Lynds v Fitzherbert Rowe [2017] NZHC 1297 (13 June 2017)

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BETWEEN	JEFFREY ROY LYNDS First Plaintiff NEWBURY RACING AND BREEDING LTD Second Plaintiff
AND	FITZHERBERT ROWE Defendant

Hearing:	3-20 May 2016, 2 and 3 June 2016 (further memoranda received 29 June 2016, 5 July 2016, and 5 August 2016), 29 September 2016 (further memoranda received 8 and 25 November 2016, 20 February 2017 and 8 May 2017)
Appearances:	C Carruthers QC and Q Haines for the plaintiffs L J Taylor QC and A Sherlock for the defendant
_Judgment:	_{13 June 2017}

Introduction ....................................................................................................................................... [1] The evidence ...................................................................................................................................... [8] The participants.............................................................................................................................. [8] The Mitchell Group needed to restructure .................................................................................... [17] The genesis of the Newbury partnership ...................................................................................... [27] Restructuring proposals continue ................................................................................................. [31]

Newbury Park discussions............................................................................................................ [35]

AMP default not remedied by six month deadline ........................................................................ [37] Newbury Park agreement resolved ............................................................................................... [39] Restructuring completed............................................................................................................... [42] Newbury Park business underway................................................................................................ [43] Restructuring leaves funding shortfall ......................................................................................... [44] Further Kairanga properties ........................................................................................................ [46] Further National Bank borrowings .............................................................................................. [48] Newbury Park lease finalised ....................................................................................................... [49] The negotiations to purchase Le Belvedere/Mitchell Group defaults ........................................... [50]

_{Application for funding for Stage two of Kairanga
......................................................................
[67]}

Partnership decides to purchase two stallions ............................................................................. [68] MCDC declines Stage two funding............................................................................................... [72] The Pegasus transaction............................................................................................................... [75] The Tui meeting on 1 June 1989 ................................................................................................... [89] Settlement of stallion purchases ................................................................................................. [103] Review of MCDC/Tui securities ................................................................................................. [107] Settlement of sale of Lynds’ property ...........................................................................................[110] Further meetings over Stage two finance ....................................................................................[111] Tui issues default notice to the Mitchell Group ...........................................................................[112] Discussions between NZRPT and Tui ......................................................................................... [123] Syndication of the stallions......................................................................................................... [127] Tui becomes mortgagee in possession ........................................................................................ [134] Mr Mitchell leaves Newbury Park .............................................................................................. [135] Mitchell Group’s court action against Tui .................................................................................. [136] Pegasus default/NRBL established ............................................................................................. [137] The Mitchell Group settle with Tui ............................................................................................. [139] Further funds for Pegasus .......................................................................................................... [141] A further proceeding against Tui is contemplated ...................................................................... [144] Mr Lynds becomes concerned about Fitzherbert Rowe.............................................................. [146]

Has the claim been brought too late? .......................................................................................... [149] Limitation Act 1950 .................................................................................................................... [149] Laches......................................................................................................................................... [156]

Is there a conflict of duty? ............................................................................................................ [160]

Submissions ................................................................................................................................ [160] The law: double employment rule .............................................................................................. [165] The law: the no inhibition rule ................................................................................................... [174] The law: actual conflict .............................................................................................................. [175] The relevant date for the double employment rule ..................................................................... [176] Fitzherbert Rowe’s potential conflict .......................................................................................... [181] My findings ................................................................................................................................. [182]

Causation ....................................................................................................................................... [200] Loss ................................................................................................................................................. [209] The law ....................................................................................................................................... [209]

Time at which loss to be assessed ............................................................................................... [214]

The expert evidence .................................................................................................................... [216] Ms Kelly’s methodology.............................................................................................................. [217] Mr Hussey’s methodology........................................................................................................... [219] Choice of methodology ............................................................................................................... [221] The assumptions ......................................................................................................................... [222] An alternative methodology........................................................................................................ [255]

Judicature Act interest .................................................................................................................. [261] Result .............................................................................................................................................. [263]

[1] Jeffrey Lynds sues his former solicitors, Fitzherbert Rowe, for breach of fiduciary duty in relation to a partnership he entered into with Robin Mitchell and others (the Mitchell Group), for whom Fitzherbert Rowe also acted, in 1988.

[2] Mr Lynds trained race horses. Mr Mitchell was a dairy farmer. The partnership involved them combining Mr Lynds’ business with some livestock (cattle) and expanding the horse business by purchasing stallions for breeding. Mr Lynds entered the partnership and committed to borrowing funds understanding Mr Mitchell to have financial substance. In reality Mr Mitchell’s dairy business was saddled with significant debt and could not meet its obligation, without obtaining further finance. Mr Mitchell used funds from the partnership borrowings to remedy his dairy business’s defaults.

[3] The major borrowings by the partnership were from a financier (Pegasus)¹to purchase two stallions (the Pegasus transaction). The partners intended to syndicate the stallions to repay Pegasus. The syndication of the stallions was unsuccessful and the partnership was unable to meet its obligations to Pegasus. The partnership business was restructured into a company, the second plaintiff (NRBL), with Michael Lynds (the brother of Jeffrey) and Brendon Meo (a friend and substantial client of Jeffrey’s horse training business) providing funds which enabled the business to continue to operate and ultimately repay Pegasus. As part of this restructuring Mr Mitchell withdrew from the partnership. Mr Mitchell passed away in 2010. Mr Meo passed away in August 2012. NRBL did not return to solvency after the financial disaster of the Pegasus transaction was put into liquidation in

[4] Fitzherbert Rowe acted for Mr Mitchell in restructuring his dairy operations. They also acted for Mr Mitchell’s major lender (MCDC²which later merged with Tui³) following this restructuring. They also acted for Mr Lynds, Mr Mitchell and their partnership on partnership matters. This included acting for them on the

Mr Mitchell’s financial difficulties when they acted on the Pegasus transaction. He contends they breached their fiduciary duty to him by failing to advise him they had a conflict of interest and Mr Lynds needed to obtain independent advice before committing to the Pegasus transaction.

[5] Mr Lynds and NRBL⁴seek to recover from Fitzherbert Rowe loss suffered as a result of the Pegasus transaction. Depending on how the assessment of loss is approached, their claim is for $4,993,000 to $5,506,000 (inclusive of interest).

[6] Fitzherbert Rowe contend that there was no actual or potential conflict when the instructions were accepted and thereafter the two partners who carried out those instructions (Mr Rowe and Mr Roche) were unaware of the full difficulties Mr Mitchell was under. They accept there was a conflict between Mr Mitchell and MCDC/Tui which eventually led to another partner (Mr Sunderland) resigning from acting for Tui, but this conflict did not impinge on their duties to Mr Lynds.

[7] They submit that if the Court finds they breached a fiduciary duty it is only the loss suffered by Mr Lynds that is recoverable. They say that this loss must then be substantially reduced for Mr Lynds’ contributory negligence in entering into the Pegasus transaction. They also contend that Mr Lynds has brought his action too late. They say he could reasonably have discovered the matters on which he now bases his claim in 1992 when Mr Mitchell was embroiled in litigation with Tui.

[8] Mr Lynds has been a self-employed horse trainer since 1974. He and his wife, Jan Lynds, ran the business together. In 1976 they purchased a 25 acre horse training establishment in Woodville. They started developing their business, gathering clients and, eventually, making a profit. Mr Mitchell became a client of Mr Lynds around 1978. Mr Lynds trained Zamalla, one of Mr Mitchell’s horses.

[9] Mr Mitchell was an experienced farmer. He was a Nuffield Scholar and had won the Alec Cameron Memorial Award for excellence in farming. He was a director at MCDC, was on the New Zealand Beef Council, and was Chairman of the New Zealand Town Milk Federation. He was understood to be an accomplished businessman and successful farmer. For a number of years he was a Director of the MCDC until it merged with Tui in 1989.

[10] At the beginning of 1988 Mr and Mrs Mitchell held interests in several farming operations. These were:

[11] The group of entities that made up the Mitchell and Williamson interests became known as the Mitchell Group.⁸At least as is relevant to this proceeding, Mr Mitchell made the Mitchell Group’s financial decisions.

[12] Michael Lynds is the brother of Jeffrey Lynds. He trained as an appraiser and a registered valuer. He was involved in rural lending initially with the Rural Bank

1978. The farm business was operated by the Kairanga Partnership which was equally owned by each couple. At the end of August 1987 the Mitchells purchased the McDonnell’s share. At the end of 1989 the Williamsons joined as partners.

⁶The titles were all held in equal share by Mr and Mrs Mitchell’s family trusts. 385 of the stock

were owned by the Williamsons and the remaining stock, plant and equipment were owned by the Fairview Partnership (80 per cent by the Mitchells and 20 per cent by the Williamsons).

⁷The Mitchell Group held a 50 per cent share in this. The other 50 per cent was owned by AMP.

This was purchased in 1983 as a joint venture between AMP and the Mitchell Group. AMP provided the required funding for the Mitchell Group to acquire their half. There was a complicated ownership structure for the half share owned by the Mitchell Group: half of its share was owned by each of the couples’ family trusts (Mitchells’ 57.2 per cent, Williamsons’

35.7 per cent and McDonnells’ 7.1 per cent). The other half was owned by the three couples, in the same proportions, in their own right. The Mitchells acquired the equity previously held by the McDonnells in August 1987.

Mitchell through these roles. He had instigated the Mitchell Group’s involvement in Pahau Reserve, but once the project was established he did not have any active involvement in it. He left AMP in 1986 and pursued other ventures.

[13] Fitzherbert Rowe is a firm of solicitors practising in Palmerston North. At the time of these events there were 10 partners in the firm. They included Maurice Rowe, Phil Sunderland and Barry Roche.

[14] Mr Rowe was the partner who primarily acted for Mr Mitchell. Mr Mitchell was a long-standing client of the firm. Mr Rowe’s father, a partner in the predecessor firm, had first acted for Mr Mitchell. In about 1973 Mr Rowe’s father passed Mr Mitchell’s matters over to him. By this time Mr Rowe had been a partner for about six years and had been practising for about nine years.⁹He acted for Mr

[15] MCDC was the original dairy co-operative in the Manawatu region. Its principal dairy factory operations were located close to the Mitchell Group’s Kairanga property.¹¹In the late 1970s and through most of the 1980s MCDC was seeking to expand and secure milk supply from the Manawatu region. It was looking to establish relationships with farmers close to MCDC’s centre of operations which would provide it with the ability to spray milk waste onto their land as a disposal measure. In accordance its expansion objectives MCDC had a policy of providing finance to some supplier members for the purpose of establishing new dairy units or

developing existing ones. During the events at issue here, MCDC merged with Tui. Tui had a different approach to finance applications than MCDC.

[16] MCDC was also a long-standing client of Fitzherbert Rowe, and its predecessor. Mr Sunderland had acted for MCDC for many years. In the 1980s a

⁹Mr Rowe joined the firm when he commenced practice in 1964. He became a partner in 1967.

He had experience in a wide range of legal work but over time focussed on commercial property, commercial transactions and resource management work.

¹⁰He was also a professional trustee for both Mr and Mrs Mitchell’s family trusts and held a personal covenant to repay loans secured over trust property, limited to the value of the assets held within those two trusts.

instructions came through the company secretary, Mr Mollett. By and large the firm

[17] Mr Mitchell and the Mitchell Group had substantial borrowings relating to its farming interests. This including borrowings from AMP, Wanganui Savings Bank¹²(which later became Trustbank Central Ltd), Wrightson Farmers Finance Ltd,¹³

_{Wrightson NMA Ltd,}¹⁴_{and the National
Bank.}¹⁵_{Various securities were held by}

these entities.¹⁶The AMP lending included a multi-currency loan facility to the

[18] As at early 1988 the substantial borrowings were causing Mr Mitchell financial strain. At this time the Mitchell Group was in default of its obligations to AMP, AMP was pressing Mr Mitchell to resolve the defaults, and Mr Rowe was aware of this.¹⁷

1987 had not been paid by 7 January 1988. A second AMP loan for $230,000 was due for repayment on 7 March 1988. In a letter dated 7 January 1988 AMP expressed concern that throughout the term of these loans the Mitchell Group’s payments had been late. AMP advised that it would not agree to extend the loans as had been requested. It would agree to maintain the status quo on these loans until 30

June 1988 providing it did not become aware of any erosion in its security.¹⁸

_{Mitchell Group’s interest in Pahau Reserve, and to develop and
expand Kairanga}

¹⁵_{Approximately $578,145 when the NZRPT transaction
(referred to later) was settled.}

¹⁶For example, various AMP loans were secured over Kairanga. One AMP loan (used to purchase

Pahau Reserve) was secured over Pahau and the Wanganui Savings Bank loan was also secured over Pahau.

¹⁷The AMP letters dated 7 January 1988 and 4 July 1988 about these defaults were addressed to

¹⁸The letter provided details of the quarterly interest payments to be made and that a default rate of

into a large scale and intensive dairy that would hold 970 cows. Michael Lynds had some knowledge of this proposed restructuring.¹⁹

[21] As part of this restructuring, an agreement was reached with the New Zealand Rural Property Trust (NZRPT). This agreement involved a complicated structure by which Mr Mitchell would undertake the Kairanga development. Mr Rowe was aware of the details of this agreement and provided Mr Mitchell with legal assistance relating to it.²⁰

[22] Under this agreement the Mitchell Group would sell its three principal Kairanga farm blocks to NZRPT at 80 per cent of the land’s agreed market value. NZRPT would then lease that land, plus a neighbouring block to be purchased (the Mildon Block), back to the Mitchell Group. At a later stage further neighbouring blocks would be purchased (the Robert and Hollows blocks). The lease would be on a term of three years with a right of renewal for another 15 years. The Mitchell Group would also have a right of first refusal if NZRPT decided to sell the land at the end of the initial 15 year period.

[23] To counter-balance the discount in the purchase price the annual rental was 5 per cent (as opposed to the market rental of 8 per cent) for the first six years. Additionally, the Mitchell Group was required to purchase vendor units in the NZRPT to the value of 60 per cent of the amount NZRPT paid for the Kairanga land. After five years the Mitchell Group was entitled to sell up to 20 per cent of its unit holding. The purpose of these units was to offset the disadvantage of having a leasehold farm rather than a freehold farm, as the lease holder effectively became a shareholder in NZRPT and therefore would benefit if the value of the farmland increased.

[24] The NZRPT also agreed to reimburse the Mitchell Group for 80 per cent of the work the Mitchell Group planned to develop the farm. However, they would

¹⁹A handwritten letter (undated) shows notes he made for Mr Rowe setting out Mr Mitchell’s financial position and proposing that an application be made for finance from the Rural Bank for

$200,000 to repay the National Bank lending. Michael Lynds said in cross examination he prepared this note in early January 1988.

²⁰The detail of the extensive assistance required of Mr Rowe is set out in his invoice to Mr Mitchell provided on 2 March 1989. Mr Rowe’s knowledge of the NZRPT transaction is set out in a memorandum from him to Mr Sunderland dated 22 April 1988.

require the Mitchell Group to purchase additional vendor units of 60 per cent of that value and annual rents would increase to include 5 per cent of the amount spent on development costs.

[25] Substantial funding was needed by the Mitchell Group to complete this proposal. It was proposed this would be obtained from MCDC. At a meeting on 16

March 1988, at a time when Mr Mitchell was a director on the MCDC Board, it resolved to support in principle the policy of being involved in arranging finance for new suppliers or existing suppliers who desired to increase their production. This was to be addressed by the Suppliers Finance Committee with urgency and a special Board meeting would take place once arrangements were at an advanced stage. This resolution was made specifically as a result of Mr Mitchell’s proposed plans for

[26] Following advice from its accountants (Touche Ross),²²a report from Mr Mitchell’s accountants (Mr Fenwick of Arthur Young),²³and advice from Mr Sunderland²⁴it appears that by 22 April 1988 MCDC had approved in principle the facility which at that stage was for $1.4 million.²⁵

[27] While Mr Mitchell was working on this restructuring of his farming operations, in around April 1988, Mr Mitchell proposed to Mr Lynds that they

²¹As is apparent from the recommendation to the Board on 15 March 1988 to approve in principle the Mitchell Group proposal for which a borrowing facility to a maximum of $1.9 million was sought.

²²Touche Ross (accountants) reported to MCDC on Mr Mitchell’s financial proposal on 22 March

1988. They considered the farming operation at Kairanga was viable subject to debt servicing and investment income. The debt servicing was dependent on the dividends to be received from the vendor units and there were a number of unknown factors relating to them. They concluded this relied too heavily on the performance of NZRPT and as such it involved a “high level of risk” for the MCDC. They said they could not recommend the proposal in its current form.

²³Mr Mitchell engaged Arthur Young (Mr Fenwick) to write to MCDC about the financial viability of the proposal. It did so sometime in March 1988.

²⁴In April 1988 Mr Sunderland provided advice to MCDC about the financial viability of the Kairanga proposal, which at this point was for a facility of $1.4 million. Mr Sunderland advised that, based on the various reports and discussions, the proposal did appear to be financially

viable. He also provided advice on the security for the proposed facility. This included

obtaining a mortgage on the lease. He regarded this as the prime security because, in the event of default, MCDC could acquire the Mitchell Group’s interest under the lease and operate the farm as tenant.

²⁵On that date Wrightson NMA Ltd was advised by Mr Sunderland that MCDC had approved sufficient funds to enable the purchase by NZRPT to proceed.

establish a partnership to purchase a property known as Newbury Park, a 320 acre multi-purpose horse stud and training facility located on the outskirts of Palmerston North.²⁶No written partnership agreement was entered into. However the intention was that Mr Lynds would transfer his horse training business to this property and Mr Mitchell would bring cattle to the property for later sale by the partnership.²⁷

[28] As a result of these discussions, in May 1988 Mr Lynds negotiated an agreement to purchase Newbury Park on behalf of the partnership for $1.6 million. Mr Lynds instructed Wellington solicitors to act for him on this transaction. Mr Mitchell provided the deposit of $100,000. Settlement was to occur on 30 June 1988 (which was also when Mr Mitchell was required to meet his obligations to AMP and was intending to do so through the restructuring plans). Mr Lynds says that Mr Mitchell was to get bridging finance for the rest of the purchase price until he had settled the Pahau Reserve sale with AMP. He also says Mr Mitchell told him of his involvement in a major dairy development at Kairanga and that funding had been

[29] In fact there would have been insufficient funds from this sale to pay the balance of the purchase price. It is therefore unclear how Mr Mitchell envisaged the balance of the purchase price would be funded. Mr Lynds did not have the ability to do so. If Mr Mitchell intended to proceed with settling this purchase, he must have envisaged the $1.5 million would be borrowed but it is unclear whom that borrowing would be from. However, as matters transpired, it became unnecessary to settle the purchase.

[30] On 17 June 1988 Mr Lynds and Mr Mitchell became aware there were complications with settlement of the Newbury Park purchase. The vendors, Blessed Investments,²⁹had earlier entered into an agreement to sell Newbury Park to a Mr

_{Carpenter. Blessed Investments believed this contract had been brought
to an end}

²⁶It is not necessary to distinguish between Mr Mitchell and the Mitchell Group in relation to the

²⁸_{This is consistent with Mr
Sunderland’s advice to the NZRPT on 22 April 1988.}

when it entered the contract with Mr Lynds. Mr Carpenter disputed this. He lodged a caveat to prevent Blessed Investments settling with Mr Lynds.

[31] On 21 June 1988 Mr Sunderland provided further advice to MCDC on the Mitchell Group Kairanga funding proposal. This advice was based on the details of the arrangement that Mr Rowe had provided to Mr Sunderland. Despite Mr Sunderland’s advice to MCDC in April 1988, at this time Mr Sunderland advised that Fitzherbert Rowe could not advise on the financial aspects of the Mitchell Group as “we are not familiar” with this and did not have the financial knowledge to provide an assessment. It is apparent this comment was based on what Mr Rowe

thought Mr Sunderland should say.³⁰At this point Fitzherbert Rowe had a potential

conflict of interest as between its two clients (MCDC and Mr Mitchell), but this is simply background insofar as Mr Lynds’ claim is concerned.

[32] Mr Sunderland’s advice to MCDC at this time went on to say the proposal “would not under any circumstances find favour” with the Rural Bank. This was because the proposed security was significantly less than what it would have accepted. Further, the security did not necessarily provide MCDC with the ability to realise its security and immediately recoup its investment. Fitzherbert Rowe’s conflict at this stage was recognised, with Mr Sunderland concluding his advice by saying “because of our close relationship with both parties we must leave the final decision to you”.

[33] The sale of Pahau Reserve and the NZRPT transaction for Kairanga with financing from MCDC was not going to be sufficient to clear Mr Mitchell’s total

³⁰Mr Sunderland’s advice to MCDC essentially copied what Mr Rowe had said about this in a memorandum to him written at about the same time. This comment was relied on by Mr Rowe to seek to show that he did not have a complete picture of Mr Mitchell’s financial position, and that therefore the restructuring was not material information that ought to have been disclosed to Mr Lynds when acting for him on some of the partnership matters. In my view this comment does not mean that Mr Rowe did not have material information as to the financial strain Mr Mitchell was under, that he was restructuring his affairs in the face of pressure from AMP, and that he needed to obtain substantial financing for what was proposed. The detailed narration on his invoice to Mr Mitchell dated 2 March 1989, which is set out later, makes it clear he did have knowledge of those matters.

would be cleared and the AMP multi-currency loan could be reduced.³¹Mr Mitchell was also looking to obtain further funds from other sources. Amongst these efforts, he had in mind borrowing money from the National Bank which would be secured by mortgages over his residential property (although Mr Mitchell was intending to sell this) and another property at Pukawa.³²He also decided to increase the facility sought from MCDC from $1.4 million to $1.5 million and to add a further $350,000 to the loan to acquire 640 cows over which MCDC would have security.³³

[34] While the restructuring was being organised the AMP quarterly payments on the two loans which had matured (the $204,000 and $230,000 loans), were not paid on their due dates.³⁴

[35] Mr Mitchell and Mr Lynds had discussed that Mr and Mrs Mitchell would sell their residential property and move on to Newbury Park. When it became apparent there was a potential problem with settling the Newbury Park purchase, Mr Mitchell engaged Mr Rowe to assist. On 21, 23 and 28 June 1988 the respective lawyers for Mr Lynds and Mr Mitchell corresponded about a proposed response to the vendor’s solicitors in which they would insist that settlement proceed. Despite the uncertainty about whether that would happen, on 25 June 1988 Mr and Mrs Mitchell entered into an agreement to sell their residential property for $180,000.

