NG and GO v Harkness Law Ltd

• Jurisdiction: New Zealand
• Judge: Bell (No 2)
• Judgment Date: 15 July 2014
• Neutral Citation: [2014] NZHC 1667
• Docket Number: CIV-2013-485-1389
• Court: High Court
• Date: 15 July 2014

Between

Adrian Hwee Kiat NG and Alicia Sock Hoon GO

First Plaintiffs

Matthew Hsun Yean Lim

Second Plaintiff

and

Harkness Law Limited

First Defendant

John Renwick Harkness

Second Defendant

[2014] NZHC 1667

CIV-2013-485-1389

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

Defendants' application for strike out of cause of action based on dishonest assistance by law firm and its principal, enabling directors to breach their duties — plaintiffs were creditors who had paid money to companies under an option programme for a property development which did not eventuate — companies were now in liquidation — scheme had been marketed in south-east Asia and had not protection for investors — whether the plaintiffs had standing to claim for dishonest assistance if fiduciary duties were not owed to them.

Appearances:

S Barter for the Plaintiffs

S Shortall and A E Gordon for the Defendants

ORAL JUDGMENT OF ASSOCIATE JUDGE Bell (No 2)

1 This matter is the resumption of the hearing of the defendants' application for summary judgment and to strike out the plaintiffs' claims. On 29 April 2014 I gave an interim decision on the plaintiffs' claims against the defendants under the Fair Trading Act 1986. The plaintiffs have another cause of action. That is for dishonest assistance under the second limb in Barnes v Addy. 1 I did not deal with that cause of action in my earlier decision. Since then, the parties have filed further evidence. The argument has been fuller than the parties would have been able to give at the earlier hearing.

2 The plaintiffs' claim is that the first and second defendants gave dishonest assistance to directors and de facto directors of Hunter Gills Road Ltd and Albany Heights Villas Ltd in breaching fiduciary duties which those directors owed to their companies. They say that as a result of the breaches of fiduciary duties by those directors and the dishonest assistance given by the defendants, they have suffered losses and they are entitled to look to the defendants to make good those losses.

Dishonest assistance as a claim of accessory liability

3 I begin by considering what is involved in a claim for dishonest assistance. I refer to the Court of Appeal's decision in Fletcher v Eden Refuge Trust, 2 where the court summarised how Duffy J at first instance characterised the cause of action. There were three ingredients:

The Court of Appeal followed that approach.

• (a) money is lost as a result of breach of trust or fiduciary duty;

• (b) the defendant has participated in the breach of duty by helping or assisting in some way in those breaches; and

• (c) there is dishonesty, objectively assessed, on the part of the defendant.

4 As to the matters to be proved in a claim against a fiduciary for breach of fiduciary duty, the defendants have referred to Tipping J's decision in Everist v McEvedy: 3

To succeed in a claim for breach of fiduciary duty the plaintiff must show three things: first that the defendant owed the plaintiff a fiduciary duty; second that the defendant was in breach of that duty; and third that the plaintiff has suffered a loss arising out of a transaction or circumstance to which the breach was material.

5 It is necessary, however, to add a further matter. A claim for dishonest assistance, or knowing assistance, under the second limb in Barnes v Addy, is a claim for accessory liability. It is a claim that some person has become involved in wrongdoing by someone else who owes a primary duty. The person owing the primary duty is either a fiduciary or a trustee. The accessory has secondary liability. Therefore, the accessory cannot have any greater liability than the fiduciary or the trustee. There are, of course, added requirements in that the accessory must have the level of dishonesty laid down in Royal Brunei Airlines Sdn Bhd v Tan, 4 Westpac New Zealand Ltd v MAP & Associates Ltd 5 and Fletcher v Eden Refuge Trust. That may mean that in some cases the alleged assistant may not be liable (because the required dishonesty has not been proved), even though the trustee or fiduciary is liable. But the alleged assistant's liability cannot be more extensive than that of the trustee or fiduciary.

6 Fiduciary duties can be enforced only by those to whom the duties are owed. The ordinary principle is that a non-beneficiary cannot enforce a fiduciary duty owed by a fiduciary or trustee. That becomes relevant when it is necessary to consider to whom directors owe their duties. Accordingly there is an issue in this case whether the fiduciary duties were owed to the plaintiffs. The question to be addressed is whether the plaintiffs are able to run a claim for dishonest assistance if any fiduciary duties were not owed to them.

