearmont in Mr Gapes’ letter to Mr Greenwood of 3 November 2017. I am satisfied, therefore, that the documents are relevant to the claims the plaintiff makes against the defendants and should be discovered.
Plaintiff’s application for orders fordiscovery
[98] In its application dated 27 June 2018, the plaintiff seeks orders requiring 5M and CQT to disclose documents listed in Mr Greenwood’s affidavit of 29 May 2018 for which privilege is claimed, together with any other legal advice obtained by 5M and CQT.
[99] As explained in Mr Horton’s affidavit of 5 July 2018, after the plaintiff had filed its application, Mr Greenwood and Mr Walsh swore amended affidavits of documents which had the result of moving to Part 2 of the Schedule to Clearmont’s list of documents some documents which had been in Part 2 of the Schedule to the original list of documents of 5M, Mr Greenwood and CQT. As a consequence, some of the documents initially covered by the plaintiff’s application are now included in Clearmont’s list of documents rather than the list of 5M, Mr Greenwood and CQT.
[100] While the plaintiff did not amend its application following these changes to the defendant’s list, Mr Little, who appeared for the plaintiff at the hearing of the plaintiff’s application, addressed the Court on the basis that the plaintiff’s application includes the documents in the Clearmont list and Mr Watts replied on that basis as
well. I approach the matter, therefore, on the basis that the plaintiff’s application is in respect of documents for which 5M, CQT and Clearmont have claimed privilege.
[101] Mr Little says that for the purposes of the plaintiff’s application there are now two categories of documents:
(a) Documents over which 5M and CQT claim litigation privilege and which were paid for by trust funds (Category One documents);
(b) Documents over which 5M and CQT originally claimed solicitor-client privilege but which the defendants now say were created solely for the benefit of Clearmont and subject only to Clearmont’s privilege but which are in the control of 5M and CQT as well as Clearmont (Category Two documents).
Category One documents Submissions of counsel
[102] The plaintiff’s claim to the Category One documents is based principally on the assertion that 5M and CQT hold their assets in the Five Mile Development on trust for Clearmont and the plaintiff and cannot claim privilege for, and must disclose, any documents that have been generated for the purpose of the trust and have been paid from trust assets. In support of this position, Mr Little cites extracts from Lewin on Trusts and English and Australian authorities.
[103] The relevant extracts from Lewin on Trusts are:18
23-048 Normally disclosure will be ordered of cases submitted to and opinions of, counsel taken by trustees, and other instructions to and legal advice obtained from the trustees’ lawyers, and for the guidance of the trustees in the discharge of their functions as trustees, and paid for by the trust fund. Even though such advice is privileged, the privilege is held for the benefit of the trustees, and so privilege is no answer to the beneficiary’s demand for disclosure. ...
23-052 Trustees who are sued for breach of trust or other relief in contentious trust proceedings are not liable to disclose legal advice obtained and paid for by them for the purpose of their defence. They may assert privilege for such advice in the normal way and beneficiaries’ rights to disclosure under trust law make no difference. Similar considerations apply to communications with their lawyers for the purpose of their defence after commencement of proceedings, and in our view, communications with their lawyers (paid for by themselves) before the commencement of proceedings in relation to their liability for trust, though not to communications before commencement of proceedings in relation to the trust property.
(Footnotes not included.)
[104] Mr Little referred me to a number of the authorities cited in Lewin in support of these propositions, notably Talbot v Marshfield and Schreuder v Murray (No 2),19 as well as two more recent English High Court decisions, Lewis v Tamplin and Blade v Isaac. 20
[105] Mr Skelton reiterates that the defendants do not accept that the plaintiff has a beneficial interest in the assets of 5M and CQT so they do not accept that the above extracts of Lewin and the authorities apply in the ways cited by Mr Little. Mr Skelton submits that the prescriptions that a trustee must be acting in his or her personal interest and pay for the advice personally in order to sustain a claim to litigation privilege do not apply where the question of whether a party is a beneficiary is at issue in the litigation. Mr Skelton referred me to another extract from Lewin on Trusts which, he submits, is more applicable to the circumstances of this case:21
20-086 Generally a person seeking disclosure under the trust supervisory jurisdiction must establish that he is entitled to the interest or rights under the trust which he claims. Where his interest or rights are yet to be established, the claimant may, in the litigation or prospective litigation seeking to establish the interest or rights, obtain disclosure of documents relevant to his claim to the extent permitted by rules of court, but not normally under the trust supervisory jurisdiction.