[36] At the same time Mr Mitchell was working with Mr Needham, the principal of Blessed Investments, to resolve the matter. This involved extracting some benefits for his proposed partnership with Mr Lynds and leasing the Newbury Park property from Mr Carpenter. On 29 June 1988 Mr Rowe received by fax a letter

³¹On 21 June 1988 Mr Rowe sought AMP’s agreement to release its securities over some of the Mitchell properties (including their residential property) in return for reducing the $1,230,000 sum owing under the multi-currency facility to $700,000.

³²This is mentioned in a report from Arthur Young provided to National Bank on 22 June 1988 on Mr Mitchell’s instructions. This report advised the Mitchell Group’s net asset position after the restructuring would be $521,000 plus an assessed value of the proposed Kairanga leases from NZRPT of $1,720,800. It is not, however, clear how accurate the $521,000 assessment was. For

example the amounts owing to AMP do not appear to coincide with the proposal made to reduce

³³_{This was noted at a MCDC meeting (attended by Mr Mitchell)
on 29 June 1988.}

³⁴The payment due on 1 February 1988 was paid on 19 February, the payment due on 7 March

1988 was paid on 20 April, the payment due on 1 May 1988 was paid on 13 June 1988, and the payment due on 7 June 1988 remained unpaid as at 4 July 1988.

Mr Needham.³⁵This involved Mr Mitchell/Mr Lynds withdrawing from the purchase of Newbury Park in exchange for a return of the deposit and some other arrangements.³⁶On 30 June 1998 a file note indicates that Mr Mitchell (and possibly Mr Lynds) discussed with Mr Rowe the possibility of a lease from Mr Carpenter for Newbury Park.

[37] By 30 June 1988 the Mitchell Group sale of Kairanga to NZRPT had not settled, which also meant that the Mitchell Group had not repaid the two AMP loans within the six month period of extension earlier granted by AMP.³⁷On 4 July 1988

AMP wrote to Mr Rowe expressing its “considerable concern and disappointment” that the two outstanding AMP loans had not been repaid within the six month extension.³⁸AMP advised that the penalty interest provisions would apply and legal steps would be taken to realise its securities.

[38] Mr Rowe was working to stave off AMP enforcement action. Settlement of the NZRPT proposal, with funding from MCDC, was necessary for this.³⁹On 15

_{July 1988), Mr Rowe wrote to Mr Lynds’ solicitors, on behalf of Mr
Mitchell and Mr}

³⁶“Pompeii Court” access as further described in a 19 May 1988 agreement, Mr Lynds training

horses on behalf of Waikato Stud Ltd on usual arrangements, and Blessed Investments providing all reasonable assistance on Mr Mitchell’s behalf to acquire a stallion. In fact, as is discussed later, Mr Mitchell later made arrangements for the partnership to buy Le Belvedere from Blessed Investments’ financier (Esanda Finance Corporation Ltd (Esanda)) when Blessed Investments was in default to Esanda.

this time. The loan had an unrealised loss of $94,582.39 (the difference in the value of the

currencies when the loan was drawn down a year earlier) and no principal reductions had been made during that period.

³⁸_{This letter also set out details of the late quarterly
payments referred to above.}

³⁹On 5 July 1988 Mr Rowe wrote to National Bank advising that Mr Mitchell would be seeking a

release of the bank’s security over some livestock because MCDC required this security for its

lending. On the same day Mr Rowe wrote to AMP seeking a deferral of recovery action. On 8

July 1988 AMP advised it would agree to defer recovery action if the Mitchell Group had paid an interest sum of $25,512.77 within seven days. AMP advised that recovery action would be taken without further notice if this payment was not made in this timeframe. Despite this further extension, however, this sum was not paid.

Lynds, setting out the agreement which had been reached with Blessed Investment. In addition to the matters agreed on 29 June 1988, it had also been agreed that Blessed Investments would pay compensation of $50,000.⁴⁰Blessed Investments had also agreed to obtain an agreement with Mr Carpenter pursuant to which he would give Mr Mitchell and Mr Lynds a right of first refusal to purchase or lease the property. Mr Rowe acknowledges he was acting for Mr Lynds as well as Mr Mitchell at this point. In accepting instructions to act for Mr Lynds, Mr Rowe appears not to have appreciated that his knowledge of Mr Mitchell’s financial

difficulties might be of real interest to Mr Lynds in decisions about how the Newbury Park dispute should be resolved. Mr Rowe’s evidence is that he understood the financial difficulties were temporary and would be resolved once the restructuring was implemented.

28 July 1988. On that day Blessed Investments’ solicitors paid $150,000 (the refunded deposit and the agreed compensation) into Fitzherbert Rowe’s trust account.⁴¹In anticipation of entering a lease with Mr Carpenter, on Friday 29 July

1988 at 5.10 pm, Mr Rowe confirmed an agreement reached with Mr Carpenter’s solicitor that Mr and Mrs Mitchell would occupy the house on Newbury Park the next day, as licensee, and the occupancy could be terminated by Mr Carpenter on 14 days notice.

⁴¹The $150,000 received from Blessed Investments was utilised as follows: (a) on about 2 August

1988 Mr Rowe had paid $14,000 to a Timaru creditor of Mr Mitchell’s. This payment was made on Mr Mitchell’s instructions and Mr Rowe had confirmed this with Mr Lynds (the instructions and confirmation are recorded in letters from Mr Rowe to Mr Mitchell and Mr Lynds dated 2

August 1988); (b) on about 11 August 1988, on the instructions of Mr Mitchell and Mr Lynds (see telephone note dated 9 August 1988 and letters from Mr Rowe to Mr Mitchell and Mr Lynds on 11 August 1988), Mr Rowe paid $100,000 to the Mitchell Group partnership account which had been opened at the National Bank (being a refund on the deposit Mr Mitchell had paid) and

$25,000 was paid to Michael Lynds (this was recorded in Fitzherbert Rowe’s trust account as paid to Jeffrey Lynds. In fact it was a payment to Michael Lynds relating to a bailment that

Michael Lynds was arranging for Robin Mitchell for the Mitchell Group. However this did not proceed because MCDC considered a bailment would leave it with insufficient security); (c) the balance ($11,000) was used for disbursements incurred by Fitzherbert Rowe in settling the Newbury Park matter. The payments of $14,000 and $25,000 were intended to be repaid in October 1988 once the MCDC financing was obtained and the NZRPT transaction settled.

notices required that the Mitchell Group remedy the failure to repay the loans of

$134,000 and $70,000 (the defaults) by paying those sums by 4 September 1988,⁴²failing which AMP would exercise its rights under two mortgages. Neither Mr Rowe nor Mr Mitchell told Mr Lynds about these notices.

[42] On 11 August 1988 Mr Sunderland, for MCDC, forwarded to Mr Rowe, for Mr Mitchell, a facility agreement, mortgage of lease, mortgage of the vendor units and instrument by way of security (IWS) for execution. Mr Rowe was continuing to correspond with AMP on the terms on which it would release its securities.⁴³The MCDC funds were made available to the Mitchell Group on 31 August 1988. Some earlier advances on those funds had also been paid.⁴⁴The NZRPT transaction was also settled around this time.

[43] The lease payments for Newbury Park commenced in September 1988 although the lease was not yet finalised and Mr Rowe and/or Mr Mitchell were in contact with Mr Carpenter about this.⁴⁵As mentioned, it was envisaged the partnership between Mr Mitchell and Mr Lynds would involve cattle, horse training and a horse stud business. By this time Mr Mitchell had moved 1,100 cattle on to Newbury Park. It was intended this stock, once grown, would be sold with the

profits going to the partnership. In about October 1988 Mr Lynds transferred his horse training business to Newbury Park. He said he did so at Mr Mitchell’s request.

_{At this stage he still owned his Woodville property. There was a surge
in business}

⁴³On 4 August 1988 AMP advised it would discharge mortgage 678587.1 on payment of not less than $130,000 but the money would be received without prejudice to its rights under the Property Law Act notices. On 18 August 1988 Mr Rowe wrote to AMP about the terms on which AMP would release its securities and withdraw caveats to enable the sale of Kairanga to

NZRPT to settle. On 25 August 1988 AMP advised Mr Rowe that the amounts owing under the

two outstanding AMP loans now totalled $350,181.79 (an amount of $345,226 was referred to in the letter but a handwritten amendment was made because an additional sum of $4,955.79 was owing). It also appears that no reduction of the multi-currency facility had occurred, although it was intended that $450,000 would be paid in reduction of that facility. There are various handwritten notes of Mr Rowe, some of which appear to relate to this period, with how proceeds from the sale to NZRPT will be applied.

⁴⁴It appears that MCDC understood the earlier advances were to be held in Fitzherbert Rowe’s trust account and interest payments deducted from those funds. See MCDC letter to Mr Mitchell dated 22 December 1988.

from his clients over the next few months which covered the Newbury Park partnership expenses.

[44] On 4 October 1988 Mr Mitchell wrote to Mr Rowe advising he had prepared, on a preliminary basis, statements relating to: the MCDC advance, NZRPT, the Pahau Reserve sale⁴⁶, and a “statement of further funds required”. In this letter Mr Rowe:

(a) Referred to instructions from Mr Mitchell to pay $30,000 to the Mitchell Group partnership account with National Bank, and to pay from that account $14,920 to Elders Pastoral Ltd, $39,000 to the Newbury Park partnership,⁴⁷$20,000 for legal costs, and the balance to Wanganui Savings Bank.

$205,000 out of the proceeds from the Pahau Reserve and Kairanga transactions and there was “already a shortfall of funds” of $11,347.06 to meet this.

(c) Noted that Mr Mitchell intended to obtain further funds from National Bank to meet the shortfall, but considered that, because of the undertaking, it could not distribute the funds it held until a definite arrangement was in place with the National Bank.

(d) Advised that it should apply all the moneys it held to the reduction of the Wrightson account, and the further money the Mitchell Group required (for the matters referred to in (a) above and for the NZRPT development units) should be met from the further funding to be

⁴⁶From this sale, there were funds of $937,750 for the land, $347,500 for the plant and machinery and $6,922 in accrued interest.

⁴⁷The $39,000 payment was intended to be a refund of the $14,000 and $25,000 payments earlier made from the $150,000 Blessed Investment funds: see the narration on the statement of further funds required.

$108,960 to NZRPT for the development units, having already received $227,000 from NZRPT for improvements; and this would increase to $201,600 because of the expected cost of the total improvements.⁴⁹

(g) Noted the Mitchell Group may have paid these development costs from funds other than those received from NZRPT but Mr Rowe was “unaware of this” and so had included the funding of the development units in the statement of “further funds required”.

[45] This letter confirms that the restructuring did not clear the Mitchell Group’s existing liabilities⁵⁰and significant further funding was needed ($331,669.06), assuming there was no existing source of funding for the Kairanga development units and Mr Rowe was not aware of any such source. Additionally the Mitchell Group had borrowed $1.85 million from MCDC with MCDC holding securities over the Kairanga operation. At this point Mr Mitchell’s principal assets appear to have been the Kairanga operation, the Mitchell Group’s interest in Fairview,⁵¹a smaller Kairanga property⁵²(the AMP multi-currency loan was secured against these two properties), and his interest in the Newbury Park partnership. Mr and Mrs Mitchell

_{Kairanga. This was going to require further funding from MCDC within a
few short}

⁴⁸Note that, in addition to this shortfall, the AMP multi-currency facility was only to be reduced by

$450,000 which would leave a significant amount owing under that facility (it appears this was around $880,000), and the Mitchell Group would also owe $1,850,000 to MCDC.

⁴⁹The actual amount of this obligation became $252,000 possibly because of cost overruns in completing the cow shed.

⁵²Owned by Robgarry Farms Ltd. On 21 July 1989 this was sold to an independent purchaser (Patan Investments Ltd) for $215,000. Most of the sale proceeds went towards repaying the AMP multi-currency loan.

months of the original facility. On 18 November 1988, as had been envisaged as part of the Kairanga development, NZRPT commenced arrangements for the purchase of

38 hectares which adjoined the Kairanga property (the Robert block) which would be structured along similar lines as the existing arrangement between NZRPT and the Mitchell Group.⁵³

[47] The close off date for applications to MCDC for finance in the following year was 30 November 1988. Mr Mitchell did not, however, raise with MCDC the need for financing to continue with the Kairanga development by this date.⁵⁴Why he did not do so is unknown. What is known is that on 30 November 1988 the first instalment under the MCDC loan was due (an amount of $94,608.88) and the Mitchell Group failed to meet it. Mr Mitchell apparently had no way of meeting this first instalment except by way of further borrowing.

[48] Mr Mitchell approached the National Bank for funds with the support of MCDC. Specifically MCDC was willing to guarantee a Mitchell Group overdraft with the National Bank of up to $200,000 until 1 July 1989 (at which time this would be added to the loan to MCDC), to enable the Mitchell Group to meet the first

December 1988 the National Bank advised Mr Rowe that it had agreed to provide the Kairanga partnership an overdraft facility of $150,000. Mr Mitchell had offered security over stock (an IWS). The bank asked Mr Rowe to attend to completion of the security. Although the security over the stock had not been put in place at this stage, it seems that the overdraft facility was put in place which enabled the Mitchell

_{Group to pay the outstanding first loan instalment to MCDC on 28
December 1988.}

⁵³NZRPT was to pay 90 per cent of the current market value (90 per cent of $330,000) and the Mitchell Group was to pay the balance. The Mitchell Group was also to take up vendor units and pay the real estate fee. The Mitchell Group was to lease this property.

⁵⁴On 24 November 1988 Arthur Young advised MCDC that the value of the Mitchell Group’s assets which had been provided as security to MCDC (the lease of the Kairanga from NZRPT, plant and livestock and the NZRPT units) was $2,096,933. This is prior to the intended acquisition of the Hollows and Robert blocks.

⁵⁵See MCDC letters dated 5 and 22 December 1988. The 22 December 1988 letter to Mr Mitchell recording its understanding that Mr Mitchell was intending to obtain finance of $200,000 to

meet the outstanding first loan instalment (which facility MCDC had agreed to guarantee) and requesting that Mr Mitchell arrange this finance urgently which was due on 30 November 1988 and that default interest was to be charged. MCDC also asked for confirmation that Fitzherbert Rowe had deducted MCDC interest from the advances made before 31 August 1988 and advised that default interest was being charged on the outstanding first instalment.

[49] Alongside these events, on 6 December 1988 the lease from Mr Carpenter for Newbury Park was entered into. Mr Rowe paid $111,000 on behalf of Mr Mitchell and Mr Lynds to complete this settlement. The funds for this payment came from a payment of $20,000 from Mr Lynds (a further $20,000 was to be paid for his 50 per cent interest in the partnership once he had sold his residential property), a payment made by the Mitchell Group of $78,163 and other funds held by Fitzherbert Rowe.

Mr and Mrs Lynds were also making arrangements to sell their Woodville property.⁵⁶

[50] Undeterred by his 1988 financial issues, in January 1989 Mr Mitchell was looking into purchasing a stallion, Le Belvedere. The stallion was owned by Blessed Investments (the vendor of Newbury Park) and was being trained by Mr Lynds at Newbury Park from October 1988.⁵⁷Blessed Investments was in default of its obligations to its lender (Esanda) which held security over the horse.

[51] Mr Mitchell was apparently also intent on continuing with the Kairanga development – or at least had not indicated otherwise to NZRPT. On 13 January

1989 NZRPT’s solicitors advised Mr Rowe that, after some delay, the agreement to purchase the Robert block had been entered into. The agreement to purchase the Robert block was conditional on the lease agreement being entered into. An agreement for the Mitchell Group to lease the property was provided and the obligation on the Mitchell Group to contribute to the purchase price was noted.

[52] At this time the Mitchell Group was required to make payment to NZRPT for development units but was unable to do so.⁵⁸On 14 January 1989 Mr Mitchell sent NZRPT a National Bank (Mitchell Group Farm account) cheque post-dated 3

⁵⁶It is not clear whether an agreement to sell their property was entered into at this time.

Mr Lynds says he entered a contract to sell this property in December 1988. However, in a fax to Mr Rowe on 30 May 1989, Mrs Lynds provides details of the purchase agreement indicating it was not entered into until this later stage. Mr Rowe acted for Mr and Mrs Lynds on settlement of this agreement.

documentation”. However on 3 February 1989 Mr Mitchell telephoned NZRPT to tell them he had not yet organised financing, and if the post-dated cheque was banked it would “bounce”. NZRPT was “getting seriously concerned” by this. On

8 February 1989 NZRPT was also pressing Mr Rowe for a response regarding the lease for the Robert block.

[53] From 6 February 1989 to 14 April 1989 Mr Rowe was on sabbatical overseas. Before leaving, he dictated notes to Mr Roche providing information on work Mr Roche was to take over during his absence. This included obtaining the Mitchell Group’s and the Lynds’ signatures on the Newbury Park lease, and working with NZRPT on the lease of the Robert block. There was also a handwritten note from Mr Rowe to Mr Roche about the IWS for the National Bank (presumably referring to the 14 December 1988 National Bank letter). He said Mr Roche would need to check who owned the stock and chattels and “this matter is fairly urgent.”

[54] Mr Rowe had also dictated a letter, statements and an invoice for the dissolution of the Pahau Reserve partnership and the NZRPT transactions. These were sent to Mr Mitchell on 2 March 1989. The cover letter noted that most of the work had been completed but there remained outstanding matters regarding “the vendor’s units and the development aspects”. The invoice for NZRPT provides a

⁵⁹Amongst other things, it describes “attendances with Messrs Williams, of [NZRPT], and [Michael] Lynds in May 1988 concerning proposals and financial structure thereof relating to ratio of cash payment and issue of vendor units, ... lengthy attendances and consultations with [Mr Mitchell] concerning overall financial position and proposed financial structure, ... subsequent attendances concerning certain financial aspects of Agreements relative to vendor units, extensive attendances and communications in respect thereof, ... consultations concerning existing AMP Financial Corporation facility over Kairanga farm properties and other properties, attendances on receiving instructions as to proposed partial reduction and reduced security formulating proposal to AMP, ... receiving communications from AMP Finance NZ Limited concerning outstanding loans, numerous and lengthy attendances in respect thereof, communications to defer enforcement action, receiving various repayment statements and demands, receiving communications and numerous enquiries from Wrightson NMA Limited concerning payment of outstanding account, ... lengthy attendances on analysing needs for Application of proceeds in relation to existing securities, consultations concerning possible payment from Pahau property, various communications with Wrightsons and advising as to progress of transactions, ... receiving Property Law Act Notice from AMP Finance NZ Limited and further attendances concerning same, ... [and] lengthy attendances on computing vendor units to be provided as part of consideration.”

[55] On 2 March 1989 the next MCDC loan instalment was due and was not paid.⁶⁰Nor had the $252,000 owing to NZRPT for the development units been paid. On this date Mr Mitchell discussed with NZRPT that he would obtain funding from MCDC to enable NZRPT to present the post-dated cheque which it still held. NZRPT also sought further information about this from Mr Mitchell.⁶¹

[56] Despite the MCDC and NZRPT defaults Mr Mitchell was continuing his negotiations for the purchase of Le Belvedere. On 5 March 1989 he flew to Melbourne to discuss this purchase with Esanda.⁶²Esanda wanted NZD625,000 for the horse. Mr Lynds’ evidence was that he did not want to buy Le Belvedere. He had been training Le Belvedere for some time and knew the horse very well. His view was that Le Belvedere was not a racing horse. He considered the price was too expensive. He was also aware, as was Mr Mitchell, that there had been previous

[57] On 7 March 1989 a MCDC meeting took place. Mr Mitchell’s apology was recorded. At this meeting the MCDC Directors resolved to sign the heads of agreement for the proposed merger with Tui. They also resolved that the acceptable ratio of loan amount to security value would reduce from 66 per cent to 60 per cent in line with Tui’s lending policies. Three applications for advances from 1 June

1989 totalling $1,340,000 had been received. This included an application from the Mitchell Group. It was resolved that these applications “be approved subject to security being put in place.”

1989. On 8 March 1989 Mr and Mrs Mitchell went to the accountants at 1.30 pm “to sign some papers”. Mr Mitchell spent the afternoon (at the races) and evening (dinner) with Mr Lynds and others.⁶³At some point around this time Mr Mitchell

further $64,800 to take up units in the Hollows block (another adjoining property intended to be

occupied as part of Stage two of the development). The letter also noted that NZRPT had agreed to pay up to $420,000 for the dairy shed. It was still to distribute $40,000 and this would occur once the $252,000 cheque from Mr Mitchell had cleared.

⁶²_{Mrs Mitchell notes in her diary that Mr Mitchell left for
Australia that afternoon.}

says this arrangement was made without his knowledge.⁶⁴It seems Mr Mitchell arranged the overdraft so he could use it to meet outstanding Mitchell Group obligations.⁶⁵

[59] On 8 March 1989 Mr Roche received a letter from the National Bank notifying him that the bank had agreed to provide the Newbury Park partnership with a $200,000 overdraft. The bank noted the Newbury Park partnership had offered as security a First Charge Registered IWS over stock on two pieces of land which Mr Mitchell would describe to Mr Roche.

[60] Ms Harrex, a legal executive at Fitzherbert Rowe, prepared the IWS to be given by Newbury Park partnership on 8 March 1989. Based on Ms Harrex’s time records⁶⁶she thinks Mr and Mrs Mitchell executed this IWS on 9 March 1989.⁶⁷Ms Harrex also believes another IWS in the bank’s favour relating to the Kairanga partnership was executed at this time, as it made sense to execute both on the same day.⁶⁸

[61] The National Bank also decided to obtain guarantees for the Newbury Park facility. On 10 March 1989 it wrote to Mr Rowe asking him to arrange the execution by Mr and Mrs Mitchell and Mr and Mrs Lynds of a guarantee for the Newbury Park facility.⁶⁹The National Bank also obtained an updated net asset position of the

⁶⁴_{In September 2002 Mr Mitchell disputed that this was
without Mr Lynds’ knowledge.}

⁶⁵As discussed later, on 4 April 1989 a cheque for $175,000 was drawn on this account in favour of the Mitchell Group.

⁶⁶Six time units were recorded for “attendances” on 9 March 1989. There are other entries for 8

⁶⁷This is also consistent with a Fitzherbert Rowe note which refers to an appointment for “Thursday” at 11 am. Mrs Mitchell’s diary note also confirms she went to Mr Rowe’s office that day “to sign some papers.”

