MASON & MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LTD (IN LIQUIDATION) V CONWAY LEWIS AND ANOR HC AK CIV-2003-404-000936

MASON & MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LTD (IN LIQUIDATION) V CONWAY LEWIS AND ANOR HC AK CIV-2003-404-000936 4 April 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2003-404-000936IN THE MATTER OF Sections 134-137, 194, 300 and 301 Companies Act 1993 AND IN THE MATTER OF GLOBAL PRINT STRATEGIES LTD (In Liquidation) BETWEEN KAREN BETTY MASON & JEFFREY PHILIP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LTD (IN LIQUIDATION) Plaintiffs AND CONWAY LEWIS First Defendant AND JOHANNA LEWIS Second Defendant Hearing: 4 April 2007 Appearances: Brian Keene QC and Robert Hollyman for Plaintiffs Peter Davey for Defendants Judgment: 4 April 2007JUDGMENT OF HARRISON J_________________________________________________________________________________ SOLICITORS Shieff Angland (Auckland) for Plaintiffs Gill Coutts & Co (Auckland) for Defendants COUNSEL Brian Keene QC; Peter DaveyIntroduction[1] On 13 December 2006, following a conference with counsel, I made this order:[3] However, before the registry arranges a conference, it should allocate a separate half day fixture before me (I am scheduled to hear civil work in Auckland in the weeks commencing 26 March and 2 April 2007) to determine as preliminary issues before trial under R418 the questions of whether (1) the liquidators are bound by a concession (assuming it is a concession) made by their former counsel in the High Court on the limit of their arguable claim for damages to $560,000; (2) if not, what is the date from which damages should be calculated.[2] The purpose of this order was twofold – one was to assist, if possible, the parties in striking a settlement of this litigation; the other was an attempt to confine issues and thus the scope of evidence for trial. [3] In accordance with my directions, both Messrs Brian Keene QC and Robert Honeyman for the plaintiffs and Mr Peter Davey for the defendants filed comprehensive and constructive synopses of submissions.High Court[4] Ms Karen Mason and Mr Jeffrey Meltzer filed this proceeding in this Court in 2003 in their capacity as liquidators of Global Print Strategies. They allege that the defendants, Mr and Mrs Lewis, along with a Mr Grant, who were at the relevant times directors of Global, were in breach of their statutory duties. In particular, they alleged breach of obligations not to allow the company to trade recklessly (s 135 Companies Act 1993) and to keep proper books of accounts (s 300). They sought a substantial award of compensation. [5] The liquidators' claim went to trial before Salmon J on 3, 4 and 5 November 2004. The Judge dismissed it in a reserved judgment delivered on 25 November 2004. He found that the Lewises had not committed breaches of their statutory obligations. He did not make alternative findings on compensation to cover the contingency of an error on his primary findings.Court of Appeal[6] The liquidators appealed. In a decision delivered on 30 March 2006 the Court of Appeal reversed Salmon J: Mason v Lewis [2006] 3 NZLR 225. The Court held that the Lewises were guilty of reckless trading (the company had been trading on an insolvent basis since at least March 2000 and by August 2000 there was an urgent need for close investigation as to whether it should continue trading) in allowing Global 'to drift for another 15 months'. Accordingly, they would be liable for compensation. [7] However, the Court declined to make orders for compensation. I shall return to this subject shortly. It remitted the proceeding to this Court to determine, first, whether a declaration should be made under s 300 and, if so, its terms, and, second, whether an order should be made under s 301(1) and, if so, its terms: para [125]. Unfortunately Salmon J has since retired. Given his unavailability I have been assigned to hear and determine the claim for compensation. [8] One event of particular relevance to this rehearing occurred in the Court of Appeal. While the liquidators' claim for relief under s 301 is for $2.177 million, their s 300 claim was for a declaration that the Lewises be found personally liable for all debts. The liquidators' then counsel apparently accepted that a fair sum for which the Lewises should be liable was $560,000: para [92]. (The judgment is equivocal on whether counsel's advice was limited to the s 300 claim or extended to both; by reference to written synopses filed in the Court of Appeal, Mr Davey suggests that counsel's advice applied to both claims.) [9] The Court later noted, when discussing resolution, that it would be 'inappropriate' for the Lewises to be liable for more than $560,000 or, put another way, 'it would not be right' for them to be exposed to greater liability: para [123]. [10] When formulating two questions on 13 December 2006 I assumed that determination of either or both would assist the parties to confine the issues and thus the scope of evidence for trial. Having read counsel's synopses, heard them in oral argument and, most importantly, carefully reviewed the Court of Appeal's decision, Iam not satisfied that determination of either at this stage will be effective. To the contrary, it is likely to be counterproductive. I shall now explain why.Damages Direction[11] The Court of Appeal's natural preference was to determine both liability and compensation. It was reluctant to put the parties to further cost and delay by remitting the latter issue. But it was unable effectively to fix compensation in the absence of primary findings by the trial Judge and also because of the manner in which the liquidators had presented their case at trial: paras [90]-[91]. [12] With respect, the Court most constructively identified five areas of concern and uncertainty: (1) an unexplained disparity between the statement of claim and primary evidence on loss: paras [93]-[95]; (2) problems of proof of some claims: paras [96]-[98]; the status of a debenture held by Commercial Factors Ltd and its impact on the incidence of recovery of compensation: paras [99]-[103]; (4) framing of remedies (in this respect, the Court appeared to link counsel's nomination of a claim for $560,000 to the s 301 claim); and (5) clarification of indebtedness to the Inland Revenue Department. [13] The Court neatly summarised the existing evidential difficulties as follows: para [106]:To summarise at this point: what was before the High Court was misleading; we do not know what the size of the pool of unmet debts created by the directors' actions is; and the status of secured creditors is problematical. Further evidence is required on these matters, and fairness to unsecured creditors, as well as Commercial Factors, requires further evidential investigation.