IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2019-404-2745 [2024] NZHC 2235	

BETWEEN	FINANCIAL MARKETS AUTHORITY
Plaintiff	
AND	CBL CORPORATION LIMITED (IN LIQUIDATION)
First Defendant – DISCONTINUED

SIR JOHN WELLS
Second Defendant – DISCONTINUED

PETER ALAN HARRIS
Third Defendant – TO BE DISCONTINUED

Continued …	

Hearing:	18 July 2024	
Appearances:	JCL Dixon KC, N M Blomfield and JEM Greer for FMA DPH Jones KC and S E Cameron for C J Mulholland	
Judgment:	24 July 2024	
Reasons:	9 August 2024	

JUDGMENT OF GAULT J
(Strike out application of CD proceeding – reasons judgment)

This judgment was delivered by me on 9 August 2024 at 3.00 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar

……………………………………

FINANCIAL MARKETS AUTHORITY v CBL CORPORATION LTD (IN LIQUIDATION) [2024] NZHC 2235 [24 July 2024]

Continued …

AND	ANTHONY CHARLES RUSSELL HANNON
Fourth Defendant – DISCONTINUED

GEOFFREY JOHN TURNER as executor of the ESTATE OF ALISTAIR LEIGHTON HUTCHISON
Fifth Defendant – DISCONTINUED

NORMAN GERALD PAUL DONALDSON
Sixth Defendant – DISCONTINUED

IAN KELVIN MARSH
Seventh Defendant – DISCONTINUED

CARDEN JAMES MULHOLLAND
Eighth Defendant	

[1]	Mr Mulholland applied on 19 June 2024, six days before commencement of an eight-week trial in this proceeding brought by the Financial Markets Authority (FMA), to strike out causes of action in the second amended statement of claim.

[2]	The same day, the FMA applied for leave to file a third amended statement of claim.

[3]	Counsel did not consider that the strike-out application affected the scope of the FMA’s evidence and were content for the trial to commence.

[4]	The strike-out application was heard on 18 July 2024. By that date, I had granted leave for the FMA to file a third amended statement of claim (in a further revised form) without prejudice to the strike-out application.

[5]	The scope of the strike-out application narrowed considerably. In essence,  Mr Mulholland sought to strike out two causes of action:

(a)	the 12th cause of action – breach of s 270 of the Financial Markets Conduct Act 2013 (FMCA) – Castlerock transaction – October 2017; and

(b)	the 24th (alternative) cause of action – breach of s 270 of the FMCA – failure to disclose material information after 23 June 2017.

[6]	The primary ground relied on was abuse of process since the FMA is no longer pursuing the relevant causes of action against other defendants. In addition, pleading flaws were raised in relation to the 24th cause of action.

[7]	Mr Mulholland needed leave to file a strike-out application so close to trial. The FMA opposed leave on the grounds of delay, prejudice and lack of merit. I heard the leave issue first but indicated that I would proceed to hear the strike-out application without formally determining the leave issue.

[8]	During the hearing, Mr Jones KC acknowledged that the issues with the 24th cause of action may be capable of amendment. Counsel agreed to confer and file a memorandum addressing the proposed amendment by Monday, 22 July 2024.

[9]	The memorandum of counsel for the FMA dated 22 July 2024 provided clarification  (or  amendment)  of  the  pleading  in  the   24th   cause   of   action (and consequently the related 23rd cause of action). On 23 July 2024, Mr Jones accepted that the contents of this memorandum could be treated as being incorporated into the third amended statement of claim by consent, which I ordered, and that strike- out of the 24th cause of action was only pursued on the abuse of process ground.

[10]	Counsel indicated that a results only judgment would suffice given the timing.

Result

[11]	Despite the delay in filing the strike-out application, I granted Mr Mulholland leave so that the abuse of process ground could be addressed on its merits.

[12]	The application to strike out the 12th and 24th causes of action for abuse of process was dismissed.

[13]	I indicated that my reasons would follow. These are my reasons.