⁶⁸The livestock mortgaged to the bank related only to beef cattle and did not comprise any of the dairying herd which were the subject of the securities to MCDC.

⁶⁹Consistent with this Mrs Mitchell’s diary note for 10 March 1989 records that Mr Mitchell was

⁷⁰On 14 March 1989, Arthur Young (accountants for Mr Mitchell) provided to the National Bank a summary of the net asset position of the Mitchell Group. This included the NZRPT leases valued at $1,720,000. The estimated net asset position before National Bank indebtedness was said to be $2,120,356.

[62] Ms Harrex’s next time entries are on 14 and 15 March 1989.⁷¹Based on these entries she believes Mr and Mrs Lynds executed the IWS and the guarantee on

_{15 March 1989 as arranged by Mr Mitchell.}⁷²_{Mr
and Mrs Lynds dispute signing the}

documents on this day. They say they signed the documents, not aware of what they were signing at a later time.⁷³Ms Harrex is, however, certain that she only met Mr and Mrs Lynds once, and it was on 15 March 1989.⁷⁴

[63] In the event nothing turns on this dispute. Counsel for Mr Lynds is content for the Court to proceed on the basis that Ms Harrex’s evidence is likely to be correct. I do so, and consider it is more likely to be correct because it is consistent with the documents (which are likely to be more reliable than memory about something that occurred so long ago) and Mr Mitchell’s need to arrange the National Bank financing quickly.⁷⁵Regardless of when it was executed, Mr and Mrs Lynds were not advised that they should seek independent legal advice before executing the guarantee.⁷⁶

[64] In the meantime Mr Mitchell was progressing the purchase of Le Belvedere and obtaining finance for this. Michael Lynds was involved in these discussions. He

⁷¹Based on these entries she believes Mr Mitchell telephoned her on 14 March 1989 to tell her that Mr and Mrs Lynds would be coming into the office on 15 March 1989 to sign the IWS over Newbury Park and the guarantee.

⁷³Mrs Lynds’ evidence was that she only went into Fitzherbert Rowe’s offices once or twice which

occurred in 1990. She recalls meeting Ms Patchett (who later changed her name to Ms Harrex) when they were in the FMG building and Fitzherbert Rowe was there for that year. She says she signed the guarantee in the Newbury Park offices in June 1989. Mr Lynd says he signed the IWS in June 1989 at the Newbury Park offices, unaware of what he was signing, and the guarantee at the Fitzherbert Rowe offices sometime in October 1990.

⁷⁴She particularly recalled meeting them as her daughter was school friends with their daughter

(although the Lynds’ evidences is that this friendship was at a different time). She recalled the mood of the meeting was tense and Mr and Mrs Lynds seeming reluctant to be there. That recollection is consistent with Mr Lynds’ evidence that there was not supposed to have been an overdraft for the Newbury Park partnership, and Mr Mitchell had arranged it without his knowledge. It is also consistent with Mr Mitchell potentially having told Mr and Mrs Lynds about this on 9 March 1989. After the meeting at Fitzherbert Rowe on 9 March 1989 Mrs Mitchell’s diary note records that Mr Mitchell was in his home office with Mr and Mrs Lynds most of the day.

⁷⁵That is, Ms Harrex’s time records, the date of the IWSs (both are dated 15 March 1989), the note from the High Court recording they were received on 17 March 1989, the date of the guarantee, which is 15 March 1989, and Ms Harrex’s letter to the National Bank on 17 March 1989 advising that the two IWSs relating to the stock grazed on Newbury Park, Penshurst Road,

⁷⁶Mr Greenwood, an experienced practitioner, was called by the plaintiffs to give evidence. It was his view that Mr and Mrs Lynds should have been given this advice. The plaintiffs contended this breached the double employment rule. The defendants submitted this had not been pleaded and was out of time. The plaintiffs decided against relying on this as a breach of the double employment rule and instead relied on it only as part of the background narrative.

was asked by Mr Mitchell and Mr Lynds to assist with the initial loan application. He forwarded information to Pegasus including a Mitchell Group statement of position prepared by Mr Fenwick dated 14 March 1989.⁷⁷Duthie Whyte was acting for Pegasus in these negotiations. Mr Roche was instructed to act on behalf of Mr Mitchell and Mr Lynds on the purchase of Le Belvedere. In accordance with those instructions, on 22 March 1989, he wrote to Esanda with an offer to purchase either a half or full share of Le Belvedere.⁷⁸

March 1989 remained unpaid. By letter dated 22 March 1989 MCDC advised the Mitchell Group this was “very displeasing” and MCDC was financially affected by this. MCDC sought immediate payment of the instalment and requested the Mitchell Group ensure that future instalments were met on their due date.

[66] On around 4 April 1989 Mr Mitchell wrote a cheque for $175,000 to the Mitchell Group from the Newbury Park National Bank account putting this account into overdraft.⁷⁹Mr Lynds says he found out about this on 12 April 1989 when he saw the bank statement arrive in the post. He says he confronted Mr Mitchell that day. He says Mr Mitchell replied that this was a loan from the partnership to the Mitchell Group, it was his responsibility and the Lynds should not worry about it.⁸⁰

Consistent with this, there is a ledger entry which records a loan to the Mitchell

Group of $175,000.⁸¹Mr Lynds says he did not ask Mr Mitchell what it was for but understood that it was due to a short term cash problem.

⁷⁷Mr Fenwick’s statement of position showed a net asset position (excluding National Bank debt)

of $2,120,356. Michael Lynds recalls the initial discussions with Pegasus being for a loan of

⁷⁸The letter said that if a full share was to be purchased, AUD500,000 would be “top value” given that the current owners had already failed to syndicate the horse in Australia and New Zealand, thereby devaluing the horse.

⁷⁹_{This may have been 7 April 1989 as per the cash book
– but the exact date is not important.}

⁸⁰Mr Lynds says he believed that the cattle Mr Mitchell had moved onto Newbury Park would cover the overdraft facility and he would not personally be liable for the money as he had not signed an agreement with the bank or had any communication with the bank prior to the overdraft being granted.

⁸¹At this time the books were being done by Joanne Goss (Mr and Mrs Mitchell’s daughter). A

payment of $175,000 with a cheque number of 383853 is recorded as going to the Mitchell Group. Next to this it says “175,000 loan”. This is in different handwriting to the rest of the entries. The handwriting recording “175,000 loan” was the same handwriting recording the

$60,000 payment to Mr Mitchell as a loan (discussed later). Mr Lynds was asked about this in cross examination. He said that he had nothing to do with the cash book and Mr Mitchell must have instructed someone to change it.

[67] On 12 April 1989 there was an MCDC meeting for elections to determine who would be on the new combined board with Tui. Mr Mitchell was not elected.⁸²

On 19 April 1989 Mr Mitchell applied to MCDC for funding of $520,000 for Stage two of the development of Kairanga.⁸³This related to NZRPT’s purchase of the Robert block (39 hectares) and the Hollows block (14 hectares), to be leased and developed by the Mitchell Group in order to be farmed with the existing Kairanga property. Mr Mitchell acknowledged the application had been made late⁸⁴but said MCDC would have been aware of the plan to proceed with Stage two of the project this year. He said the details of Stage two were not known until a day or two ago,⁸⁵but negotiations were now finalised. He also said he could “manage with a guarantee if funds are not available” but with the securities MCDC held, the Mitchell Group was “unable” to obtain funds from any other source. Possibly, however, the late application for funds was at least partly because Mr Mitchell was in default of the MCDC loan and had managed to clear it only by using the Newbury Park partnership funds recently obtained from the National Bank.

[68] As Mr Lynds did not wish to buy Le Belvedere, he had been seeking quotes for other stallions. He found a stallion named Epidaurus for US$200,000. On 24

April 1989 he entered a contract to purchase Epidaurus from Narvick.⁸⁶On 28 April

_{account. This deposit appears to have come from an advance from a
syndicate.}⁸⁷

⁸²Mrs Mitchell’s diary noted that Mr Mitchell “missed out” on being elected, which was

⁸³The documents relating to the original MCDC advance refer to the prospect of additional land being purchased. Mr Sunderland believes there had been a discussion about a further extension to the loan to take place in the future. The loan facility contemplates “further advances ... at the discretion of the company”. There is nothing, however, confirming that MCDC agreed to

provide additional funding. However, the report of the 10 May 1989 Supplier Finance

Committee Meeting (considering Stage two financing) notes that “MCDC knew of the proposed

purchase of these properties from the commencement of negotiations”. At the 1 June 1989

Supplier Finance Committee meeting one member of the Committee considered MCDC was

⁸⁴MCDC’s policy was that all new applications for funds closed on 30 November the previous year.

⁸⁵_{It is not clear how accurate this statement was, at least
in relation to the Robert block.}

⁸⁷The Talking Point syndicate which is discussed later by the accountants who gave evidence about loss.

[69] Mr Mitchell still wanted to buy Le Belvedere. He continued to progress discussions with Pegasus to enable this purchase to proceed. Mr Lynds considered that buying two stallions with similar credentials to syndicate in the same limited market meant the horses would be competing with each other and this was too risky. However he says Mr Mitchell convinced him they should buy both horses on the basis that Mr Mitchell would take half of the shares (12 shares) in Le Belvedere and

[70] Mr Lynds’ evidence about this was challenged on the basis that Mr Mitchell had later denied any such agreement⁸⁹and because it was said to be unlikely. However I accept Mr Lynds’ evidence on this point – at least that Mr Mitchell led him to believe he would take these shares if need be, and could sell others, even though there may have been no binding commitment for him to do so. When Mr Mitchell denied there had been any such understanding he was in serious financial difficulty. Mr Mitchell’s conduct on various matters (such as arranging the Newbury Park National Bank overdraft and drawing on that for the Mitchell Group’s

benefit without prior discussion with Mr Lynds) raises real questions about how upfront he was with Mr Lynds.⁹⁰I also accept Mr Lynds’ evidence that it was not surprising to him that Mr Mitchell intended to take on the shares in Le Belvedere because it was normal practice for a stud master to get behind their horses, and Mr Mitchell wanted to be a stud master. Mr Lynds also remained under the illusion that Mr Mitchell was a successful businessman of financial substance.

[71] By late April 1989 Pegasus had provided oral approval for the loan. By this stage Mr Mitchell had increased the loan to $1.35 million in direct contact with Pegasus. Michael Lynds asked Mr Mitchell why the amount was increased. He said the additional funds were to be used to pay interest in advance and to purchase broodmares to support the new stallions. Pegasus sought information about the

_{Mitchell Group’s financial position. This included information
about the NZRPT}

⁸⁸Michael Lynds’ evidence was that Mr Mitchell informed him that he had 12 shares spoken for from his own personal contacts.

⁸⁹Mr and Mrs Mitchell denied the allegations in a letter to Mr Lynds dated 30 September 2002 which is referred to later.

⁹⁰Along similar lines, Mr Williamson gave evidence that he was effectively side-lined by Mr Mitchell. He was unaware of any difficulties with MCDC/Tui for funding. He was also unaware of the Pegasus facility until after it had been entered into. He was also unaware of the National Bank facility obtained for Newbury Park.

lease. On 28 April 1989 Mr Roche provided details of the Mitchell Group NZRPT lease to Pegasus. On 8 May 1989, at Michael Lynds’ request,⁹¹Arthur Young provided to Pegasus further details of the Mitchell Group’s assets and also referred to NZD886,485 owing under the AMP multi-currency loan.

[72] The Mitchell Group’s application for finance of $520,000 for Stage two was considered by MCDC’s Suppliers Finance Committee on 10 May 1989. The Committee considered the proposition appeared to be viable. It acknowledged MCDC was aware of the proposed purchase of the properties from the outset. It nevertheless recommended the application be declined because it fell outside MCDC’s lending policy on two grounds. First the application had been made late and the loan application represented 61 per cent of the security offered when the Tui/MCDC policy was not to lend where the value of the loan exceeded 60 per cent of the security value.

Your application for $520,000 to assist in financing this stage of the project has been considered by the Suppliers Finance Committee and also the Board of Directors of the Company. Unfortunately, your application falls outside our Lending Policy and we therefore advise that you should seek finance from an alternative source.

⁹¹Fitzherbert Rowe relied on this and similar evidence to submit that Michael Lynds had detailed knowledge of Mr Mitchell’s financial position and, as he accepted, was looking out for his brother. However I am not persuaded that Michael Lynds had a full knowledge of Mr Mitchell’s financial position. There is nothing to suggest he was aware of the AMP defaults which had led to the restructuring, nor of his difficulties in meeting the MCDC obligations. Michael Lynds had been involved in arranging Mr Mitchell’s AMP Financing and setting up the Pahau Reserve arrangement, so he was aware of these at the time they were created. He also provided notes for Mr Rowe about the NZRPT restructuring. This showed $1,194,000 surplus funds being available and did not indicate Mr Mitchell was experiencing financial difficulty. The lending this refers to is “mortgages” and “National Bank”. It is therefore unclear if it includes all of the Mitchell Group’s lending at the time. He was asked by MCDC to appraise Mr Mitchell’s finance application. He declined to do so due to the conflict of interest in Mr Mitchell being in partnership with Mr Lynds. In relation to the Pegasus loan, the financial information he had for this purpose came from Mr Fenwick’s valuation of 14 March 1989. This showed the Mitchell Group’s net asset position as $2,120,356 excluding National Bank indebtedness. The further information he received on 8 May 1989 and 11 May did not raise any concerns. He was aware of the $175,000 Mr Mitchell withdrew from the partnership. However, this was in line with what he considered the cattle capital arrangements to be. He heard of rumours that Mr Mitchell was having some financial difficulty with Tui after the stallion parade in spring 1989. This surprised him.

⁹²Mrs Mitchell’s diary notes record that Mr Mitchell is in Wellington at this time (10 to 19 May

The advice from our Legal Representative is that the securities currently held by [MCDC] will not impede borrowing against the securities offered to us in this application. Whilst this is contrary to your understanding of the situation, we have been advised that the securities can be set aside from those held by the Company, either by issuance of a letter to that effect or by registration of a Memorandum of Satisfaction of Charge.

The existing arrangement which is in place will continue, although we do consider it may be timely for you to consider refinancing your total project.

[74] Mr Sunderland accepts he was the “legal representative” referred to in this letter. He therefore accepts that between the date of the Stage two application (19 April 1989) and the 10 May 1989 letter he must have given advice to MCDC about the application. He did not, however, see the 10 May 1989 letter at the time and does not recall having any specific knowledge of this “declinature” letter.

[75] On 10 to 12 May 1989 communications with Pegasus were continuing. Pegasus received advice from Mr Rowe, via Arthur Young, that the Mitchell Group’s NZRPT lease was on commercial terms and could be sold at any time.⁹³It also received advice from Brian Sampson, a valuer for the Mitchell Group, that his valuation of the Mitchell Group’s NZRPT leases was $2,429,136.⁹⁴Pegasus sought clarification from Mr Sampson about his valuation. In response, Mr Sampson advised the leases were transferrable and the fair market value of the lessees interest (inclusive of the additional 53 hectares to be farmed)⁹⁵as part of a going concern were not less than $1,300,000.⁹⁶

[76] On 12 May 1989 the Mitchell Group entered into an agreement to sell the smaller Kairanga property (the Robgarry property) for $215,000. The sale proceeds

indicate that the $1,720,800 value (from Arthur Young) was “not unrealistic based on projected

financial returns which I can confirm as being realistic relative to past results from balance

[77] On 16 May 1989 Pegasus provided a written offer of finance for the two stallion purchases of AUD900,000 (NZD1.24 million).⁹⁸The term was for 60 months and required payment of AUD100,000 on settlement and then four annual payments of AUD320,455.21. The conditions included “No syndication of stallions without the written consent of Pegasus” and “Guarantees of all Companies of R Mitchell”.⁹⁹Mr Lynds does not recall any formal acceptance of the offer but assumes Mr Mitchell passed on their acceptance. His assumption is correct. Mr Mitchell sent a letter dated 16 May 1989 to Pegasus confirming the conditions were acceptable and adding “[b]oth myself (R F Mitchell) and J R Lynds will personally guarantee the loan”.¹⁰⁰

[78] On 19 May 1989 Esanda wrote to Mr Mitchell and Mr Lynds expressing concern about whether they would be in a position to settle the purchase of Le Belvedere on 25 May 1989 (the settlement date). It advised the deadline would not be extended and it had accepted another offer which would take effect at noon (Melbourne time) on that day if the purchase price had not been received in full.

[79] On 23 May 1989 Pegasus wrote to Mr Lynds and Mr Mitchell confirming it approved an advance of AUD400,000 for the purchase of Epidaurus. The documents were to be prepared by Duthie White (Pegasus’ solicitors). Funds were to be dispersed once signed documents were received. It is apparent that Mr Roche was informed of this around the same time. That is because, on that day, he contacted Pegasus seeking “urgently” the name of the solicitor at Duthie Whyte who would be preparing the loan documentation for Pegasus. Duthie Whyte provided the documents to Fitzherbert Rowe that same day. These included an IWS and a guarantee. Duthie White noted that under the IWS no ownership interest could pass

_{without Pegasus’ consent, and given the urgency Pegasus had
not yet had the}

⁹⁸NZD625,000 for Le Belvedere and NZD500,000 for Epidaurus (USD200,000 or AUD400,000)

⁹⁹An internal Pegasus document indicates the loan was agreed to because of the “financial strength of the applicants, particularly Mitchell and the fact that they are not financially reliant on the success of the stud”. The purchase price of the stallions was also said to be considerably lower than their valuations (AUD1,600,000). The reliance Pegasus placed on the Mitchell financial

position is consistent with Michael Lynds understanding that Jeffery Lynds did not provide

Pegasus with his financial information until sometime after the original offer was provided. The

_{Mitchell Group’s financial strength was the reason for Pegasus
providing the loan.}

¹⁰⁰It is unclear if the guarantee from Mr Lynds had been sought or was volunteered by Mr Mitchell but the latter seems more likely given the documents forwarded to Pegasus for signing did not seek this.

opportunity to consider the draft syndication agreement and should not be taken to have approved the terms of the proposed syndication. The urgency was presumably in response to pressure from Esanda.¹⁰¹

[80] Mr Roche does not have an independent recollection of the specific timing involved and is reliant on the available documentation to reconstruct what happened. Mr Rowe had returned from sabbatical by this stage.¹⁰²Mr Roche told him about the stallion transactions and asked him if he wanted to take over the matter. Mr Rowe told Mr Roche he should carry on with it. Mr Roche does recall that he was instructed at a relatively late stage of the transaction, with the parties already having

made the decision to purchase the two horses with financing from Pegasus. He considered his role at this point was limited to ensuring the documents were appropriately drafted from Newbury Park’s point of view, that the Mitchells and Lynds understood the effect of the transaction and documents they were signing, and to execute the physical transaction.

[81] On 25 May 1989 Mr and Mrs Lynds and Mr and Mrs Mitchell went to Fitzherbert Rowe’s offices to sign the loan documents necessary for the purchase of Le Belvedere to settle. They met with Mr Roche. Mr Lynds says that Mr Roche did not give any advice and joked to Mr Lynds to “come in and sign your life away”. This is not challenged by Mr Roche and I accept it may well have been said.¹⁰³Mr Roche says the only time he had any dealings with Mr Lynds personally was when Mr Lynds came into Fitzherbert Rowe offices to execute the loan documents.

¹⁰²He was on sabbatical from 6 February to 14 April 1989 and in Australia on business from 15 to

¹⁰³Mr Roche does not recall saying this at the time, but does recall Mr Lynds mentioning this to him at a party at some stage long after the event (before 2005), and also saying he had not realised just how true Mr Roche’s comment was.

(b) Deed of Indemnity and Guarantee from Robgarry Farms Ltd (a Mitchell entity). This was signed by Mr and Mrs Mitchell and had the company seal.¹⁰⁵

(c) Deed of Indemnity and Guarantee from Mr and Mrs Mitchell and Mr and Mrs Williamson.¹⁰⁶This was signed by Mr and Mrs Lynds although they were not named as a party to the Deed (and their signatures appear to have been crossed out)¹⁰⁷and not signed by Mr and Mrs Williamson.¹⁰⁸

(d) A certificate of title for each of Mr Lynds and Mr Mitchell declaring they are the owners of Le Belvedere and indemnifying Pegasus – these were also incorrectly signed.¹⁰⁹

$625,000 – signed by both Mr Mitchell and Mr Lynds. (f) A solicitor’s certificate – signed by Mr Roche.

[83] The errors in the execution of the documents are consistent with the urgency with which this transaction was being finalised. The Le Belvedere purchase did not, however, settle on 25 May 1989. That was because the New Zealand Racing Conference advised Duthie White, who in turn advised Esanda, that it was not in a position to confirm Esanda’s declaration of ownership. Esanda therefore advised it had no alternative but to extend the settlement date until this was resolved.

[84] Other Mitchell Group and Newbury Park matters were also progressing at this time. Specifically:

¹⁰⁵Mr Lynds says that Mrs Mitchell was not a director of Robgarry Farms and therefore should not have signed it. It should have been signed by either Mr or Mrs McDonnell as director and secretary respectively. Counsel for Mr Lynds pointed out in cross examination of Mr Roche that the seal must be affixed in the presence of either two directors or one director and the secretary. Ms Mitchell was neither a director nor the secretary.

¹⁰⁶Consistent with the letter from Pegasus that the guarantee was sought from the Mitchell Group, and had not been sought from Mr and Mrs Lynds.

¹⁰⁸It appears that Mr and Mrs Williamson later signed and faxed their copy back from the South Island. The wording in the final clause of the guarantee signed by them differs slightly from the one Mr and Mrs Mitchell signed.

¹⁰⁹Mr Lynds signed the one with Mr Mitchell’s name and Mr Mitchell signed the one in Mr Lynds’

(a) Mr Mitchell wrote to MCDC on 28 May 1989 replying to a request for information. He provided valuations of the Hollows and Robert blocks (to be purchased),¹¹⁰the value of the existing blocks, the additional NZRPT units required, stock details and development required and an updated budget.

