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Gibbston Community Water Company 2014 Limited v/s Tomanovich Holdings Limited

    CA No. 291 of 2018

    Decided On, 12 February 2019

    At, Court of Appeal of New Zealand


    For the Appellant: A.N. Isac, Advocate. For the Respondent: J. Moss, Advocate.

Judgment Text


(Given by Moore J)


[1] Tomanovich Holdings Ltd (“Tomanovich”) has applied to the High Court to set aside a disposition of property. The transaction at the centre of this dispute is the transfer of potable water assets (the water scheme) in the Gibbston Valley, Central Otago. Tomanovich claims that the water scheme was transferred to the appellant, Gibbston Community Water Co 2014 Ltd (Community Water), for less than it was worth. It is alleged this transfer was for the purpose of defeating creditors, including Tomanovich.

[2] Community Water applied to strike out the proceeding on the ground that Tomanovich’s application amounted to an abuse of process because it was commenced and continued for a collateral or improper purpose, namely to have the water scheme vested back in the transferor with the intention of Tomanovich, or others connected to it, obtaining control of the water scheme.

[3] Justice Gendall declined to grant strike-out.[1] He was not satisfied that Tomanovich’s application was an abuse of process.[2] Community Water now appeals on the basis the Judge not only erred in his assessment of some of the grounds for strike-out but also failed to assess whether, when viewed in their totality, the reasons revealed an abuse of process justifying strike-out.


[4] The water scheme is presently owned by Community Water. Most of the local landowners who use the scheme are shareholders of Community Water. The water scheme services approximately 30 neighbours in the Gibbston Valley. It operates on a non-profit, cost recovery basis.

[5] Two of the landowners who draw water from the water scheme are Kristina Buxton and David Henderson (the Hendersons). Neither is a shareholder in Community Water. Ms Buxton is the sole director of Tomanovich. Mr Henderson is her husband. He was formerly the director of Tomanovich until he was adjudicated bankrupt on 29 November 2010. The shares in Tomanovich are held by his family interests.

[6] From 2007 until December 2014 the water scheme was operated by Gibbston Water Services Ltd (Water Services). This company was owned and operated by Mr Henderson and his family interests. It purchased the shares in Water Services for $60,000. The shares were held by Gibbston Water Holdings Ltd (Holdings), another Henderson entity.

[7] It appears that from an early stage relationships between the Hendersons and others in the valley soured. Users of the water scheme became deeply mistrustful of the Hendersons. Their fear was that the Henderson interests were proposing to use the water scheme for a large hotel and spa development. That acrimony and mistrust continues today and is plainly evident in the respective stances adopted by the opposing parties.

[8] In June 2010 a number of Henderson family companies, including Holdings, were placed in receivership and liquidation. This was some months before Mr Henderson, himself, was adjudicated bankrupt.

[9] In late 2011 an attempt was made to transfer Holdings’ shares in Water Services to another Henderson company, Castlereigh Properties Ltd (Castlereigh). The liquidator of Holdings voided that transaction and applied to the High Court for an order confirming his decision. Justice Mander, in a judgment of 11 July 2014, determined the liquidator could validly make that decision.[4] He determined that the sale for $1.00 was not for fair value.[5]

[10] Five days later, statutory demands were issued against Water Services on behalf of five companies associated with the Henderson family, including Tomanovich. They claimed debts totalling approximately $40,000. These demands provide an important part of the background to the present appeal.

[11] However, on 1 December 2014 the efforts of these companies to initiate the liquidation of Water Services were thwarted when the water scheme was sold to Community Water. The purchase price was $35,000. Various records reveal that this sale was intended to remove the water scheme from the control of Mr Henderson and his associated interests. Justice Gendall summarised the position in the following way:[6]

[19] It is that sale of the water scheme from [Water Services] to [Community Water] for $35,000 which is essentially the subject of [Tomanovich’s] challenge here. [Tomanovich] in its pleading maintains that as a creditor of [Water Services] it has been prejudiced by the disposition of company property, being the sale of the water scheme asset, at an undervalue. It contends that this sale was a disposition which was made with the intent to prejudice it and others as creditors of [Water Services] (as no part of the $35,000 was available to them) and, as a result, [Water Services] essentially became insolvent. As to its claim to be a creditor of [Water Services], [Tomanovich] notes that on 16 July 2014 it issued the statutory demand noted above. This claimed the sum of $11,838, said to be an outstanding debt owing to [Tomanovich]. The statutory demand expired without payment or compromise.

