GOLD STAR INVEST LIMITED v V [2022] NZHC 653

GOLD STAR INVEST LIMITED v V [2022] NZHC 653 [1 April 2022]UNTIL FURTHER ORDER OF THIS COURT THERE IS AN INTERIMORDER PREVENTING THE PUBLICATION OF THE NAMES OF THEDEFENDANTS AND NON-PARTY PUBLIC OR MEDIA FROM HAVINGACCESS TO THE COURT FILE OR ANY DOCUMENTS RELATING TO THEPROCEEDING HELD BY THE COURT WITHOUT THE MATTER BEINGREFERRED TO A JUDGE FOR DIRECTION.IN THE HIGH COURT OF NEW ZEALANDNELSON REGISTRYI TE KŌTI MATUA O AOTEAROAWHAKATŪ ROHECIV-2019-442-000023[2022] NZHC 653BETWEEN GOLD STAR INVEST LIMITEDPlaintiffAND VFirst DefendantAND WSecond DefendantAND CThird DefendantAND HFourth DefendantAND PFifth DefendantHearing: 10 March 2022Appearances: C J Griggs for PlaintiffJ F Anderson QC and K T van der Plas for First Defendant(by VMR)S M Pasley for Second Defendant (by VMR)F B Barton and A L Clarke-Tahana for Third Defendant (by VMR)J R Sumner and R Williams for Fourth Defendant (by VMR)C S Lawes for Fifth Defendant (by VMR)Judgment: 1 April 2022JUDGMENT OF ASSOCIATE JUDGE PAULSENThis judgment was delivered by me on 1 April 2022 at 12.30 pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:[1] This is an application by the first defendant, supported by all other defendants,for an order under r 10.15 of the High Court Rules 2016 (the Rules) that the Courtdetermine a question separately from, and prior to, the full trial of the proceeding.[2] The plaintiff's position is to formally abide the decision of the Court, but itscounsel has made submissions to the effect the first defendant has not shown a splittrial is warranted. For the reasons that follow, I agree with that assessment.Background and the pleading[3] The plaintiff (Gold Star) alleges the defendants took part in a conspiracy byunlawful means to injure it. It seeks to recover damages of more than $4,700,000.[4] Gold Star was incorporated in March 2011 by the second defendant, with RolfHäring (Mr Häring) as the sole shareholder and director. In August 2012, the fifthdefendant, who was then the partner of Mr Häring, was appointed director of GoldStar and Mr Häring resigned his directorship shortly thereafter. The fifth defendantremained sole director of Gold Star until 5 July 2017.[5] From 2005 to 2010, Mr Häring had defrauded Mazda Motor Europe GmbH(Mazda) of a large sum. In July 2013, he was adjudicated bankrupt in Germany andDr Alex Kulas was appointed Mr Häring's insolvency administrator.[6] Mr Häring was convicted of charges of embezzlement from Mazda, and taxfraud. In June 2013, he was sentenced to imprisonment and released on probation on1 July 2016. He remained the sole shareholder of Gold Star, subject to theadministration of Dr Kulas.[7] The plaintiff alleges Gold Star was used as a vehicle to receive and holdsubstantial funds Mr Häring had obtained through his criminal activities. As a result,in the financial year ending 31 March 2012, Gold Star had accumulated assets of$5,652,493 represented principally by shares in three property owning companies.The assets owned by each of the three companies were sold or otherwise disposed ofand the resulting funds were converted into liquid assets between November 2012 andSeptember 2013 totalling $4,938,498. Of that sum, it is alleged an amount of$4,589,633 was paid by Gold Star as drawings to or on behalf of Mr Häring. Thesepayments are defined in the amended statement of claim as "the distributions".[8] Gold Star pleads that the funds Mr Häring obtained by fraud, along with anyproperty acquired using those funds and the proceeds of sale of such property, weresubject to an institutional constructive trust for the benefit of Mazda. It then pleadsthat the distributions were not authorised, in compliance with s 52 of the CompaniesAct 1993, by the fifth defendant as the sole director of Gold Star, and that Gold Starcould not, immediately after the distributions, satisfy the solvency test.1[9] There is then a further pleading that the "authorisation of the distributions" bythe fifth defendant was in breach of her duty of care as a director under s 137 of theCompanies Act, because it was known that the funds were proceeds of property whichhad been acquired using money that had been fraudulently obtained from Mazda.[10] There are further pleadings that the defendants acted in combination, knowingthat the funds of Gold Star had been acquired fraudulently from Mazda, and that bytheir conduct they were causing loss to Gold Star by rendering it insolvent.Procedural history[11] While this proceeding was commenced in 2019, it remains at an early stagewith discovery not yet commenced.[12] The first defendant originally sought orders as follows:2(a) the following questions be determined separately from, and prior to,the full trial in the proceeding ("Separate Questions"), oralternatively, such questions as the Court thinks appropriate:(i) whether the payments identified at paragraph 57 of theamended statement of claim are "distributions" for thepurposes of s 52 of the Companies Act 1993 ("Act");(ii) whether the distributions breached s 52 of the Act; and1 Companies Act 1993, ss 4 and 52(2).2 Application dated 17 December 2021.(iii) whether those breaches of s 52 of the Act amount to "unlawfulmeans" for the purpose of a tortious conspiracy cause ofaction.