(b) On 29 May 1989 the National Bank wrote to Ms Harrex asking when it could expect to receive the guarantees for the Kairanga partnership and Newbury Park.¹¹¹

[85] While the Le Belvedere settlement was delayed, settlement of the Epidaurus purchase was progressing. On Tuesday 30 May 1989 Duthie Whyte faxed a letter to Narvick stating “we expect to hold funds tomorrow (31^stMay) and to be able settle [the purchase of Epidaurus] by sending the funds to your bank ...”. The letter also set out various documents Duthie Whyte would need to sight prior to settlement.¹¹³

On the same day Duthie Whyte faxed a letter to Mr Roche enclosing the Epidaurus security documents and the letter to Narvick. The letter said:

1. We will fax you the preliminary documents this afternoon and courier them to you for execution tomorrow morning.

2. Upon receipt of your certificate we will arrange for disbursement of funds on Tuesday. (Emphasis added.)

[86] Duthie Whyte also advised that it preferred to make the payment directly to

Narvick. (It appears that earlier it had been envisaged the funds would be provided to Fitzherbert Rowe.) An authority was enclosed for this to occur. The letter also

¹¹⁰_{The Hollows block was valued at $126,000 and the Robert
block was valued at $360,000.}

¹¹¹Ms Harrex’s evidence was that the guarantees were not sent at the time they were signed as

Fitzherbert Rowe had not received the letter of distraint relating to what security was given. The

¹¹²She noted the purchase price was $205,000, a deposit of $8,000 “is required on signing” and

¹¹³A registration document, a transfer of Epidaurus to Pegasus, an invoice, a statement that the existing owner was not subject to any encumbrance etc, an undertaking to complete o wnership papers on receipt of funds.

said execution of an IWS would be arranged immediately prior to Epidaurus’ flight

[87] The next morning, Wednesday 31 May 1989, the documents for Epidaurus were signed. The documents signed were as follows:¹¹⁴

(a) Deed of indemnity and Guarantee from Robgarry Farms Ltd (a Mitchell entity) – signed by Mr and Mrs Mitchell with the company seal.¹¹⁵

(b) Deed of indemnity and Guarantee from Mr and Mrs Mitchell and Mr and Mrs Williamson. Once again this was signed by Mr and Mrs Lynds although they were not named as parties to the Deed, as well as the Mitchells, and the Lynds signatures appear to have been crossed out.

(d) Lease documents for Epidaurus signed by Mr Mitchell and Mr Lynds. (e) Mr Roche’s solicitor’s certificate.

[89] The next day, 1 June 1989, the Mitchell Group application for Stage two finance was to be considered by MCDC/Tui. Mr Rowe says that prior to the morning of 1 June 1989 he was not aware of the correspondence between MCDC and Mr Mitchell regarding the Stage two finance. He recalls Mr Mitchell had mentioned that MCDC was seeking further information in connection with Stage two

_{and that he was in the course of providing the requested information.
However, he}

¹¹⁴Mr Lynds says that Mr Mitchell was taken into a separate room at Fitzherbert Rowe while they were there to sign the documents. He says that Mr Mitchell later told him that he had taken his Tui Finance application to Fitzherbert Rowe on that day. He assumes they went into a separate room to discuss this. However that is speculative and I therefore disregard this aspect of his evidence.

¹¹⁶As at 31 May 1989 Newbury Park’s overdraft with the National Bank stood at $202,175.48.

does not believe that Mr Mitchell provided any more detail than this at that time. He says the first he knew about there being a potential issue with the Stage two finance was when he received a call from Mr Mitchell on the morning of 1 June 1989.

[90] In this conversation, Mr Rowe recalls that Mr Mitchell said he was scheduled to meet with the Tui Finance Committee that afternoon. He explained that the meeting was to discuss whether the proposed drawdown of Stage two funding should take place. He asked Mr Rowe to attend the meeting. Mr Rowe recalls feeling somewhat inconvenienced at the need to attend this meeting at such short notice and without proper time to review the matter. However, he attended the meeting as Mr Mitchell said the matter was urgent. I consider Mr Rowe understood from the short

[91] The Tui minutes record the meeting commenced at 1.15 pm and Mr Mitchell, his lawyer and possibly his accountant would join the meeting at 1.30 pm. It is apparent that at the outset the Committee members were, at best, interested only in providing short time finance if necessary. The following was noted:

There are a number of issues which are required to be answered and given that satisfactory answers are received, then finance for short term (say six to nine months) should be made available. Such advance would be conditional upon Mitchell’s refinancing the total advances made by Tui Milk Products.

Mr Reed raised the issues of instalment payments being late and questioned the status of other investments of Mitchell and the worst case scenario if the Company declines to advance the additional monies to Mitchell.

[92] Following this discussion the minutes record that Mr Mitchell, Mr Rowe and Tui’s legal representative, Mr Smith,¹¹⁸joined the meeting at 1.45 pm. The following matters were discussed:

(a) Tui explained it had concerns that the $200,000 overdraft Tui had guaranteed, which was to be converted to an advance from 1 July

¹¹⁷Mr Rowe believes he told Mr Mitchell that MCDC had committed to Stage two funding when the original loan was set up. The Mitchell Group had proceeded with the expansion of the Kairanga farming operation in good faith on the basis of having certainty of funding to complete the project. He believes he was asked to attend the meeting because of these comments. However it is unclear with the passage of time how accurate Mr Rowe’s recollection about this is. In particular, it may have been Mr Mitchell who told Mr Rowe that this was the position, and he wanted Mr Rowe there to convey this on his behalf. What is clear is that Mr Mitchell appreciated the situation was serious and therefore wanted Mr Rowe at the meeting.

1989, had not been included in the finance costs. It also had concerns about whether the rate of return was reasonable and about the budget.

(b) Tui raised the possibility of refinancing the arrangement. Mr Mitchell said he was reluctant to look elsewhere because of the $20,000 establishment costs.

(c) Tui said it had been a condition of the overdraft guarantee that any surplus funds from the Pahau Reserve sale were to be applied as a first priority to MCDC. Mr Mitchell advised there had been no surplus funds from that sale.

(d) Mr Mitchell said Kairanga had been set up from the outset as an on- going development and if he had known Tui were not going to advance the Stage two funding he would not have proceeded with obtaining MCDC finance.

(f) Tui noted that the first two instalments under the MCDC loan were paid late and Mr Mitchell needed to honour his side of the arrangement.

Involvement by the Mitchell Group in other investments, particularly Newbury Park, was raised by Mr Whitelock. Mr Mitchell summarised the Mitchell Group involvement in that Company. Mr Rowe reported that no assets had been realised to his knowledge or funds invested elsewhere at the expense of repaying the Dairy Company.

Mr Brown expressed his appreciation for the frankness in which Mr Mitchell discussed the Newbury Park operations.¹¹⁹

¹¹⁹It is unclear from this note whether Mr Mitchell discussed the recent Pegasus financing of the stallions. Mr Brown’s view that Mr Mitchell had been frank does not, in my view, indicate this one way or the other. However, given the obvious reluctance by Tui to remain the financier for the Kairanga operation, the fact Mr Mitchell had taken on such a significant liability would have been highly material information. It was information likely to be recorded in the minutes and likely to have been a further reason for Tui to decline the Stage one funding. Mr Sunderland’s evidence was that, while he could not answer for what Tui would have done if aware of the

$1.35 million loan from Pegasus, he “would imagine that it would have fundamentally affected their determination at that stage”. He considered it would have negatively impacted on Tui’s future security position. I consider it more likely than not that Mr Mitchell did not disclose to Tui the $1.35 million Pegasus loan which had just been entered into.

In view of the fact that [Tui] may have a different policy than that which [MCDC] had in relation to supplier finance, refinancing of the project should be addressed in the next six to nine months. Mr Mitchell considered there would be a considerable amount of work to do in which to arrange a refinancing of the project and that if he was given two to three years to get the project fully established then the proposal would become a more attractive proposition. Mr Whitelock advised that the length of time would not be available.

[95] Mr Rowe then retired from the meeting and Mr Mitchell left for the next part of the meeting. One Committee member considered Tui was changing the rules after the deal had been set up. Another considered the best option was for Tui to get out of the deal. After this discussion, the minutes record:

The meeting adjourned in order that the telephone discussion could take place with Mr P.J. Sunderland. Mr Sunderland advised that we should be looking at a total package of $2.5 million, not a further advance of $700,000. A rational decision should not be made without assessment of the securities, i.e. valuation of Property Trust units, valuation report on land, revaluation of lease based on term of lease. Vendor units were originally only a minor aspect of the securities and we should call on Arthur Young or Touche Ross to undertake a review. This could take fourteen days. Confirmation of the rule of thumb valuation of 90% of the land and improvements value for the lease should be sought. The Facility Agreement should be reviewed in total.

Mr Smith outlined the procedure which the Company wished to follow prior to committing any further funds. The request to be treated as an application for $2.5 million, i.e. not an advance of a further $700,000. A fourteen day time period was sought in which to undertake a review of the:

Finance was agreed to in principle, subject to the review being favourable and supporting such. There is a preference to review the current Loan Facility Agreement and this would be carried out in this fourteen day period. The term would be subject to a twelve month period with the Company having the option to roll the Facility over for a further twelve months. Some other clauses may also require reviewing.

Mr Mitchell questioned why the need to undertake a revaluation. Mr Trotter advised that Mr Sunderland had recommended the revaluation and that the Company could not ignore such. Mr Mitchell should discuss the matter with Mr Rowe and then Mr Sunderland.

Mr Mitchell advised that Rural Property Trust has settled with Robert. He does not know what action the Rural Property have over his late settlement with them.

The company will engage a firm to undertake the review of the securities offered in total. A meeting will be called once this has been received.

[98] It seems that after the meeting Mr Rowe had a discussion with Mr Mitchell about the situation. He made an undated file note which said:¹²⁰

Early March spoke with Harry Brown, Chairman of Finance Committee. He indicated that there had been some opposition because of later instalments but that ~~they had overcome these~~ because all up to date with penalty [interest paid] & initial stages of big project the funding was approved. This would have been after the [Board] meeting of 7^th/3.

~~HB said that as far as old Board was concerned the matter was OK but were~~ ~~concerned about~~ [end of note].

[99] The contents of this note suggest that Mr Rowe did not know prior to 1 June

1989 about the 11 May 1989 letter declining the Stage two loan. Mr Rowe also received a full briefing of the outcome of the meeting via an undated memorandum from Mr Sunderland, following a briefing from Mr Smith, which was as follows:

Subject in all things to the final confirmation by the Board of Directors of Tui Milk, I am advised that the company is prepared to offer to the Mitchell Group a further advance of $700,000 subject to and conditional upon the following conditions being fulfilled within the next 14 days (ie by 15 June

(a) The company reviewing the total security package (that is the existing securities in the proposed further securities) to determine whether the total security package comes within its lending policies and in particular,

¹²⁰Mr Rowe says that note was made after the 1 June 1989 meeting. He relies on the fact that the

note talks in the past tense. It says that the merger “took place” on 1 June 1989.

obtaining valuations of the following in all respects satisfactory to the company –

(b) The company reviewing the terms of the current Facility Agreement and the Mitchell Group accepting any proposed changes (and here it is contemplated in particular that the company may require the terms of the facility to be reduced to a 12 month term with rollovers of all or part of the facility at the option of the company and also perhaps making provision for the right of the company to review the interest margin which is additional to the bill rate as defined).

[100] Mr Sunderland noted that from this advance $200,000 would be used to repay the MCDC guarantee to the bank. He also asked Mr Rowe to provide him with all the MCDC security documents.

[101] Therefore, at this stage the $700,000 was agreed in principle subject to the outcome of the review. The review included the whole facility which might be reduced to a 12 month term.

[102] Tui’s financial controller, Mr Reed, was unhappy with the prospect of any further advance being made to Mr Mitchell and he anticipated the Mitchell Group security review would be unfavourable. He set out his views in an internal memorandum dated 2 June 1989.¹²¹The Mitchell Group’s next MCDC/Tui quarterly loan instalment was due that day. It was not met. Also on 2 June 1989 Mr Mitchell received a note from NZRPT setting out the amount he owed to it. The note advised

¹²¹He said the “whole situation of this loan, is particularly disturbing” especially when the Executives were opposed to further advances which the directors subsequently approved. He considered Tui was in a situation where it would have to approve it, providing the security was satisfactory. However he considered the security was highly questionable and he was expecting the report on this to be unfavourable. He noted Mr Mitchell had been 30 days late with each loan instalment so far. He wanted Mr Sunderland to provide definite advice on the value of the security but Mr Sunderland did not see that as part of his role.

[103] Alongside these events, the settlement of the purchases of Le Belvedere and Epidaurus was proceeding. There is no clear evidence of when the purchase of Epidaurus settled. Fitzherbert Rowe’s file does not record this. Neither side has any definite recollection of this. Based on Mr Roche’s reconstruction of the documents, Fitzherbert Rowe contend it occurred on 1 June, or at the latest 2 June 1988.¹²²

[104] Mr Lynds suggests settlement took place on 6 June 1989. He refers to the 30

May 1989 letter from Duthie Whyte which referred to settlement to take place on “Tuesday”. As 30 May 1989 was a Tuesday this must have meant 6 June 1989 (the following Tuesday). Mr Roche suggests the reference to Tuesday must have been in error, and that Duthie Whyte meant Thursday. In my view Mr Roche’s view relies

[105] Moreover, settlement taking place on 6 (or 7) June 1989 is consistent with the flow of the funds as between Pegasus and Newbury Park/Fitzherbert Rowe. The first loan instalment was payable to Pegasus on settlement from funds advanced by Pegasus. The Newbury Park National Bank statement shows that Pegasus credited

$201,555 to Newbury Park on 7 June 1989. This was the balance of funds borrowed after the amounts needed to purchase the two stallions. Newbury Park then sent a

_{cheque to Fitzherbert Rowe for $112,500, the first interest payment, by
overnight}

¹²²Mr Roche notes that once he faxed his certificate on 31 May “Duthie Whyte were in all respects ready to proceed with settlement from Newbury Park’s and Pegasus’ side, and there would have been no reason for them to hold off from doing so assuming that Narvick had promptly sent the documents listed in Duthie Whyte’s letter” and Narvick would have had no reason not to do so. He also refers to toll call records which show calls from Mr Roche to Duthie Whyte on 31 May,

1 and 2 June 1989. Mr Roche believes the latest of these was likely to be Duthie Whyte confirming that settlement had been completed. The record of these toll calls, however, does not exclude the possibility that Duthie Whyte also called at a later date to confirm the settlement had taken place. Mr Roche accepts that his evidence is not conclusive on when settlement took place.

¹²³While Duthie Whyte may have been ready to settle on 31 May 1989, this does not mean that is when settlement occurred. Duthie Whyte needed to sight documents from Narvick before settlement occurred. There is no evidence that Narvick was in a position to provide those

documents on 2 June 1989. The settlement of Le Belvedere had been postponed because of a

delay in providing an ownership declaration. For all anyone knows, a similar delay may have occurred with Epidaurus. While it was envisaged that settlement would occur 30 days after the deposit was paid (which would have been 30 May 1989) there is no evidence to suggest that Narvick was pushing for a particular settlement date (unlike Esanda, the vendor of Le Belvedere).

post on 7 June. Fitzherbert Rowe paid that same amount into Duthie Whyte’s bank account on 8 June 1989.¹²⁴This was in response to a letter that day to Mr Roche from Duthie Whyte which stated:¹²⁵

We also note you hold funds for us in respect of the Epidaurus advance¹²⁶and would be grateful if you would let us have these by return.

We also note in respect of [Epidaurus] that the first lease payment was due at settlement and we would be grateful if you would arrange to have your clients urgently put in funds for that amount.

[106] There is clear evidence,¹²⁷and the parties are agreed that, settlement of Le Belvedere took place on 8 June 1989.¹²⁸On this same day the stallion syndication was announced. It received much publicity on TV, radio and print.

[107] Meanwhile the review of Tui’s securities was underway. Coopers & Lybrand were hired to carry out the review on the Mitchell Group for Tui. On 7 June 1989

Mr Booth (of Coopers & Lybrand) wrote to Tui. The letter noted the securities Tui held were the mortgages over the leases, the mortgages over the vendor units, and the first instrument by way of security over the livestock and plant. As to the NZRPT leases, Coopers & Lybrand stated:

The value, if any, of a lease may be regarded as the amount which a willing buyer is prepared to pay to take over a lease from an existing tenant who is a

¹²⁴Mr Roche, in a fax to Duthie Whyte, incorrectly stated this “represents interest and fees [as] discussed”. He says, what he meant was that this amount represented Newbury Park’s calculation of the combined total of the first interest instalment due on each stallion loan plus Duthie Whyte’s legal costs.

¹²⁵Mr Roche recognises a question may arise as to why Duthie Whyte would wait until 8 June to pursue payments due to be made on Epidaurus’ settlement (1 June 1989 according to his evidence). He says this is because of the cash to be advanced from the Pegasus loan. Both Pegasus and Duthie Whyte would have appreciated that Mr Mitchell and Mr Lynds would wish to receive the direct cash portion of the Pegasus loan before making their first payment. Also,

Pegasus would not wish to pay the direct cash portion of the advance until the Epidaurus sale

was completed and there was security available. However this explanation is equally consistent with Epidaurus having settled on 6 or 7 June 1989 (not 1 or 2 June 1989).

¹²⁶Mr Roche describes this as being an advance made by means of Pegasus, through its agents,

paying over the required balance of the stallion’s purchase price to the vendor’s agent. That seems contrary to the words of the letter which are about an advance for Pegasus funds for Epidaurus that were held by Fitzherbert Rowe.

¹²⁷This is consistent with a fax from Esanda to Mr Mitchell on 7 June 1989 that settlement was to take place on 8 June 1989. There is also an invoice dated 8 June 1989 for this purchase.

¹²⁸Esanda had received the clearance it had been waiting for from the New Zealand Racing

willing seller of the lease. This is the relevant measure of value for the purpose of a lender who has lent money on the value of security afforded by a mortgage over a lease of land. It represents the amount which the lender stands to realise to recover his money lent, by disposing of the lease following default by the borrower.

We do not purport to be valuers of rural land or of leases of such land. Nevertheless, in general terms we consider that a lease on the terms set out above, which requires rentals to be regularly reviewed to reflect current market values on a continuing basis, commands little or no premium. Nor does the additional right of first refusal to purchase the property where the purchase price would be at market value at the time of the purchase, represent any additional economic value which necessarily would warrant a premium of any kind.

In summary then, we conclude that mortgages over leases and related documentation may provide you with a means of taking over the farming operations and maintaining milk supply to your company in the event of defaults by Mitchell Group. However, in our opinion leases on the general terms set out above are of little, if any value, for the purposes of potential realisation to recover amounts owing to your company by Mitchell Group in the event of their default under your loan agreement arrangements with them.

We do not consider it appropriate to attribute some value to these units, other than the current redemption value of 92.5 cents per unit. Instead we suggest that it is appropriate to comment on the extent to which a prudent investor might lend against such security. In this regard, in view of the equity investment nature of the units in New Zealand Rural Property Trust and the restriction of up to five years upon the redemption of the vendor units held by the Mitchell Group, we submit that, whereas a prudent investor seeking a sound investment might be prepared to lend on the security of up to 66% of the value of sound freehold property, that the same prudent investor might be prepared to lend on the security of only 50% or less of the 92.5 cents per unit current redemption value of an investment such as vendor units in New Zealand Rural Property Trust.

[109] Therefore, the outcome of the review by Coopers & Lybrand was that the leases had no value, the NZRPT units were valued at 92.5 cents per unit and a prudent investor may be prepared to lend 50 per cent or less of this security value as opposed to the 66 per cent MCDC had been prepared to lend on sound freehold property.

[110] Settlement of the Lynds’ Woodville property occurred on 14 June 1989. Around 20 June 1989 Fitzherbert Rowe disbursed the proceeds of the sale to Mr

Lynds. He used $20,000 of the money to pay the remaining balance of his capital commitment. He paid $26,000 directly to Rob McAnulty as Mr Mitchell had personally pledged to pay him commission on the sale of Le Belvedere. This was structured as an unsecured loan to Mr Mitchell.¹²⁹

[111] Also on 14 June 1989 there was a meeting between Mr Sunderland, Mr Booth and two representatives from Tui (Mr Bailey and Mr Mollet). Coopers & Lybrand’s advice was accepted. Mr Sunderland’s advice that Tui must look at this as a proposition for $2.52 million, and not just an additional advance of $500,000, was also accepted. It was noted that, on this basis, there was “insufficient security for the additional amount, let alone the question of whether it is adequate for the existing loan”. It was also noted that approval for the loan was initially “industry milk driven, and not security driven.” A number of action points were noted. They included declining the application for further money until the total package was resolved and carrying out research to see whether MCDC had given any guarantees to Mr Mitchell.

[112] After the meeting Messrs Bailey, Mollet and Reed from Tui had a discussion with Mr Gartnell (a solicitor from Macalister Mazengarb). They discussed “how can we get out of the current loan?” They noted they could “issue demand for loan against Mitchell” and that NZRPT “will also be issuing a default summons”. In accordance with that discussion, Mr Gartnell, on behalf of Tui, issued to the Mitchell Group a Property Law Act default notice under cover of a letter dated 14 June

¹²⁹Mr Lynds paid another $20,000 to Mr Mitchell as his contribution to a joint investment in a

¹³⁰According to Mrs Mitchell’s diary note, on 15 June 1989 Mr Mitchell was “busy all day with office work” and “had to go and see his solicitor [in the] afternoon”. The following day, her diary note says, Mr Mitchell was “in [the] office most of the day” and Michael Lynds was there in the afternoon, and had dinner and stayed the night. He left at about 10.30 am the next day. Michael Lynds was, however, unaware of the Property Law Act notices and that Tui funding for Stage two was not going to be provided.

[113] Also on 14 June 1989 Mr Mitchell withdrew $60,000 from the Newbury Park National Bank account. He used this to pay $60,000 to Tui towards remedying the Mitchell Group’s default. This was recorded in Newbury Park’s books as a “loan” to the Mitchell Group.¹³¹This left approximately $35,000 outstanding to Tui.

[114] By letter dated 19 June 1989 Tui advised Mr Rowe that a meeting was to take place on 21 June 1989. This letter referred to Tui having declined, at this stage, the further loan of $520,000, due to the history of slow-payment, the default in the June

1989 payment, and Tui’s extreme concern having led to the issue of the default notices. Tui was also said to be particularly concerned about its security for the existing loan. Tui said it was “important that at this stage we reassess the whole situation, and put it on a more commercial basis”. Tui sought further information about the Mitchell Group’s assets and liabilities, its disposal of assets over the last three years, and requested that Mr Mitchell “please detail your investment in Newbury Park and horses and the commitments associated with such”.

