POLPERRO CORPORATION LIMITED V INTERNATIONAL MARINE SERVICES LIMITED HC AK CIV-2006-404-2390

POLPERRO CORPORATION LIMITED V INTERNATIONAL MARINE SERVICES LIMITED HC AK CIV- 2006-404-2390 22 November 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2006-404-2390UNDER The Companies Act 1993 BETWEEN POLPERRO CORPORATION LIMITED Plaintiff AND INTERNATIONAL MARINE SERVICES LIMITED Defendant Hearing: 17 November 2006 Appearances: Ms Hunter for plaintiff Mr J Shaw for defendant Judgment: 22 November 2006 at 3 p.m.JUDGMENT OF ASSOCIATE JUDGE J P DOOGUEThis judgment was delivered by me on22.11.2006 at 3.00 pm, pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: Kensington Swan, Private Bag 92101, Auckland International Marine Services Ltd, 6 Jellicoe Street, Viaduct Harbour, AucklandBackground[1] The plaintiff claims to be owed a sum of a little over $21,000. Having regard to the amount at stake the proceedings have been remarkably elongated and complex. That is a matter that I will discuss further with counsel subsequent to this judgment. [2] The proceeding arises from the fact that the defendant was formally a tenant of a property owned by the plaintiff. In keeping with the overall approach of the parties to this litigation the alleged indebtedness concerning the rent became the subject of a long-winded dispute. That culminated in the plaintiff serving a statutory demand on the defendant on 27 May 2004. Thereafter proceedings commenced in the District Court. A judgment was entered in favor of the plaintiff in the District Court for $21,232.88. The defendant filed an appeal to the High Court and the Judge tried to get the parties to settle but they did not. [3] But in the end on a later date a settlement was reached in February 2006 by the terms of which the defendant agreed to pay to the plaintiff a sum of $4,000. Payment not having been made the plaintiff served a second statutory demand and presumably based upon that demand, liquidation proceedings were filed in the High Court on 7 April 2006. On 3 April 2006 the plaintiff was served with a Notice of Meeting of Creditors dated 31 March 2006. The Notice advised that a meeting of creditors was to be held on 11 April 2006. A compromise was proposed with each of the creditors to the following effect:IMS proposes to pay each of its unsecured creditors ten (10) cents in the dollar for each dollar owed by IMS to its creditors in full and final settlement of all amounts owed by IMS to its secured creditors.[4] The plaintiff voted against the proposed compromise. The compromise was nonetheless adopted by the requisite majority of creditors. The plaintiff thereafter forcefully rejected the compromise and claimed that it was a collusive arrangement because of the close connections that the majority of the creditors who had voted in favour of it had to the defendant company or its shareholders.[5] On or about 3 May 2006 the plaintiff filed yet another set of proceedings, this time a claim seeking an order pursuant to section 232(3) of the Companies Act 1993. The order that is sought is described in the prayer for relief as follows:(a) That the plaintiff not be bound by the compromise because: (i) The compromise is unfairly prejudicial to the plaintiff: (ii) There was a material irregularity in obtaining approval of the compromise;[6] The defendant in its statement of defence makes the point, first, that the compromise was not unfairly prejudicial to the plaintiff and says that all the creditors claims that were compromised were legally owed and the creditors were bona fide creditors of the defendant. It says as well that there was no material irregularity in obtaining approval of the compromise. It responds to the pleading that Mr Wayne Shore, the defendant's sole director was also a director of a third company which in turn was a shareholder in a creditor which entered into a compromise, Smart Ships Limited. There were also other connections between Mr Shore and his family with other creditors. But the defendant in its response denied that this in any way amounted to a material irregularity.Application for further and better discovery[7] The plaintiff has now sought further and better discovery of various documents which are set out in a schedule affixed to the Notice of Interlocutory Application. In that schedule the plaintiff specifies that the defendant ought to give discovery of the following groups of documents:1. The Financial Accounts for the 12 months prior to the compromise. 2. Copies of all correspondence with the unsecured creditors including all invoices and purchase orders ever issued with those unsecured creditors. 3. The creditors ledger for the 12 months prior to the compromise. 4. The trade debtors ledger for the 12 months prior to the compromise. 5. Credit Card statements for the credit cards listed in the balance Sheet as of June 2006 for the 12 months prior to the compromise.6. Documents evidencing the sale of the vehicles and furniture and fittings listed in the Balance Sheet as of June 2006. 7. Documents evidencing the loan account and who provides that facility listed in the balance Sheet as of June 2006. 8. Any documentation held by IMS relating to the Newtworkmarine Group of companies or the respondents relationship with any of the companies forming that groupRules and Principles[8] Rule 300 of the High Court Rules states:300 Order for particular discovery against party after proceeding commenced (1) If at any stage of the proceeding it appears to the Court from evidence or from the nature or circumstances of the case or from any document filed in the proceeding that there are grounds for believing that a party has not discovered one or more documents or a group of documents that should have been discovered, the Court may order that party – (a) to file an affidavit stating – (i) whether the documents are or have been in the party's control; and (ii) if they have been, but are no longer, in the party's control, the party's best knowledge and belief as to when the documents ceased to be in the party's control and the person who now has control of them; and (b) to serve the affidavit on any other party. (2) The Court may not make an order under this rule unless satisfied that the order is necessary at the time when the order is made.