[106] Mr Skelton also cites authorities in support of these propositions, notably
O’Rourke v Darbishire, as well as passages in Shreuder v Murray where Buss JA made
19 Talbot v Marshfield (1865) 2 Dr & Sm 549, 62 All ER 728 at 729; Schreuder v Murray (No 2)
[2009] WASCA 145; (2009) 260 ALR 139 (WASCA) at [94].
20 Lewis v Tamplin [2018] EWHC 777 (Ch) at [59]; Blade v Isaac [2016] EWHC 601 (Ch) at [51].
it clear that he was dealing there with a case where the beneficiaries’ rights had vested and were not in dispute.22 Mr Skelton says that because the plaintiff’s status as a beneficiary is in dispute, the plaintiff has no vested right to any privileged documents. However, the defendants have voluntarily disclosed to the plaintiff documents to which the plaintiff would be entitled if it were a beneficiary.
[107] Referring to the same passages in Shreuder v Murray and Lewis v Tamplin to which Mr Little drew attention, Mr Skelton also says that because the plaintiff is a hostile party, it cannot have access to legal advice 5M obtained in order to defend itself. Mr Skelton also says that just because the advice has been paid for from trust assets does not mean 5M was not acting “personally” or that the privilege in the documents is lost because by that fact alone.
[108] Until the validity of the deed of nomination has been determined, whether 5M holds its assets on trust for the plaintiff as well as Clearmont remains unknown. However, I do not need resolve that question, or whether CQT holds its shares on trust, in order to decide the plaintiff’s application.
[109] Broadly, the two extracts from Lewin on Trusts cited by Mr Little deal with solicitor-client privilege outside the context of litigation on the one hand and with litigation privilege on the other. In the former situation, which concerns the management and administration of the trust, or what Lewin describes as disclosure under the trust supervisory jurisdiction, the accepted position has been that privilege cannot be asserted and, according to Master Matthews in Blade v Isaac, does not even arise because advice sought and provided regarding the administration of the trust is trust property and must be available to the beneficiaries.23 In the latter situation, Lewin and the authorities, notably Schreuder and Lewis v Tamplin¸ state that privilege can properly be asserted when a beneficiary brings an action against a trustee, although they also say that this is only where the trustee is being sued in his or her personal
23 Blade v Isaac [2016] EWHC 601 (Ch) at [51].
capacity and where the trustee pays for the legal advice for which privilege is claimed.24
[110] The plaintiffs’ key contention is that because the advice for which privilege has been claimed was not sought “personally” by 5M and CQT and has been paid for by trust assets, 5M and CQT cannot claim litigation privilege so that the more general position stated in paragraph 23-048 of Lewin on Trusts quoted at [103] applies. Behind that contention lies an assumption that a beneficiary’s entitlement to trust documents, absent litigation privilege, is unqualified.
[111] That assumption may have been appropriate when courts approached disclosure from the perspective of proprietary interest – as was the case in Re Londonderry’s Settlements, a decision of Lord Justice Harman, which was also cited in Lewin on Trusts at paragraph 23-048, and where Lord Justice Harman said:25
Counsel was advising the trustees as to their rights and duties and every beneficiary must be entitled to see advice of that sort. It is paid for out of trust money and is the property of the beneficiaries.
