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High Court of New Zealand Decisions |
Last Updated: 12 April 2018
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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-2016-404-57
[2018] NZHC 604 |
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BETWEEN
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A D BANKS
Plaintiff
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AND
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W R FARMER
First Defendant
S M GAMBLE
Second Defendant
C J MASSAM
Third Defendant
D L FREDERICK
Fourth Defendant
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Hearing:
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11 December 2017
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Appearances:
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J W A Johnson and N G Lawrence for the Plaintiff
R J Hooker for the Second, Third and fourth Defendants
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Judgment:
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5 April 2018
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JUDGMENT OF PALMER J
This judgment is delivered by me on 5 April 2018 at 2 pm pursuant to r 11.5 of the High Court Rules.
.....................................................
Registrar / Deputy Registrar
Solicitors:
Vallant Hooker & Partners, Auckland Wynn Williams, Christchurch
BANKS v FARMER & ORS [2018] NZHC 604 [5 April 2018]
Summary
[1] Mr Adam Banks sues directors of a company for alleged breaches of the Securities Act 1978 (the Act) and the Companies Act 1993 in investing his money. One director who lives in the United States, Mr Douglas Frederick, protests the Court’s jurisdiction. Associate Judge Doogue set aside the protest.1 Mr Frederick seeks review by the High Court of that decision on the ground there is not a serious question to be tried here. He says there is evidence Mr Banks was a habitual investor and he was not investing his own money.
[2] To decline to assume jurisdiction for evidential reasons before the parties have completed disclosure and exchange of evidence is likely, as a matter of fact, to be unjustified in most circumstances unless there is no sufficiently plausible evidential foundation. I consider there is a sufficiently plausible evidential foundation that Mr Banks was not a habitual investor for the purposes of the Act, which is not the same as being financially literate. I do not consider the source of Mr Banks’ funding affects his legal claims. The questions raised by Mr Frederick can be explored at trial in the light of all the evidence. They are not a basis for the Court to decline to assume jurisdiction. I uphold Associate Judge Doogue’s decision to set aside the protest to jurisdiction.
What happened?
Mr Banks, Mr Frederick and Mako
[3] Mr Frederick resides in the United States. In December 2011, he became a director of Yellowtuna Holdings Ltd which became Mako Networks Holdings Ltd (Mako) in April 2013. A November 2010 report on Mako capital-raising listed him as Chair of the Board. Mako’s 2012, 2013 and 2014 financial statements listed Mr Frederick as a director.
[4] Mr Banks says he was approached about investing in the company that became Mako by Mr William Farmer, a director, in late 2010. Mr Banks invested in Mako by making loans to it under three agreements in February 2011, June 2013 and March
1 Banks v Farmer [2017] NZHC 1596.
2014. The first two loans totalled around UKP 1,500,000, and the third was NZD 500,000.
[5] In early 2014 Mako restructured existing debt to Telecom Rentals Ltd, a Spark subsidiary, which acquired a first ranking general security agreement over Mako’s assets. Mr Banks’ consent was not sought, though it was required under his agreements. In early 2015, Mr Banks called up his advances to Mako together with interest owed. They were never repaid. Mako was placed in receivership by Spark and liquidated in August 2015.
Mr Banks’ proceedings
[6] Mr Banks brought proceedings against Mako’s directors including Mr Farmer and Mr Frederick. He seeks repayment on the basis of three causes of action:
(a) Mako and its directors failed to comply with their obligations under s 37 of the Act when raising money from the public.
(b) Mr Banks entered into the loans in reliance upon advertisements that included untrue statements under s 55G of the Act by Mako and the defendants.
(c) The defendants breached their duties as directors of Mako under the Companies Act 1993.
Mr Frederick’s protest to jurisdiction
[7] On 20 January 2017, Mr Frederick filed a protest to the New Zealand courts’ jurisdiction to hear the matter, under r 5.49 of the High Court Rules 2016 (the Rules), on the basis:
(a) Mr Banks has not pleaded any reliance on any particular act or conduct of Mr Frederick.