[9] I intend to follow the approach discussed by Asher J in his judgment in Body Corporation 187242 and Peggs v Auckland City Council and others HC AK CIV 2005-404-001597 20 July 2006. First as to the scope of discovery, Asher J noted at [14]:14. Rule 295 requires a party to discover all documents that: a) are or have been in that party's control; and b) relate to the matter in question in the proceeding.Despite a recent debate in the Rules Committee as to the appropriate test, it remains that stated by Brett LJ in the leading authority Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55 (CA) at 63: It seems to me that every document relates to the matters in question in the action, which not only would be evidence upon any issue, but also which, it is reasonable to suppose, contains information which may – not which must – either directly or indirectly enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary. I have put in the words "either directly or indirectly", because, as it seems to me, a document can properly be said to contain information which may enable the party requiring the affidavit either to advance his own case or to damage the case of his adversary, if it is a document which may fairly lead him to a train of inquiry, which may have either of these two consequences.[10] Next, His Honour discussed the benchmark against which relevance is tested:20. The answer in New Zealand is clear. The benchmark is the pleadings. Whether a document advances a party's case or damages the case of its adversary and is therefore relevant, is discerned from them. It is only documents relevant to the issues that emerge from those pleadings that are discoverable. It was stated by Richardson J in New Zealand Rail Limited v Port Marlborough New Zealand Limited [1993] 2 NZLR 641 (CA) p 644: The general principles governing discovery are well settled. Parties are required to discover only those documents which are relevant to a matter in question in the proceedings. They must be relevant in the sense of being capable of advancing a party's case or of damaging the case of its adversary. Relevance is determined by the pleadings and an order is not to be made unless the Court is satisfied that it is reasonably necessary. The pleadings both identify and limit the issue in the case.[11] This approach is regularly adopted by New Zealand Courts: AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190, 196. In this case the relevant pleadings are the plaintiff's statement of claim and the second defendant's statement of defence. [12] So far as the requirement to give further and better discovery is concerned, two further aspects need to be noted. First there is a presumption that the affidavit of documents is complete: Effem Foods Pty Ltd v Best Friend Pet Foods Ltd HC AK CP 20/95 8 July 1996 Paterson J at 5:The oath of the party giving discovery is conclusive unless the Court can be satisfied not on a conflict of affidavits, but either from the documents produced or from anything in the affidavit made by the party or by any admission by him in the pleadings or necessarily from the circumstances ofthe case, that the affidavit does not truly state that which it ought to state – see GE Capital Corporate Finance Group Ltd v Bankers Trust Co [1995] 2 All ER 993.[13] Consistent with the conclusivity of the affidavit, before the Court makes an order under R 300, there must be grounds for believing that the party giving discovery has not discovered one or more documents that should have been discovered. In Sim's Court Practice in the commentary to R 300 there appears the following statement:The threshold in the Rule is that the Judge is the one who must have the grounds for belief. In AMP Society v Architectural Windows Ltd [1986] 2 NZLR 190, 199, Chilwell J said: "That state of mind can be induced by direct or by indirect evidence; proper inferences play their part in considering the evidence, the nature or circumstances of the case, and any document filed in a proceeding. The New Zealand Rules accordingly make provision for 'a priori reasoning' but not for a priori reasoning on the part of a deponent by affidavit."I intend to be guided by the above statement in deciding the present application.Issues in this case[14] The various grounds of opposition advanced in answer to the present application are that the documents sought are not relevant to the substantive proceeding, that the documents are private and confidential and that the application amounts to a "fishing expedition". [15] One of the difficulties in deciding the present application arises from the fact that counsel did not analyse in any depth the issues that would fall to be decided at the hearing of the substantive proceeding. The plaintiff apparently considers that those issues will include whether the compromise should be set aside because some of the debts allegedly owed to the creditors were not genuine debts; that they were "sham" debts. If I have correctly understood the basis of the plaintiff's claim, it is that in due course the Court will have to decide whether it is legitimate to enquire into matters such as sham debts as a basis for a s 232 application. No doubt authorities such as Whiteman v UDC Finance Limited [1992] 3 NZLR 684, will have to be examined in more detail at that time.