[12] The essence of Tomanovich’s application under s 348 of the Property Law Act 2007 (the Act) is that the disposition of the water scheme to Community Water was at a significant undervalue. Under s 348, the Court may make an order vesting the property in certain nominated persons or require a person who has acquired or received the property to pay reasonable compensation.[7]

[13] Two days after the transfer to Community Water, Water Services was placed into liquidation by shareholders’ resolution. Since the transfer, Community Water has operated and maintained the water scheme.

[14] There is one, further, background matter of relevance. This was described by Gendall J in the following terms:[8]

... once the present proceeding was issued, on 14 December 2017 [Community Water] made an open offer of settlement to [Tomanovich], (accompanied by a denial of liability) for reasons it outlined as:

(a) “The disproportionate cost that was being associated with this litigation compared to the relatively low value of [Tomanovich’s] claim”; and

(b) “The very strong impression [Community Water] has that [Tomanovich] through Mr Henderson is conducting this litigation for the purpose of seeking to wrest back control of the potable water scheme. This is notable from an email from [Tomanovich’s] solicitor, from various discussions between counsel and from the fact that financial compensation is not sought in the proceeding, just the setting aside of the sale.”

[Community Water’s] offer was to pay 100 per cent of all the creditor claims against [Community Water] of the Henderson companies and interests as approved by the liquidators, together with category 2B scale costs for steps taken up to the date of the offer. The offer, it seems, went on to state that if any doubt arose about the value of those creditor claims, the liquidators and the Henderson entities could avail themselves of the processes under the Companies Act to resolve that value issue.

Approximately one week later on 22 December 2007, this offer from [Community Water] was rejected. [Community Water] says this occurred without explanation.

Recent Developments

[15] In its submissions filed for this appeal Tomanovich claims that the offer was rejected because it provided no security for payment and required action to be taken by a liquidator, not appointed by the creditors, when the liquidator had no resources to do so and had refused to take any steps to date.

[16] This prompted the appellant, on 5 November 2018, to amend its offer of settlement by offering to pay all of the Henderson company debts as recorded in the proofs of debt filed by the five companies totalling $43,588.80. Also included was an offer to pay 2B scale costs for the steps taken in the proceeding until 15 December 2017 (being the date of Community Water’s original offer).

[17] On 2 October 2018, Tomanovich applied to join four additional plaintiffs; the four other Henderson companies which, with Tomanovich, have expired statutory demands. The joinder application has been adjourned pending the determination of this appeal.

[18] Tomanovich has also sought to amend its substantive claim by adding an alternative ground of relief; damages to be paid to Water Services. Mr Moss, for Tomanovich, submitted this provides the court with an alternative form of relief under s 248 if the claim is successful but the court is reluctant to transfer the water assets back to Community Water.

Legal principles

[19] Justice Gendall correctly summarised the principles which apply to strike-out applications, observing that Community Water’s application fell to be considered under the fourth ground of strike out listed in r 15.1(d) of the High Court Rules 2016, abuse of process. As the Judge observed, this ground:[9]

... extends beyond the other grounds and captures all other instances of misuse of the court’s processes, such as a proceedings that has been brought with an improper motive or are an attempt to obtain a collateral benefit.

[20] Determining whether a proceeding amounts to an abuse of process requires a broad, merits based judgment which takes into account the public and private interests involved and the facts of the case, focusing particular attention on the central question of whether, in all the circumstances, a party is misusing or abusing the court’s process.[10]

[21] This is an appeal by way of rehearing.[11] Community Water is entitled to judgment in accordance with the opinion of the appellate Court, which should not defer to the lower Court’s assessment of the evidence, but rather form its own, independent judgment.[12]

Issues on appeal

[22] Before Gendall J, six grounds for strike-out were advanced. On appeal, five are maintained. They are:

(a) The proceeding has been continued for an improper purpose.

(b) Tomanovich or associated parties have now held inconsistent positions in this and earlier litigation.

(c) Mr Henderson’s involvement in this proceeding is a cause for concern.

(d) Tomanovich is seeking to raise an issue it could have raised before.

(e) When the above grounds are assessed correctly and together, the only conclusion is that this proceeding is an abuse of process and should be struck out.

[23] We address each ground in turn.

Has the proceeding been commenced or continued for an improper purpose?