(b) [i]n the event of findings against the plaintiff on the above issues, orany one of them, Judgment be entered in favour of the defendants andthe proceeding be dismissed; and(c) the plaintiff pay the first defendant's costs.[13] When that application came before me on 21 February 2022, after hearing fromcounsel I reserved my decision. As a consequence of my exchanges with counsel, Ithen received a memorandum indicating the first defendant wished to amend theapplication to seek an order that only one question be heard separately. That questionis as follows:Whether the payments identified at paragraph 57 of the amended statement ofclaim are "distributions" for the purposes of s 52 of the Companies Act 1993("Act").[14] I had the application called before me again on 10 March 2022 to hear furthersubmissions. Prior to that hearing helpful memoranda were filed.The Rules and relevant principles[15] Rule 10.15 of the Rules provides as follows:10.15 Orders for decisionThe court may, whether or not the decision will dispose of theproceeding, make orders for—(a) the decision of any question separately from any otherquestion, before, at, or after any trial or further trial in theproceeding; and(b) the formulation of the question for decision and, if thoughtnecessary, the statement of a case.[16] Pursuant to r 10.14, the "question" in r 10.15 includes: any question or issue in any proceeding, whether of fact or of law or partlyof fact and partly of law, and whether raised by pleadings, agreement ofparties, or otherwise.[17] The relevant principles to be applied in applications under r 10.15 are set outin McGechan on Procedure and are not in dispute.3 The starting-point is apresumption against a split trial because having all matters in issue determined in onetrial would normally be the most expeditious and efficient manner of dealing with aproceeding. The burden of displacing the presumption rests on the party contendingfor a split trial. The burden has been variously described as "not insignificant","moderate" and "heavy". An appropriate approach is to consider whether theapplicant has established good, preponderant reasons in favour of a separate questiondetermination. The Courts have warned against the difficulties that arise from splittrials, including that experience shows a shortcut may prove to be the longest distancebetween two points.4[18] A list of matters that have been taken into account in deciding whether toexercise the discretion to order a split trial were identified in Turners & Growers Ltdv Zespri Group Ltd.5 I find more useful the approach taken in Haden v Attorney-General where Kós J identified that important questions to be addressed by a Courtbefore granting an application under r 10.15 were as follows:6(a) Will there be difficult demarcation questions between those issues to beaddressed at the first trial and those left for the second?(b) Will the separate question bring the proceedings to an end?(c) What potential time saving does the separate question offer?(d) How will appeals be dealt with?(e) Are there any other practical considerations tending one way or theother?3 Andrew Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR10.15.05]and [HR10.15.06].4 Clear Communications Ltd v Telecom Corporation of New Zealand Ltd (1998) 12 PRNZ 333 (HC)at 335; Tilling v Whiteman [1980] AC 1 (HL) at 25; and Treaty Tribes Coalition, Te Runanga oNgati Porou and Tainui Maori Trust Board v Urban Maori Authorities [1997] 1 NZLR 513 (PC).5 Turners & Growers Ltd v Zespri Group Ltd HC Auckland CIV-2009-404-4392, 5 May 2010 at[11].6 Haden v Attorney-General (2011) 22 PRNZ 1 (HC) at [50].SubmissionsThe defendants' submissions[19] The first defendant, supported by all other defendants, submits the separatequestion is a discrete one that can be determined without affecting other aspects of theproceeding, or the second trial if it is necessary. It contends the resolution of theseparate question will save a significant amount of cost and time. If discovery isneeded it will be tailored discovery and small in volume and the hearing time todetermine the separate question will be a fraction of what will be taken up with a fulltrial. The estimate provided was that the separate question could be determined in oneand a half days. It is said, by comparison, a full trial will be lengthy and costly,involving five defendants who are spread across four different jurisdictions and timezones and may require translators as well as discovery in several different languages.[20] The first defendant argues the Court's decision on the separate question maybe determinative of the proceeding. It considers that if the plaintiff fails to establishthe amounts paid to Mr Häring were distributions for the purposes of s 52 of theCompanies Act, the claim must inevitably fail (or at least will suffer a mortal blow).It argues the plaintiff could not then amend the claim to include a new basis for anunlawful means conspiracy or add any new causes of action because such claimswould likely be time-barred.[21] The defendants also note, as the case has not yet been set down for trial, thereis no risk of losing trial dates already allocated. They submit the delay caused by anyappeal that may result from a decision on the separate question is amply justified bythe potential savings in time, cost and resources in avoiding a full trial.