[115] The Mitchell Group paid a further $35,213.37 to Tui to settle its default on 20

[116] On 21 June 1989 Mr Mitchell was “at solicitors [at] 9 am” and then at MCDC for a meeting.¹³³The participants at the meeting included Mr Sunderland, Mr Rowe, Mr Mitchell and Mr Fenwick. The minutes of the 21 June 1989 Tui meeting record that the $95,000 paid after the default on 2 June 1989 were “treated as on account, or held in trust”. Further information was sought from Arthur Young and the Newbury Park operation was described as “a high risk one, depending very much on investors views of the value of the stallions and its service fees.”¹³⁴

[117] After the 21 June 1989 Tui meeting Mr Sunderland says he realised there was the potential for the interests of Tui and Mr Mitchell to differ. It was therefore

_{agreed that he would withdraw his involvement in the Mitchell
Group’s application}

¹³¹Similar to the $175,000 withdrawal discussed earlier, there is an issue about who recorded the

¹³²The amount in default was approximately $95,000 and it was settled by the $60,000 payment using the Newbury Park facility and this later payment. Mrs Mitchell’s diary note records that on 20 June 1989 Mr Mitchell “went into town early to go to accountants.”

¹³⁴On 22 June 1989, according to Mrs Mitchell’s diary note either she or Mr Mitchell “worked on books all morning as the accountant wanted them by afternoon.”

for Stage two funding, given Mr Rowe was acting for the Mitchell Group. No one at Fitzherbert Rowe considered whether Mr Lynds should be informed of these developments despite having acted for him just a few weeks earlier on the Pegasus transaction. This was even though, on 23 June 1989, Fitzherbert Rowe sent the Pegasus loan documents to Duthie Whyte after four reminder notices.

[118] Mr Bailey from Tui, who was present at the 21 June 1989 meeting, provided a report to the Tui directors on 27 June 1989. This recapped events and said the information provided at the 21 June 1989 meeting:

... did prove that the Mitchell Group is in serious financial difficulties, and should Tui Finance ever contemplate the advance of further monies then such a decision would be against all of the principles required of a Director under the Directors Liability clause.

[119] The report attached a summary of the Mitchell Groups financial position prepared by Mr Reed, a summary of the legal position and a report on discussions with the NZRPT by Mr Gartnell. A number of recommendations were made. These included appointing a small sub-committee with power to act should it be necessary and the appointment of Mr Pearson (described as Bob Pearson, ex Rural Bank, Masterton, as an appraiser for loans) to assess the position. It was also said it was “quite clear already that the Mitchell Group is straining under the weight of financial commitment”. More information was needed but then Tui “will need to act swiftly and decisively”. It is clear from this report that Tui was preparing to call up the loan.

$405,637 for the Stage one development.¹³⁵At this time Mr Sampson provided Mr Mitchell with a further valuation of the NZRPT leases. This was for $2,172,410. Mr Sampson explained this was his view of the “worth” of the leasee’s interest as part of the Mitchell Group going concern business. It was not intended to be an

_{indication of what the leasee’s interest might bring on the open
market as a “stand}

alone” entity.¹³⁶Arthur Young (Mr Fenwick) used this valuation in advising NZRPT

[122] On 31 July 1989 Mr Pearson’s report, prepared for the Tui Directors’ meeting on 2 August 1989, was sent to Tui’s CEO. The report concluded there was a shortfall in equity (liabilities exceeding assets) of $328,790,¹³⁸a deficit of $76,920 in debt servicing charges and the amount available for debt servicing, and a short-fall in security of $682,730. The report also noted that Mr Mitchell had approached an Auckland finance broker for a loan but this was “unlikely to eventuate”.¹³⁹

[123] In July and August 1989 NZRPT and Tui discussed the Mitchell Group’s position. As Mr Rowe summarised it, Tui’s position was that the Mitchell Group should transfer all of its interests in the Kairanga dairy farming operation and associated assets (including the NZRPT leases) to Tui in return for Tui and NZRPT releasing the Mitchell Group from all remaining liability. NZRPT’s view was that the Kairanga operation was sustainable in the long term which would enable the Mitchell Group to meet its obligations to both Tui and NZRPT. NZRPT favoured arrangements which would put substantial financial and management control of the farm operation into the hands of Tui and NZRPT but did not seek to exclude the

[124] The Mitchell Group was prepared to agree to arrangements which would enable Tui and NZRPT to monitor closely the trading and financial position of the Kairanga farm operation, as well as placing restrictions on personal drawings and

_{other outward transfers of funds. The Mitchell Group considered it
should have the}

¹³⁶Mr Sampson gave evidence that, at the time he gave his valuations, he was not aware of the Mitchell Group defaults and assumed the leases were to run for 30 years. He understood the Mitchell Group had an excellent track record of returns. He relied on information provided by Mr Mitchell and Mr Rowe.

¹³⁸Mr Pearson valued the NZRPT leases at $200,000. He noted “the Rural Property Trust have indicated that lessees interest could be worth up to 20% of market value which for the 205 ha

Tui has security over is $1.9 million. I have acknowledged this by placing a figure of $200,000

¹³⁹This loan was sought to cover the following: AMP ($590,000); General Finance ($70,400); Development Contingency ($120,000); and Costs and Working Capital ($19,600).

¹⁴⁰These are supported by the minutes of the meetings between NZRPT and Tui and the letter Tui sent to Mr Mitchell.

opportunity to demonstrate that it could service all of its obligations from its farming income. Therefore it was not willing to simply transfer all Kairanga assets to Tui.

[125] At around this time Tui had been withholding payment to the Mitchell Group for its milk supply and purporting to apply those proceeds to the principal outstanding under the loan. Mr Rowe says this affected the Mitchell Group’s ability to meet its other commitments. Mr Rowe wrote several letters to Mr Gartnell stating that the default had been remedied and withholding the milk proceeds was “oppressive” under the Credit Contracts Act 1981. Mr Mitchell was intending to

[126] The next Tui instalment was due on 6 September 1989. Mr Mitchell considered there had already been a substantial credit accrued towards this from the milk proceeds. Mr Rowe says Mr Mitchell paid what he considered to be the balance of $45,350. However, by letter dated 8 September 1989, Tui advised Mr Mitchell it was calling up the loan. It required the Mitchell Group to transfer its interests in the Kairanga operation to Tui. This was confirmed at a meeting between

Tui and the Mitchell Group on 26 September 1989.¹⁴²NZRPT was still, however,

endeavouring to negotiate with Tui a basis on which the Mitchell Group could retain its interest in Kairanga.¹⁴³

[127] At around the same time as these arrangements were taking place the Newbury Park partnership was endeavouring to sell shares in Le Belvedere and Epidaurus. The proposed syndication involved selling 24 shares in each horse to investors and using these funds to repay the money borrowed.¹⁴⁴Mr Lynds explained that the best time to sell shares in a breeding stallion is the horse breeding season

¹⁴²_{Mr Rowe was advised by Mr Gartnell of this by letter
dated 27 September 1989.}

and $444,000 (Le Belvedere). On 1 September 1989 they received their first payment for syndication of the shares. Mrs Mitchell deposited that payment into the National Bank account. This concerned Mr Lynds as the money was meant to be kept separate to pay Pegasus. Mr Lynds did not realise at this stage that they required Pegasus’ approval to syndicate the horses and that this had not been given.

[128] September 1989 was a very busy period with the horse training and stud business. There was a parade of the stallions and most of the influential national studs and buyers attended. Michael Lynds says there were some rumours circulating after the parade that Mr Mitchell was having some financial difficulties with Tui. Michael Lynds says he asked Mr Mitchell about the rumours. Mr Mitchell told him that he had missed a quarterly instalment to Tui as he intended to pay it by way of the Tui loan that had been approved but had not yet settled. He stated that he had made good the default payment and was due substantial funds for a deferred milk payment. He also said that with the MCDC/Tui merger there had been a changing of the guard and he felt that after a settling down period all would return to normal. Michael told Jeffrey Lynds about this default and that it was caused by Tui holding monies due for milk. I accept Michael Lynds’ evidence about this. Mr Mitchell’s positive spin on his issues with MCDC/Tui is consistent with Mr Mitchell’s modus

[129] Mr Mitchell was continuing to try and resolve the Mitchell Group’s financial difficulties. During this month he sold the Newbury Park cattle to Elders Pastoral Ltd despite them being encumbered to the National Bank. The cattle were moved off the property in November 1989.¹⁴⁶

[130] On 17 December 1989 Mr Mitchell went to the Gold Coast to secure a refinancing package for his farms. While he was away Mr Lynds studied the cash book and questioned him on his return. Mr Mitchell told Mr Lynds that he had visited a loan broker who was willing to refinance him. Mr Lynds also learned that the cattle proceeds had been used by Mr Mitchell to remedy defaults with Tui and NZRPT. Mr Mitchell projected earnings of $145,000 from the cattle trading but in the end only earned $25,000. When Mr Lynds asked Mr Mitchell why the cattle had

¹⁴⁵For example, entering into the agreement to purchase Newbury Park at the time of the issues with AMP, proceeding with a lease of Newbury Park when there was an opportunity to withdraw from that venture, not informing Mr Rowe of the 11 May 1989 letter at the time, wanting to purchase two stallions despite the outstanding obligations to NZRPT, and proceeding with the Pegasus loan for those purchases in the face of uncertainty about finance for the Stage two development.

¹⁴⁶Mr Lynds was concerned about this as he believed the cattle were Mr Mitchell’s capital contribution to the partnership. He asked for a cattle audit to be carried out by Ernst & Young (formerly Arthur Young). In February 1990 Mr Mitchell issued invoices showing Newbury Park purchasing the cattle from him.

[131] Mr Lynds realised that he could not trust Mr Mitchell. He instructed Ernst & Young to carry out an audit. He says this showed Mr Mitchell had recorded the

$60,000 he withdrew from Newbury Park on 14 June 1989 as a loan to the Mitchell Group. Mr Lynds began reviewing all the transactions Mr Mitchell made. He set up accounts at Fitzherbert Rowe to ensure that there were adequate cash reserves for syndication. Mr Lynds was asked by a client if Mr Mitchell was “finished” as he had heard this from a director of Tui. Mr Lynds had sympathy for Mr Mitchell as he believed that Tui was causing these problems.

[132] In December 1989 the Mitchell Group and Tui negotiated an agreement which enabled the Mitchell Group to remain in possession of Kairanga. The arrangements included that the MCDC loan repayments would be on an interest only basis until 30 June 1990.

[133] The syndication was not successful. By August 1990 there were 10 shares sold in Epidaurus and one share sold in Le Belvedere.¹⁴⁷Mr Lynds says he had focused on selling the Epidaurus shares as he believed Mr Mitchell intended to buy

12 shares in Le Belvedere and Epidaurus had the better credentials. Mr Lynds considers the reason for the failure was Mr Mitchell’s financial position. It was put to Mr Lynds that Le Belvedere was a bad investment as was shown by its earlier failed syndication. Mr Lynds explained that when it was syndicated earlier it arrived late into the season and was an ex-race horse. He says Le Belvedere ended up being a good breeding horse.

[134] The Mitchell Group’s position with Tui did not improve. Tui gave notice to take possession on 20 September 1990.¹⁴⁸Tui purported to enter the Kairanga property as mortgagee in possession under its securities. The ground for action was

_{stated as being a material change in the overall financial position of
the Kairanga}

¹⁴⁷Some earlier sales in Le Belvedere had transferred to Epidaurus. Ultimately out of the 48 shares available in the two horses only 21 were sold. Sixteen shares were sold in Epidaurus ($440,000) and five in Le Belvedere ($92,500).

¹⁴⁸Mr Mitchell had regular monthly meetings with Tui. The draft accounts, prepared on 25 July

1990 for the meeting, showed a negative cash balance from the Kairanga operations. However, this did not take into account the Fairview operations which were performing well. Mr Mitchell understood he had until 30 September 1990 to provide the group accounts.

partnership. The Kairanga partnership took the view that Tui’s entry into possession was without proper justification or authority. While Tui had the draft financial information in relation to the Kairanga operation, it did not have the overall financial position and therefore could not correctly assess the situation. The Mitchell Group prepared an application to the High Court. Negotiations and Court proceedings continued over the next two and a half years.

[135] In October/November 1990 the National Bank froze Newbury Park’s trading account.¹⁴⁹There were negotiations with the bank to enable the business to keep trading. In December 1990 Mr Lynds moved onto the Newbury Park property. Mr Mitchell left the property and ceased to have any active involvement in the running of Newbury Park. No formal termination agreement was entered.

[136] The Mitchell Group’s hearing against Tui began in February 1992.¹⁵⁰Mr Lynds says he attended for a few days of the hearing but did not follow the evidence. Mr Mitchell told Mr Lynds that he was not in default and that the issues were Tui’s fault. He said that when he won the case he would repay the $200,000 he took from the partnership. So Mr Lynds supported him in the case. Michael Lynds also says that Mr Mitchell had agreed to repay the partnership $200,000.¹⁵¹

[137] Pegasus had been put into statutory administration in late 1990. At this time

_{Newbury Park was in default of its obligations under the Pegasus loan.
Mr Lynds}

¹⁴⁹The partnership received default notices from the National Bank. The bank advised Mr Lynds to find another bank. The amount owing at this stage was $185,000.

¹⁵⁰This took place over four days from 17 to 20 February 1992. It was then adjourned to allow the parties to put the evidence of future witnesses in writing and exchange these briefs. The next Court document I have been provided is from 16 November 1992. It is a memorandum of counsel for Tui advising it was ready to proceed, however, due to additional material received from the plaintiffs, it would now require more time. Mr Lynds explains: “the Court case was

adjourned in November 1992 for further discovery on Newbury Park” and “the 1992 court case

came to an immediate halt as Tui wanted full disclosure of the Mitchell Group’s financial position up to 1988”. He says that in April 1993 Mr Mitchell sold his Fairview property and used the funds to reduce his debt to Tui and be allowed back on the Kairanga property. This settlement was advised to NZRPT on 27 April 1993.

¹⁵¹He says this occurred at a meeting at his house in Raumati in August 1991.

entered negotiations with Pegasus. As part of these negotiations Newbury Racing and Breeding Ltd (NRBL) was incorporated in May 1992. The assets and liabilities of Newbury Park were transferred to NRBL on 1 July 1992. Additional capital was required. Michael Lynds and Brendan Meo agreed to invest $100,000 each in NRBL. They each took a 25 per cent shareholding in the business and Mr Lynds held a 50 per cent shareholding. NRBL made two payments of $100,000 to Pegasus,

[138] NRBL remained in default with Pegasus until 1993 when the loan was refinanced as a result of the negotiations. $821,579¹⁵³of unpaid interest was written off as part of the restructure. Mr Lynds says this was due to Pegasus’ financial problems. He says Pegasus was taken over by the State Bank of Australia and the restructure was entered into in order to clear its books. In return for a $500,000 cash injection, securities of the earlier sold stallion shares would be released, interest waived and the remaining balance would continue to be secured as it was in 1989.

[139] On 23 April 1993 Tui and the Mitchell Group entered a settlement agreement. The Mitchell Group agreed to proceed with the sale of the Fairview farm, and all relevant stock and plant, and if it paid Tui $700,000, Tui would release its second mortgage over Fairview. The Mitchell Group would then be entitled to resume possession of the Kairanga leases from 1 June 1993 subject to renewal by NZRPT. The balance of the Tui loan would be repaid over a 10 year term commencing 1 June

1993. On completion of these steps all claims and issues between the parties were deemed to be settled.

[140] The sale of Fairview proceeded and $700,000 was paid to Tui. However, Tui had failed to renew the leases when the initial three year term expired in 1991 and

¹⁵²Mr Mitchell agreed to assign the partnership’s interest in the stallions to NRBL and Pegasus so the title could be given to the syndicate investors. In exchange Mr Lynds agreed to seek Mr Mitchell’s removal from the Pegasus loan. However, as far as Pegasus was concerned, Mr Mitchell was one of the original borrowers and it would not release his personal liability. Therefore Mr Mitchell remained involved in the restructure. In March 1993 there was a further proposed resolution. It required an immediate payment of $200,000. When that was not paid, Pegasus did not release the title to the stallions.

¹⁵³As specified in Michael Lynds’ evidence. The initial Pegasus loan document states $774,336

NZRPT had taken the position that the Mitchell Group was not entitled to reinstate the leases. Proceedings were brought against NZRPT. Settlement was reached in

[141] In April 1994 NRBL failed to meet a payment to Pegasus. Mr Lynds attempted to get Mr Mitchell to honour the promise he says Mr Mitchell had made earlier to repay the partnership money withdrawn by the Mitchell Group. Mr Mitchell refused to do so. Eventually Mr Mitchell was able to get back onto the Kairanga farm. He then entered an agreement to help repay some of the Pegasus loan. Mr Meo loaned Mr Mitchell $100,000 to pay Pegasus in exchange for it releasing 10 shares in the stallions and the Mitchells agreed with NRBL that they would purchase another 10 shares for $100,000 to be paid no later than 31 July

[142] In around June 1995 Fitzherbert Rowe was pressing Mr Lynds for payment of their fees relating to an unrelated Newbury Park dispute in 1993. Mr Lynds paid around $8,000 of this and Mr Mitchell agreed to pay the other half but did not do so. Fitzherbert Rowe brought proceedings against Mr Lynds for $8,862.57. He did not defend these proceedings and summary judgment was issued. Eventually Fitzherbert Rowe brought bankruptcy proceedings against Mr Lynds. NRBL then paid the fees.

[143] In 1996 the term of the new Pegasus loan expired and Pegasus was not willing to extend it any further. $308,000 remained outstanding. NRBL agreed with Pegasus that the loan would be fully repaid if a lump sum of $284,000 was paid to Pegasus. Mr Meo agreed to assist by advancing short term finance of this amount. In 1997 NRBL and Mr Meo, who had not been paid by Mr Mitchell, commenced

¹⁵⁴Mr Rowe was “dead set against the agreement” but Mr Mitchell signed it anyway.

[144] In 1998 NRBL agreed to assist Mr Mitchell in bringing claims against Tui. Michael Lynds carried out some work to assist with this. Mr Mitchell paid $20,000 to NRBL. Michael Lynds’ work led to a review of the Mitchell Group files. At around the same time Mr Lynds had also been contemplating a claim against Mr Mitchell. Mr Mitchell responded to that in a document dated 30 September

2002. In this document Mr Mitchell denied Mr Lynds was not aware the Newbury Park partnership was to operate a National Bank overdraft. He also said the cattle was a partnership expense. He also said the financial difficulty he found himself in was entirely out of his control. MCDC had reneged on its promised funding, he was unable to predict Tui’s lack of integrity, and this was a forerunner for worse to come.¹⁵⁶

[145] The proceedings were not ultimately pursued against Tui because of Limitation Act issues. However, in the context of considering the Tui claim, Michael Lynds gave evidence of a conversation with Mr Mitchell he recalled having in July

2004.¹⁵⁷Mr Mitchell advised Michael Lynds, after denying it many times, that he

¹⁵⁵The Mitchell Group had at this time been unsuccessful in other litigation. This involved a sharemilker on the farm while Tui was mortgagee in possession, who had commenced proceedings against the Mitchell Group for outstanding amounts owing while Tui was mortgagee in possession. Mr Mitchell suspected the sharemilker had misappropriated a number of livestock during that time and therefore counterclaimed against him on that basis. The sharemilker’s claim was upheld, and Mr Mitchells claim dismissed, at trial in the District Court in 1997. This was appealed to the High Court. The appeal was dismissed. Mr Mitchell was required to pay around $85,000 to the sharemilker. He could not afford to do so. Mr Williamson paid the amount as part of the Mitchell Group, remained jointly and severally liable. At the same time certain lease rental and premium payments had become payable to NZRPT. Mr Williamson entered an agreement with NZRPT where he paid the amount due and the leases were terminated, with Mr Williamson facing no further liability.

¹⁵⁶Counsel for Mr Lynds objected to this document because it was the evidence of Jeffrey and Michael Lynds that Jeffrey had never seen the document. The approach I have taken is to treat the statements made by Mr Mitchell as admissible (in fairness to Mr Mitchell who is no longer alive to respond to these matters) and the fact he is not able to be cross examined is relevant to weight I place on it.

accepted that he did not know from this conversation when Mr Rowe first learned that MCDC declined Stage two funding.¹⁵⁸

[146] In 2005 Mr Lynds telephoned Mr Roche with his concerns about Fitzherbert Rowe’s actions. Mr Lynds says Mr Roche admitted he knew this matter wasn’t going away and he would speak to Mr Rowe about it. Mr Lynds says he called again some weeks later and Mr Roche told him to “come and get us”. Mr Roche’s evidence is that when Mr Lynds called him sometime in 2005 this was the first he was aware of any fallout or disagreement between Mr Mitchell and Mr Lynds. He says Mr Lynds expressed his dissatisfaction with Fitzherbert Rowe and its involvement in transactions involving him and Mr Mitchell. He says Mr Lynds had stated he was not concerned with Mr Roche’s involvement personally, but rather what he saw as a conflict dating back to financing matters in which Fitzherbert Rowe were involved.

[147] Mr Lynds says he had insufficient evidence to instigate a claim at this point. It was only in February 2006 when Mr Lynds acquired Mr Mitchell’s documents relating to a Serious Fraud Act complaint that he realised the full extent of Fitzherbert Rowe’s involvement in Mr Mitchell’s affairs. In March 2006 Mr Lynds went to the Palmerston North High Court, with the permission of Mr Mitchell and acquired further information from a 1995 court file relating to Mr Mitchell’s claim

that cattle had been misappropriated from Kairanga.¹⁵⁹While he was there he

discovered the court file relating to the Mitchell Group’s litigation against Tui from

1990 to 1992. He says he became aware of the May 1989 declination letter at this time because it was on this file. Further information from the court file was obtained

¹⁵⁸This evidence was initially objected to by Fitzherbert Rowe. The objection was later withdrawn.

The evidence does not assist with when Mr Rowe first learned MCDC had declined Stage two funding. There is no reliable evidence to suggest this was before 1 June 1989.

¹⁶⁰Mr Lynds endeavoured to give evidence that in November 2006 Mr Mitchell told him Mr Rowe knew about the declination letter before the Pegasus loan documents were signed. This was objected to and Mr Lynds’ counsel did not seek to rely on the evidence. The reliable evidence about this is that Mr Rowe first learned there was an issue with Stage two funding when he received the telephone call from Mr Mitchell on 1 June 1989 asking him to attend the MCDC/Tui meeting that afternoon.

$100,000 for the 10 stallion shares agreed to in 1994. A year later Mr Mitchell passed away. Two years later Mr Meo passed away.

