IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

CIV-2014-312-137 [2015] NZHC 1073

BETWEEN	RACHAEL LEE KNAUF
(nee Harrington) Plaintiff	

AND	
JUSTIN GLENN MARSHALL Defendant	

Hearing:	19 May 2015
(By way of telephone conference)	

Appearances:	
B C Nevell for Plaintiff
A Gallagher for Defendant	

Judgment:	
20 May 2015	

JUDGMENT OF MANDER J

[1]       The plaintiff, Rachael Knauf, has made application for discovery of a number of identified documents, or classes of documents, said to be in the possession of the defendant, Justin Marshall.

[2]       The discovery application arises out of a claim by Ms Knauf under s 25 of the Companies Act 1993 (the Act).  She seeks an order that Mr Marshall be liable for a legal obligation of a company, the name of which was incorrectly stated in the document creating the obligation, which he signed on its behalf.

Background

[3]       In the latter half of 2008, Ms Knauf was employed as a truck driver by a company operating a Mainfreight franchise.   On 7 November, she signed an employment  agreement,  naming  her  employer  as  “Central  Freight  Services”. Mr Marshall was a director and shareholder of Central Freight Services Limited, and
it is Ms Knauf’s case that she believed her employer was this company.

KNAUF v MARSHALL [2015] NZHC 1073 [20 May 2015]

[4]       Ms Knauf subsequently brought  a claim  against  her employer  before  the Employment Relations Authority.  In October 2012, a preliminary determination by the authority held that Ms Knauf’s employer was actually a company called Thunderbird One Limited (the company).  The Authority upheld Ms Knauf’s claim and, in April 2013, ordered the company to pay her some $63,000 in compensation and lost wages.  In May 2014, the company was struck off the Companies Register. Ms Knauf has not been able to recover the award made in her favour from the company.

[5]       In September 2009, the Mainfreight franchise, owned by the company was sold to a third party.  The status and distribution of the proceeds of the sale of the franchise is essentially the focus of the discovery application.

The discovery application

[6]       Ms Knauf’s claim is set down for hearing on 3 June next.  The resolution of these discovery issues is therefore of some urgency. A hearing was convened by way of telephone conference to hear Ms Knauf’s application.

[7]       She makes application for discovery of four categories of documents:

(a)       An unredacted settlement statement showing the value of the sale and purchase of the Mainfreight franchise.  Following an informal request by Ms Knauf, a redacted settlement statement was provided, as it was considered that the date the franchise was sold may be relevant to the proceeding.  The value of the sale, however, was redacted.  It was not considered relevant and is commercially sensitive.

(b)       Documents  in  Mr  Marshall’s  possession  or  control  describing  the terms upon which the Mainfreight franchise was sold.   Counsel for Mr Marshall have advised the file which may contain such documents is with Mr Marshall’s former solicitors.  While those documents are currently being sought, Mr Marshall’s position is that such material is not relevant to the present proceeding.

(c)	The unredacted annual accounts for the company for the years 2008-

2013.  As a result of the employment proceeding, the 2013 company accounts have already been disclosed to Ms Knauf.  Those accounts also provide the 2012 figures.

(d)       Income  and  tax  summaries,  income  tax  returns  and  notices  of assessment sent to, or from, the Inland Revenue Department in respect of Central Freight Services Limited for the years 2008-2015 inclusive. Mr Marshall does not oppose this aspect of the application, and copies of the requested documents have been, or are in the process of being provided.

The parties’ submissions

[8]       Before reviewing the respective positions of the parties, it is necessary to set out s 25(2) of the Act, in order to understand the issues that arise on Ms Knauf’s claim.

[9]       Section 25(2) of the Act provides:

25	Use of company name

…

(2)	Where—

(a)        a document that evidences or creates a legal obligation of a company is issued or signed by or on behalf of the company; and

(b)      the name of the company is incorrectly stated in the document,—

every person who issued or signed the document is liable to the same extent  as  the  company  if  the  company  fails  to  discharge  the obligation unless—

(c)        the person who issued or signed the document proves that the person in whose favour the obligation was incurred was aware at the time the document was issued or signed that the obligation was incurred by the company; or

(d)        the court is satisfied that it would not be just and equitable for the person who issued or signed the document to be so liable.

…

[10]     It is plain from the pleadings that Mr Marshall disputes Ms Knauf ’s position that she was unaware when she entered into the employment agreement, that the employment obligations under the agreement were being incurred by the company. The requested discovery is not relevant to that issue.  The documents in respect of which  discovery is  sought,  however,  are  said  to  be  relevant  to  the  question  of whether the Court will be satisfied that it would not be just and equitable for Mr Marshall to be liable for the legal obligations of the company arising from that agreement.

[11]     Ms Knauf ’s concern is that Mr Marshall would appear to be arguing that it would not be just and equitable to order him to be liable for the company’s legal obligation.   She argues that Mr Marshall personally received significant financial benefit from the sale of the Mainfreight franchise, and was able to maintain the benefit of that distribution to him because of the lengthy delay in determining Ms Knauf’s case before the Employment Relations Authority.  It was not until October
2012 that the authority made a preliminary determination that Ms Knauf’s employer was the company.  She contends that, as a result of that delay, the company was able to disburse the net proceeds of the sale of the franchise to Mr Marshall, and that such funds were no longer available to the company to pay the award made in her favour in April 2013.