[22] It is contemplated that the hearing of the separate question might proceed on astatement of the case under r 10.20 of the Rules but, in any event, the hearing is likelyto require few witnesses, so the need to recall witnesses for the full trial is also unlikely.The plaintiff's submissions[23] The plaintiff submits the paucity of available hearing time in the presentCOVID–19 environment means the holding of two separate hearings will be anadditional burden on the Court's resources and would delay the final resolution of theproceeding.[24] The plaintiff also submits there are inevitably time efficiencies to be gainedfrom having all the issues heard at one trial so the time required to determine theproposed separate question is likely to be insignificant in the context of that trial as awhole.[25] The plaintiff argues the resolution of the preliminary question will not bring anend to the litigation. This is because non-compliance with s 52 of the Companies Actis not the only basis upon which the payments made to Mr Häring are said to beunlawful. The plaintiff also pleads the payments were made in breach of s 137 of theCompanies Act and a finding that this was the case does not depend on whether thepayments come within the definition of distributions for the purposes of s 52. For thatreason, it is said, regardless of any decision the Court makes on the separate question,most of the evidence, including whether the defendants conspired with fraudulentintent, will need to be traversed at the second trial and the trial is unlikely to beabbreviated to any significant extent.[26] The plaintiff also says there is a real prospect of multiple appeals if a separatehearing is ordered. It says both the plaintiff and the defendants are likely to exercisetheir rights of appeal from a decision on the separate question.My analysis[27] Determining whether payments made to or for the benefit of a shareholder aredistributions for the purposes of s 52 is not straightforward. The leading authoritiesappear to be decisions of Heath J in Kitchener Nominees Limited v James ProductsLtd,7 and Re DML Resources (in liq).8 In Re DML Resources (in liq) his Honour said:[65] The use of the expressions "direct or indirect" and "to or for" thebenefit of the shareholder [in the definition of "distribution" in s 2 of the Act]serve to confirm the necessary link between the negative impact on the netvalue of the company and the positive impact on the net value of theshareholder. They also emphasise that the inquiry is one of substance ratherthan form. An analysis based on the substance of the transaction lessens thelikelihood of a shareholder using its influence, as an insider, to mask the truenature of the transaction to avoid compliance with the distribution rules.[66] A distinction must be drawn between the transfer of wealth to ashareholder in its capacity as a shareholder and a bone fide transfer of wealthto that shareholder in some other capacity. Failure to draw that distinctionwould, in my view, undermine the purpose of the reforms made by enactmentof the distribution provisions of the Act because those reforms were focusedsquarely on the protection of creditors or higher ranking shareholders [67] I am satisfied that the provisional view I expressed in KitchenerNominees Ltd (that a distribution does not occur if the shareholder receivesbenefits from the company as part of a genuine arm's length transaction forwhich valuable consideration is given) was correct. If a genuine loan contracthas been entered into between a shareholder (as lender) and company (asborrower) repayment of that loan cannot be impugned unless challengeable,on liquidation, under other provisions of the Act Similarly, if a shareholderis employed by the company and receives wages, provided the servicesrendered are genuine any payments made to the shareholder, qua employee,could not be impugned under the distribution provisions [28] The arguments the parties will present at trial are foreshadowed in submissionsmade to Grice J in support of an application to discharge a freezing order made earlierin this proceeding which were provided to me.9 I understand the defendants' positionis that any payments to or for the benefit of Mr Häring were not made to him quashareholder but were in repayment of genuine loans advanced to Gold Star to fund itsactivities. However, the plaintiff's analysis is the payments were not arms-lengthtransactions or genuine loans entered into with Gold Star. It will submit there is noevidence the payments were made on any other basis other than Mr Häring's capacityas a shareholder, and were unquestionably distributions for the purposes of s 52. Whenfaced with these competing positions, Grice J recognised that the issue was one shecould not resolve on the application before her, as it was early in the proceeding and7 Kitchener Nominees Limited v James Products Ltd (2002) 9 NZCLC 262,882 (HC).8 Re DML Resources Ltd (in liq) [2004] 3 NZLR 490 (HC).9 Gold Star Invest Ltd v V [2019] NZHC 3504.very fact-dependent.10 I agree with her assessment. The emphasis of the Court'sinquiry will be the substance of the transactions rather than their form and whether thepayments conferred a net benefit upon Mr Häring.11[29] Against this background, I have come to the view it is not appropriate to ordera split trial. For the reasons that follow, I am not satisfied that making such an orderwill deliver the substantial advantages that the defendants consider it will.