GIBBSTON COMMUNITY WATER COMPANY 2014 LIMITED v TOMANOVICH HOLDINGS LIMITED [2019] NZCA 7

GIBBSTON COMMUNITY WATER COMPANY 2014 LIMITED v TOMANOVICH HOLDINGS LIMITED[2019] NZCA 7 [12 February 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA291/2018[2019] NZCA 7BETWEEN GIBBSTON COMMUNITY WATERCOMPANY 2014 LIMITEDAppellantAND TOMANOVICH HOLDINGS LIMITEDRespondentHearing: 6 November 2018Court: French, Lang and Moore JJCounsel: A N Isac for AppellantJ Moss for RespondentJudgment: 12 February 2019 at 3.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay the respondent costs on a band A basis together withusual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Moore J)Introduction[1] Tomanovich Holdings Ltd ("Tomanovich") has applied to the High Court toset aside a disposition of property. The transaction at the centre of this dispute is thetransfer of potable water assets (the water scheme) in the Gibbston Valley,Central Otago. Tomanovich claims that the water scheme was transferred to theappellant, Gibbston Community Water Co 2014 Ltd (Community Water), for less thanit was worth. It is alleged this transfer was for the purpose of defeating creditors,including Tomanovich.[2] Community Water applied to strike out the proceeding on the ground thatTomanovich's application amounted to an abuse of process because it was commencedand continued for a collateral or improper purpose, namely to have the water schemevested back in the transferor with the intention of Tomanovich, or others connected toit, obtaining control of the water scheme.[3] Justice Gendall declined to grant strike-out.1 He was not satisfied thatTomanovich's application was an abuse of process.2 Community Water now appealson the basis the Judge not only erred in his assessment of some of the grounds forstrike-out but also failed to assess whether, when viewed in their totality, the reasonsrevealed an abuse of process justifying strike-out.Background3[4] The water scheme is presently owned by Community Water. Most of the locallandowners who use the scheme are shareholders of Community Water. The waterscheme services approximately 30 neighbours in the Gibbston Valley. It operates ona non-profit, cost recovery basis.[5] Two of the landowners who draw water from the water scheme areKristina Buxton and David Henderson (the Hendersons). Neither is a shareholder inCommunity Water. Ms Buxton is the sole director of Tomanovich. Mr Henderson isher husband. He was formerly the director of Tomanovich until he was adjudicatedbankrupt on 29 November 2010. The shares in Tomanovich are held by his familyinterests.1 Tomanovich Holdings Ltd v Gibbston Community Water Co 2014 Ltd [2018] NZHC 990 [decisionof Gendall J].2 At [62].3 The background to this proceeding was comprehensively summarised by Gendall J at [7]–[30].What follows gratefully draws on that summary.[6] From 2007 until December 2014 the water scheme was operated byGibbston Water Services Ltd (Water Services). This company was owned andoperated by Mr Henderson and his family interests. It purchased the shares in WaterServices for $60,000. The shares were held by Gibbston Water Holdings Ltd(Holdings), another Henderson entity.[7] It appears that from an early stage relationships between the Hendersons andothers in the valley soured. Users of the water scheme became deeply mistrustful ofthe Hendersons. Their fear was that the Henderson interests were proposing to use thewater scheme for a large hotel and spa development. That acrimony and mistrustcontinues today and is plainly evident in the respective stances adopted by theopposing parties.[8] In June 2010 a number of Henderson family companies, including Holdings,were placed in receivership and liquidation. This was some months beforeMr Henderson, himself, was adjudicated bankrupt.[9] In late 2011 an attempt was made to transfer Holdings' shares in Water Servicesto another Henderson company, Castlereigh Properties Ltd (Castlereigh). Theliquidator of Holdings voided that transaction and applied to the High Court for anorder confirming his decision. Justice Mander, in a judgment of 11 July 2014,determined the liquidator could validly make that decision.4 He determined that thesale for $1.00 was not for fair value.5[10] Five days later, statutory demands were issued against Water Services onbehalf of five companies associated with the Henderson family, includingTomanovich. They claimed debts totalling approximately $40,000. These demandsprovide an important part of the background to the present appeal.[11] However, on 1 December 2014 the efforts of these companies to initiate theliquidation of Water Services were thwarted when the water scheme was sold toCommunity Water. The purchase price was $35,000. Various records reveal that this4 Walker v Gibbston Water Services Ltd [2014] NZHC 1638 [decision of Mander J].5 At [89] and [137(c)].sale was intended to remove the water scheme from the control of Mr Henderson andhis associated interests. Justice Gendall summarised the position in the followingway:6[19] It is that sale of the water scheme from [Water Services] to[Community Water] for $35,000 which is essentially the subject of[Tomanovich's] challenge here. [Tomanovich] in its pleading maintains thatas a creditor of [Water Services] it has been prejudiced by the disposition ofcompany property, being the sale of the water scheme asset, at an undervalue.It contends that this sale was a disposition which was made with the intent toprejudice it and others as creditors of [Water Services] (as no part of the$35,000 was available to them) and, as a result, [Water Services] essentiallybecame insolvent. As to its claim to be a creditor of [Water Services],[Tomanovich] notes that on 16 July 2014 it issued the statutory demand notedabove. This claimed the sum of $11,838, said to be an outstanding debt owingto [Tomanovich]. The statutory demand expired without payment orcompromise.