[112] However, as Brewer J observed in Burgess v Monk after citing the same passage from Re Londonderry’s Settlements, the proprietary theory referred to in that passage is no longer the jurisdictional basis upon which beneficiaries are granted access to trust documents.26 That was confirmed by the Supreme Court’s decision given by O’Regan J in Erceg v Erceg.27 In that decision, O’Regan J considered the Privy Council’s decision in Schmidt v Rosewood Trust Ltd28 where Lord Walker reviewed earlier authorities including O’Rourke v Darbishire and Re Londonderry’s Settlements as well as Re Cowin,29 another case of considerable longstanding. O’Regan J observed that in Schmidt v Rosewood Lord Walker had made it clear that since Cowin, a beneficiary with a vested and transmissible beneficial interest in the
25 Re Londonderry’s Settlements [1965] Ch 918 at 932.
26 Burgess v Monk [2016] NZHC 527, [2016] NZAR 438 at [10].
27 Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320.
28 Schmidt v Rosewood Trust Ltd [2003] UKPC 26, [2003] 2 AC 709.
29 Re Cowin (1886) 33 Ch D 179 (Ch).
property of a trust does not have an entitlement as of right to disclosure of trust documents.30 O’Regan J went to state, with evident approval:31
In summarising his conclusions, [Lord Walker] was clear that no beneficiary (and particularly no discretionary beneficiary) is entitled as of right to disclosure of “anything which can plausibly be described as a trust document”. In deciding whether to order disclosure, the Court may have to balance the competing interests of different beneficiaries, the trustees and third parties.
[113] The Court of Appeal and the Supreme Court in Erceg proceeded on the basis that Schmidt v Rosewood should apply in New Zealand.32 The question for the Supreme Court was whether the Court of Appeal had been right to hold that decisions on disclosure should be made in the exercise of the Court’s discretion. The Supreme Court held that, rather than it being a matter of discretion, the Court’s supervisory jurisdiction was one that must be exercised in accordance with principle after careful assessment of the factors relevant to disclosure sought by a particular beneficiary. O’Regan J went on to identify, on a non-exhaustive basis, 10 matters that need to be evaluated in relation to an application for disclosure of documents in the exercise of the court’s trust supervisory jurisdiction.33
[114] Following Erceg, it is clear that questions of disclosure of trust documents should not be approached from a presumption that documents that are trust property must be disclosed upon the request of any beneficiary unless some exception can be found, such as when litigation privilege applies. What is required is a more comprehensive assessment, having regard to the matters identified by O’Regan J.
[115] I consider that the decisions in Schmidt v Rosewood and Erceg must also inform the approach to disclosure in the context of litigation privilege. In that context, the starting presumption is that privilege can be claimed and disclosure is not required. The only qualifications to that presumption have been the decisions that have said that for the privilege to apply, the advice must have been obtained and paid for personally by the trustee. However, those requirements themselves stem from a presumption of proprietary interest – that advice that has not been obtained and paid for personally is
30 Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320 at [26].
31 At [33].
32 Erceg v Erceg [2016] NZCA 7, [2016] 2 NZLR 622.
33 Erceg v Erceg [2017] NZSC 28, [2017] 1 NZLR 320 at [50].
trust property because it has been paid for from trust assets and therefore cannot be denied to any beneficiary that seeks disclosure. Following Schmidt v Rosewood and Erceg, I consider that the factors of whether the advice has been sought in the trustee’s personal capacity and how it has been paid must be considered in the context in which disclosure is sought and cannot apply as automatic limitations on the availability of litigation privilege.
[116] In the present context, the trustee is a company, 5M, which holds its assets for named beneficiaries. It does not have interests outside of those assets or, in the management of those assets, outside of those beneficiaries. If one of the beneficiaries brings a claim for breach of trust, it would be artificial to hold that the company can claim privilege for legal advice it obtains to defend that claim only if it is acting personally – whatever that might mean in the context of a company. It would be even more artificial to hold that the company can claim that privilege only if it pays for the legal advice personally when it has no assets other than trust property from which to pay for the advice. Such a requirement would place the trustee at a significant disadvantage in defending the claim brought by the beneficiary against it and would be contrary to long established principle that a person – be that person a natural person, a company or a trustee – must be able to consult his or her legal advisers in confidence.34
[117] For these reasons, I am satisfied that the plaintiff’s request for an order for disclosure of the Category One documents based on the plaintiff being a beneficiary should not be granted. I am confirmed in that conclusion by the decisions in New Zealand, even before the Supreme Court’s decision in Erceg, that recognised that litigation privilege could properly be claimed in respect of documents brought into existence for the purpose of defending a claim by a beneficiary, and made no qualification that the privilege did not apply if the advice was not sought personally or had been paid for from trust assets.35
Claim for disclosure based on the plaintiff and Clearmont being in a joint venture
[118] Mr Little submitted, as an alternative to the claim based on the plaintiff having a beneficial interest in the assets of 5M and CQT, that the plaintiff also had an entitlement to the Category One documents based on it being in a joint venture with Clearmont.
