VICTORIA ST APARTMENTS LTD (IN LIQ) V SHARMA HC AK CIV-2009-404-008377

VICTORIA ST APARTMENTS LTD (IN LIQ) V SHARMA HC AK CIV-2009-404-008377 18 February 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2009-404-008377BETWEEN VICTORIA STREET APARTMENTSLIMITED (IN LIQUIDATION)PlaintiffAND SUREN SHARMAFirst Defendant/RespondentAND SUREN SHARMA AND PAULRICHARDSON AS TRUSTEES OF THESHARMA FAMILY TRUST NO. 2Second Defendants/RespondentsAND SUREN SHARMA AND PAULRICHARDSON AS TRUSTEES OF THESHARMA FAMILY TRUSTDefendant/RespondentAND QUAY STREET APARTMENTSLIMITEDFourth DefendantAND MUTUAL TRUST PROPERTIESLIMITEDFifth DefendantAND REGINALD JAMES WATTThird Party/ApplicantHearing: 16 February 2011Appearances: D Grove for Third Party/ApplicantD Smyth for RespondentsJudgment: 18 February 2011 10:00:00JUDGMENT OF VENNING JON APPLICATION TO STRIKE-OUT AND/OR STAY PROCEEDINGSThis judgment was delivered by me on 18 February 2011 at 10 am, pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: Ellis Law, AucklandGanda & Associates, AucklandCopy to: D Grove, AucklandD Smyth, AucklandIntroduction[1] Mr Watt seeks orders striking out or staying the defendants' third party claimagainst him in these proceedings. The application is advanced on the basis that the defendants and Mr Watt are involved in other proceedings (CIV-2006-404-2975) that will determine the issues raised by the third party notice. Mr Watt says that as the issues between the defendants and him will be resolved in the 2975 proceedings to pursue the same issues in these proceedings is an abuse of process. Alternatively he says that as the claims arise out of the same series of events and the same transactions the third party claim should at the least be stayed. During argument Mr Grove focused on the application for stay.[2] The defendants oppose the application. They take the view that the questions in issue in these proceedings are particular to the proceedings and will not be resolved in the 2975 proceedings.The 2975 proceedings[3] To resolve the issue it is necessary to identify the matters in issue in both sets of proceedings as defined by the pleadings. In the 2975 proceedings Mr Watt and various entities associated with him sue Mr Sharma and various entities associated with him, together with Mutual Trust Properties Ltd and Quay Street Apartments Ltd.[4] The Watt interests allege that from 1997 Mr Sharma was employed by Mr Watt (and/or entities associated with him) to undertake accounting and financial duties in relation to the Watt interests property developments and investments (the pre-2001 property transactions). Mr Watt was then adjudicated bankrupt on 25 July 2011. The Watt interests also allege that from about August 2004 (after Mr Watts'discharge from bankruptcy) Mr Sharma and the Watt interests were parties to an ongoing joint venture pursuant to which a number of properties were purchased, leased and on-sold (the joint venture).[5] The Watt interests raise four causes of action. The first, against Mr Sharma, alleges breach of fiduciary duty as accountant and financial controller in relation to the pre-2001 property transactions. The relief sought is, inter alia, the appointment of an accountant to take an account of the profits made on each of the pre-2001 property transactions. The relief also includes an order for damages in a sum to be calculated after the taking of accounts.[6] The second cause of action alleges breach of the joint venture by Mr Sharma, the trustees of the Sharma Family Trusts and various other companies and trusts associated with Mr Sharma. The plaintiffs seek, inter alia, a declaration as to the plaintiffs' entitlement to a half-share of the net profits, the appointment of an accountant to undertake a review of the joint venture transactions, and damages.[7] The third cause of action alleges breach of duty by the former trustees of the Watt Family Trust No. 1. Again, a declaration of the plaintiffs' entitlement is sought in relation to each of the properties owned by the Trust, the appointment of an accountant to undertake a review, and damages.[8] The fourth cause of action alleges that by reason of breaches of fiduciary duty the Sharma interests hold moneys as constructive trustees for the plaintiffs. It is essentially a tracing cause of action.[9] The statement of claim attaches a schedule that identifies the property transactions in issue. Importantly for present purposes the schedule refers to a property at 138-140 Victoria Street, Wellington.[10] In the 2975 proceedings the parties have agreed to the appointment of an independent accountant, Mr Lyne of Grant Thornton, as an expert pursuant to r 3.24 to conduct an investigation and prepare a report regarding the purchase, rental andsale of the properties, the subject of the proceedings. The order appointing the accountant directs him to report and verify (where possible):the source of the funds used to purchase the properties;income received and expenses paid during the ownership of the properties;the sale price and disbursement of funds;the funds received and paid from the purchase, holding and sale;the entities involved in making or receiving payments in each of the transactions relating to the properties.[11] The parties also agreed the 2975 proceedings would be stayed pending completion of the expert's report but reserved leave to apply for further directions.The present proceedings[12] In the present proceedings Victoria Street Apartments Ltd (VSAL) (now in liquidation) sues Mr Sharma, the trustees of the Sharma Family Trusts No. 2 and No. 1, Quay Street Apartments and Mutual Trust Properties Ltd. VSAL alleges that at all material times, Mr Sharma was its sole director and shareholder and as such owed ita duty to act in good faith and in the company's best interests.