Background chronology

[14]	In December 2019, following the collapse of the CBL group, the FMA commenced this proceeding against CBL Corporation Ltd (in liquidation) (CBLC), its six directors and Chief Financial Officer (Mr Mulholland) alleging breaches relating to false and misleading statements (fair dealing) and continuous disclosure obligations under ss 19, 22, 23 and 270 of the FMCA.

[15]	Since at least the amended statement  of  claim  filed  in  November  2022, the format of the FMA’s pleading has contained 24 causes of action, with the 12 odd-numbered causes of action alleging contraventions by CBLC and the immediately following 12 even-numbered causes of action alleging involvement in those

contraventions by the individuals. The first to fourth causes of action alleged breaches of the fair dealing provisions in the FMCA and the remaining causes of action alleged various breaches of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the NZX Listing Rules. Among those continuous disclosure claims, the 23rd and 24th causes of action contain alternative causes of action relating to the cumulative material effect of the information previously pleaded.

[16]	In May or June 2023, CBLC and the four independent directors settled with the FMA, making admissions in relation to seven causes of action. In particular, CBLC admitted the first, fifth, seventh, ninth, 13th, 17th, and 21st causes of action. The independent directors admitted the second, sixth, eighth, 10th, 14th, 18th and 22nd causes of action. The FMA and these defendants sought declarations of contravention and pecuniary penalties based on these admissions.

[17]	On 30 June 2023, the last day before the close of pleadings, the FMA filed a second amended statement of claim.

[18]	In October 2023, the  FMA  discontinued  its  claim  against  the  Estate  of Mr Hutchison, another director of CBLC who had died in December 2021.

[19]	Following my judgment of 21 December 2023 making declarations of contravention and imposing pecuniary penalties as sought by CBLC and the four independent directors, on 31 January 2024 the FMA discontinued the remaining causes  of  action  against  CBLC  and  the  independent  directors.   Relevantly, those causes of action included the 11th and 12th causes of action, and the 23rd and 24th alternative causes of action.

[20]	On 26 March 2024, counsel for the FMA and Mr Harris, the managing director of CBLC, filed a joint memorandum advising that they had also settled and were seeking a penalty hearing. Mr Harris made the same admissions as the independent directors. Judgment following his penalty hearing is reserved. In the meantime, the FMA has not filed a discontinuance against Mr Harris.

[21]	On 10 May 2024, Mr Mulholland’s lawyers wrote to the FMA’s lawyers seeking confirmation that the FMA would not be pursuing Mr Mulholland on the causes of action it had discontinued against CBLC and the directors.

[22]	On 17 May 2024, the FMA’s lawyers responded to the effect that all causes of action against Mr Mulholland would be taken to trial.

[23]	On 18 June 2024, in a telephone conference Mr Mulholland raised the abuse of process issue with the Court, at the same time as the FMA proposed a further amended statement of claim. I directed that any abuse of process application should be filed and served urgently given the timing. The application was filed the next day.

[24]	Following leave being granted for the FMA’s third amended statement of claim, its case against Mr Mulholland was streamlined to allege involvement in the following contraventions:

(a)	a misrepresentation to investors on 24 August 2017 that CBLC’s operating profit for the half-year to June 2017 had been materially reduced because its subsidiary CBL Insurance Ltd (CBLI) had made a “one-off” increase of $16.5m to the amount that it was  setting aside (ie reserving) for future claims against its insurance policies — in breach of the fair dealing provisions in ss 19, 22 and/or 23 of the FMCA (second cause of action);

(b)	a failure to disclose to the market from 24 August 2017 that approximately $35m of premium receivables due to CBLI were over a year past due (aged receivables) and the solvency impact of the aged receivables under the Solvency Standard for Non-Life Insurance Business 2014 — in breach of the continuous disclosure obligations  in s 270 of the FMCA and cl 10.1 of the NZX Listing Rules (10th cause of action);

(c)	a failure to disclose to the market on or shortly after 11 October 2017 that CBLI signed a term sheet to sell the aged receivables to Castlerock

