CHURCHILL GROUP HOLDINGS LIMITED & ORS V ARAL PROPERTY HOLDINGS LIMITED CA CA283/05

CHURCHILL GROUP HOLDINGS LIMITED & ORS V ARAL PROPERTY HOLDINGS LIMITED CA CA283/05 31 May 2006IN THE COURT OF APPEAL OF NEW ZEALAND CA283/05BETWEEN CHURCHILL GROUP HOLDINGS LIMITED & ORS Appellants AND ARAL PROPERTY HOLDINGS LIMITED First Respondent AND DAVID LEUNG Second Respondent Hearing: 4 April 2006 Court: William Young P, Glazebrook and Chambers JJ Counsel: G J Judd QC for Appellants J G Miles QC and J D McBride for Respondents Judgment: 31 May 2006JUDGMENT OF THE COURT A The appeal is allowed. B The appellant's application for leave to admit further evidence is granted. C The High Court order dated 15 December 2005 requiring the appellants to provide further security for costs of $200,000 is set aside. D The respondents' application for further security for costs is to be considered afresh by the High Court – (a) in light of these reasons for judgment; and (b) taking into account the further evidence admitted under order B; and(c) taking into account any further evidence which the respondents wish to adduce in reply to the evidence admitted under order B. E The order relating to the evidence of Mr Chong is varied by the deletion of the last two sentences. The order thus reads as follows:The order requiring the service of witness statements for all witnesses to be called by the plaintiffs includes Mr Chong with the gloss that, if the plaintiffs so choose, the affidavit sworn and filed by Mr Chong in this claim to date can be nominated as his brief of evidence.F In the circumstances there is no award of costs.____________________________________________________________________REASONSGlazebrook J [1] Chambers J [47] William Young P [53]GLAZEBROOK J Table of ContentsPara NoIntroduction [1]Williams J's judgment [5]Application to file further evidence in High Court [8]Application for further evidence to be adduced in this Court [12]Appellants' submissions [17]Respondents' submissions [24]Discussion [34]Result [44]Introduction[1] The appellants are seeking damages of some $18.5m and exemplary damages of $25m from the respondents. The claim relates to proposed extensions to a shopping centre on the Whangaparaoa Peninsula. On 15 December 2005, Williams Jordered the appellants to provide further security for costs of $200,000. Churchill had already provided security of $100,000 in accordance with an earlier judgment of Williams J delivered on 30 September 2003. [2] The appellants asserted that security should not have been ordered because, as a result, they will be unable to pursue their claim. The respondents submitted that the appellants' case is without merit and that, in any event, they have not shown that they are unable to provide security. [3] In this regard, the appellants sought leave to adduce additional evidence as to their impecuniosity. This application was initially opposed by the respondents on the basis that the evidence was available at the time of the High Court hearing. This objection was withdrawn at the hearing of the appeal. The respondents submitted that the new evidence would not, in any event, have had any bearing on the outcome of the application. [4] In his judgment, Williams J also ordered that witness statements be exchanged sequentially and that Mr Chong's affidavit, which had already been filed in the proceedings, could be treated as his brief of evidence. If that was done, however, no additional evidence-in-chief could be adduced from him. The appellants submitted that the orders relating to Mr Chong's evidence should not have been made. Although initially the appellants also challenged the order for the sequential exchange of briefs, that challenge was abandoned just before the hearing. The respondents supported the orders made by Williams J with regard to Mr Chong's evidence.Williams J's judgment[5] Williams J found force in Mr Miles' submission that the appellants had not advised the Court how they have funded this litigation over the past year or so and how they intend to fund the preparation and conduct of the trial itself. He accepted that any further security for costs may run the risk that the appellants do not proceed to trial but he considered that this was inherent in the ordering of security for costs. In any event, given the plaintiffs' "dogged determination" to proceed with thismatter ever since it was commenced over four years ago, Williams J considered that the chances of their not continuing to trial were remote. As the question of whether the appellants' impecuniosity had been caused by the respondents' actions will be one of the major issues at trial, Williams J considered it inappropriate to make any observations on that topic. [6] Taking into account the above and all the other matters usually considered in such applications, Williams J granted the application and ordered the plaintiffs collectively to provide further security. The sum sought was $200,000. Given the complexity and length of the trial and consequent need for considerable preparation, he considered that the amount sought was not unreasonable and accordingly fixed the order for further security at that sum. [7] As