[24] Mr Isac, for Community Water, submitted the rejection of Community Water’s offer is telling. He said that if the offer was accepted this may well provide an “end result” more favourable to Tomanovich than it could expect if it was ultimately successful in its claim. Thus he said Tomanovich’s rejection of the offer without a credible explanation was objectively unreasonable, leading to the strong inference that these proceedings are being continued for an improper purpose.[13]

[25] In our view the issue is not so straightforward as Mr Isac contended. We agree with Gendall J that these are genuine causes of action.[14] There is a legitimate dispute as to the value of the water assets, for reasons we expand upon below in relation to the second ground of appeal. If Tomanovich’s position is proved correct, the offer of settlement will not provide a more favourable “end result” than Tomanovich and the other Henderson companies could otherwise expect. We also note Tomanovich now seeks alternative orders: to either set aside the transaction or award damages to the extent of the undervalue.

[26] Furthermore, as Mr Moss submitted, s 348 is a bespoke provision. It entitles creditors who claim to be prejudiced by a disposition of property to apply to the court to set that disposition aside. It operates independently of any action undertaken by the liquidators. In the present context this is a particularly important consideration because Water Services does not have the funds to compensate the liquidator’s costs. On Tomanovich’s account, that is a consequence of the sale of the water assets at undervalue. And, because Community Water’s offer of settlement is contingent on action by the liquidators, the settlement offer does not provide a true or proper substitute for the relief claimed.

[27] For these reasons we are not satisfied the refusal of Community Water’s settlement offer establishes the proceedings were commenced or continued for an improper or collateral purpose, or that would provide support for strike-out.

Has Tomanovich or its associated parties maintained inconsistent positions in this and earlier litigation?

[28] Mr Isac submitted that Ms Buxton, as director of Tomanovich, has deliberately adopted inconsistent factual positions in different, albeit related, proceedings. He submitted that this inconsistent conduct was undertaken for the purpose of obtaining a strategic advantage.

[29] In particular, Mr Isac pointed to what he described as contradictory evidence given by Ms Buxton in respect of the value of the water assets. First was her claim to Mander J in Walker v Gibbston Water Services Ltd that the shares in Water Services were all but worthless because their value was only about $2,500.[15] By contrast, in the present proceedings, Tomanovich suggested the value of the water assets is at least $140,000. This is based on an offer made by a Mr Edney, who Community Water believes may be associated with the Henderson family.

[30] As Gendall J accepted, the discrepancy is a “major one”.[16] But it is explicable. First, as Mander J explained:[17]

[The valuation of $2,500] however represents the disposal value of the readily removable parts, being the pump, fittings and concrete tank. It does not purport to be a valuation of the potable water system in the Gibbston Valley itself. In effect, the valuation provided by Mr Moore and the $5,000 listed in the financial statements is nothing more than the book value of the equipment which could be recovered if the system was dismantled and disposed of. It does not represent the market value of the potable water scheme, nor does it purport to be.

[31] One surveyor put the cost of replacing the water scheme at $158,000 plus GST.[18] While Mander J did not make a finding on the value of the water assets, his conclusion plainly reveals he rejected Ms Buxton’s valuation, preferring the replacement value.

[32] We agree with Mr Moss that in the face of those comments it would have been an exercise in futility, as well as irresponsible, for Ms Buxton to have maintained the value of the water scheme was $2,500. For that reason the position taken by Tomanovich in this proceeding is not inappropriate, and does not lend support to the strike-out application.

[33] We would also add that the observations of Mander J lend weight to Tomanovich’s underlying argument that the sale of the water assets was at undervalue.

Is Mr Henderson’s involvement in these proceedings evidence of an abuse of process?

[34] This submission may be dealt with in short order. Mr Henderson is subject to a prohibition preventing him from participating, directly or indirectly, in the running of any business without the consent of the court.[19] Community Water claims Mr Henderson has been intimately involved in this litigation and thus in breach of that prohibition. He has filed a number of affidavits in support of the various applications brought by Tomanovich. Mr Isac submitted that Mr Henderson’s involvement in the proceedings is apparent from the following:

(a) In December 2014 Mr Henderson was reported in the Otago Daily Times as saying he would challenge the sale of the water assets. His lawyers wrote to Mr Marshall, one of the directors of Community Water, advising that if the assets were not voluntarily returned proceedings would be commenced.

(b) He made an affidavit in support of the present application and has continued to file affidavits in support of Tomanovich’s various interlocutory applications.

(c) Ms Buxton is Mr Henderson’s wife.

(d) Mr Henderson appears to have obtained Community Water’s discovery documents in these proceedings and has used one in breach of an implied undertaking.

(e) When Community Water first made its open offer Mr Henderson telephoned Ms Erkkila, another of the directors of Community Water, issuing threats in the event Tomanovich’s claim was not resolved to his satisfaction.