Receivables Management Ltd (Castlerock) and its effect — in breach of the continuous disclosure obligations in s  270  of the FMCA and  cl 10.1 of the NZX Listing Rules (12th cause of action);

(d)	a failure to disclose to the market on or shortly after 13 January 2018 that the Central Bank of Ireland (CBI) had directed CBLC’s subsidiary, CBLIE, to apply a capital add-on, essentially requiring it to hold additional cash reserves of €31.5m — in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the NZX Listing Rules (22nd cause of action); and

(e)	a  failure  to  disclose  to  the  market  from  25  January  2018  until   5 February 2018 that CBLI’s reserves needed to be strengthening by
$100m — in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the NZX Listing Rules (eighth cause of action).

[25]	In the alternative to the four continuous disclosure contraventions, the FMA alleges a failure to disclose to the market by the end of January 2018 the cumulative material effect of the information concerning receivables, the CBI direction and reserving — in breach of the continuous disclosure obligations in s 270 of the FMCA and cl 10.1 of the NZX Listing Rules (24th cause of action).

[26]	As indicated, the strike-out application also narrowed to concern only the 12th and 24th causes of action. These were the remaining causes of action that were not admitted by other individual defendants (nor were the related odd-numbered causes of action admitted by CBLC).

Leave

[27]	No interlocutory application may be made after the close of pleadings date without the leave of a judge.1 The same principles are applied as for leave to amend after close of pleadings. It is necessary to surmount the three formidable hurdles of

1	High Court Rules 2016, r 7.7(1).

showing that the step is in the interests of justice, and will not significantly prejudice defendants, or cause significant delay.2

[28]	In relation to the abuse of process ground, I accept that Mr Mulholland may not have had full visibility of the settlement arrangements between the FMA, CBLC and the independent directors in June 2023. They were confidential, at least in part. However, by December 2023, or 31 January 2024 at the latest, Mr Mulholland knew that the FMA was discontinuing its residual claims against those other defendants. He should have raised the issue then. The position became even more acute following Mr Harris’ settlement on 26 March 2024, leaving Mr Mulholland as the only remaining defendant. Yet Mr Mulholland only wrote to the FMA about this issue on 10 May 2024. Following the reply, he delayed a further month before raising it with the Court and filing an application in the week before trial (although I understand it may have been raised with counsel for the FMA following Mr Jones’ return from overseas at the end of May, at which point a further amended statement of claim was signalled). This delay weighs against leave. It is not a complete answer to say the FMA is not prejudiced by the delay because an interlocutory appeal would not have been feasible even if Mr Mulholland had applied earlier. In the event of an adverse decision and appeal, the FMA might have sought to adjourn the trial of this proceeding together with the IPO proceeding.

[29]	On the other hand, I accept that, despite delay, the interests of justice may weigh in favour of leave in the case of an alleged abuse of process if the ground appears sufficiently arguable, so that the issue can be considered on its merits. Also, if the alleged abuse of process is made out, it is difficult to envisage how the FMA could realistically have prevented or cured the abuse.

[30]	In relation to the separate grounds, that is alleged pleading flaws in the 24th cause of action, these could and should have been raised since at least November 2022 in relation to the earlier versions of the statement of claim. Further, they are capable of amendment and would not warrant strike out, especially after evidence has been exchanged — and indeed has been given by the FMA witnesses.

2	Elders Pastoral Ltd v Marr (1987) 2 PRNZ 383 (CA) at 385.

[31]	For these reasons, despite Mr Mulholland’s delay in filing the strike-out application, I granted leave so that the abuse of process ground could be addressed on its merits.

Abuse of process

Applicable legal principles

[32]	The applicable legal principles are not in  dispute.  Under  r  15.1  of  the High Court Rules 2016 and the Court’s inherent jurisdiction, the Court may strike out all or part of a pleading if it is an abuse of the process of the Court.