[12]     Ms Knauf submits that the value of the sale of the franchise and the way in which the funds were subsequently managed and distributed will be relevant to the overall assessment of the equity and justice of ordering Mr Marshall to be personally liable for the company’s obligations under s 25.  In that regard, it is noted that the company appears to have continued to trade, at least until 2012, despite the sale of the franchise in 2009.   Disclosure of the company accounts will allow analysis of director’s wages and shareholder’s equity and distribution paid to Mr Marshall over that period, and, so it is submitted on behalf of Ms Knauf, the benefit received by

Mr Marshall  as  a  result  of  the  protracted  Court  proceedings,  during  which  the

identification of Ms Knauf’s employer apparently remained in issue.

[13]     Mr Marshall’s opposition is centred on a submission of irrelevancy.   He submits that the material being sought to be discovered is commercially sensitive, and that the proceeds of the sale of the Mainfreight franchise cannot be relevant to Ms Knauf’s claim, which is based on her understanding at the time she signed her employment agreement.  It was emphasised that the Mainfreight franchise was sold in September 2009, and the determination by the Employment Relations Authority was not made until April 2013, some three and a half years later.   Mr Marshall expressed  concern  that  the  application  for  disclosure  amounted  to  a  “fishing” exercise which may be used for the purposes of a different cause of action against him, and that, as a mere creditor of the company, Ms Knauf has no entitlement to the company’s accounts.

Analysis

[14]     The determination of an application for particular discovery still largely turns on the question of relevancy.  That will be informed by identification of the issues in dispute.  The potential issues which can be anticipated to arise in the context of a claim under s 25 of the Companies Act are relatively limited.

[15]     No  issue  arises  in  the  present  case  that  the  name  of  the  company  was incorrectly stated in the employment agreement, which created the legal obligation on Ms Knauf’s employer, Thunderbird One Limited.  It follows that Mr Marshall, as the person who issued or signed the document, will be liable to the same extent as the company in failing to discharge the obligations created by the document unless he can prove that Ms Knauf was aware at the time the document was signed that the obligation was incurred by the company. As I have already observed, that is a matter that will be in contest at the hearing, however, the documents in question are not relevant to that issue.

[16]     Alternatively, Mr Marshall may avoid liability if the Court is satisfied that it would not be just and equitable for him to be held liable for the company’s obligations.  Without prejudice to his submission that Ms Knauf was aware that her

employer was  the company at the time the employment agreement  was signed, Mr Marshall will also argue that, even if she was not so aware, it was of no material effect.  That submission relies upon a contention that her misapprehension made no practical difference because the company referred to in the agreement has not, in any event, traded, and was always a shell company for the purpose of protecting the business’s trading name “Central Freight Services”.

[17]     The relevance of the documents sought by Ms Knauf turns on a suggested causative connection between the delay in the resolution of her employment dispute, involving, as it did, clarification of who her employer actually was, and the company lacking the means to meet the award for damages and wages.  It is suggested that the suspected channelling of the proceeds from the sale of the Mainfreight franchise to Mr Marshall in the intervening period is likely to be relevant to the question of whether it would be just and equitable to render him liable under s 25(2).

[18]     In the course of the hearing, I inquired from Mr Sage, who appeared on behalf of Mr Marshall, whether it was accepted that the value of the business owned by the company, effectively the Mainfreight franchise, was ultimately disbursed to Mr Marshall at some stage after the completion of the sale transaction.   In the absence of any justifiable need to distinguish the legal entity of the company from himself, it seemed Mr Marshall would be unlikely to be able to argue that any injustice or inequity arose from such arrangements, in terms of him being held responsible for the company’s employment breach. Equally, however, in such circumstances, the documents sought to be discovered would lose their relevance.

[19]     Notwithstanding the apparent ambit of his identified argument regarding the issue of whether justice and equity should not render him liable for the company’s obligations, Mr Marshall was not prepared to make that concession.

Decision

[20]     In the absence of being able to accurately corral the potential argument to be made by Mr Marshall under this heading, I concluded that the requested documents were discoverable on the basis contended for on behalf of Ms Knauf.  It is likely, in assessing the issue of whether the Court can be satisfied that it would not be just and

equitable  to  hold  Mr Marshall  liable  for  the  company’s  legal  obligations,  that information regarding the disbursement of company funds and assets, particularly vis-à-vis Mr Marshall as a director and shareholder of the company during the period of the employment dispute, will be relied upon by Ms Knauf as supportive of her case.

[21]     Accordingly,  I  make  the  following  order  that  Mr  Marshall  provide  for inspection within 7 days, the following documents, or class of documents in his possession or control:

(a)       An unredacted settlement statement showing the value of the sale and purchase of the Mainfreight franchise to Wright Freight Limited on or about 25 September 2009.

(b)       Any documents in the defendant’s possession or control (including those in his former lawyer’s possession and control) describing the terms upon which the Mainfreight franchise, owned by Thunderbird One Limited, was sold to Wright Freight Limited, on or about 25
September 2009.

(c)       All  annual  accounts  for  the  company  for  the  years  2008-2013 inclusive and unredacted.

Costs

[22]     Ms Knauf, having been successful in her application for particular discovery, is entitled to an award of costs on a 2B basis.

Solicitors:
B Nevell, Dunedin
Duncan Cotterill, Christchurch