[30] As was noted in Haden v Attorney-General, the issues in the two hearingsshould be discrete and, if they are not, and there is a significant overlap, separatedetermination is far less likely to be appropriate.12 Kós J noted that particularconsideration must be given to the potential difficulties from issue estoppel and, in amulti-party proceeding (as this is), inefficiencies associated with parties with limitedconnection to the separate question being required to attend the first hearing, simplyto protect their positions.13 These are important considerations in this case.[31] I do not accept that the issues arising in relation to the proposed separatequestion are discrete. Upon the pleadings, issues that will need to be determined inrelation to it include whether the payments were the proceeds of property acquiredfrom Mazda by fraud, were subject to an institutional constructive trust for the benefitof Mazda, were paid as drawings to Mr Häring and rendered Gold Star insolvent. Thesame issues will arise in relation to the plaintiff's alternative argument that thepayments were unlawful in breach of the fifth defendant's duty of care under s 137 ofthe Companies Act.[32] Related to this, I also do not accept the determination of the separate questionwill bring an end to the proceeding. While this is not determinative of this application,it is an important consideration against granting a split trial. On the pleadings, GoldStar plainly advances an alternative argument that the payments were unlawful unders 137 of the Companies Act. I do not accept the defendants' submission the allegationof breach of s 137 is entirely derivative upon the payments being distributions within10 At [40] – [41].11 Re DML Resources, above n 8, at [65] and [88].12 Haden v Attorney-General, above n 6, at [50(a)].13 At [50(a)].the meaning of s 52. I do not consider that is a correct reading of the pleadings andcounsel for the plaintiff, Mr Griggs, confirms that they were not intended to be read inthat way. In any event, even if the statement of claim might be clearer, it is plainlycapable of amendment.[33] There is insufficient information before me to determine that ordering a splittrial will make any substantial time and cost savings. In Haden, Kós J said theapplicant should be able to demonstrate by reference to reasoned time estimates thepotential time saved if the separate question is answered affirmatively and also addressthe counterfactual of what total time will be taken if the question is answerednegatively.14 In this case, there are no reasoned time estimates before me. It wassubmitted the hearing of the separate question might take only one and a half days butthere was no reasoned basis for that and, given my view of the issues that are likely toarise, I do not accept it is a reliable estimate. My sense is that as the proceeding is atan early stage and the parties have yet to even undertake discovery, this application ispremature.[34] Also relevant in this context is the potential delay to the final resolution of theproceeding and associated inefficiencies resulting from splitting the trial into twoparts. There can be no doubt, in my view, that splitting the trial will substantially delaythe final resolution of this litigation. What is in effect proposed, is that the parties willgo through interlocutory steps, such as discovery, to the extent required only in relationto the separate question prior to the first hearing. They may be waiting for aconsiderable time for that hearing. While the defendants hope that will bring an endto the litigation, I do not accept that is likely the case. The parties will then be facedwith a further round of discovery, and potentially other interlocutory matters, before afurther significant wait for a second trial which may re-traverse at least some of thematters that arose at the first trial. The potential for delay is obvious, significant andwill be inefficient and costly in my view.[35] I also agree with the submission of Mr Griggs that multiple appeals are likelyto occur and that they are inefficient. While the issue that has arisen concerning s 5214 Haden v Attorney-General, above n 6, at [50(c)].is not novel, the leading authorities are two decisions of a single judge in this Courtand the issue is plainly suitable for consideration at an appellate level. Given the sumsat stake, it would be expected the parties would look to exercise their appeal options.Further, it appears to me the issue of the application of s 52 is an important one, thatit is better resolved in the context of a full hearing with all the relevant evidence, andwithout the risk the parties will inadvertently fail to put all the relevant evidence beforethe Court.Result[36] The application is dismissed.[37] As the plaintiff, at least formally, took no position on the application, thereshall be no order as to costs.[38] I direct that this case is to be set down before an Associate Judge on a date thatsuits counsel for a case management telephone conference. Counsel should filememoranda at least three working days prior to the conference with proposedtimetable directions to advance the case to trial._______________________O G PaulsenAssociate JudgeSolicitors:Mahony Horner Lawyers, WellingtonWilson Harle, AucklandRobertsons, AucklandAnderson Lloyd, ChristchurchFord Sumner Lawyers, WellingtonKnapps Lawyers, Nelson