indicated above, timetable orders were also made for the sequential filing of witness briefs and the following order was made in relation to Mr Chong's evidence:The order requiring the service of witness statements for all witnesses to be called by the plaintiffs includes Mr Chong with the gloss that, if the plaintiffs so choose, the affidavits sworn and filed by Mr Chong in this claim to date can be nominated as his brief of evidence. If that course is followed, no additional evidence-in-chief is to be adduced from Mr Chong. If this subparagraph is not complied with, the plaintiffs may not call Mr Chong to give evidence at the fixture.Application to file further evidence in High Court[8] On 4 November 2005, the day after the hearing before Williams J, the appellants filed a memorandum asking for leave to file further evidence relating to their ability to fund the litigation. They indicated that they had not expected that issue to be the focus of the hearing and had assumed that the appellants' lack of funds was accepted. [9] The respondents, in a memorandum filed on 7 November 2005, set out their view that the material the appellants sought to raise should have been adduced before the hearing. They nevertheless consented to the filing of a further affidavit, provided the respondents could file further affidavits in reply and that their costs on thesecurity for costs application were met by the appellants. It was stipulated that any further affidavit filed by the appellants should address: (a) how they have funded this litigation to date; (b) how they intend to fund Mr Judd's fees and those of expert witnesses he intends to call at trial; (c) what assets and income sources they and entities associated with them have available; and (d) what steps have been taken to obtain funding from: (i) the creditors of the appellants that seek to benefit from this litigation, and (ii) from friends, family, associates or litigation financiers. [10] The respondents also reserved the right to apply for a further oral hearing to deal with matters arising. By memorandum of 8 November 2005, the appellants rejected the conditions the respondents sought to impose. [11] On 7 November 2005 the High Court issued a minute to say that, if Williams J considered in the course of writing his judgment that further assistance would be derived from receipt of the further affidavit proffered, a minute would be issued. No such minute was issued.Application for further evidence to be adduced in this Court[12] The appellants apply to file affidavits in this Court from Mr Fava, Mr Thomas, Mr Yee, Ms Wardrope and Mr Dustin. [13] Mr Fava, who is the sole director of all four appellant companies, deposes, in an affidavit sworn on 17 January 2006, that his family trust sold his family home in 2002 for $3.5 million. After repaying all mortgage debt, the funds have been utilised for living and litigation costs. These funds are now, however, exhausted (as the trustees, Mr Thomas and Mr Yee in a separate affidavit, attest).[14] Mr Fava affirms that he is also without funds, as are all other associated entities. He says that his previous counsel and solicitors withdrew from the proceeding once the funds from the trust ran out. They are still owed fees but have agreed to await the outcome of the litigation. The appellants' present counsel and solicitors have deferred their fees and will be paid if the claim is successful. Mr Fava does not depose as to how the appellants are to fund hearing fees or expert witnesses fees. I understand, however, that they intend to apply for a waiver of hearing fees and are hopeful that the expert witnesses will operate on the same basis as their current counsel and solicitors. [15] Mr Fava also deposes that he has attempted to obtain funding for the litigation from the creditors of the third appellant, Matam Investments Ltd. Inquiries were made via the solicitor for the former liquidator of Matam. After inquiry, the liquidator has confirmed that creditors representing over 54% of unsecured creditors of Matam are not prepared to finance the litigation. Neither is litigation financing available as none of the companies are in liquidation and Mr Fava has been told that this is a necessary pre-requisite for obtaining funding. On this topic the parties may find the article by Lee Aitken of interest – "'Litigation Lending' after Fostif: An Advance in Consumer Protection, or a Licence to 'Bottomfeeders'?" (2006) 28 Sydney Law Review 171. [16] Mr Fava deposes further that his friends, family and associates are persons of modest means, unable to help. This is backed up to a degree by Mr Fava's sister, Ms Wardrope, who deposes that she can assist no further. Mr Dustin deposes that he has assisted Mr Fava with modest loans but is not in a financial position to assist further. He is a creditor of Matam (as to about a quarter of the unsecured debt).Appellants' submissions[17] Mr Judd QC, for the appellants, relied on the comment of this Court inA S McLachlan Ltd v MEL Network (2002) 16 PRNZ 747 at [15] that an order for security that would prevent a plaintiff from pursuing a claim should be made only where the claim has little