[33]	As the Court of Appeal said in Reid v New Zealand Trotting Conference:3

Misuse of the judicial process tends to produce unfairness and to undermine confidence in the administration of justice. In a number of cases in recent years this Court has had occasion to consider the inherent jurisdiction of the High Court, and on appeal this Court, to take such steps as are considered necessary in a particular case to protect the processes of the Court from abuse. (See particularly Moevao v Department of Labour [1980] 1 NZLR 464 and Taylor v Attorney-General [1975] 2 NZLR 675.) In exercising that jurisdiction the Court is protecting its ability to function as a Court of law in the future as in the case before it. The public interest in the due administration of justice necessarily extends to ensuring that the Courts’ processes are fairly used and that they do not  lend  themselves  to  oppression  and  injustice. The justification for the extreme step of staying a prosecution or striking out a statement of claim is that the Court is obliged to do so in order to prevent the abuse of its processes. In Hunter v Chief Constable of the West Midlands Police [1982] AC 529 Lord Diplock began his judgment, which was concurred in by the other members of the House, with these words:

“My Lords, this is a case about abuse of the process of the High Court. It concerns the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people. The circumstances in which abuse of process can arise are very varied; those which give rise to the instant appeal must surely be unique. It would, in my view, be most unwise if this House were to use this occasion to say anything that might be taken as limiting to fixed categories the kinds of circumstances in which the court has a duty (I disavow the word discretion) to exercise this salutary power.”

3	Reid v New Zealand Trotting Conference [1984] 1 NZLR 8 (CA) at 9. See also Dotcom v District Court at North Shore [2018] NZCA 442, [2018] NZAR 1859 at [16]; and Schaeffer v Murren [2018] NZCA 420 at [15].

Discussion

[34]	Mr Jones clarified that he was not submitting that as a matter of principle the FMA can never settle a proceeding alleging FMCA contraventions and involvement in contraventions with some defendants but proceed with the same allegations against other defendants. Nor did he submit that the FMA must pursue the company as primary contravener in a case alleging individuals were involved in the contravention. It is not a pre-condition that proceedings be brought against the primary contravener.4

[35]	Rather, Mr Jones submitted that the effects of the FMA settlements in this case give rise to injustice, denial of a fair trial, and abuse of process given the FMA’s responsibilities as a model litigant. In essence, he submitted that those effects are the combined result of the FMA pursuing but then settling with CBLC, the primary contravener; settling with other directors without calling them to give evidence; and not seeking a waiver of legal privilege from CBLC or the directors in relation to legal advice that may give rise to a defence. He also submitted that the FMA has been strategic in this regard, for example leaving Mr Mulholland to call the directors so that the FMA could cross-examine them.

[36]	I accept that the FMA should be a model litigant and should make decisions about the parties to join in enforcement proceedings, and whether to settle and/or discontinue, in the public interest. Such settlements are not to be discouraged. Here, the FMA’s decisions not to pursue the 11th and 23rd causes of action against CBLC, or the 12th and 24th alternative causes of action against other individual defendants, are explicable rather than capricious. There is no suggestion that if Mr Mulholland had made similar admissions to the other individual defendants, the FMA would have pursued him in respect of the 12th and 24th causes of action dropped against them. As Mr Dixon KC submitted, there is no basis to infer that the FMA has acted capriciously in settling with defendants other than Mr Mulholland.

[37]	In particular, although the 12th cause of action was not admitted by or pursued against others (nor was the related 11th CBLC cause of action), there was some

4	New Zealand Bus Ltd v Commerce Commission [2007] NZCA 502, [2008] 3 NZLR 433 at [143], citing Matheson Engineers Pty Ltd v El Raghy (1992) 37 FCR 6 (FCA). See also Australian Securities and Investments Commission v Bettles [2023] FCA 975 at [493].

overlap between the nineth to 14th causes of action. They all related to premium receivables recorded as being due in respect of business originated by a managing agent (SFS) and written by a ceding insurer (Elite), approximately $35m of which were aged over one year (aged receivables). The nineth and 10th causes of action related to non-disclosure of the existence and impact of the aged receivables. The 11th and 12th causes of action related to non-disclosure of the Castlerock term sheet signed in October 2017 to sell the aged receivables, and its effect. The 13th and 14th causes of action related to non-disclosure of CBLC’s subsequent decision to write off the aged receivables (instead of proceeding with the Castlerock transaction). Mr Mulholland was not a defendant in relation to the 14th cause of action. It is unsurprising that admissions by other defendants in relation to the nineth, 10th, 13th and 14th causes of action led to discontinuance against them without pursuing the 11th and 12th causes of action. In those circumstances, I accept Ms Gatland’s evidence that the FMA determined it was not in the public interest to continue with the 11th and 12th causes of action against the other defendants.