[16] In answer to my questions, Mr Shaw for the defendant, on the other hand, said that the only issue that could be determined in a proceeding brought pursuant to s 232 was whether there was some inequality of treatment that amounted to unfair discrimination against the creditor bringing the application. [17] For the moment, I will say no more than that I will proceed on the assumption that the applicant can rely on the grounds that the debts supporting the compromise are shams and that, therefore, evidence bearing on the legitimacy of some of the debts owed to those voting on the compromise, is relevant. [18] If such an issue is at large in the proceedings, then any documents which are relevant to that issue must be properly discoverable. Any documents, that is, which would have the tendency to advance the plaintiff's case or harm the defendant's case must be discoverable. Given circumstances where the plaintiff questions the authenticity of debts which are relied upon by the purported creditors, any background documentary material which can assist in resolving the issue of whether or not the creditors are bona fide and genuine must be disclosed. [19] In this case, as I understand it, the liabilities are said to have arisen out of the trading operations of the company. Therefore, all original documents which affirm the existence of genuine debts are relevant. Conversely, discovery of documents from which any reference to the questioned debts is omitted, may be relevant as well. For that reason, production of a document such as the Company's creditors ledger would seem to be discoverable. The omission of any mention of the disputed debts in such a ledger would tend to harm the defendant's case. [20] Production of foundation documents which purport to support the existence of a questioned debt would also be relevant to establishing whether or not a given party who voted on the compromise was in fact a "creditor" within the meaning of the Act. [21] Such documents should be discovered, even if their effect would be to advance the defendant's case rather than hinder it. The plaintiff is entitled to see such a document. If an order is made to produce such a document if it exists, then itsnon-disclosure, other than on grounds such as it no longer exists although once it did, must be seen as significant in the overall context of the proceedings. [22] Approaching matters on that footing, I determine that the documents in category 1 in the plaintiff's schedule A are discoverable. [23] Category 2, although on its face relevant, is expressed in terms that are far too wide. I would not be prepared to make an order in terms of paragraph 2 because it is unnecessary and because the effect of such an order would be oppressive. [24] Item 3, the Creditors ledger, for the 12 months prior to the compromise is discoverable. If the validity of the debts is at issue, then one would expect the question of whether or not those debts appeared in the creditor's ledger to be of assistance in advancing the plaintiff's case or hindering the defendant's case. [25] Ms Hunter said that the reason for seeking the order in "4" is as follows. She said that even if the creditors were relevantly "creditors", it is possible that they were also debtors of the company and that the company was entitled to set off such debts against what it owed to the creditors. I regard this as being speculative. There is no evidence to suggest that there were actually debts that could give rise to a set off. Nor am I prepared to infer that it is likely that there were such debts. There is simply no basis for ordering further and better discovery in respect of this group. I am not prepared to grant the orders sought as to Category 4. [26] Nor am I prepared to make an order in respect of those documents listed in paragraph 5. It was not explained to me how these could be relevant to the plaintiff's claim. The credit card companies did not vote on the compromise. As I understand Ms Hunter, an argument would be presented to the effect that the credit card liabilities did not reflect genuine company debts but rather represented the company paying the personal expenses of office holders, managers etc of the company. It was not explained to me how the Court might enquire into matters such as this in the context of a s 232 application.[27] The next category was documents evidencing the sale of vehicles and furniture and fittings listed in the balance sheet as at June 2006. Again, I cannot accept that these relate to a live issue in the proceedings. The same is true of Category 7. I am not prepared to order discovery of the documents in Category 8. There is not even proof that the "Networkmarine Group" had anything to do with the voting for the compromise, or indeed, that there was ever a relationship of debtor/creditor between them and the company.Confidentiality[28] I do not accept that the fact that the defendant regards the documents in question as confidential provides an answer to the defendant's application. The defendant's remedy is to seek protective orders which maintain the confidentiality of the document rather than objecting to discovering it at all."Fishing" discovery[29] The defendant's last point is that the plaintiff is engaged on a "fishing expedition". Consistent with the fact that I conclude that the limited categories of documents which I am going to order to be discovered sought are relevant to the plaintiff's claim, they cannot be viewed as attempts at "fishing" for a presently unpleaded cause of action. That is, the discovery relates to existing causes of action and does not constitute an attempt on the part of the plaintiff to cast about for still further causes of action which the plaintiff opportunistically hopes might emerge as part of the discovery process.Costs[30] If either party wishes to apply for costs, they should file and serve a concise memorandum within seven days. I have in mind that brief submissions of no more than three pages should be filed. If it is necessary for there to be any further argument on the matter I will schedule the matter to be further discussed at one of my chambers lists later in the year. ______________________ J P Doogue Associate Judge