[149] Fitzherbert Rowe contend the claim is statute barred. They say section 4(9) of the Limitation Act 1950 applies because the breach of fiduciary duty claim is analogous to a claim for breach of contract or in tort. This means Mr Lynds had six years to bring his claim after the cause of action accrued but this was subject to postponement under s 28. The six years therefore began to run when Mr Lynds could with reasonable diligence have discovered the breach of fiduciary duty. They say Mr Lynds was put on enquiry in December 1989 when he knew Tui had not approved the Stage two funding. They say Mr Lynds had the opportunity at the time of the 1992 court case to discover when Fitzherbert Rowe knew about Mr Mitchell’s financial position. Mr Lynds was aware throughout that Fitzherbert Rowe acted for Mr Mitchell on the Tui loan and, therefore, that they may have been aware that Tui had declined Stage two funding prior to the Pegasus transaction.

[150] Mr Lynds submits the six year time period does not apply. He submits his claim for equitable relief is not analogous to a negligence claim. He agrees that, if he is wrong about this, the six year period is postponed by s 28 until the breach of fiduciary duty was reasonably discoverable. From 1989 onwards Mr Lynds was still being misled by Mr Mitchell that the whole problem had arisen because of improper conduct by Tui. He says it was not until he reviewed the court files in 2006 that he discovered the true position and Fitzherbert Rowe’s knowledge of that.

[151] I consider that the six year period does not apply by analogy because this is a disloyalty claim.¹⁶¹Even if it did apply, the six year period would not commence

_{until the breach of fiduciary duty over the Pegasus transaction
was reasonably}

¹⁶¹See Johns v Johns [2004] NZCA 42; [2004] 3 NZLR 202 (CA) at [80]: “There will be a bar by analogy only when the fiduciary duty claim parallels the statute barred claim so closely that it would be inequitable to allow the statutory bar to be outflanked by the fiduciary duty claim.” See also Smith v Walker [2012] NZCA 191 at [69].

discoverable. What must be discovered or known are all the facts which together constitute the cause of action.¹⁶²The first important fact in discovering this cause of action was that the problem with Tui had arisen before the Pegasus transaction was entered into.

[152] In December 1989 Mr Lynds knew that Stage two funding had been declined but he did not know this had occurred prior to entering into the Pegasus transaction. That would have appeared an unlikely prospect given Mr Mitchell’s keenness to enter into the Pegasus transaction which entailed some financial risk. Mr Mitchell had told Michael Lynds in 1989 that the loan had been approved but not settled. Up until 2002, when Mr Lynds was contemplating bringing a claim against Mr Mitchell, the evidence suggests Mr Lynds believed Tui had been the real cause of Mr Mitchell’s problems and it had acted unfairly and wrongly towards Mr Mitchell. Mr Lynds had concerns about Mr Mitchell’s conduct in 2002, but the evidence does not suggest that he knew at this time that Tui had declined Stage two funding before

1 June 1989. The evidence indicates that Mr Lynds did not learn this before Michael Lynds obtained an admission from Mr Mitchell sometime around July 2004 (or around this timeframe).

[153] The next important fact for a claim against Fitzherbert Rowe was that they knew that there was a potential problem with Stage two funding before the Pegasus transaction was entered into. Mr Lynds was aware that Fitzherbert Rowe had acted for Mr Mitchell in relation to the Tui lending. At best this might have put him on enquiry only about whether they knew before the Pegasus transaction that the Stage two funding was in doubt. However, as his solicitors on the Pegasus transaction, he was entitled to assume that they would have been acting in his best interests.

[154] Michael Lynds’ evidence about Mr Mitchell’s July 2004 admission is consistent with the evidence that Jeffrey Lynds called Fitzherbert Rowe in 2005 expressing his dissatisfaction with them. This led him to review the 1992 court file where he first came across the firm evidence that the Stage two loan was declined

¹⁶²Laws of New Zealand Limitation of Civil Proceedings: Limitation Act 1950 (online ed) at [303].

[155] In these circumstances I consider Mr Lynds’ cause of action was not reasonably discoverable before 11 June 2001 (six years before the proceeding was commenced). The precise meaning of “reasonable discoverability” depends on the context.¹⁶³In this context it did not mean Mr Lynds doing everything possible to investigate whether Fitzherbert Rowe breached its duty to him, while supporting Mr Mitchell in his claim against Tui in 1992. Mr Lynds’ discovery of Fitzherbert

Rowe’s involvement occurred because he was diligent and dogged in his desire to find out what had really happened. He discovered this in 2006 and commenced his claim soon afterwards.

[156] Fitzherbert Rowe submits the doctrine of laches applies to Mr Lynds’ claim. They submit Mr Lynds refrained for an excessive period from seeking redress after being in a position to identify the matters he now relies on. They submit this has caused substantial prejudice to Fitzherbert Rowe, including the death of key witnesses (Mr Mitchell and Mr Meo) and the loss of key files (making it more difficult to trace the flow of events).

[157] The doctrine of laches requires a balancing of equities. The onus is on Fitzherbert Rowe to show it would be inequitable to allow the claim to proceed. In this case I do not accept that Mr Lynds refrained for an excessive period in seeking redress once he knew his rights had been breached. As discussed above, it was not until 2005 that he understood Fitzherbert Rowe may not have protected his interests and it was not until 2006 that he had firm evidence of when the Stage two funding was declined. His claim was commenced promptly after that.

[158] I am also not satisfied that the delay has caused significant prejudice to Fitzherbert Rowe. Although Fitzherbert Rowe no longer has its files from that period, correspondence and documents were available from other sources. The important issue was when Mr Rowe learned of issues with the Stage two funding. It is apparent from the available documents that he was aware of this on 1 June 1989. I

_{have accepted his evidence that he was not aware of the issues before
then. Whether}

Mr Mitchell could have assisted Fitzherbert Rowe’s defence is speculative. It is

[159] For these reasons I am not satisfied that Fitzherbert Rowe have been placed in a position that makes it unreasonable or unconscionable to allow Mr Lynds to enforce his rights.

[160] Mr Lynds submits that Fitzherbert Rowe breached its fiduciary obligation of loyalty to him because it was in breach of the “double employment” rule. He submits this breach arose when the Pegasus loan, supported by the security documents and guarantee, were entered into.¹⁶⁴

[161] He submits Fitzherbert Rowe were acting for two principals (Mr Lynds and Mr Mitchell) with potentially conflicting interests. This arose from the firm’s knowledge of Mr Mitchell’s poor financial position which was confidential to it, the disclosure of which would have influenced Mr Lynds’ decision about entering into the above transactions. He submits it is the firm’s knowledge that is relevant, rather than the knowledge of the individual partner acting on the two transactions. Before accepting instructions to act for Mr Mitchell and Mr Lynds on the above transactions he submits Mr Lynds’ informed consent was required. This required, at the least, that Mr Lynds be advised he was entitled to independent legal advice because of the information the firm held concerning Mr Mitchell’s financial position.

[162] Fitzherbert Rowe submit there was no breach of the double employment rule. They submit the firm was acting for the partnership on the Pegasus transaction, not two individuals with potentially conflicting interests. They say Fitzherbert Rowe’s instructions were to arrange for the implementation and settlement of the transaction to which Mr Mitchell and Mr Lynds had already agreed to enter. They were not

_{instructed to advise on the wisdom of this transaction. They say that
in so doing}

there was no potential conflict between the partners, as they had a common interest in having the transaction settled.

[163] Fitzherbert Rowe submit neither the firm, nor the partners within the firm acting on the Pegasus transaction, at the time they accepted instructions to act on that transaction, had information about Mr Mitchell materially relevant to whether Mr Lynds should proceed with the transaction. They accept that if they did have such information, then they would have been required to inform Mr Lynds that, as a result of the firm acting for Mr Mitchell or MCDC, they could not act on the transactions and he would have to get independent advice.

[164] Fitzherbert Rowe also submit that if a solicitor properly accepts instructions to act for two clients, a breach of fiduciary duty for failing to disclose material information about one client to the other client will only arise subsequently if the solicitor intentionally fails to make this disclosure. They say that the relevant question is what the solicitor acting knew, not what others in the partnership may have known. They say that because there was no breach of the double employment rule in acting on the Pegasus transaction, a fiduciary duty was breached only if Mr Rowe (or Mr Roche) intentionally failed to disclose to Mr Lynds material information after the instructions were accepted. It is not suggested that Mr Roche had any material information. They say that Mr Rowe did not have material information either. Even if objectively he did have material information, they say his failure to disclose this may have been negligent, but it was not intentional (because he expected the security review to be favourable). Therefore it was not a breach of fiduciary duty.

[165] The double employment rule is as described by Millet LJ in Bristol & West

A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other ... This is sometimes

... consent given in the knowledge that there is a conflict between the parties and that as a result the solicitor may be disabled from disclosing to each party the full knowledge which he possesses as to the transaction or may be disabled from giving advice to one party which conflicts with the interests of the other.

[167] The double employment rule arises in a relationship of trust and confidence. The fiduciary has undertaken to act in the interests of another and has an obligation of loyalty. Because the double employment rule is concerned with the obligation of undivided loyalty, it is a rule that applies both to where a lawyer is acting for two clients with potentially opposing interests, and where one partner in a firm is acting for one client and another partner in the firm is acting for another party with an

opposing interest.¹⁶⁷The rule has been described as prophylactic because it prevents

the fiduciary from being in a position where a conflict of two inconsistent duties arises.¹⁶⁸

[168] The precise scope of the obligation of loyalty depends on the retainer. It is necessary to identity the task the lawyer has undertaken to perform and the obligation of loyalty extends to all the activities within that role.¹⁶⁹This includes disclosing information known by the firm which is relevant to the instructions the

¹⁶⁷Bolkiah v KPMG [1998] UKHL 52; [1999] 2 AC 222 (HL) at 234 per Lord Millet: “a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position.” See also, Charles Hollander and Simon Salzedo Conflicts of Interest (5th ed, Sweet and Maxwell, London,

2016) at [1-003]: “The conflict is a conflict of the firm, partnership or company and not merely of the individual partner. For this reason, the conflict extends beyond the individuals within the firm who act for the client to the firm itself. It follows that to accept instructions for a second

client where there is a conflict of interest gives rise to an automatic breach of fiduciary duty

unless both clients have consented. Even when both clients have consented, there will be circumstances in which the professional cannot act, or continue to act, because he would be professionally embarrassed in doing so. These principles are nothing to do with whether the professional has obtained relevant confidential information. They are based on the fiduciary obligation of loyalty.”

¹⁶⁸Hollander above n 167 at [2-008] citing Conaglen, Fiduciary Loyalty (Oxford, Hart Publishing,

2010) at 61-62 which, inter alia, says “[r]emoving the influences therefore increases the

[169] A New Zealand example of the application of these principles, outside the lawyer/client area is Stevens v Premium Real Estate Ltd.¹⁷¹This case concerned a real estate agent who did not communicate to the vendor that the purchaser was a property speculator who regularly bought residential properties and on-sold them at a profit. The agent misled the vendors by telling them the purchaser wanted to move to the property to reduce his commute time. The Supreme Court referred to Millet LJ in Mothew¹⁷²and said it was beyond doubt that the agent was a fiduciary for the vendors and owed them a duty of loyalty. It said that failure “to disclose a material matter about the person being introduced as a prospective purchaser – a matter objectively likely to operate on the principal’s judgment – is a breach of the duty of loyalty.”¹⁷³The information known about the prospective purchaser “was very likely to have affected the [vendors’] attitude towards his offer and the response they would make.”¹⁷⁴

[170] The agent was not excused because the information about the vendor was confidential. If someone puts themselves in a position of having two irreconcilable duties, it is her own fault. She cannot prefer one principal over the other.¹⁷⁵The duty can be modified by informed consent. In this case the agent could have sought permission from the purchaser to disclose the information to the vendors. If the purchaser declined to give the information then the agent could have advised the

vendors she had information about the purchaser she was unable to reveal. The requirement was for the principal’s informed consent to the agent acting with a potential conflict of interest.¹⁷⁶

[171] An example of this principle in the solicitor/client context is Hilton v Barker Booth and Eastwood.¹⁷⁷In this case the solicitors acted for Mr Hilton and Mr Bromage in an agreement pursuant to which Mr Hilton would purchase a property and develop it into flats, after which Mr Bromage would purchase the property. Mr Hilton did not know the solicitors had previously acted for Mr Bromage, an

_{undischarged bankrupt, in criminal proceedings which had led to his
imprisonment}

¹⁷⁵_{At [71] citing Hilton v Barker Booth and Eastwood
[2005] UKHL 8; [2005] 1 WLR 567 (HL) with approval.}

(he reached the deal with Mr Hilton a few months after his release). The solicitors did not inform Mr Hilton of this. The development proceeded. Mr Bromage did not complete the transaction and the result was a financial disaster for Mr Hilton.

[172] Mr Hilton’s claim against the solicitors was for breach of contract. The trial court held the solicitors had breached their professional duty to Mr Hilton in acting for both him and Mr Bromage. It also held that Mr Hilton would not have proceeded with the transaction had he been informed of Mr Bromage’s bankruptcy and convictions. However, because it would have been a breach of the solicitors’ duty to Mr Bromage to disclose the information, the breach was in continuing to act rather than sending Mr Hilton away for independent advice. As it had not been contended an independent solicitor would have known of Mr Bromage’s bankruptcy and convictions, the solicitor’s breach of duty caused no loss to Mr Hilton. The Court of Appeal upheld this decision.

[173] In the House of Lords Mr Hilton succeeded. Solicitors have a duty of single- minded loyalty to their client. This may mean it is professionally improper and a breach of their duty to act for two clients with conflicting interests in a transaction. Although Mr Hilton had not brought his claim as a breach of fiduciary duty, he did not need to. The breach of fiduciary duty was also a breach of the solicitors’ contractual duty. Their duty of loyalty to Mr Hilton required the solicitors to disclose the information they knew about Mr Bromage. This duty conflicted with their duty to Mr Bromage, in the absence of informed consent, not to disclose the information. The solicitors put themselves in the position of having irreconcilable duties. Their duty to Mr Bromage did not exonerate the breach of duty to Mr Hilton to tell him they could not act for him and he should seek independent advice. The solicitors were liable to Mr Hilton for the losses suffered on the transaction.

[174] If a solicitor is properly acting for two clients with potentially conflicting interests because she has obtained their informed consent, that is not the end of the matter. A solicitor breaches her duty if she is inhibited in performing her duties to

one client because of her duties to another.¹⁷⁸This principle is referred to as the “no inhibition” principle. It is discussed by Millet LJ in Mothew as follows:¹⁷⁹

That, of course, is not the end of the matter. Even if a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interest of one principal to the prejudice of those of the other

... I shall call this the “duty of good faith”. But it goes further than this. He must not allow the performance of his obligations to one principal to be

Conduct which is in breach of this duty need not be dishonest but it must be intentional. An unconscious omission which happens to benefit one principal at the expense of the other does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care. This is because the principle which is in play is that the fiduciary must not be inhibited by the existence of his other employment from serving the interests of his principal as faithfully and effectively as if he were the only employer. I shall call this “the no inhibition principle”. Unless the fiduciary is inhibited or believes (whether rightly or wrongly) that he is inhibited in the performance of his duties to one principal by reason of his employment by the other his failure to act is not attributable to the double employment.

[175] If a solicitor is properly acting for two clients with potentially conflicting interests because she has obtained their informed consent, an actual conflict of interest will arise if a solicitor cannot perform her duties to both clients simultaneously.¹⁸⁰This is discussed in Mothew as follows:¹⁸¹

Finally, the fiduciary must take care not to find himself in a position where there is an actual conflict of duty so that he cannot fulfil his obligation to one principal without failing his obligation to the other ... If he does, he may have no alternative but to cease to act for at least one and preferably both. The fact that he cannot fulfil his obligations to one principal without being in breach of his obligations to the other will not absolve him from liability. I shall call this “the actual conflict rule”.

[176] The first issue concerns the date at which the double employment rule applied. Fitzherbert Rowe submit the relevant date was 22 March 1989 when Mr Roche was instructed to make the offer to purchase Le Belvedere. I do not accept

[177] The submission assumes that the purchase of the two stallions and the loan from Pegasus were one transaction to which the Mitchell Group and Mr Lynds were irretrievably bound once the offer to purchase Le Belvedere was made. That, however, was not the position. The purchase of Le Belvedere, the purchase of Epidaurus and the loan facility from Pegasus were three separate transactions,

entered into with three separate parties,¹⁸²each subject to its own terms and

[178] Further, the Mitchell Group and Mr Lynds did not enter into a formal retainer with Fitzherbert Rowe. By instructing Mr Roche to make an offer to purchase Le Belvedere, the Mitchell Group and Mr Lynds did not commit to instructing Fitzherbert Rowe on all the legal work relating to the loan and the purchase of the two stallions. Similarly, Fitzherbert Rowe were not committed to carrying out that legal work. Each instruction was specific to the relevant matter.

[179] The offer to Esanda to purchase Le Belvedere, the initial subject of Fitzherbert Rowe’s instruction, was complete on or about 22 March 1989. A further instruction was received around 28 April 1989 to pay the deposit for Epidaurus. That instruction was complete when the deposit was paid. The retainer to act on the Pegasus loan commenced on 23 May 1989 when Pegasus advised the loan had been approved and would be available once the security documents were signed. The instructions to complete the purchase of the two stallions commenced on about the same date, as the availability of the funds and the settlement of the stallion purchase were connected, and ended on the settlement of each of those purchases.

[180] It is therefore necessary to consider what Fitzherbert Rowe, or individual

partners within the firm, knew about the Mitchell Group’s financial position when

¹⁸³Hollander above n 167 at [6-027] reviews the cases about the attribution of knowledge of one partner to the other partners. He discusses that, because existing client conflicts are concerned with conflict not confidentiality, attribution does not feature as an issue. The professional cannot act at all without informed consent, and can only set up an information barrier if the clients have consented. Different issues arise with former client conflicts.

[181] Although Fitzherbert Rowe were not asked to advise on the wisdom of the Pegasus facility and the stallion purchases, it is not disputed that, if the Mitchell Group was in serious financial difficulty, it would be materially relevant to Mr Lynds’ decision whether to proceed with the transactions. Because it was materially relevant to the instructions, Fitzherbert Rowe’s obligation was to disclose this to Mr Lynds if they were aware of it. This potentially conflicted with Fitzherbert Rowe’s duty of confidentiality owed to Mr Mitchell.

[182] Mr Mitchell was in serious financial difficulty from the beginning of 1988. He was saddled with substantial debt and could not meet his obligations to repay two AMP loans that had matured, let alone the interest that continued to accrue while these loans remained unpaid. He consequently needed to realise assets to pay this debt. His solution was to sell his interest in Pahau Reserve and to enter into the NZRPT transaction for the Kairanga partnership. This required further significant borrowing, obtained from MCDC, and financial obligations to NZPRT. These transactions did not clear all of Mr Mitchell’s debts. Moreover, Mr Mitchell needed a further source of funding to complete his obligations under the NZRPT transaction.

[183] How the leases should be valued was critical to the assets versus liabilities assessment. The Touche Ross and Brian Sampson valuations were on the basis that the leases would continue. However these did not take into account the Mitchell Group’s defaults and the possibility that Tui would look to call up its securities because of them. Tui had advice from Coopers & Lybrand about the value of the leases in this scenario. It also had advice from Mr Pearson. On the basis of this advice the Mitchell Group’s financial position was poor. Further, quite apart from the assets and liabilities position, the Mitchell Group could not meet its obligations when due without resorting to further borrowing.

[184] Mr Rowe was aware that the restructuring had taken place because Mr Mitchell had been unable to meet its obligations to AMP and had defaulted on them. Mr Rowe was intimately involved in considerable work necessary to resolve the pressure AMP was exerting on Mr Mitchell. Mr Rowe was aware that the NZRPT transaction was an unusual one, which left the Mitchell Group as lessees rather than owners. He was aware the restructuring had not cleared all of the Mitchell Group’s

borrowings.¹⁸⁴He was also aware the restructuring had left the Mitchell Group with

a $331,669.06 shortfall, most of which related to NZRPT obligations. He expected Mr Mitchell would secure that shortfall from the National Bank. He was also aware that there was to be a second stage of the Kairanga development which Mr Mitchell expected to be funded by further borrowing from MCDC.

[185] Overall my assessment is that Mr Rowe knew there had been serious cash flow difficulties which had caused the Mitchell Group to default on their obligations to AMP. However, throughout 1988, he also expected they would be resolved. By October 1988 he understood these difficulties to have largely been resolved. To the extent that they had not, he considered that Mr Mitchell had matters under control. Mr Rowe was also aware that, during this period, Mr Lynds and Mr Mitchell were in partnership and their partnership was leasing the Newbury Park property. Mr Rowe failed to appreciate his potential conflict of interest in acting for Mr Lynds and

[186] For his part, Mr Sunderland was aware that the MCDC Stage one facility had increased during the period it was being considered (from $1.4 million in the initial application to $1.85 million when granted). He considered the security offered was less than what the Rural Bank would accept, and it did not necessarily provide MCDC with the ability to immediately recoup its investment by realising its

[187] Mr Rowe knew that by December 1988 Mr Mitchell had secured a $150,000 overdraft from the National Bank. This was for less than the shortfall in funds he had identified in October 1988. However there is no evidence that Mr Rowe knew at the time they occurred that the Mitchell Group had defaulted on the first MCDC instalment due on 30 November 1988, that MCDC had provided a $200,000 guarantee in support of that overdraft, and that Mr Mitchell had used the overdraft to pay the outstanding MCDC instalment that was due. He was aware that the IWS for the National Bank overdraft had not been completed and this was “fairly urgent”.

[188] Mr Rowe was also unaware that Mr Mitchell had post-dated a cheque for his outstanding NZPT’s obligations, and then told NZRPT not to cash it on that date because it would bounce. However he was aware, prior to his sabbatical, that Mr Mitchell had not completed matters with NZRPT. Specifically he knew that NZRPT had been pressing to proceed with the lease of the Robert block. He had left instructions with Mr Roche to complete this. He understood the Mitchell Group expected to obtain funding for this from MCDC. He did not know whether that funding had been obtained prior to his departure on sabbatical.