[13] VSAL says that Mr Sharma directed or effected payments by VSAL to the defendants. The first cause of action alleges that, in breach of his fiduciary duty, Mr Sharma directed payments of $418,000 from VSAL to various entities associated with him.[14] The second cause of action alleges that, under the control of Mr Sharma, VSAL made advances to the trustees of the Sharma Family Trust No. 2 to meet theTrust's obligations to Mutual Trust Properties Limited and other parties totalling$754,000.[15] The third cause of action alleges that, at the direction of Mr Sharma, VSAL made payments to the trustees of the Sharma Family Trust totalling $138,000.[16] The fourth cause of action alleges that, at the direction of Mr Sharma, VSAL made payments totalling $339,000 to Quay Street Apartments Ltd.[17] The fifth cause of action alleges that, at the direction of Mr Sharma, VSAL made payments totalling $380,000 to the benefit of Mutual Trust Properties Ltd.[18] VSAL seeks to recover all of those sums from the Sharma interests on the grounds that no consideration was provided for the payments.[19] In a sixth cause of action VSAL claims that Mr Sharma, as a director, breached the duties owed to it under ss 135 and 301 of the Companies Act 1993.[20] In response to the claim against them Mr Sharma and the Sharma interests have raised the third party claim against Mr Watt. They claim that Mr Sharma caused the plaintiff, VSAL, to make payments totalling $682,000 (approximately) either directly to Mr Watt or to entities controlled or associated with him as Mr Sharma believed Mr Watt was entitled to such payments. (Counsel accepted that VSAL acted essentially as a bank or treasury company).The law[21] Rule 15.1 provides for the dismissal or striking-out of a proceeding which is otherwise an abuse of process of the Court. It is an abuse of process to maintain duplicate proceedings seeking relief available in other proceedings: Otis Elevator Co Ltd v Linnel Builders Ltd.1 Similarly, where there are two sets of proceedings which are identical (or substantially identical) and both seek identical (or substantially identical) relief that will be an abuse of process and one of the sets of proceedings ought to be stayed or struck out: Bank of New Zealand v Rada Corporation Ltd.2 Further, r 10.12 confirms that where there are two or more1 Otis Elevator Co Ltd v Linnel Builders Ltd (1991) 5 PRNZ 72 (HC).2 Bank of New Zealand v Rada Corporation Ltd HC Auckland 17 July 1989, M717-89.proceedings and a common question of law or fact arises in the proceedings or the rights to relief claimed arise out of the same series of events and same series of transactions then the Court may order one of them to be stayed.Decision[22] The first issue in the present case is whether the relief claimed by the Sharma interests against Mr Watt in the third party claim in these proceedings is an issue that otherwise would be determined in the 2975 proceedings.[23] Mr Grove submitted that the issues concerning the Victoria Street investment will be resolved in the 2975 proceedings and that the independent accountant Mr Lyne is currently investigating the relevant transactions. He submitted on that basis it would be an abuse of process and prejudicial to Mr Watt for the Sharma interests to be able to pursue the third party claim against Mr Watt in the present proceedings.He suggested the defendants were seeking to "cherry pick" these transactions.[24] In answer, Mr Smyth submitted there was no basis for a stay because the issues raised in the third party claim were not raised in the 2975 proceedings.[25] The basis of the application is that the matters in issue in the third partyproceedings will be determined by Mr Lyne's report in the 2975 proceedings. The ambit of Mr Lyne's investigation and report is defined by the consent memorandumand the pleadings in those proceedings. By the consent memorandum Mr Lyne wasdirected to conduct an investigation in relation to "the properties". "The properties"were identified in the schedule to the consent memorandum, and included a reference to 138-140 Victoria Street, Wellington. The purchaser was noted as Australasian Investments Ltd. VSAL is not referred to in the schedule to the consent memorandum as associated with 138-140 Victoria Street. Further clarification of the extent of the transactions to be investigated by Mr Lyne is to be found in the amended statement of claim. The pleading in that does not refer to VSAL either. Paragraph 11 of the amended statement of claim identifies a schedule setting out the details of the properties purchased, leased and sold by the parties as "the propertytransactions" in issue. The schedule identifies the relevant transaction in relation tothe Victoria Street property as:138-140 Victoria Street, Wellington.Purchaser: Australasian Investments Limited (guaranteed by Watt Trust No. 1 Ltd)Status: Sold to Treasury Technology Distributions Ltd.Date purchased: 14 November 2000.Purchase Price: $1.1m including GST of $122,222.Mortgage: First Mortgage to Halliwell Securities Limited $943,000 at 10.95%.Second mortgage taken out on 19/3/01 to Gold Band Finance Ltd at $309,100.Third mortgage taken out on 4/5/01 by Monk Trust Ltd.Date of Sale: 19 March 2001.Sale price: $1.35m zero rated.[26] There is no reference in that schedule to VSAL. So for the purposes of the property transactions involving 138-140 Victoria Street the relevant transactions are limited to the purchase in November 2000, the sale in March 2001 and payments and transfers relevantly connected with those transactions. VSAL was not incorporated until 19 March 2003, well after the dates referred to in the schedule. Further the transactions in issue in the third party claim post-date August 2003. The earliest noted is 19 August 2003.