[14] The Court then gave brief and again helpful directions on the principles to be applied in fixing compensation; that is, on causation, culpability and duration of trading: paras [107]-[108]. It also discussed culpability, repeating its earlier findings about the Lewises' breach of duties as directors: para [115]. Significantly it directed this Court at the remitted hearing to determine relative culpability between Mr andMrs Lewis ensuing any global reliance on a finding of joint and several liability: para [116]. [15] As a result of this last direction, the Lewises must carefully consider legal representation for the duration of this proceeding. Presently Mr Davey acts for both. However, in the event that they seek findings in terms of the Court of Appeal's direction at [116], a conflict will arise. They will require separate representation. This problem will only be resolved if Mr Davey, who presently acts for them both, advises the liquidators that the Lewises are jointly able to meet an award of compensation, thereby pre-empting an inquiry into comparable and discrete culpability. [16] The Court directed the format of the revised hearing: para [119]-[121]. Its opening requirement for the liquidators to clarify the exact position of Global's indebtedness plainly opens the door to additional evidence as is later envisaged: para [120]. However, the Court's observations that 'the Judge will be able to determine the final orders substantially on the basis of the existing record' and that the further hearing 'would not be de novo' create problems. Some guidance is given, however, by the limitation on the relevance of the material to the remedies to be granted on the basis of these findings:[121] The further hearing would not be a de novo hearing. Its purpose is solely to determine what orders are appropriate, bearing in mind the findings outlined in these reasons for judgment. Any new evidence should be limited to material relevant to remedies as the further hearing would proceed on the basis of the following findings: (a) the Lewises were in breach of s 135 from September 2000; (b) section 138 does not provide them with a defence; (c) proper accounting records were not kept at any stage; and (d) the defence under s 300(2) is not available to the Lewises.Mr Keene, albeit reluctantly, accepts that the s 301 inquiry is limited in terms of para [121](a) to evidence from September 2000. However, he properly makes the point that no such limitation applies to the s 300 inquiry in terms of para [121](c).Decision[17] The Court offered some suggestions for the plain purpose of assisting the parties to strike a resolution outside of trial. In this respect it identified 'what we consider the outer limits of liability': para [122], and said as follows: para [123]:While there are still unknown factors, it is difficult to see how the Lewises' contribution, either to the company or to the creditors, could be less than a minimum of $100,000. At the other extreme, it would be inappropriate for them to be held liable for more than $560,000. That was the sum sought by the liquidators on the appeal before us. It may be, as we discussed at the hearing, that this figure considerably understates the indebtedness which flowed from the Lewises' defaults, which is likely well over $1m. But given that the remission is in large part a result of the liquidators' failure properly to plead this matter, it would not be right for the Lewises now to be exposed to a greater sum than they would have had to pay had we been able to determine the case ourselves, and found in accordance with the liquidators' submissions in this Court. At the same time, that sum of $560,000 is merely a cap on quantum for the particular reasons we have given. The culpability of Mr or Mrs Lewis may still be right up to that sum if the Court, having heard relevant evidence, so determines.[18] I am satisfied that these concluding paragraphs ([122]-[123]) are no more than appellate guidelines for a framework within which the parties might negotiate a compromise. In this context only the Court set the parameters of the Lewises likely liability within the range of $100,000-$560,000. Anything higher, the Court said, would be unfair or not right. [19] These guidelines, however authoritative, are strictly obiter. They do not relate to the ratio of the Court of Appeal decision. They have no binding effect. Their proper place, if any, in the context of trial will be within the exercise of this Court's statutory discretion to fix compensation. Mr Davey can legitimately argue that they have relevance there. But otherwise they have no status and cannot operate as a formal fetter or limitation on the quantum of the liquidators' claim and on this Court's jurisdiction to make orders for the benefit of Global's creditors. [20] For this brief reason I am satisfied that it would be inappropriate to make an order on the first question. Similarly the second question does not requiredetermination now. The issue of starting dates for calculating damages must be decided in accordance with para [121] and other provisions of the judgment. [21] As previously noted, the compensation trial will present special difficulties. I will have to address and consider the existing evidence. However, on the Court of Appeal's own findings, additional evidence will be necessary. I will have to re-trace much of the ground covered at the original trial. [22] This proceeding was filed nearly four years ago and requires early determination. Both Global's creditors and the Lewises must have finality. Mr Keene estimates that the compensation hearing will last for three days, the same duration as the original trial. Accordingly, I request the registry to allocate a fixture of three days duration on the first date available before me after 1 September 2007, after consulting with counsel.Trial Timetable[23] I make timetabling orders as follows: (1) The plaintiffs are to file and serve their briefs of evidence by 4 pm on 8 June 2007; (2) The defendants are to file and serve briefs in answer by 4 pm on 6 July 2007; (3) Counsel are to complete a common bundle of documents by 27 July 2007. [24] The registry is to allocate another conference with counsel before me in the week commencing 6 August 2007 and half a day for a judicial settlement conference after that date. ______________________________________ Rhys Harrison J