chance of success. Mr Judd submitted that, in this case, theorder for the provision of security would have the effect of preventing the plaintiffs from pursuing a genuine claim. [18] Mr Judd pointed out that the reason security was ordered by Williams J was that the appellants had provided insufficient detail in connection with the way they had funded the litigation over the past year and how they intended to fund the preparation and conduct of the trial itself. In Mr Judd's submission, the High Court overlooked the evidence of Mr Fava. Mr Fava's affidavit in opposition to the application for further security stated:The plaintiffs' ability to fund this litigation is now entirely dependent upon my being able to obtain loans from friends or family or associates. There is already doubt as to whether I will be able to secure the necessary funding to meet the plaintiffs' expenses. A requirement to pay further security would mean, absent a miracle, that the plaintiffs will be unable to proceed with their claim.[19] Mr Judd submitted that the appellants could have provided further detail had they been aware that there was an issue. He said that the appellants thought that the issue would be whether it could be said that the appellants' claim had little chance of success or that the appellants were not genuine plaintiffs. Consequently, the appellants' submissions were almost completely devoted to those issues and the associated question of whether the impecuniosity had been caused by the respondents' acts. When the respondents' submissions were filed, the appellants became aware that the ability to fund further security was an issue. As a consequence, Mr Judd filed the memorandum referred to at [8] above. Mr Judd submitted that Williams J had failed to deal with the application to adduce new evidence and this failure is in itself a ground of appeal. [20] Mr Fava's affidavit and the affidavits of Mr Dustin, Ms Wardrope and Messrs Yee and Thomas contain the evidence which would have been placed before the High Court had the application to adduce new evidence been granted. It was submitted that the affidavits should be received by this Court in the interests of justice because they contain evidence which should have been received by the High Court. In Mr Judd's submission, the evidence the appellants seek to adduce cogently demonstrates the truthfulness of the evidence quoted at [18] above and shows that the order for security for costs will prevent the appellants from pursuing their claim.[21] As a subsidiary point, Mr Judd submitted that it is reasonably probable that the appellants' impecuniosity has been caused by the actions of the respondents. This should, in Mr Judd's submission, make the court particularly reluctant to stifle the claim. As a further subsidiary point, it was submitted that the oppressive manner in which the respondents have conducted discovery has greatly increased the appellants' costs. Mr Judd submitted that the respondents' actions in this regard are so egregious as to make it clear that the respondents' objective has been to grind the appellants down so as to make it impossible for them to prosecute the claim. [22] In response to the respondents' submission that the claim is hopeless, Mr Judd pointed to Williams J's judgment of 30 September 2003 which held, in the course of a decision on a protest to jurisdiction, that the respondents had failed to demonstrate that Churchill has no good arguable case, although it was recognised that aspects of the damages claim (for what appeared to be expectation damages under the Fair Trading Act 1986) may require re-pleading. In his submission, the claim remains in essence the same as that dealt with by Williams J in that judgment. The case does, in his submission, have substantial merit. [23] As to the order relating to Mr Chong's evidence, Mr Judd pointed out that r 441G of the High Court Rules provides that oral evidence-in-chief of any person may be adduced at the trial if that oral evidence is in response to evidence adduced by another party to the proceeding or is adduced with the leave of the trial judge. In Mr Judd's submission, the direction that, if Mr Chong's affidavits are used as a proxy for his witness statement, no additional evidence-in-chief is to be adduced from Mr Chong should not have been made, as it forecloses or prejudges an application for leave which may be made at the trial depending upon the circumstances as they are at that time. It was therefore submitted that it was wrong in principle for the High Court to have given this direction and that it should be rescinded by this Court.Respondents' submissions[24] Mr Miles QC, for the respondents, submitted that there was no discernible error in the exercise of the High Court's discretion to order the provision of furthersecurity and that security for costs is demonstrably necessary in this case. In his submission, it would be oppressive to require the respondents to face the cost of a six week trial, on top of the substantial costs incurred to date, with no hope of recovering any award of costs from the appellants beyond the existing security of $100,000. Although, from time to