(b) Mr Banks did not obtain leave of the Court to commence proceedings against Mr Frederick, who was residing outside New Zealand, as required by the Rules.
(c) Mr Banks does not have an arguable case against Mr Frederick.
(d) If there is an arguable case, the proper jurisdiction is the United States, where Mr Frederick resides.
The judgment under review
[8] Associate Judge Doogue heard Mr Banks’ application to set aside the protest to jurisdiction and issued his judgment on 11 July 2017.2 He considered the Court of Appeal’s two-stage test in Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd, for a court assuming jurisdiction under r 6.29(1)(a) of the Rules, was satisfied:3
(a) there was a good arguable case the claim falls wholly within one or more of the paragraphs of r 6.27 (under which service may be effected overseas without leave); and
(b) the court should assume jurisdiction on the basis: there is a serious issue to be tried on the merits; New Zealand is the appropriate forum; and other relevant circumstances support an assumption of jurisdiction.
[9] The Judge also considered the alternative test in r 6.29(1)(b) was satisfied: had Mr Banks applied for leave, leave would have been granted and it is in the interests of justice that the failure to apply for leave should be excused.
[10] Accordingly, Associate Judge Doogue set aside the protest to jurisdiction. Mr Frederick seeks review of that decision under s 26P of the Judicature Act 1908, which was then in force.
2 Banks v Farmer, above n 1.
Further evidence
[11] In filing his notice of opposition to the application for review, Mr Banks filed an affidavit. Mr Frederick filed an affidavit in reply. Mr Banks filed a further affidavit in which he affirmed the factual claims in the 29 June 2016 Amended Statement of Claim. These affidavits included new evidence not available to Associate Judge Doogue. Mr Johnson, for Mr Banks, initially opposed the admissibility of Mr Frederick’s new evidence but, at the hearing, was happy to approach the matter on the merits of all the new evidence, including that of Mr Banks. I indicated at the hearing I would consider the admissibility of the affidavits in the course of considering my judgment. In the interests of justice, I have decided to take the affidavits into account in making my decision.
Is there a serious question to be tried?
[12] In reviewing an Associate Judge’s decision under s 26P of the Judicature Act 1908, the High Court is empowered “to make such order as may be just”. In essence, Mr Frederick must persuade me Associate Judge Doogue’s decision was wrong, in fact or law.4 Under former r 2.3(4), which applied to this review, the review is a rehearing and I am empowered to receive further evidence in the interests of justice.5
[13] Mr Hooker, for Mr Frederick, indicated at the hearing he was not pursuing an argument the Judge was wrong about the first stage of the Wing Hung test. The issue is whether there is a serious question to be tried, under the second stage of the test.
Submissions
[14] Mr Hooker, for Mr Frederick, submits there is insufficient evidence Mr Banks is not a habitual investor for the purposes of the Act or that the money he advanced to Mako was his own. He relies on emails that Associate Judge Doogue ruled inadmissible but are now attached to the affidavits I have examined. He submits they
5 See McCullagh v Robt Jones Holdings Ltd [2016] NZHC 263, [2016] NZCCLR 16 at [40] citing
Peterson v Lucas Mill Pty Ltd [2012] NZHC 2398 at [26].
show a person with business acumen and knowledge, with access to significant sums of money on three separate occasions, who is not employed and lives off trust investments. He questions why Mr Banks does not disclose his investments, bank accounts, trusts, source of income or the basis of his residential immigration status. He submits the Court is entitled to draw the inference Mr Banks is in the business of investing money. He submits the Judge was wrong to consider Mr Banks did not need to affirm the statement of claim by any affidavit. Mr Hooker also submits there is clear evidence the money invested in Mako came not from Mr Banks but from his mother so he has not provided evidence of his assertion he made the investment in Mako.
[15] Mr Johnson, for Mr Banks, submits Mr Hooker has simply repeated the arguments before Associate Judge Doogue who did not err. He submits the emails on which Mr Hooker relies do not show Mr Banks regularly invested money for the purposes of his business. He submits where Mr Banks obtained the money he invested is irrelevant to his causes of action.