(f) Mr Henderson has sought to represent all of the Henderson creditors in their dealings with the liquidator.

[35] While these factors certainly indicate that Mr Henderson maintains a close interest in these and related proceedings, as Gendall J observed,[20] he is not a party. Given his past connection with the water scheme it is unsurprising that Tomanovich has filed evidence from him. In several respects, it would appear that he is the only available witness with direct knowledge of the matters he discusses. For these reasons, we are not satisfied that any involvement Mr Henderson has in these proceedings amounts to or contributes to an abuse of process.

Are these proceedings in breach of the rule in Henderson v Henderson?

[36] The rule in Henderson v Henderson is that the same parties cannot litigate a matter which might have been appropriately raised in an earlier litigation, but which was not only because of omission, negligence, inadvertence or even accident.[21]

[37] Again, this ground may be dealt with briefly. Tomanovich is not re-litigating matters which have already been brought before the court. Community Water was not a party to the 2014 originating application. That application concerned the termination of the liquidation of Water Services and the removal of a liquidator, in other words matters other than the particular transfer which lies at the heart of these proceedings.

[38] While there has been some delay in bringing this application, we do not accept that any substantial prejudice has been suffered by Community Water. In particular, we note that the proposed amended statement of claim seeks alternative relief in damages. If it is ultimately found that the transfer of the water assets was at undervalue, but their return would prejudice Community Water, it will be available to the court to award damages to Tomanovich.

Global assessment

[39] Mr Isac was critical of Gendall J for failing to conduct a broad, merits based evaluative judgment taking account of all of the facts of the case. While he accepted the Judge assessed each ground individually and observed that five had merit, he says the Judge did not undertake a collective or global analysis of whether Tomanovich was misusing or abusing the process of the Court.

[40] In our view there are two difficulties with that submission. The first, and most obvious, is that the Judge expressly undertook a global analysis when, having analysed each of the grounds, he observed that:[22]

[62] The sum of the factors discussed above lead me to conclude, but only by a reasonably fine margin, that this proceeding is not an abuse of process under r 15.1(1)(d).

[41] Secondly, in our view the single most persuasive factor justifying dismissing the strike-out application is that there appears to be a legitimate and bona fide dispute as to the value of the water scheme. There is a body of evidence from different sources which supports Tomanovich’s claim that the value of the water assets may be considerably greater than the $35,000 Water Services paid. That is a matter for the court to determine on the hearing of this application. It will require expert valuation evidence.

[42] It seems to us that the issues for litigation on this application are narrow. The first question is what is the true value of the water scheme, and whether the $35,000 paid by Comm

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unity Water was undervalue. Secondly, if the disposition was under value, what relief in terms of s 248 of the Act should be ordered. [43] This matter needs to be determined without further delay. Any outstanding interlocutory skirmishes, including discovery, should focus on the issues to be determined. Result [44] The appeal is dismissed. [45] The parties agreed that costs should follow the event. The appellant must pay the respondent costs on a band A basis together with usual disbursements. ------------------------------------------ [1] Tomanovich Holdings Ltd v Gibbston Community Water Co 2014 Ltd [2018] NZHC 990 [decision of Gendall J]. [2] At [62]. [3] The background to this proceeding was comprehensively summarised by Gendall J at [7]–[30]. What follows gratefully draws on that summary. [4] Walker v Gibbston Water Services Ltd [2014] NZHC 1638 [decision of Mander J]. [5] At [89] and [137(c)]. [6] Decision of Gendall J, above n 1. [7] See also Property Law Act 2007, s 350(1). [8] At [27]–[29]. [9] Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679 at [89] (footnote omitted); quoted by Gendall J at [32]. [10] Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1 (HL) at 31. [11] Court of Appeal (Civil) Rules 2005, r 47. [12] Austin, Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16]. [13] Relying on Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509 at 537. [14] Decision of Gendall J, above n 1, at [43]. [15] See decision of Mander J, above n 4, at [76]. [16] Decision of Gendall J, above n 1, at [47]. [17] Decision of Mander J, above n 4, at [76]. [18] Decision of Mander J, above n 4, at [77]. [19] Havenleigh Global Services Ltd v Henderson [2016] NZHC 2969 at [446]. [20] Decision of Gendall J, above n 1, At [51]. [21] Henderson v Henderson [1843] EngR 917; (1843) 3 Hare 100 at 115[1843] EngR 917; , 67 ER 313 (Ch) at 319. [22] Decision of Gendall J, above n 1.