time, corporate defendants are required to defend trials of short duration with no or inadequate security for costs, it would, in Mr Miles' submission, be extraordinary to allow four insolvent companies to put the respondents to the cost of a six week trial involving serious allegations of fraud and misconduct without the protection of a material award of security. [25] Mr Miles submitted that neither of Mr Judd's subsidiary points have merit. The appellants contend that it is the respondents' actions that have caused the plaintiffs' impecuniosity. Mr Miles submitted that this argument has previously been canvassed before the High Court and has not been accepted, for the obvious reason that the appellants were all placed into liquidation as a consequence of debts they incurred prior to the October meetings in Singapore which form the bases of the appellants' claims. [26] Mr Miles submitted that the arguments regarding discovery are similarly misconceived. In his submission, the respondents are entitled to challenge the adequacy of the appellants' discovery. In any event, he pointed out that a number of key documents have been discovered by the appellants in the more recent lists as a consequence of the respondents' queries. Further, in his submission, there have been a number of instances of oppressive conduct in the appellants' manner of pursuing the claim. [27] As to the claim that the requirement for further security will stifle the claim, in Mr Miles' submission, given the appellants' admitted impecuniosity, it is incumbent on the parties standing to benefit from this litigation to provide the respondents with a degree of protection in the event that the claim is unsuccessful. Those standing to gain are the shareholders and directors of the appellants as well as the creditors. Mr Miles pointed out that the creditors of Matam have an agreement with the appellants that they will receive the first $1.047 million of any judgment or settlement, after first deducting the costs of Matam's liquidator and legal costs.(It appears that this will not apply if the appellants succeed only on the Fair Trading Act claim). [28] Of those creditors only one, Mr Dustin, has said he is unable to assist further. There is no suggestion that the remaining creditors are unable to contribute towards the security required. They are nevertheless, in Mr Miles' submission, in the position of seeking the significant rewards promised by the appellants' claim without incurring any of the risk of an adverse costs award. [29] Mr Miles submitted that it is unfair to allow the beneficiaries of a claim to hide behind the plaintiff's corporate veil, drip-feeding such funds through to it as are necessary to progress the litigation, while ensuring that they have no exposure to costs in the event that the claim is unsuccessful. Where there are such parties standing behind the litigation, it is incumbent on them to demonstrate their own impecuniosity if an application for security is to be defeated. [30] Mr Miles adopted the approach taken by the Full Court of the Federal Court of Australia in Bell Wholesale Co Pty Ltd v Gates Export Corp (1984) 52 ALR 176, which formulated the proposition as follows (at 179 – 180):In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.[31] As to the evidence now proffered by the appellants, although withdrawing his objection to it now being received by this Court, Mr Miles pointed out that, in accordance with the comments in Bell Wholesale, the evidence relating to impecuniosity should have been proffered at the hearing before Williams J. It was clearly available. In any event, in his submission, the additional evidence tendered by the appellants does not address the issue of impecuniosity of all shareholders andcreditors. That the creditors do not wish to finance the security for costs is, in his submission, no answer. [32] Mr Miles analysed the appellants' claim in some detail and submitted that there are, in any event, major difficulties with that claim. He submitted that the claim has changed substantially since Williams J's judgment of 30 September 2003 and that there is little prospect of success. In terms of the McLachlan principles, it is thus not inappropriate to grant security. [33] As to the appeal against the order relating to Mr Chong's evidence, Mr Miles submitted that this should also be dismissed. In his submission, the order did not preclude the operation of s 441G and was an appropriate order in the circumstances. In his submission, the respondents should not have to face evidence on what is apparently a major plank of the appellants' case for the first time at trial.Discussion[34] On the material available to Williams J, the decision to make an order requiring security to be given was unexceptionable. He was, in my view, entitled to take into account the lack of explanation as to how the litigation (including senior counsel) had been funded over the year before the hearing and how the substantive hearing was to be funded. He was also entitled to take into account the complexity of the trial and the high costs of the respondents in meeting the amended claim and the appellants' "dogged determination" to date. [35] I do not consider that the subsidiary points raised by Mr Judd take the appellants any further. I cannot see how conduct in relation to discovery could be relevant to whether security is ordered (although it could conceivably affect quantum). As to the contention that the appellants' impecuniosity was caused by the respondents, this was considered by Williams J but, in his view, any attempt to assess whether this was the case would inappropriately impinge on the substantive merits of the case.