[38]	The 23rd and 24th causes of action were pleaded in the alternative. Therefore, following the  admissions by other defendants in relation to earlier causes of action,  it was appropriate to discontinue against them without pursuing those alternative causes of action.

[39]	The FMA emphasised that Mr Mulholland consented to the discontinuances filed in respect of CBLC and the independent directors following their admissions. However, I do not consider this is a complete answer to the abuse of process claim. While  the  Court  may  constrain  discontinuance   to   address   some   injustice,5  Mr Mulholland is not objecting to the admissions but to the prejudice he says he will suffer if pursued in respect of causes of action that have been (or are to be) dropped against the other defendants. If Mr Mulholland had refused to consent or sought to impose conditions, the FMA (supported by the other defendants) may very well have simply sought and obtained leave to discontinue without his consent. I accept that when Mr Mulholland’s consent was sought, he had the opportunity to raise the matters he now raises but this is mostly relevant to delay which I have already addressed.

5	Perpetual Trust Ltd v Mainzeal Property and Construction Ltd [2012] NZHC 223 at [6].

[40]	The key issue is whether the alleged effects of the FMA settlements in this case give rise to injustice or preclude a fair trial for Mr Mulholland, amounting to abuse of process. I deal with the three components of Mr Mulholland’s complaint in turn: first, no primary contradictor; second, no evidence from  the  directors;  and third,  no waiver of privileged legal advice.

[41]	In relation to the first complaint, it is common ground that the FMA’s case against Mr Mulholland requires the FMA to establish a contravention by CBLC — without reference to its admissions — and involvement by Mr Mulholland in that contravention.6 Of course, CBLC is not present at trial as a contradictor. Even where the alleged primary contravener company has not settled, it may not participate as a contradictor especially when it is in liquidation, as here. For example, CBLC has indicated that it will not participate in the trial in the IPO proceeding even though it had not settled with the FMA. In any event, Mr Mulholland can be a contradictor in relation to CBLC’s alleged contravention as well as in relation to his own alleged involvement. In the continuous disclosure context in Australia, the alleged accessory has acted as the contradictor for the primary contravention where the company did not seek to defend itself.7

[42]	Mr Mulholland’s contradictor complaint is really that the directors were better placed to defend the claim and he would have had the benefit of that. However, since they were entitled to settle with the FMA, the issue is whether that settlement unfairly precludes Mr Mulholland from being able to defend the claim. That leads into the second complaint, that the FMA is proceeding without evidence from the directors.

[43]	Before the settlements, Mr Mulholland had access to all the discovered documents including from CBLC (except privileged documents, addressed next) and transcripts of interviews of directors and employees. The FMA had already served its briefs of evidence, which naturally did not include the defendant directors. The terms

6	Noting that s 502 of the Financial Markets Conduct Act 2013 provides conduct must still be treated as contravening a civil liability provision even if the conduct does not lead to liability because of the availability of a defence, and so the issue of whether Mr Mulholland was involved in that contravention would be engaged.
7	Australian Securities and Investments Commission v Big Star Energy Ltd (No 3) [2020] FCA 1442; accessory’s liability upheld on appeal in Cruikshank v Australian Securities and Investments Commission [2022] FCAFC 128.

of settlement are confidential (at least in part) and there is no evidence before me addressing whether the FMA sought to lead evidence at trial from the available directors — or whether such evidence would assist the FMA or Mr Mulholland. But there is no suggestion the terms of settlement preclude the directors from assisting Mr Mulholland. Mr Mulholland could have asked the directors to assist — especially in relation to information that was not recorded in documents — and could have sought to call them. There is no property in a witness. I do not infer that the FMA has been strategic to prejudice Mr Mulholland by not calling the directors knowing they could assist his defence. The Court can only decide the case on the basis of the evidence called by the parties, but there is no abuse inherent in the FMA’s decision not to call the directors.