[119] As with the question of whether or not the plaintiff has a beneficial interest in the assets of 5M and CQT, the question of whether or not the plaintiff is in a joint venture with Claremont will depend on the validity of the deed of nomination. However, even if the deed of nomination is valid and the plaintiff and Clearmont are in a joint venture, that does not assist the plaintiff’s claim.
[120] Mr Little submits that it has been established that privilege cannot be maintained against a joint venture partner and cites decisions of the English Court of Appeal and the Supreme Court of Victoria: Cia Barca de Panama SA v George Wimpey & Co Ltd and Younghanns v Elfic Pty Ltd (No 2).36 Having reviewed those decisions, I do not consider they establish a separate basis for requiring disclosure of documents.
[121] In Barca de Panama, the English Court of Appeal said that the same principles apply in relation to joint venture parties as apply as between trustees and beneficiaries, and made its decision on that basis and by reference to Talbot v Marshfield, one of the authorities cited by Mr Little in support of his claim based on the plaintiff having a beneficial interest in the assets of 5M and CQT.37 Since the same principles apply in the joint venture context, I do not see any basis for reaching a decision based on an asserted joint venture different than that reached above. The facts of Younghanns were peculiar to that case and I regard that decision as having little relevance to this aspect of the plaintiff’s application.
36 Cia Barca de Panama SA v George Wimpey & Co Ltd [1980] 1 Lloyd’s Law Rep 598 (CA);
Younghanns v Elfic Pty Ltd (No 2) [2000] VSC 113.
37 Talbot v Marshfield (1865) 2 Dr & Sm 549, 62 All ER 728.
[122] In his written submissions, Mr Little puts the plaintiff’s claim to see documents held by Clearmont and subject to solicitor-client privilege on the basis that since the 5M and CQT have those documents – because they were initially included on those parties’ documents list – the plaintiff is entitled to see documents held by 5M and CQT as trustees that will enable the plaintiff to assess whether the trustees acted in accordance with their duties. In the alternative, he says that any privilege that Clearmont had in the documents had been waived by making them available to 5M and CQT. In his oral submissions, Mr Little also invites the Court to infer that the documents had been paid for by trust assets and so were trust documents and should be made to the plaintiff as a beneficiary of the trust.
[123] Dealing with the last argument first, while I understand the plaintiff’s dissatisfaction with the answers given by the defendants’ solicitors to the requests by the plaintiff’s solicitors for an assurance that the advice had not been paid for from trust assets, I do not consider those replies provide a sufficient basis from which to infer that the advice must have been paid from trust assets. But even if the advice had been paid for by trust assets, whether deliberately or inadvertently given the number of hats that Mr Greenwood wears in relation to 5M, CQT and Clearmont, that should not, of itself, determine whether the advice is trust property - as is clear from Erceg.
Disclosure on the basis of Erceg
[124] Mr Little’s primary submission for disclosure of the Category Two documents is based on the application of the matters identified by O’Regan J in Erceg. However, I do not consider that that decision assists in relation to these documents. Leaving aside the question of payment, the Category Two documents are not documents created by or for a trustee concerning the administration of the trust.
[125] According to Mr Horton’s affidavit sworn on 5 July 2018, the Category Two documents are documents created by or for Clearmont or Clearmont’s solicitors. Whether or not Clearmont and the plaintiff hold a beneficial interest in the assets of 5M and CQT and whether or not Clearmont and the plaintiff are joint venturers, it does
not follow each of them is entitled to the legal advice that the other obtains regarding its rights and interests in the trust or joint venture.