[189] There is a dispute between the parties about whether Mr Rowe also knew the Mitchell Group had not met its obligations to purchase the NZRPT development units arising from the transaction settled in September 1988. This dispute depends on what Mr Rowe meant in his cover letter¹⁸⁶that there remained outstanding matters regarding “the vendor units and developments”. Mr Rowe was cross- examined about whether this meant he knew the Mitchell Group had not yet met

their obligations arising from Stage one of the NZRPT development. He said he did not know what he meant. In re-examination he considered his cover letter was instead referring to a mortgage that was yet to be completed for the development units.¹⁸⁷In giving this evidence Mr Rowe was guessing about what his letter meant given the passage of time. However I consider the answer he gave in re-examination

_{is more likely to be correct, because that did involve outstanding legal
work (the}

¹⁸⁶_{Dated 2 March 1989 sent to Mr Mitchell with the
statements relating to the NZRPT transaction.}

¹⁸⁷The units that were acquired due to NZRPT funding the development of the cow shed.

topic of his cover letter)¹⁸⁸whereas payments due to NZRPT by the Mitchell Group did not necessarily involve Mr Rowe.

[190] In the absence of any clear evidence on the point I am not prepared to conclude that, before departing on sabbatical, Mr Rowe knew the Mitchell Group had not yet met their obligations arising from Stage one of the NZRPT development. Nor do I accept that he knew that, while he was away, the Mitchell Group had also failed to meet the MCDC loan instalment due on 2 March 1989.

[191] Mr Rowe was aware in May 1989 that the Newbury Park partnership were intending to purchase two stallions and were loaning funds from Pegasus for that purpose. His partner Mr Roche was acting for Mr Mitchell and Mr Lynds on this matter. There is no reliable evidence that Mr Mitchell told Mr Rowe on his return or during May 1989 about the default on the second MCDC loan instalment, his failure to pay NZRPT for the development units or of MCDC’s 11 May 1989 letter declining Stage two funding.

1989 that Stage two funding had been declined through Mr Sunderland’s knowledge.

Mr Sunderland accepts the reference to MCDC’s “legal representative” in the 11

May 1989 letter was referring to him. The letter does not say that the decision to decline Stage two funding was based on legal advice. The legal advice referred to is that MCDC’s securities did not impede the Mitchell Group from borrowing elsewhere. It is a safe inference that Mr Sunderland knew, when giving this advice, that it related to an application for further funding from MCDC. It is also a safe inference that Mr Sunderland knew, when giving that advice, that MCDC was at least contemplating declining the application. However there is no reliable evidence that Mr Sunderland actually knew this was MCDC’s firm decision at this point.

1989 that the Newbury Park partnership had obtained an overdraft of $200,000 from the National Bank for which security was given. On 23 May 1989 he knew of the amount of the loan the Mitchell Group and Mr Lynds were entering into with Pegasus and the security for that. He was aware the loan was to provide the purchase price for the two stallions and to cover the first loan instalment.

[194] In these circumstances I consider Fitzherbert Rowe had a potential conflict of interest in accepting the instructions to act for the Mitchell Group and Mr Lynds on

23 May 1989. There was a potential conflict as between MCDC/Tui and the Mitchell Group relating to the proposed Stage two funding. That also gave rise to a conflict in relation to Mr Lynds. If there was any difficulty in obtaining the Stage two funding, that potentially impacted on the Mitchell Group/Mr Mitchell’s financial position. That in turn was relevant to Mr Lynds’ personal risk in borrowing the money from Pegasus to purchase the stallions.

[195] It does not appear that Fitzherbert Rowe had a system by which conflict checks were carried out before instructions were accepted. Had they had such a system and carried out a conflict check before accepting the instructions on 23 May

1989, there would have been the opportunity to seek and obtain Mr Lynds’ informed consent. The failure to obtain Mr Lynds’ informed consent meant that the instructions to act on 23 May 1989 were in breach of the double employment rule. I therefore do not accept Fitzherbert Rowe’s submission that they were properly acting on the Pegasus transaction and did not need informed consent.

[196] On 1 June 1989, while Fitzherbert Rowe were acting in breach of the double employment rule, a further potential conflict of interest arose for which informed consent was required. That potential conflict arose because on this date, while Mr Roche was acting for Mr Mitchell and Mr Lynds on the stallion purchases, Mr Rowe learned of information material to Mr Lynds’ financial risk under the Pegasus loan. When he learned of this information he was aware that Mr Roche was acting on the stallion transaction (and Mr Rowe had earlier agreed with Mr Roche that he should continue with the transaction). Mr Rowe owed a duty of confidentiality to

Mr Mitchell. He therefore could not disclose this information to Mr Lynds, for whom his firm was still acting through Mr Roche, without Mr Mitchell’s consent.

(c) Tui was concerned about the $200,000 it had guaranteed which was to be converted to an advance and this was not included in the application, whether the rate of return and budget were reasonable, and the late payment of the first two MCDC instalments;

(d) Tui had provided the $200,000 guarantee on the basis that any surplus funds from the Pahau reserve sale would be applied as a first priority to MCDC, but there had been no surplus funds;

(f) Mr Mitchell considered two to three years would enable him to get Kairanga fully established and this would make it a more attractive proposition for refinancing, however Tui was not prepared to allow that length of time;

(g) Tui agreed in principle to provide Stage two funding, but this was subject to a review of the securities for the entire funding to be carried out in the next 14 days; and

[198] In short Mr Rowe was aware there was no guarantee of Stage two funding and the whole loan was subject to a review to be carried out in the next 14 days. He was aware of this, knowing that Mr Mitchell needed the funding for Stage two and that Tui’s position on this was contrary to Mr Mitchell’s expectations when the Kairanga restructuring was put in place. He knew the restructuring had been undertaken because of the Mitchell Group’s inability to repay the two AMP loans. In

these circumstances I consider that Mr Rowe must have known that Mr Mitchell’s financial position was in jeopardy if the review of securities was unfavourable. While Mr Rowe may have anticipated the review would be favourable, as at 1 June

1989 the review placed Mr Mitchell’s financial position in temporary jeopardy while the matter was worked through with Tui and I consider Mr Rowe must have known that.

[199] Mr Rowe became focussed on endeavouring to resolve Mr Mitchell’s financial difficulties with Tui. However Mr Rowe’s knowledge of those difficulties was information material to Mr Lynds in deciding whether to proceed with the stallion transactions. The purchase of the stallions had risks, because they were being funded entirely by borrowing from Pegasus and the ability to repay that borrowing depended on a successful syndication of the shares in the horses. Mr Lynds was liable to repay the borrowing as a party to the loan. Fitzherbert Rowe’s duty of loyalty to Mr Lynds was breached by not providing this material information to him.

[200] The next question is whether Fitzherbert Rowe’s breach of fiduciary duty caused Mr Lynds loss. This is approached on the basis of what Mr Lynds would have done if the material information had been disclosed to him.¹⁸⁹It is not approached on the basis of what would have happened if Mr Lynds had been told on

¹⁸⁹Having accepted instructions to act in breach of the double employment rule, Mr Roche and Mr Rowe cannot say they were prevented from disclosing the information to Mr Lynds because of their duty to Mr Mitchell. See Hilton above n 175. See also Stevens v Premium Real Estate Ltd above n 171 at [82] and [86] referring to the High Court Judge considering what the plaintiffs would have done if the defendants had told them what they knew.

¹⁹⁰Fitzherbert Rowe seek to distinguish Hilton above n 175 because in that case Mr Hilton and Mr Bromage had not come to the solicitors with the deal already done. Here they say Mr Mitchell and Mr Lynds had already agreed to obtain the Pegasus facility and purchase the stallions by the time Fitzherbert Rowe were instructed to act. I do not regard this as a material distinction. If a

solicitor is instructed to implement an agreement already entered into, and she knows facts about

one party that would be material to the other, a solicitor acting with undivided loyalty to that party would need to consider whether there is an ability to unwind the transaction. In accepting the instructions without informed consent to the potential conflict, or agreement from Mr Mitchell to disclose the information, the solicitor has irreconcilable duties in the same way as in Hilton.

[201] As explained in Stevens v Premium Real Estate Ltd, a fiduciary used to be subject to a strict rule of causation.¹⁹¹A fiduciary who had breached a duty by not disclosing material facts about a transaction to a person, could not contend the person would have entered the transaction even if the disclosure had been made. Speculation about what the person would have done was regarded as irrelevant. This led to unfair results and was modified. The position now is that once a plaintiff

shows a loss arising from a transaction to which the breach was material, the plaintiff is entitled to recover unless the defendant fiduciary shows the loss would have occurred in any event.

[202] In this case there is loss arising from purchasing the stallions. It is therefore for Fitzherbert Rowe to show the loss would have occurred in any event. Fitzherbert Rowe submit the proper question is whether Mr Lynds would have proceeded with the stallion transaction if Mr Rowe had told him that the Tui loan was approved in principle but subject to a review of securities. They say that Jeffrey and Michael Lynds both had a detailed knowledge of the Mitchell Group’s assets and liabilities from the Pegasus loan approval process and earlier dealings.

[203] I do not accept this submission. Mr Lynds was not informed of the potential conflict and given the opportunity to seek independent advice. It was in Mr Lynds’ interests to be informed that the Mitchell Group had yet to secure funding for Stage two of Kairanga. Mr Lynds was not told what occurred at the 1 June 1989 meeting. This information was material to his personal financial risk under the Pegasus loan for which he was jointly and severally liable if the syndication of the two stallions was not successful. Mr Lynds had been persuaded to enter the partnership and to purchase Le Belvedere, as well as Epidaurus, understanding Mr Mitchell had financial substance and he understood Mr Mitchell was prepared to take half the shares in Le Belvedere if necessary.

[204] I do not accept Fitzherbert Rowe’s submission that the agreement in principle

was good news in that it had reversed the earlier declinature of Stage two funding on

11 May 1989, nor that the review of securities would be of no concern. The position was not simply that the loan was approved in principle but subject to a review of

securities. As discussed, the information known to Fitzherbert Rowe, and to Mr Rowe specifically, on 1 June 1989 was more alarming than this. The information showed the Mitchell Group’s financial position was of such concern to Tui that it had not committed to Stage two financing contrary to Mr Mitchell’s expectation, that the entire facility was up for review, and if Stage two was advanced Tui might still require the entire facility to be refinanced in 12 months time. Even if Mr Rowe, and Jeffrey and Michael Lynds expected the security review to be favourable, it was in Mr Lynds’ interests to be informed of Tui’s concerns and the risks to him associated with that.

[205] Tui’s concerns indicated that the financial position of the Mitchell Group was potentially worse than what Jeffrey and Michael Lynds had understood it to be. They did not purport to have full details of that position. Tui’s concerns, on top of Mr Mitchell having arranged a National Bank overdraft without Mr Lynds’ knowledge and drawing down that overdraft to meet Mitchell Group financial obligations, could (and likely would) have given Mr Lynds reason to pause on proceeding with the stallion purchases. Mr Mitchell’s financial substance was important to Mr Lynds. It reduced the personal risk to him of, what was a risky venture.

[206] I consider Fitzherbert Rowe have not shown that the purchase of the stallions would have proceeded even if Mr Lynds had been informed of the material information. As at 1 June 1989 only the advance of USD50,000 on Epidaurus had been paid. Mr Lynds was denied the opportunity to seek to defer the settlement of both stallion purchases until the 14 day review was concluded. It was possible this would mean losing the Le Belvedere purchase, as Esanda had been putting pressure on the Newbury Park partnership to settle this transaction. However Mr Lynds had been reluctant to purchase Le Belvedere as well as Epidaurus. The risk of losing the Le Belvedere purchase was likely to have been a risk that Mr Lynds was willing to take. There is no evidence that Narvick were pushing for settlement even though the settlement date in the agreement had passed.

[207] It is likely that, had a deferral of settlement of the stallion purchases been sought for 14 days, the purchases of neither horse would have eventuated. A deferral

may well have raised a red flag with Pegasus as to whether it should loan the funds. Esanda and/or Narvick may have looked for alternative buyers and been successful in that¹⁹²in which case the Mitchell Group/Lynds purchases would not have settled. Alternatively, Esanda and/or Narvick may have pushed for settlement and threatened litigation, but that strategy would not likely have led to a resolution within 14 days. More likely, assuming there were no alternative buyers waiting in the wings, they would have agreed to wait 14 days for the review to take place.

[208] At the end of the 14 day review period Fitzherbert Rowe knew that the security review had not been favourable and Tui was contemplating calling up the loan. This led to Mr Sunderland stepping aside from acting further for Tui because of a conflict of interest with Mr Mitchell. The alarm bells about Mr Mitchell’s financial position that arose at the 1 June 1989 meeting were ringing ever more loudly by 14 June 1989. It is likely Mr Lynds would have sought to withdraw from the purchases. If withdrawal had not already occurred by 8 September 1989, the withdrawal strategy would have continued when Tui advised it was calling up the loan and it was clear there was a major problem for the Mitchell Group. Pegasus would likely have cancelled its funding agreement (Mr Mitchell’s financial position being an important part of Pegasus decision to advance the funds). That would have left Mr Mitchell and Mr Lynds unable to complete the purchases and the vendors having to mitigate their loss by finding other buyers for the stallions.

[209] Mr Lynds seeks equitable compensation for the loss he suffered in entering into the Pegasus loan and purchasing the stallions. The compensation seeks to restore Mr Lynds to the position he would have been in if that transaction had not

_occurred.¹⁹³_{In considering this, at least in a
case where the breach is of the duty of}

¹⁹³This is not a case where any improper gains by the fiduciary are alleged.

loyalty (as is the case here), the fiduciary has the burden where there is doubt about the extent of the loss.¹⁹⁴

[210] There has been debate in the authorities about how questions of remoteness, contributory negligence and mitigation are taken into account in claims for equitable compensation. In Day v Mead the Court of Appeal considered contributory negligence was relevant by analogy and, if the plaintiff had contributed to the loss, that should be taken into account in assessing what was the just and fair award of

[211] The Supreme Court of Canada, in Canson Enterprises Ltd v Broughton, were divided in their view about how such issues are approached.¹⁹⁶One approach held that the common law principles should be applied by analogy.¹⁹⁷The other approach held the question was whether the losses were directly linked to the breach.¹⁹⁸

Another approach was to consider the question of remoteness as a matter of fairness.¹⁹⁹In the event, however, the Court agreed on the outcome.

[212] The case concerned a solicitor who breached his fiduciary duty by failing to

_{disclose to his client that a third party was making a secret profit on
the client’s}

¹⁹⁴In Stevens v Premium Real Estate Ltd above n 171 at [85], the majority held that the approach to causation, also applies to loss. Where there is a normal or prima facie measure of loss, the fiduciary must positively show it is not an appropriate measure. The onus is on the fiduciary to show the loss suffered was actually less and any doubt should be resolved against the fiduciary. The Chief Justice disagreed. She considered it was for the plaintiff to prove the amount of its loss that was caused by the breach. The difference between the majority and the Chief Justice was over whether, as the Chief Justice put it at [10], the “[a]dditional benefit they might, conceivably but speculatively, have obtained” was properly attributable to the breach of duty.

¹⁹⁷In a decision delivered by La Forest J (Sopinka, Gonthier and Cory JJ agreed) it was held that where the breach was in failing to disclose material information about another party, not involving a secret profit to the solicitor, compensatory damages should be the same in equity as they would be at common law. Similar considerations of remoteness or and contributory negligence arose.

¹⁹⁸McLachlin J (Lamer CJ and L’Heureux-Dubé agreed) considered the damages should not be measured by analogy with tort and contract. Equitable compensation is a monetary remedy

available when the equitable remedies of restitution and account are not appropriate. The plaintiff ’s loss is to be assessed with the full benefit of hindsight. Foreseeability is not a concern. It is, however, essential that the losses made good are only those which, on a common sense view of causation, were caused by the breach. The plaintiff is not required to mitigate its

losses, but losses resulting from clearly unreasonable behaviour on the part of the plaintiff will

not flow from the defendant’s breach. Losses arising from the behaviour of third parties are recoverable if there is a direct link between the breach of duty and the losses suffered. Here there was no direct link because the loss was caused by third parties after the solicitor’s duty had come to an end and the plaintiff ’s assumed control of the property.

purchase of land. The client proceeded to purchase and develop a warehouse on the land, which it would not have done if the secret profit had been disclosed. The client suffered loss when the warehouse began to sink causing extensive damage to the building. The sinking was attributed to the negligence of the soil engineers and a pile-driving company. Those parties were unable to meet the full damages award for their negligence and the lender foreclosed on the property. The client sued the solicitors for their remaining loss. The Court held the client could recover the difference in the price represented by the secret profit and expenses incidental to the acquisition of the property. It could not recover the loss arising from the negligence of those involved in the warehouse development. By this stage the property was under the control of the client and the third parties’ negligence was not sufficiently linked to the solicitor’s breach of duty.

[213] It has been suggested that the proper approach will depend on the nature of the fiduciary duty breached. If the claim could equally have been one for negligence or breach of a contractual duty to take care, there should be no difference between the award made in equity and that which would have been awarded at common law.²⁰⁰In the present case the breach is of the duty of loyalty. However the breach of the duty of loyalty was not a dishonest one. It arose out of a failure to recognise the potential conflicts of interest with its other clients in acting for Mr Lynds and did not personally advantage Fitzherbert Rowe.

[214] The time at which loss is to be assessed is discussed in Canson by McLachlin

A related question which must be addressed is the time of assessment of the loss. In this area tort and contract law are of little help. There the general rule is that damages are assessed based on the value of the shares as at the time of the wrongful act, in view of what was then foreseeable, either by a reasonable person, or in the particular expectation of the parties. Various exceptions or apparent exceptions are made for items difficult to value, such as shares traded in a limited market. The basis of compensation at equity, by contrast, is the restoration of the actual value of the thing lost through the breach. The foreseeable value of the items is not in issue. As a result, the

²⁰⁰Sir Peter Blanchard (ed) Civil Remedies in New Zealand (2nd ed, Brookers, Wellington, 2011) at

losses are to be assessed as at the time of trial, using the full benefit of hindsight.

It may sometimes be necessary to qualify this general principle to recognize the plaintiff’s responsibility not to act unreasonably. It may not be fair, for example, to allow a plaintiff who has discovered the breach to speculate at the expense of the fiduciary. If a fiduciary holds out an investment as secure when in reality it is highly speculative, the injured party should not be able to retain the investment in unreasonable hope of a fortuitous rise in value, secure in the knowledge that any loss will be borne by the fiduciary. In such a case, the court might conclude that the loss should be assessed as at the time at which the behaviour of the plaintiff becomes clearly unreasonable. Mitigation, where losses are assessed as at the time of trial but adjusted to account for what might have been saved, will be appropriate where the losses which might have been prevented are separable from the underlying value of the thing lost; for instance, consequential losses. Adjusting the time of assessment will be more appropriate where the actions or omissions of the plaintiff directly affect the value of the thing lost. No doubt the final award will sometimes be the same under either approach.

[215] In this case there is the complicating factor of NRBL’s establishment, at a time when the Newbury partnership was unable to repay the Pegasus loan. NRBL was able to continue to trade only because of the capital injected by Michael Lynds and Mr Meo, and because of loans made by Mr Meo.

[216] The parties each called an expert to give evidence assessing the loss to Mr Lynds arising from the Pegasus transaction. Each expert used a different methodology and different assumptions. They each looked at the position on the basis that the losses carried through into NRBL. Mr Hussey also considered the position if the losses should be assessed at 30 June 1992 when the partnership dissolved. The parties were agreed that I should determine the appropriate methodology and assumptions. They then anticipated the experts would be able to work together to agree the quantum of loss.

[217] Mr Lynds called expert evidence from Ms Kelly. She was instructed to consider Mr Lynds’ position if the Pegasus loan and stallion purchases had not taken place. She identified four categories of losses that would not have occurred: loan repayments, loan servicing costs, the costs of keeping the stallions and legal and other direct costs. She also identified three categories of mitigating revenues or cost

reductions: service fees, syndication fees and savings on progeny service fees. This was for the period from when the loan was drawn down, until the remaining part of the loan was repaid in 1997.²⁰²

[218] Her first approach was to simply add up all the losses and deduct the revenue and cost reductions. On this approach the loss totalled $3,183,000 before interest²⁰³and costs. She amended her loss calculation to $3,069,000 as her first calculation included the initial interest payment of $113,875 twice. Her second (alternative) approach involved removing the transactions associated with the Pegasus loan and stallion purchases from the financial accounts up until 1997 and she compared this with the actual financial accounts for this period. On this approach the loss totalled

$2,556,000 before interest and costs. Ms Kelly considered the second approach was preferable because the first approach does not identify the losses suffered by Mr Lynds personally.

[219] Fitzherbert Rowe called expert evidence from Mr Hussey. His approach began with calculating the loss to the partnership from the stallion transactions. This involved calculating stallion costs versus revenues, assets funded by the transactions versus funding liabilities²⁰⁴and a comparison of Mr Mitchell’s and Mr Lynds’ partnership accounts. He added these amounts to calculate the loss each year from the stallion transactions. He allocated half of this loss to Mr Lynds for each year except 1992, where he allocated the full loss to Mr Lynds.²⁰⁵He then added the loss in value of the stallions when sold to NRBL and Mr Mitchell’s negative current account. This gave Mr Lynds a loss from the partnership of $352,000. He carried this sum through to his calculations for NRBL. However, it was offset by the stallion benefits he identified in 1993 and capital contributed by Michael Lynds and

²⁰²She says that after 1997 the stallions were no longer earning any revenue. The only transactions that continued to impact on the loss suffered from this point were continuing debt servicing costs generated from new loan funding used to repay Pegasus.

²⁰³She calculated Judicature Act interest (which she described as opportunity cost) of $2,370,039 for the period between 1989 and 2014.

²⁰⁴He considered any additional liabilities over the value of the relevant assets would have been used to repay other debt and as such could not be included in the loss.

[220] Mr Hussey then calculated the loss to Mr Lynds as a shareholder in NRBL. This was calculated in two different ways. On the first approach he assumed the Meo consultancy fees were retained by NRBL. On this approach he calculated the loss as being $459,646. On the second he assumed that Meo consultancy fees were instead paid to Mr Lynds as salary. On this approach he calculated the loss as being

$1,157,387. These both included Judicature Act interest where he considered this was appropriate to 31 May 2015.²⁰⁶

[221] I consider that Ms Kelly’s second methodology is the appropriate one if the losses are to be calculated through to 1997 when the Pegasus loan was repaid (before adding interest). It has the advantage of conceptual simplicity and a more direct focus on losses specific to the Pegasus lending and stallion purchases. I consider it therefore best fits with the need for equitable compensation to be directly linked Fitzherbert Rowe’s breach. However, the position becomes more complex when the assumptions Ms Kelly has used in making her calculations are considered.