[12] The essence of Tomanovich's application under s 348 of the Property Law Act2007 (the Act) is that the disposition of the water scheme to Community Water was ata significant undervalue. Under s 348, the Court may make an order vesting theproperty in certain nominated persons or require a person who has acquired or receivedthe property to pay reasonable compensation.7[13] Two days after the transfer to Community Water, Water Services was placedinto liquidation by shareholders' resolution. Since the transfer, Community Water hasoperated and maintained the water scheme.[14] There is one, further, background matter of relevance. This was described byGendall J in the following terms:8 once the present proceeding was issued, on 14 December 2017[Community Water] made an open offer of settlement to [Tomanovich],(accompanied by a denial of liability) for reasons it outlined as:(a) "The disproportionate cost that was being associated with thislitigation compared to the relatively low value of [Tomanovich's]claim"; and(b) "The very strong impression [Community Water] has that[Tomanovich] through Mr Henderson is conducting this litigation forthe purpose of seeking to wrest back control of the potable water6 Decision of Gendall J, above n 1.7 See also Property Law Act 2007, s 350(1).8 At [27]–[29].scheme. This is notable from an email from [Tomanovich's] solicitor,from various discussions between counsel and from the fact thatfinancial compensation is not sought in the proceeding, just the settingaside of the sale."[Community Water's] offer was to pay 100 per cent of all the creditor claimsagainst [Community Water] of the Henderson companies and interests asapproved by the liquidators, together with category 2B scale costs for stepstaken up to the date of the offer. The offer, it seems, went on to state that ifany doubt arose about the value of those creditor claims, the liquidators andthe Henderson entities could avail themselves of the processes under theCompanies Act to resolve that value issue.Approximately one week later on 22 December 2007, this offer from[Community Water] was rejected. [Community Water] says this occurredwithout explanation.Recent Developments[15] In its submissions filed for this appeal Tomanovich claims that the offer wasrejected because it provided no security for payment and required action to be takenby a liquidator, not appointed by the creditors, when the liquidator had no resources todo so and had refused to take any steps to date.[16] This prompted the appellant, on 5 November 2018, to amend its offer ofsettlement by offering to pay all of the Henderson company debts as recorded in theproofs of debt filed by the five companies totalling $43,588.80. Also included was anoffer to pay 2B scale costs for the steps taken in the proceeding until15 December 2017 (being the date of Community Water's original offer).[17] On 2 October 2018, Tomanovich applied to join four additional plaintiffs; thefour other Henderson companies which, with Tomanovich, have expired statutorydemands. The joinder application has been adjourned pending the determination ofthis appeal.[18] Tomanovich has also sought to amend its substantive claim by adding analternative ground of relief; damages to be paid to Water Services. Mr Moss, forTomanovich, submitted this provides the court with an alternative form of relief unders 248 if the claim is successful but the court is reluctant to transfer the water assetsback to Community Water.Legal principles[19] Justice Gendall correctly summarised the principles which apply to strike-outapplications, observing that Community Water's application fell to be consideredunder the fourth ground of strike out listed in r 15.1(d) of the High Court Rules 2016,abuse of process. As the Judge observed, this ground:9 extends beyond the other grounds and captures all other instances of misuseof the court's processes, such as a proceedings that has been brought with animproper motive or are an attempt to obtain a collateral benefit.[20] Determining whether a proceeding amounts to an abuse of process requires abroad, merits based judgment which takes into account the public and private interestsinvolved and the facts of the case, focusing particular attention on the central questionof whether, in all the circumstances, a party is misusing or abusing the court'sprocess.10[21] This is an appeal by way of rehearing.11 Community Water is entitled tojudgment in accordance with the opinion of the appellate Court, which should notdefer to the lower Court's assessment of the evidence, but rather form its own,independent judgment.12Issues on appeal[22] Before Gendall J, six grounds for strike-out were advanced. On appeal, fiveare maintained. They are:(a) The proceeding has been continued for an improper purpose.(b) Tomanovich or associated parties have now held inconsistent positionsin this and earlier litigation.