[126] Erceg and the decisions that preceded it concerned the right of beneficiaries to trust documents. The Category Two documents are not, by their nature, trust documents. They are a beneficiary’s documents and Erceg and the earlier authorities do not stand for the proposition that one beneficiary is entitled to another beneficiary’s legal advice if it happens to be held by a trustee. (I leave aside the Younghanns situation where disclosure was ordered on the basis that the joint venturers in that case had retained the same solicitors).
[127] It would be different if the Category Two documents had been prepared jointly for 5M, CQT and Clearmont or have been provided to Claremont by 5M or CQT for the purposes of assisting Clearmont’s discharge of its responsibilities as trustee. In either of those cases, the documents would be liable to disclosure following application of the matters identified by O’Regan J in Erceg. But on the basis of the statements in Mr Horton’s affidavit that the documents were prepared for Clearmont in its own right, separately from 5M and CQT and solely for the benefit of Clearmont, I conclude that the documents are not trust documents and are not subject to disclosure under the Court’s trust supervisory jurisdiction.
Has Clearmont waived privilege in the documents?
[128] The plaintiff’s argument for waiver is based on the fact that 5M, Mr Greenwood and CQT jointly affirmed, through Mr Greenwood’s affidavit of documents of 29 May 2018, that the documents now said to be Clearmont’s documents were in the control of 5M, Mr Greenwood and CQT. Mr Little says the fact that the documents are or were in the control of 5M, Mr Greenwood and CQT means that Clearmont has waived the privilege in the documents in terms of s 65 of the Evidence Act 2006 as discussed by French J in Houghton v Saunders.38
[129] Section 65(2) of the Evidence Act provides:
38 Houghton v Saunders [2009] NZHC 878; (2009) 19 PRNZ 476 (HC).
A person who has a privilege waives the privilege if that person, or anyone with the authority of that person, voluntarily produces or discloses, or consents to the production or disclosure of, any significant part of the privileged communication, information, opinion, or document in circumstances that are inconsistent with a claim of confidentiality.
[130] In Houghton v Saunders, French J distilled a number of principles from the case law on waiver of privilege. The most relevant of these for present purposes is the final and overarching principle identified by French J:39
(vii) the test to be applied is whether on all the circumstances the conduct is inconsistent with maintaining the confidentiality of the privileged material in a way that could lead to injustice if the privilege is upheld.
[131] As Mr Watts and Mr Skelton both submitted, such voluntary disclosure as has occurred in this case is the consequence of the fact that Mr Greenwood is the second defendant in his own right and the sole director of 5M and CQT and also, through his trusts, in effective control of Clearmont. While those different legal capacities have to be respected, it would be artificial to regard the fact that Mr Greenwood listed in his capacity as the representative of the first to third defendants a document that he was sent as one of the controlling interests in Clearmont as amounting to a voluntary disclosure. If it is a disclosure at all, it is only in a technical sense and could not sensibly be taken as amounting to a voluntary production of the documents in circumstances that are inconsistent with a claim of confidentiality.
[132] Applying the above principle from Houghton v Saunders, I am satisfied there would be no injustice to the plaintiff in upholding the privilege in documents to which the plaintiff would not have no entitlement if the defendants’ solicitors had not made an error in the original listing.
Result
[133] For all the above reasons, I have reached the conclusions set out at [13] and I make the orders for security for costs and third party discovery set out at [14]. I otherwise dismiss the defendants’ application and the plaintiff’s application.
39 At [55].
[134] Because the defendants have largely succeeded in their application, including the application to issue a third party notice, and because the plaintiff has been unsuccessful in its application, the defendants are entitled to costs on the two applications on a 2B basis, together with disbursements fixed by the Registrar.
[135] Lest there be any doubt, I will not entertain any application for increased or solicitor-client costs. Counsel should also be able to sort out among themselves what the amount of costs should reasonably be. If they cannot, I grant leave for counsel for the defendants to file a memorandum of no more than five pages by 5.00 pm Monday 4 February 2019 and for counsel for the plaintiff to file a memorandum in response of no more than five pages by 5.00 pm Monday 11 February 2019.
G J van Bohemen J
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/3439.html