[44]	Turning to the third complaint, I accept that CBLC and the directors claimed legal privilege. This included privilege claimed in redacted parts of some documents relied on by the FMA at trial, although it was not suggested there was legal advice in relation to the subject matter of the 12th cause of action (non-disclosure of the Castlerock term sheet and its effect).

[45]	Even assuming that privilege was claimed for legal advice in relation to one or more components of the cumulative (alternative) 24th cause of action, I do not consider that the FMA has created an unfairness by not obtaining a waiver of privilege by CBLC and the directors. As Mr Dixon submitted, it may not be appropriate for the FMA to require a waiver of privilege as a condition of settlement. While the FMA may not have sought a waiver, Mr Mulholland could also have done so (presumably on the basis that, as a senior executive of CBLC, the legal advice was for his benefit as well). Insofar as Mr Mulholland was aware of legal advice at the time relating to CBLC’s continuous disclosure obligations (which was not put in issue in CBLC’s statement of defence), he can seek to rely on it.8 The FMA cannot be expected to know the content of such privileged legal advice. Insofar as Mr Mulholland was not aware of relevant legal advice at the time, it is difficult to see how he could rely on it in his defence.

8	His brief of evidence did refer to some legal advice, to which the FMA objected in at least one instance. That objection remains for determination, if necessary.

[46]	More generally, if these three complaints had merit, they would apply equally to the other causes of action pursued against Mr Mulholland, which are not the subject of the strike-out application. This indicates that the effects complained of do not arise as a result of the alleged abuse in pursuing the 12th and 24th causes of action.

[47]	Finally, where the conduct in issue gives rise to an alleged denial of a fair trial, the Court of Appeal’s observations in Schaeffer v Murren are apt (albeit the conduct in that case involved alleged threats):9

Such conduct may properly found an application for permanent stay or strike- out of a proceeding. But the burden on the applicant for such orders will be a heavy one. That is because the effect of granting such an application is to preclude altogether the determination of the asserted rights of a party to proceedings before the courts. A court will do so only where it is demonstrated that there was no other available means that would permit a fair trial to take place. In most cases this will be a proper matter for the trial judge to address. It will be a rare case indeed where a pre-trial application for stay based on abusive conduct by one party will be granted. That is because in most cases the effect of the abusive conduct, and whether fair trial is possible despite it, will only be able to be assessed at the trial, rather than ex ante, after:
(1)	determination of the actuality of the alleged abusive conduct;
(2)	consideration of appropriate trial directions to neutralise or mitigate the proven conduct; and (3) the efficacy of those directions has been assessed in operation at trial.

[48]	Here, the effects complained of do not come close to the high bar needed to decide on a strike-out application that a fair trial is not possible.

[49]	I conclude there is no injustice or denial of a fair trial amounting to abuse of process in the FMA continuing this proceeding against Mr Mulholland following settlements with other defendants in which they made admissions and the FMA decided not to pursue the remaining causes of action.

[50]	For these reasons, I dismissed the application to strike out the 12th and 24th causes of action for abuse of process.

9	Schaeffer v Murren, above n 3, at [16] (footnotes omitted).

Gault J

Solicitors / Counsel:
Mr JCL Dixon KC and Mr W Potter (for the plaintiff Financial Markets Authority), Barristers, Auckland
Ms JEM Greer, Financial Markets Authority, Auckland
Mr J Caird, Ms N Blomfield and Ms C G Paterson (plaintiff’s instructing solicitors), Simpson Grierson, Auckland
Mr DPH Jones KC (for the 8th  defendant Carden James Mulholland), Barrister, Auckland Mr DCS Morris and Ms S Cameron (8th defendant’s instructing solicitor), CM & Associates, Auckland