[36] I also consider that Williams J would have been entitled to refuse the application to adduce further evidence. I accept Mr Miles' submission (see at [31] above) that it is for the party who seeks to argue that the provision of security would stifle a claim to provide the supporting evidence for that contention. This should be done at the time of the hearing and not after its conclusion. On the other hand, the respondents did consent (conditionally) to the application being granted and Williams J did not expressly deal with that application. [37] The evidence that would have been filed in the High Court had the application been granted has now been filed in this Court, Mr Miles having withdrawn his opposition to its admission. There is no doubt that this evidence explains how the litigation has been funded in the past and also (largely) how it will be funded in the future, both factors that weighed heavily in Williams J's decision. It also addresses the financial situation of Mr Fava, the Trust, other associated entities and Mr Fava's sister. [38] To a degree also, the new evidence addresses the question of litigation lenders and Matam's creditors, although as Mr Miles points out, it is only Mr Dustin who has deposed as to being unable to fund the litigation. The other creditors have only been approached through the liquidator (but not it seems with any detailed explanation of the claim) and have indicated unwillingness rather than inability to assist. They have provided no reason for their refusal. In Mr Miles' submission, the evidence now before the Court could have had no effect on Williams J's judgment because of this. He submitted that it is only where creditors are unable to fund the litigation that security should not be ordered. Apart from in relation to Mr Dustin, there is no evidence that this is the case. [39] I consider that Mr Miles is putting the test too high. The decision whether or not to order security is a discretionary one. Even where creditors are solvent it may be unreasonable in commercial terms to expect creditors who are not otherwise associated with the shareholders to fund security for costs (or at least all of the security) in a case where there is no suggestion that they are funding the litigation itself. This would particularly be the case if the claim is complicated (as it is here) and the debt owed to the creditor is small – in this regard see the comments, forexample, by Anderson J in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 334 - 5 and by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 (27 July 2004) at [79]. Questions as to reasonableness could affect both whether security is ordered and the quantum. [40] Given the fact that the application to adduce new evidence was not dealt with by the High Court and that the new evidence could have affected Williams J's decision, I consider the only fair option is to allow the appeal and remit the application to the High Court for it to be re-argued. The respondents would then have the opportunity to challenge the evidence now relied on by the appellants and any supplementary evidence that may be filed. [41] This leaves Mr Miles' contention that the appellants' case is hopeless and that it is substantially different from the case that was the subject of Williams J's judgment of 30 September 2003. The argument in this form was not put to Williams J. It would thus be inappropriate for this Court now to deal with it. It can, however, be raised when the matter is re-argued in the High Court. [42] With regard to Mr Chong's evidence, I do not read the Judge's order as excluding the operation of r 441G. I see his order merely as warning that, if the affidavit is treated as Mr Chong's brief, then the appellants cannot expect to be granted leave to lead orally evidence that Mr Chong would have been willing to provide in the form of a brief. I, however, accept that the last two sentences of the order are inappropriate as they could be taken to exclude the r 441G discretion. The order should therefore be varied to remove those sentences. [43] I understand that there may be some difficulties in getting Mr Chong's co-operation with regard to the preparation of a brief of evidence. If these difficulties eventuate, it seems to me that the appellants should provide to the respondents an outline of what they expect Mr Chong would say if he gives evidence orally.Result[44] By consent, the application to adduce further evidence is granted. The appeal is allowed, the order for further security for costs is set aside and the application is referred back to the High Court. [45] The order relating to the evidence of Mr Chong is varied by the deletion of the last two sentences. The order thus reads as follows:The order requiring the service of witness statements for all witnesses to be called by the plaintiffs includes Mr Chong with the gloss that, if the plaintiffs so choose, the affidavit sworn and filed by Mr Chong in this claim to date can be nominated as his brief of evidence.