[222] Assumption A concerns $235,000 withdrawn from Newbury Park by Mr Mitchell. This is made up of two amounts: $175,000 withdrawn on 4 April 1989; and $60,000 withdrawn on 14 June 1989. Ms Kelly bases her calculation on the assumption that these withdrawals would not have taken place if Mr Lynds had been properly advised (that is, informed by Fitzherbert Rowe of Mr Mitchell’s poor financial position). She considers it appropriate to treat Mr Lynds as having taken over Mr Mitchell’s deficit in the partnership current account. Mr Hussey says this approach disadvantages Mr Mitchell because the partnership assets were sold at book value and Mr Mitchell should get the advantage of the market value of the

²⁰⁶In a later brief he reworked his calculations using different assumptions.

[223] I consider Ms Kelly’s methodology is more appropriate. I agree with her there is no point in trying to recreate the sale of the assets at market value. The amounts shown in the financial accounts are the sounder basis on which to proceed. However, I consider that only the $60,000 withdrawal is relevant. Those funds were withdrawn after Fitzherbert Rowe’s breach of duty. The funds are directly linked to the breach because they came from the Pegasus loan. Mr Lynds did not pursue his claim relating to the failure to advise of the need for independent advice when the securities and guarantee were given for the National Bank overdraft, from which the

[224] Assumption B concerns whether Fitzherbert Rowe is liable for the National Bank interest incurred on the $235,000 withdrawal. Mr Hussey considers this involved double counting because Ms Kelly has also calculated Judicature Act interest on the loss. Ms Kelly agreed with Mr Hussey about this.

[225] I consider that National Bank interest charged on the $60,000 withdrawal is directly linked to Fitzherbert Rowe’s breach and would be recoverable. To the extent that Judicature Act interest amounts to double counting on this amount it would not be recoverable.

[226] Assumption C concerns a “Talking Point debt” which is shown in the financial accounts.²⁰⁷Ms Kelly proceeded on the basis that this debt arose to fund the initial deposit for Epidaurus of USD50,000 (NZD81,921). As there is no evidence it was repaid by the vendors, when the full amount of the purchase was funded by the Pegasus loan, she considers it is a cost the partnership incurred from the stallion transaction. Mr Hussey agrees it is unclear whether the initial deposit was repaid. He has not included it, however, on the basis that Fitzherbert Rowe is

_{not responsible for the failure to seek repayment from the vendor for
this amount.}

²⁰⁷This debt no longer appears in the Newbury Park partnership accounts by 1992.

[227] I consider the Talking Point debt should not be taken into account in assessing Mr Lynds’ loss. This is because:

(a) If the deposit for Epidaurus was in fact paid twice, the failure to seek repayment of the sum is not sufficiently linked to the breach of fiduciary duty. It was the responsibility of the Newbury Park partners, and their accountant, to notice this overpayment and seek recovery.

(b) I consider it is not clear that the deposit was paid twice. After the settlement of Epidaurus had taken place, Duthie Whyte wrote to Fitzherbert Rowe seeking payment of two things. One was the first lease payment. There is evidence this was paid by Fitzherbert Rowe on 8 June 1989. As to the other, Duthie Whyte’s fax said “[w]e also note that you hold funds for us in respect of the Epidaurus advance and would be grateful if you would let us have these by return”. Mr Roche described this as being the “advance made by means of Pegasus, through its agents, paying over the required balance of the stallion’s purchase price to the vendor’s agent”. That evidence indicates Pegasus paid the balance only to the vendors. The more likely scenario is that the vendors were not overpaid and the Newbury Park partnership had the benefit of the full Pegasus facility to purchase the two stallions and to repay the Talking Point debt.

(c) Fitzherbert Rowe submit that there is a further reason why the Talking Point loan should not be taken into account. That is, the deposit was paid prior to the breach of fiduciary duty. If Mr Lynds had been advised of Mr Mitchell’s poor financial position and not proceeded with the Pegasus loan and stallion purchases this deposit would have been forfeited. I agree.

[228] Assumption D concerns whether Fitzherbert Rowe are liable for the Pegasus debt to the extent it exceeded the cost of the two stallions. Ms Kelly’s calculation includes the entire loan amount on the basis that it would not have been drawn down

but for the stallion purchases. Mr Hussey says it should not be taken into account because the additional amount must have been funding for the non-stallion part of the business and therefore should not be attributed to Fitzherbert Rowe.²⁰⁸

[229] I consider Ms Kelly’s approach is the correct one. If Fitzherbert Rowe had disclosed the material information about Mr Mitchell the loan would not have been drawn down. The entire loan is therefore directly linked to the breach of duty.

[230] Assumption E is concerned with the extent to which Fitzherbert Rowe is liable for the NRBL losses. Mr Hussey approaches the matter on the basis that Fitzherbert Rowe is only liable to the extent that the losses had a flow on effect to Mr Lynds. He calculates these losses on the basis that Mr Lynds held 50 per cent of the shares and Michael Lynds and Mr Meo held the other 50 per cent.

[231] Ms Kelly acknowledges her first approach did not take this into account. Her second approach calculates the NRBL losses only to the extent they had a flow on effect to Mr Lynds. She has approached this on the basis that, when NRBL was formed, Mr Lynds assumed 100 per cent of the partnership loss on the sale of Newbury Park assets to NRBL and Mr Lynds was the only active shareholder and manager of NRBL and the company profits and losses flowed to him.

[232] I consider the partnership losses at the time of the sale to NRBL should be assessed as 100 per cent to Mr Lynds. At this time Mr Lynds has assumed the full loss. I agree with the experts that, if the NRBL losses are relevant at all, they are only relevant to the extent they had a flow on effect to Mr Lynds. Fitzherbert Rowe did not owe a fiduciary duty to NRBL. I consider that losses suffered by Mr Lynds after NRBL was established, if recoverable, should be calculated on the basis of Mr Lynds 50 per cent shareholding because that is the way those involved structured

²⁰⁸The evidence is that part of the additional amount was used to fund the first payment to Pegasus and Mr Mitchell used $60,000 for his own purposes. The balance possibly may have been taken up in legal costs, but I am unsure about this.

[233] Assumption F concerns the $200,000 of new capital introduced by Michael Lynds and Mr Meo. This was used to reduce the Pegasus debt. Mr Hussey says the loss calculation must recognise that NRBL received this benefit. He treats this new capital as a cash injection which offsets the losses.

[234] On Ms Kelly’s second approach, she considers the $200,000 should be treated as a loan. This was first on the basis that NRBL should be treated as a plaintiff. Alternatively, her counterfactual is that NRBL would not have been formed and the $200,000 contribution would have been made as a loan. Mr Hussey says the

$200,000 of new capital was, by definition, not a loan and it will never be repaid.

[235] In my view it is not appropriate to treat NRBL as a plaintiff entitled to damages. Fitzherbert Rowe owed no duty to it. The new capital is relevant only to the extent of its effect on Mr Lynds. If his losses are to be calculated until the Pegasus loan was repaid in 1997 I would not treat the $200,000 as a loan. I agree with Mr Hussey that the parties involved treated it as capital, for which they became shareholders in NRBL. (Had NRBL been successful it seems likely they would have received a share of the profits.) Mr Lynds is not liable to repay the capital and therefore this is not part of his loss.

1994 to reduce the Pegasus debt. Mr Meo lent Mr Mitchell $100,000, which was paid to Pegasus, to acquire stallion shares from NRBL. Mr Mitchell was to repay this by 28 February 1997. He did not do so and was bankrupted over the debt. Mr Meo caused NRBL to acquire the debt with the result that NRBL then owed a further

to record the purchase of the Mitchell loan at cost ($100,000) and then to record the

$100,000 debt to Mr Meo. NRBL would then have had to write off the worthless asset acquired. He says the accounting shortcut had the effect of inappropriately

reversing the transaction in which the stallion shares had been sold. He queries how

[238] Ms Kelly’s calculations proceed on the basis that, regardless of the original intent or accounting treatment, the $100,000 was a loan from Mr Meo to NRBL and it was used to repay Pegasus. Therefore it should be included in the calculations.

[239] It appears the purpose of the $100,000 loan by Mr Meo was to set up a mechanism by which Mr Mitchell, if he was able to do so financially, would take up some shares in the stallions (which, Mr Lynds believed, he had committed to doing before they proceeded to purchase two stallions) as a way of paying back some of the Pegasus loan. It is unlikely Mr Meo would have loaned Mr Mitchell this money, given his poor financial position at the time, unless there was a prospect of a return

in some way for him.²⁰⁹The fact that NRBL took over the loan is consistent with

this. It is evidence that the parties always intended that NRBL would bear the risk of Mr Mitchell’s default. Therefore I consider Ms Kelly is correct to include this loan in her calculations.

[240] Assumption H concerns whether Mr Lynds should be treated as having a 50 per cent or 100 per cent interest in NRBL. This is the same issue as discussed under assumption E.²¹⁰I consider Mr Lynds’ loss as at 30 June 1992 should be calculated at 100 per cent as by that stage Mr Mitchell had effectively withdrawn from the partnership and was unable to assist with repaying the Pegasus loan. I consider that once NRBL was set up Mr Lynds’ losses should be calculated on the basis of his 50

[241] Assumptions I and J concern two loans made by Mr Meo. One of these was for $100,000. The other was for $290,000. As the Fitzherbert Rowe submissions

²⁰⁹For example, for his capital contribution he received a shareholding. For his advances to NRBL

Meo (or possibly Capivich, which is a Meo entity) is complicated. The financial accounts show the following:

(a) In 1996 there was a loan of $100,000 from Mr Lynds to NRBL and the Pegasus debt was reduced from $390,000 to $290,000.

(b) In 1997 there was a loan of $390,000 from Mr Meo to NRBL and the Pegasus debt was gone. The $100,000 loan from Mr Lynds was still shown as owing.

(c) In 1998 and 1999 the $390,000 was shown as a current liability owed to Mr Lynds. The notes to the 1998 accounts state “[t]his loan was made to the company from funds borrowed by JR Lynds from BT Meo. BT Meo has taken a charge by way of debenture over the assets

(d) This sum remained in the NRBL accounts as a liability owed to Mr Lynds until 2013 when it was again recorded as a current liability owed to Mr Meo. This change was not explained in the accounts.

[242] The loan of $100,000 from Mr Lynds referred to in the 1996 and 1997 accounts is unexplained. This appears to be an error. There is, however, evidence that Mr Mitchell borrowed $100,000 from Mr Meo which was used by NRBL to repay $100,000 to Pegasus. There is also evidence of a loan from Mr Meo to NRBL of $290,000 which Mr Lynds guaranteed.

[243] The $290,000 loan and guarantee were entered into on 22 November 1996. The agreements at that time were:

(a) A debenture which recorded that Mr Meo has “agreed to provide to or for the Company [NRBL] from time to time financial services more particularly defined ... as “Secured Moneys”.” “Secured Moneys”

(b) An agreement between NRBL and Mr Meo under which Mr Meo advanced a principal sum of $290,000 to NRBL to be repaid on

28 February 1997. This was subject to an interest rate of 13.5 per cent and a penalty rate of 15.5 per cent.

[244] Based on these documents the 1997 financial accounts appear to have been correct and the amount secured by the debenture and guaranteed by Mr Lynds was

$390,000 (the $290,000 in the 22 November 1996 agreement and the $100,000 initially lent to Mr Mitchell). The change in 1998 and 1999 is only correct if the loan from Mr Meo was assigned to Mr Lynds. There is no evidence of this. Instead, the evidence is that Mr Meo considered NRBL still owed him the money because he was charging NRBL interest on the loan (via a “contra” arrangement) until

30 September 2006. By this stage NRBL had paid Mr Meo in cash terms $427,602. This exceeded the principal of $390,000.

[245] It seems likely that at this point Mr Meo and Mr Lynds reached a new agreement over the terms for repayment of the loan. At this time Mr Lynds was investigating a claim against Fitzherbert Rowe. He was grateful for the considerable assistance Mr Meo had provided him in enabling him to stay in business. Mr Lynds assured Mr Meo he would be repaid if the claim succeeded. Repayment of the loan would be contingent on success in the ligation.

[246] Consistent with this arrangement, Capivich, continued to show as a current

asset “Advance – Newbury Park”. This was consistently shown as an amount of

$325,783 between 2007 and 2012. Why this was not for $390,000 is not clear. The amount shown in Capivich’s accounts was then reduced to $227,464 in 2013, again for reasons which are unclear (by this stage Mr Meo had died). However, regardless of the reasons for the particular amount shown in the accounts over this period, the

entries are consistent with there having been an assurance from Mr Lynds to Mr Meo about repayment if he was ever able to recover some damages from Fitzherbert Rowe. John Meo was executor of Brendan Meo’s estate at this time. He was aware of the assurance and the court proceeding.

[247] On 30 March 2015 a Deed of Agreement between NRBL, Jeffrey Lynds, Andrew Lynds (who is Jeffrey’s son), Charew²¹²(an entity associated with Andrew) and John Meo was entered into. Following this a Deed of Assignment of Debt and Security from the estate of Brendan Meo to Charew was entered into on 10 April

(b) in return Mr Meo’s estate was entitled to receive an amount if the claim against Fitzherbert Rowe was successful, the amount payable depending on the amount of damages; and

(c) Jeffrey Lynds was released from his personal guarantee if the Meo estate received the agreed proceeds from a successful damages claim against Fitzherbert Rowe.

[248] In light of all this, Fitzherbert Rowe first submit the loan for $390,000 was statute barred. Although the submissions did not elaborate on this, I understand this to be on the basis that the loan was restructured in 1997 so that it became a loan from Mr Meo to Mr Lynds. I also understand the argument to be that time began to run when the advance was made because there was no time specified for repayment. Fitzherbert Rowe contend that, if the loan is not recoverable against Mr Lynds because it is statute barred, then Mr Lynds has not suffered any loss from the loan and it cannot form part of his compensation. The submissions for Mr Lynds did not

[249] As discussed above my view is that the loan was always a loan from Mr Meo to NRBL. Mr Meo’s rights under that loan were assigned to Charew. Fitzherbert Rowe did not owe any fiduciary duty to NRBL. Mr Lynds can recover only to the extent that NRBL’s losses from the Pegasus transaction flow to him. Mr Meo has never sought to enforce repayment of the $390,000 from Mr Lynds pursuant to the guarantee. Compensation should not be assessed on the basis of a contingent loss which is unlikely to materialise. If Mr Lynds chooses to pay any compensation he is awarded to Mr Meo, that is a matter for him. Any amount paid to the Meo estate under the 2015 agreement by Charew arises from an arrangement entered into many years after Fitzherbert Rowe’s breach of duty. Fitzherbert Rowe had no control over that arrangement. It materially altered the terms on which the Meo debt would be repaid. In my view there is not a direct link between Fitzherbert Rowe’s breach and any payment that might be made to the Meo estate from this litigation.

[250] In short, I consider the calculation of the loss suffered by Mr Lynds should not include the loan from Mr Meo to NRBL of $390,000.

[251] Assumption K concerns whether Mr Lynds’ loss should include the interest NRBL paid to Mr Meo. This was paid as “consultancy fees” to Capivich. There was also a contra of training and agistment fees which Mr Meo owed to NRBL over the relevant period. This arrangement was set up at Mr Meo’s request. Fitzherbert Rowe contend these sums cannot form part of Mr Lynds’ compensation because the arrangement amounted to tax evasion and was therefore the arrangement was not enforceable.

[252] The tax effects of this arrangement were explained by Ms Kelly whose clear and comprehensive evidence about this I accept. NRBL claimed a GST input credit which it would not have been entitled to if the payments were for interest (which is GST zero rated). However the effect on the Inland Revenue would be neutral because Capivich would have paid GST on these amounts. She accepts there may

_{have been a small timing issue.}²¹³_{Resident
Withholding Tax (RWT) would have}

been payable by Capivich on interest received. However this would depend on whether Capivich had an exemption on the basis that the Meo interests were making losses. On the face of the material before the Court the Meo interests would have qualified for an exemption and NRBL would have had no corresponding obligation to deduct RWT. Further, as Ms Kelly stated, RWT is a provisional tax paid during the year. This would not affect the total tax liability at the end of the year which would be payable on income (including income that may have been liable for RWT), only the timing of payments. Ms Kelly responded on all the matters Mr Hussey raised to suggest there may have been a benefit to Mr Meo in the arrangement.

[253] The parties referred to Patel v Mirza.²¹⁴In that case Mr Patel paid money to Mr Mirza to buy shares using insider information which Mr Mirza expected to obtain from his contacts. The insider information did not materialise and the money remained in Mr Mirza’s account. Mr Patel was successful in recovering the money. The UK Supreme Court held that a plaintiff who satisfies the ordinary requirements of a claim for unjust enrichment is not debarred from enforcing his claim by reason only of the fact that the money he seeks to recover was paid for an unlawful purpose.²¹⁵It was necessary to consider whether the public interest would be harmed if recovery were granted.

[254] If Mr Lynds’ loss was to be calculated beyond 30 June 1992, I consider the proper approach would have been to treat the sums paid as consultancy fees,²¹⁶which were interest payments, as interest payments with a deduction for the GST credits claimed. This calculation would need to take into account that NRBL has accumulated unpaid GST. This is not about enforcing an illegal contract (even if that were established), but about restoring Mr Lynds to the position in which he would

have been if the Pegasus transaction had not succeeded. Absent evidence of loss to Inland Revenue and proof that Mr Lynds intended this, the public interest does not require that Fitzherbert Rowe be excused from compensating Mr Lynds for the loss

[255] In my view, however, the difficulties surrounding the assumptions show that it is wrong to attempt to assess Mr Lynds’ loss from the Pegasus transactions beyond

30 June 1992. NRBL was formed because Mr Lynds was unable to pay his debts, in particular he was unable to repay Pegasus under the agreed terms. At that point it was possible to calculate the loss to Mr Lynds from the Pegasus transaction. Had he known of Fitzherbert Rowe’s breach of duty at this time, his compensation claim would have been able to be determined in this way. Thereafter, he entered into arrangements which enabled him to continue to operate, but which materially altered the structure of the Pegasus transaction and the associated liabilities. These were business decisions out of Fitzherbert Rowe’s control. There is a more attenuated link between the breach of fiduciary duty and Mr Lynds’ losses as calculated under the NRBL structure. Compensation on this basis risks determining an amount that is out of kilter with the loss that is properly attributable to Fitzherbert Rowe’s actions. Equitable compensation must be an amount that is fair and just in the circumstances.

[256] If the losses were calculated as at 30 June 1992 a more straightforward methodology is potentially available. As at that date the partnership was unable to repay Pegasus. Mr Lynds was jointly and severally liable for the full amount of the loan and the full amount of the unpaid interest. Mr Mitchell, who had withdrawn from the partnership, was unable to make any payment to Pegasus. The liability stood to fall entirely on Mr Lynds. Offsetting his liability to Pegasus, he had two stallions and the income he earned from them.

[257] In rough terms it appears that the loss to Mr Lynds at 30 June 1992 might be something between $1 million and $1.5 million. I have derived this guesstimate from the following:

(b) The total interest owing under the loan was approximately $800,000 (written off by Pegasus in 1993).

(c) The stallions were sold to NRBL for $460,937. The $2.15 million Pegasus liability was offset by this asset so that, before taking into account net income earned on the stallions, the loss was approximately $1.7 million.

(d) As at 30 June 1992 the stallion income (the shares sold, service fees, and savings from their progeny) had exceeded their costs (not including the Pegasus liability). Using Ms Kelly’s figures it appears the net income may have been around $400,000. The net income would also offset the loss.

[258] An award of equitable compensation is to reflect that which the justice of the case requires.²¹⁷Standing back from the detail, an award around the $1.3 million level (before interest and costs) seems to me to:

(a) fairly restore Mr Lynds for the losses from the Pegasus transaction, entered into when Fitzherbert Rowe failed to have regard to his interests when they were in breach of the double employment rule; and

[259] I would not consider it appropriate to reduce this sum on a contributory negligence (if appropriate to apply this by analogy) or equitable abatement basis. Those matters might come more into play if the loss were to be calculated through NRBL’s operation and if that calculation produced a much higher sum than my guesstimate of the losses at 30 June 1992.

[260] Neither party contended this was the appropriate time to assess loss, although Fitzherbert Rowe floated the possibility. As a result I do not have submissions from them as to whether I have overlooked something that makes this timing

_{inappropriate or have erroneously put together the guesstimate.
It is therefore}

²¹⁷Day v Mead above n 195 at 462; see also Smith v Walker above n 161 at [61].

appropriate that I allow the parties the opportunity to make further submissions about this if they wish to do so. However I hope that the parties are able to reach a settlement on the basis of this judgment. This has been a long road for Mr Lynds and, no doubt to some extent, for Fitzherbert Rowe. Closure of the matter is desirable.

[261] Judicature Act interest is discretionary, to be exercised as the justice of the case requires. Its purpose is to enable the Court properly to compensate a successful party for its loss.²¹⁸In this case it would be unjust to allow interest from 1992 to the date of judgment. That period is simply too long, even though Mr Lynds must have faced challenges in bringing his proceeding in light of the financial strain he was under.

[262] I consider that interest at the prescribed rate for five years is appropriate. That period is closer to the time which a proceeding of this nature might ordinarily take from commencement to judgment. The prescribed rate should be at the rate which applied for the five year period from when the proceeding was commenced (that is, five years from 11 June 2007). In addition, he is entitled to interest at the prescribed rate from the date of this judgment until payment of the compensation ultimately agreed or determined by the Court.

(a) Fitzherbert Rowe breached their fiduciary duty to him; (b) he suffered loss as a result; and

[264] He is entitled to compensation. My preliminary assessment of this is that an amount between $1 million and $1.5 million (possibly around $1.3 million) is appropriate. The parties may make further submissions about my methodology and calculations if they wish to do so. They may agree a timetable for doing so.

[265] In addition to this compensation Mr Lynds is entitled to interest on the compensation at the prescribed rate under the Judicature Act for five years from

11 June 2007. He is also entitled to interest at the prescribed rate from the date of this judgment until payment of the compensation ultimately agreed or determined by the Court.

[266] The parties have leave to file (brief) submissions on issue as to costs if they are unable to resolve by agreement. They have three months from the date of this judgment to do so (or such further period as may be granted).

High Court of New Zealand Decisions

Lynds v Fitzherbert Rowe [2017] NZHC 1297 (13 June 2017)