[27] The short point is that the accountant's current brief, in accordance with the consent memorandum, which must be defined by reference to the property transactions in issue, does not extend to transactions involving VSAL. While the brief extends to identifying the entities involved in making or receiving payments,that is qualified by reference to "in each of the transactions relating to the properties". The relevant time period and general transactions are defined in theschedule.[28] Mr Grove sought to overcome that difficulty by referring to correspondence,which he submitted showed that Mr Sharma's previous counsel considered theinvestigation involved the consideration of payments involving VSAL.[29] Although Mr Smyth objected to the recent affidavit of Mr Watt which annexed the correspondence being considered by the Court, I accept that at least to the extent the affidavit annexed correspondence between counsel and the independent accountant it is a matter of record and is unobjectionable. The affidavit also annexed an arbitration award. Mr Watt was not a party to the arbitration award and Mr Grove did not suggest that the findings in that arbitration award could bind the Court in either of the 2975 or these proceedings. I do not propose to consider the arbitration award, but I have considered the correspondence.[30] However, the correspondence is of limited assistance. It is ambiguous anddoes not necessarily support Mr Grove's submission. Mr Grove referred to Mr Sharma's former counsel's reference (in a letter of 12 March 2008) to payments toQuay Street and former counsel's submission such payments should be treated as payments to Mr Watt. He noted that the third party claim in these proceedings also refers to payments to Quay Street. However, I do not read that earlier correspondence as referring to the same payments that are in issue in the third party claim in these proceedings.[31] In his letter to Mr Watt's counsel in response to the letter Mr Grove relied on, the accountant referred to the issue of payments by Mutual Trust Properties Ltd (not VSAL) to Quay Street Apartments Ltd. While the accountant did refer to VSAL it was simply to note he had treated payments as being made to and received by the relevant entity. In any event, unless and until the pleadings and/or the consent order is amended, the accountant's brief and report does not formally extend to VSAL.[32] It follows that I accept Mr Smyth's submission that on the pleadings beforethe Court the only proceeding in which the issue of whether payments made by VSAL were made for the benefit of Mr Watt will be resolved is the current proceedings. The applicant fails to make out a basis for striking-out or stay. That must effectively determine the application. However, there are a number of issuesthat do not support the application in the event that it could be said the independentaccountant's brief extended to VSAL.[33] The plaintiffs in the 2975 proceedings face real practical difficulties with the claim in those proceedings. Mr Lyne was appointed by consent orders of 29 August 2007. In an updating report for the Court on 15 February 2010, he advised that his investigation of six companies was substantially complete; his investigation into seven other companies was underway but required additional processing and additional information but that he had been able to make little progress with his investigation into the remaining five entities primarily because he did not have much by way of records and/or the financial affairs carried out by related parties in whole or in part. Mr Lyne also observed that he did not consider Mr Sharma had adequately responded to his requests for information. If that is so, steps can be taken in those proceedings to obtain orders for compliance, and, in default, striking-out defences: r 7.48.[34] Importantly, Mr Lyne indicated that the fees to complete the work will be substantial. In his affidavit says it will cost a further $85,000 to $100,000. The 2975 proceedings are effectively stalled because while the accountant was appointed by consent, Mr Watt is required to fund the investigation. Mr Grove indicated that was difficult. Mr Grove indicated that Mr Watt intended to amend the first cause of action, essentially alleging a breach of the fiduciary duty by Mr Sharma as accountant to the Watt interests by failing to prepare proper accounts and keep records and then seek a separate trial of that amended cause of action. By that means the Watt interests intend to obtain judgment and then damages which would enableMr Watt to pay the independent accountant's fee and have the report completed. As Mr Grove accepted, that process was contingent on a number of matters falling into place, and was based on a number of assumptions. The proposed course of action will clearly take some time to be brought to fruition.[35] Against that these proceedings, including the third party claim against Mr Watt, are for hearing in July this year. Mr Smyth submitted that in the circumstances it would be unfair and unreasonable to stay the third party claim against Mr Watt because the consequence would be that Mr Sharma may face a judgment against himby VSAL with no ability to seek contribution from Mr Watt until matters were resolved in 2975. I agree.[36] Mr Grove submitted that there could be no prejudice to Mr Sharma if the third party claim against Mr Watt was stayed because Mr Sharma could still raise asa defence that he had paid moneys to Mr Watt or to Mr Watt's interest at Mr Watt'sdirection. However, that does not answer the potential prejudice to Mr Sharma in these proceedings. VSAL could succeed against Mr Sharma for breach of his duty as a director, if it is established he made the payments, even though he made thosepayments at the direction of or for the benefit of Mr Watt. The only practical wayMr Sharma may have of meeting any such liability may be by way of contributionthrough the third party claim.Result[37] The application is dismissed. Costs to the respondent on a 2B basis.__________________________ Venning J