Is there a serious question to be tried?
[16] I do not consider Associate Judge Doogue erred in concluding there were serious questions to be tried in the causes of action relating to Mr Frederick. In relation to this second stage of the test, the Court of Appeal in Wing Hung Printing Co Ltd stated:6
... the Court must be satisfied there is a serious legal issue to be tried and that there is a sufficiently strong factual basis to support the legal right asserted. In approaching these questions, the Court will not determine credibility issues where there are conflicting affidavits other than in exceptional cases where one version can be demonstrated by objective evidence to be untenable. In most cases where a protest to jurisdiction is being determined, discovery will not have taken place and the evidence is likely to be relatively limited.
And:7
The serious issue to be tried test to be applied at the second stage of the inquiry was described by Lord Goff in Seaconsar as whether “at the end of the day,
6 At [37] (footnotes omitted).
7 At [42], citing Seaconsar Far East Ltd v Bank Markazi [1994] 1 AC 438 (HL) at 452D.
there remains a substantial question of law or fact or both, arising on the facts disclosed by the affidavits, which the plaintiff bona fide desires to try”.
[17] Mr Hooker points also to the Court of Appeal’s statement that there must be a “sufficiently plausible foundation established” that the claim falls within one or more of the headings in r 6.27(2) and that the court “should not engage in speculation”.8 Those passages relate to the first stage of the test, rather than the second. No doubt the Court should not engage in speculation on the second stage either and a sufficiently plausible evidential foundation is required for it too. But neither should the Court penalise a party for not advancing their case further than required by the stage the proceedings have reached.
[18] To decline to assume jurisdiction for evidential reasons before the parties have completed disclosure and exchange of evidence is likely, as a matter of fact, to be unjustified in most circumstances unless there is no sufficiently plausible evidential foundation. I do not consider this is affected one way or the other by the burden of proof being on Mr Frederick at trial in relation to the substantive defence of showing Mr Banks was a habitual investor.9 But if it were affected, it would further militate against the success of Mr Frederick’s submissions.
[19] The emails relied upon by Mr Hooker do raise questions about whether Mr Banks was a habitual investor for the purposes of the Act. This is relevant to the first cause of action, because a claim under s 37 is only actionable where the investor is a member of the public and not a habitual investor under s 3 of that Act. But the questions raised are circumstantial, concerning Mr Banks’ knowledge and circumstances. Mr Hooker relies upon an inference and what he says is lack of adequate discovery to date. But the emails do not go directly to the question of whether Mr Banks’ “principal business is the investment of money” or whether “in the course of and for the purposes of” his business, Mr Banks habitually invests money, which is what is required by s 3(2)(a)(ii) of the Act. Being financially literate is not the same as being a habitual investor. In his affidavits of 14 August 2017 and 5 December 2017, Mr Banks’ evidence is that, besides his loan to Mako, he has “no
8 At [41].
9 Securities Commission v Kiwi Co-operative Dairies Ltd [1995] 3 NZLR 26 (CA) at 32–33.
other business interests or experience”.10 There is further disclosure to come as well as the exchange of briefs of evidence and cross-examination at trial.
[20] I consider there is a sufficiently plausible evidential foundation that Mr Banks was not a habitual investor for the purposes of the Act. Mr Banks wishes to pursue his suit at trial. His claim can be tested there, including on the basis of the evidence to which Mr Frederick points. I consider the Court should assume jurisdiction to enable that to occur.
[21] Neither do I consider that questions over whether Mr Banks was investing his own money are a basis for the Court to decline to assume jurisdiction on any of the three causes of action. There appears to be no dispute Mr Banks made the loans. The questions raised about where he got the money to do so do not affect the legal claims he makes in respect of those loans.
[22] I also agree with Associate Judge Doogue the alternative test in r 6.29(1)(b) is satisfied. Had Mr Banks applied for leave, leave would have been granted and it is in the interests of justice that the failure to apply for leave should be excused.
Result
[23] On review, I uphold the judgment of Associate Judge Doogue, to set aside the protest to jurisdiction.
Palmer J
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