[46] In the circumstances, there is no award of costs.CHAMBERS J[47] I agree with the result proposed by Glazebrook J. I also agree with her reasons as to why Williams J's order relating to Mr Chong's evidence should be amended. But I do not agree with the reasons given for allowing the appeal and remitting the question of further security to Williams J. [48] My reasons for remitting that question are these. I can understand why Mr Judd was taken somewhat unawares by the way in which the security for costs argument developed in the High Court. There was some justification for his assumption prior to the High Court hearing that it was a given that the appellants had exhausted their financial resources and that the focus of the hearing was to be on the merits or otherwise of the litigation and the extent to which the respondents were responsible for the appellants' impecuniosity. The hearing, however, took a rather different course. [49] Immediately after the hearing, Mr Judd, by then appreciating that the appellants' ability to fund the litigation was or might be a live issue, sought leave to advance further evidence on that topic. Mr Miles did not oppose that application,provided certain conditions were met. One of those conditions was that he should have the opportunity to file affidavits in response. Williams J advised that, if he considered the additional material would be helpful or relevant, he would issue a minute. He did not issue such a minute, but then decided the case on the basis that the appellants had "nowhere condescended to advise the Court how they have funded this litigation over the past year or so and how they intend to fund the preparation and conduct of the trial itself": HC AK CIV 2001-404-2302 15 December 2005 at [20]. He further considered that, "given the plaintiffs' dogged determination to proceed with this matter ever since it was commenced over four years ago, the chances of their not continuing to trial seem remote": at [21]. Those were the very matters which Mr Judd's application and his further evidence were designed to address. [50] In my view, Williams J erred in deciding the matter without hearing further from the parties on the appellants' application to adduce further evidence. Had he heard that application, I think he would have been bound to grant it. Indeed, Mr Miles was prepared, albeit conditionally, to consent to the application. [51] The evidence in question did eventually come in by consent before us. Mr Miles submitted that, even if the new evidence established the appellants were impecunious, it did not establish that the appellants' creditors were impecunious. Since they would benefit from the litigation if the appellants were successful, they could reasonably be expected to put their hands in their pockets now to provide security for the respondents' costs. While the creditors' financial resources are not irrelevant, I do not consider that the creditors can necessarily be expected to contribute to the security the appellants must stump up, for the reasons given by Glazebrook J at [39]. [52] Mr Judd has now got his further evidence in. I do not consider we can determine what the security (if any) should be, as Mr Miles must be given the opportunity to respond to the evidence which has now been adduced. He has always sought the opportunity to file further evidence, should Mr Judd's application to adduce further evidence be successful. He is entitled to respond. Clearly the further hearing that will be required should take place in the High Court rather than thiscourt. In my view, once Mr Miles has filed his further evidence, Williams J should reconsider the application for further security in light of the additional evidence and these reasons for judgment. All issues will be on the table, including the contention that the appellants' case is hopeless: see [41] above.WILLIAM YOUNG P[53] I too agree that the appeal should be allowed with the results proposed by Glazebrook and Chambers JJ in their separate judgments. [54] I agree with the approach taken by Glazebrook J to the issue relating to the evidence of Mr Chong. [55] On the security for costs question, I consider that the appeal should be allowed for the reasons given by Chambers J. [56] I was initially inclined to the view should ourselves fix security for costs. This course would have had the advantage of avoiding a further hearing in the High Court with associated difficulties in terms of its impact on preparation for trial. But I have, in the end, concluded that the state of the evidence (with the new evidence relied on by Mr Judd before the Court but without a response from the respondents) is such that this exercise could not be undertaken in a fair or principled way.Solicitors: Murdoch Hall & Co, Auckland for Appellants Bell Gully, Auckland for Respondents