Directors' fiduciary duties

7 It is necessary to consider what fiduciary duties are owed by directors of companies. It is well-established that directors are in a fiduciary relationship with companies. Directors owe companies a number of duties by virtue of their directorships, but not all duties are fiduciary.

8 There are some fiduciary duties that are clearly recognised. I summarise them:

• (a) the no-conflict rule – a director must not, in any matter falling within the scope of his or her directorship, have a personal interest or an inconsistent engagement with third parties;

• (b) the no-profit rule – directors must not use their position for their own or a third party's advantage; and

• (c) the misappropriation rule — directors must not appropriate a company's property for their own benefit or the benefit of a third party.

9 I regard those as the core fiduciary duties that directors owe to the company. They are owed whether the company is solvent or not, even though in many cases the duties are enforced by liquidators after companies have gone into liquidation by reason of insolvency. Insolvency may be the occasion for enforcement of those duties, but it is not the ground for their existence.

10 I also accept that there may be other duties owed by directors that can be characterised as “fiduciary” and which extend more widely than these core fiduciary obligations. For example, the duty to exercise powers in the best interests of the company and the duty to use powers only for the purpose for which they were conferred. These correspond to the statutory duties under ss 131 and 133 of the Companies Act 1993. Case law has increasingly come to recognise those duties as also being fiduciary in nature. 6 Any conduct which is in breach of the core fiduciary duties may also breach the duties under ss 131 and 133, but I will also assume that conduct outside those core duties, in breach of ss 131 and 133, may also go to fiduciary duty.

11 The duty to exercise powers in the best interests of the company can require directors to take account of the interests of creditors – particularly in times of actual or apprehended insolvency. Cooke J recognised that, for the purpose of New Zealand law, in Nicholson v Permakraft NZ Ltd. 7 It has also been recognised in later decisions of the Court of Appeal, especially Sojourner v Robb. 8

12 To understand whether the plaintiffs have standing, it is helpful for this case to identify different groups of people.

13 First, there are the plaintiffs. They are creditors of the company and are entitled to claim in the liquidation. It is common ground that for the purpose of this hearing they have suffered losses. They made payments to both companies under the option programmes. It is arguable for the plaintiffs that they have suffered losses as a result of breaches of fiduciary duty by the directors.

14 Next are the companies – Hunter Gills Road Ltd and Albany Heights Villas Ltd. They are the companies to whom the plaintiffs made their option payments. These companies were intended to carry out proposed developments at 125 Gills Road, Albany. Hunter Gills Road Ltd held title to land temporarily but on-sold it. It did not carry out the development and has not repaid the plaintiffs or others who made option payments, as it was contractually obliged to do. Albany Heights Villas Ltd never had title to the land and has never repaid the money paid to it. Both companies were corporate trustees of trading trusts. Both are in liquidation.

15 There are the directors and de facto directors. They are Mr Paul Bublitz, Mr Chris Cook, Mr Peter Chevin and Mr Roderick Nielsen. Mr Cook was the only

one recorded in the Companies Office records as a director, but it is arguable for the plaintiffs that the other three were de facto directors within s 126(1)(a) of the Companies Act. These are the men behind the entities which were established to promote and carry out the developments at Gills Road. All of them had what was referred to in the Hunter Sterling agreement as “baggage”. That baggage was significant liabilities against each of them. It was unstated in the Hunter Sterling agreement but common ground here, that Mr Bublitz had been a director of a failed finance company; Mr Chevin was on his third bankruptcy; Mr Nielsen was bankrupt and living in Las Vegas, Nevada, United States of America; at relevant times Mr Cook lived in south-east Asia

16 There are the liquidators. They are now Mr Grant and Mr Gilbert. They are known to be liquidators who will pursue the interests of creditors in cases of insolvent liquidations. There is no suggestion that they would not be competent or willing to enforce claims against the directors or against those who had dishonestly assisted directors.

17 Finally there are the defendants. The remaining defendants are the incorporated law practice and its principal, Mr Harkness. The allegation against them is that they assisted Mr Bublitz and other directors in breaching the fiduciary duties they owed the companies.

Can the plaintiffs say that the directors owed them fiduciary duties?

18 The question is whether people other than the...