(c) Mr Henderson's involvement in this proceeding is a cause for concern.9 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR679 at [89] (footnote omitted); quoted by Gendall J at [32].10 Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1 (HL) at 31.11 Court of Appeal (Civil) Rules 2005, r 47.12 Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].(d) Tomanovich is seeking to raise an issue it could have raised before.(e) When the above grounds are assessed correctly and together, the onlyconclusion is that this proceeding is an abuse of process and should bestruck out.[23] We address each ground in turn.Has the proceeding been commenced or continued for an improper purpose?[24] Mr Isac, for Community Water, submitted the rejection of Community Water'soffer is telling. He said that if the offer was accepted this may well provide an"end result" more favourable to Tomanovich than it could expect if it was ultimatelysuccessful in its claim. Thus he said Tomanovich's rejection of the offer without acredible explanation was objectively unreasonable, leading to the strong inference thatthese proceedings are being continued for an improper purpose.13[25] In our view the issue is not so straightforward as Mr Isac contended. We agreewith Gendall J that these are genuine causes of action.14 There is a legitimate disputeas to the value of the water assets, for reasons we expand upon below in relation to thesecond ground of appeal. If Tomanovich's position is proved correct, the offer ofsettlement will not provide a more favourable "end result" than Tomanovich and theother Henderson companies could otherwise expect. We also note Tomanovich nowseeks alternative orders: to either set aside the transaction or award damages to theextent of the undervalue.[26] Furthermore, as Mr Moss submitted, s 348 is a bespoke provision. It entitlescreditors who claim to be prejudiced by a disposition of property to apply to the courtto set that disposition aside. It operates independently of any action undertaken by theliquidators. In the present context this is a particularly important considerationbecause Water Services does not have the funds to compensate the liquidator's costs.On Tomanovich's account, that is a consequence of the sale of the water assets atundervalue. And, because Community Water's offer of settlement is contingent on13 Relying on Williams v Spautz (1992) 174 CLR 509 at 537.14 Decision of Gendall J, above n 1, at [43].action by the liquidators, the settlement offer does not provide a true or propersubstitute for the relief claimed.[27] For these reasons we are not satisfied the refusal of Community Water'ssettlement offer establishes the proceedings were commenced or continued for animproper or collateral purpose, or that would provide support for strike-out.Has Tomanovich or its associated parties maintained inconsistent positions in this andearlier litigation?[28] Mr Isac submitted that Ms Buxton, as director of Tomanovich, has deliberatelyadopted inconsistent factual positions in different, albeit related, proceedings.He submitted that this inconsistent conduct was undertaken for the purpose ofobtaining a strategic advantage.[29] In particular, Mr Isac pointed to what he described as contradictory evidencegiven by Ms Buxton in respect of the value of the water assets. First was her claim toMander J in Walker v Gibbston Water Services Ltd that the shares in Water Serviceswere all but worthless because their value was only about $2,500.15 By contrast, inthe present proceedings, Tomanovich suggested the value of the water assets is at least$140,000. This is based on an offer made by a Mr Edney, who Community Waterbelieves may be associated with the Henderson family.[30] As Gendall J accepted, the discrepancy is a "major one".16 But it is explicable.First, as Mander J explained:17[The valuation of $2,500] however represents the disposal value of the readilyremovable parts, being the pump, fittings and concrete tank. It does notpurport to be a valuation of the potable water system in the Gibbston Valleyitself. In effect, the valuation provided by Mr Moore and the $5,000 listed inthe financial statements is nothing more than the book value of the equipmentwhich could be recovered if the system was dismantled and disposed of.It does not represent the market value of the potable water scheme, nor doesit purport to be.15 See decision of Mander J, above n 4, at [76].16 Decision of Gendall J, above n 1, at [47].17 Decision of Mander J, above n 4, at [76].[31] One surveyor put the cost of replacing the water scheme at $158,000 plusGST.18 While Mander J did not make a finding on the value of the water assets, hisconclusion plainly reveals he rejected Ms Buxton's valuation, preferring thereplacement value.[32] We agree with Mr Moss that in the face of those comments it would have beenan exercise in futility, as well as irresponsible, for Ms Buxton to have maintained thevalue of the water scheme was $2,500. For that reason the position taken byTomanovich in this proceeding is not inappropriate, and does not lend support to thestrike-out application.[33] We would also add that the observations of Mander J lend weight toTomanovich's underlying argument that the sale of the water assets was at undervalue.Is Mr Henderson's involvement in these proceedings evidence of an abuse of process?[34] This submission may be dealt with in short order. Mr Henderson is subject toa prohibition preventing him from participating, directly or indirectly, in the runningof any business without the consent of the court.19 Community Water claimsMr Henderson has been intimately involved in this litigation and thus in breach of thatprohibition. He has filed a number of affidavits in support of the various applicationsbrought by Tomanovich. Mr Isac submitted that Mr Henderson's involvement in theproceedings is apparent from the following:(a) In December 2014 Mr Henderson was reported in the Otago DailyTimes as saying he would challenge the sale of the water assets.His lawyers wrote to Mr Marshall, one of the directors ofCommunity Water, advising that if the assets were not voluntarilyreturned proceedings would be commenced.(b) He made an affidavit in support of the present application and hascontinued to file affidavits in support of Tomanovich's variousinterlocutory applications.18 Decision of Mander J, above n 4, at [77].19 Havenleigh Global Services Ltd v Henderson [2016] NZHC 2969 at [446].(c) Ms Buxton is Mr Henderson's wife.(d) Mr Henderson appears to have obtained Community Water's discoverydocuments in these proceedings and has used one in breach of animplied undertaking.(e) When Community Water first made its open offer Mr Hendersontelephoned Ms Erkkila, another of the directors of Community Water,issuing threats in the event Tomanovich's claim was not resolved to hissatisfaction.(f) Mr Henderson has sought to represent all of the Henderson creditors intheir dealings with the liquidator.[35] While these factors certainly indicate that Mr Henderson maintains a closeinterest in these and related proceedings, as Gendall J observed,20 he is not a party.Given his past connection with the water scheme it is unsurprising that Tomanovichhas filed evidence from him. In several respects, it would appear that he is the onlyavailable witness with direct knowledge of the matters he discusses. For these reasons,we are not satisfied that any involvement Mr Henderson has in these proceedingsamounts to or contributes to an abuse of process.Are these proceedings in breach of the rule in Henderson v Henderson?[36] The rule in Henderson v Henderson is that the same parties cannot litigate amatter which might have been appropriately raised in an earlier litigation, but whichwas not only because of omission, negligence, inadvertence or even accident.21[37] Again, this ground may be dealt with briefly. Tomanovich is not re-litigatingmatters which have already been brought before the court. Community Water was nota party to the 2014 originating application. That application concerned the terminationof the liquidation of Water Services and the removal of a liquidator, in other wordsmatters other than the particular transfer which lies at the heart of these proceedings.20 Decision of Gendall J, above n 1, At [51].21 Henderson v Henderson (1843) 3 Hare 100 at 115, 67 ER 313 (Ch) at 319.[38] While there has been some delay in bringing this application, we do not acceptthat any substantial prejudice has been suffered by Community Water. In particular,we note that the proposed amended statement of claim seeks alternative relief indamages. If it is ultimately found that the transfer of the water assets was atundervalue, but their return would prejudice Community Water, it will be available tothe court to award damages to Tomanovich.Global assessment[39] Mr Isac was critical of Gendall J for failing to conduct a broad, merits basedevaluative judgment taking account of all of the facts of the case. While he acceptedthe Judge assessed each ground individually and observed that five had merit, he saysthe Judge did not undertake a collective or global analysis of whether Tomanovich wasmisusing or abusing the process of the Court.[40] In our view there are two difficulties with that submission. The first, and mostobvious, is that the Judge expressly undertook a global analysis when, having analysedeach of the grounds, he observed that:22[62] The sum of the factors discussed above lead me to conclude, but onlyby a reasonably fine margin, that this proceeding is not an abuse of processunder r 15.1(1)(d).[41] Secondly, in our view the single most persuasive factor justifying dismissingthe strike-out application is that there appears to be a legitimate and bona fide disputeas to the value of the water scheme. There is a body of evidence from different sourceswhich supports Tomanovich's claim that the value of the water assets may beconsiderably greater than the $35,000 Water Services paid. That is a matter forthe court to determine on the hearing of this application. It will require expertvaluation evidence.[42] It seems to us that the issues for litigation on this application are narrow.The first question is what is the true value of the water scheme, and whether the$35,000 paid by Community Water was undervalue. Secondly, if the disposition wasunder value, what relief in terms of s 248 of the Act should be ordered.22 Decision of Gendall J, above n 1.[43] This matter needs to be determined without further delay. Any outstandinginterlocutory skirmishes, including discovery, should focus on the issues to bedetermined.Result[44] The appeal is dismissed.[45] The parties agreed that costs should follow the event. The appellant must paythe respondent costs on a band A basis together with usual disbursements.Solicitors:Succeed Legal, Wellington for AppellantCanterbury Legal, Christchurch for Respondent