Willcocks v Teat HC Rotorua CIV 2008-463-000784 [2011] NZHC 1753 (8 December 2011)

Last Updated: 13 December 2011

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

_{CIV 2008-463-000784}

BETWEEN ARTHUR WILLCOCKS Plaintiff

AND JAMES BUNNY TEAT Defendant

Hearing: 29 November 2011

Counsel: R O Parmenter for the Plaintiff

R B Stewart QC and M A Karam for the Defendant

Judgment: 8 December 2011 at 2:00 PM

_{[RESERVED] JUDGMENT OF WYLIE J}

This judgment was delivered by Justice Wylie

On 8 December 2011 at 2.00 pm

Pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Distribution:

R O Parmenter: [e-mail]

R B Stewart QC: [e-mail]

WILLCOCKS V TEAT HC ROT CIV 2008-463-000784 8 December 2011

Introduction

[1] I delivered an interim judgment in this matter on 27 September 2010. That interim judgment was followed by a supplementary judgment issued on 15 March

2011. The supplementary judgment corrected an accidental slip in the interim judgment.

[2] I concluded that Mr Willcocks and Mr Teat entered into an oral agreement in or about September 1999, whereby Mr Teat agreed to transfer 50 per cent of the shares in the company GB Teat Limited to Mr Willcocks at book value. I noted that an agreement to sell an asset at “book value” was certain, and that the value of the assets being sold could be determined by reference to the relevant books of account. I recorded that Mr Willcocks and Mr Teat disagreed on which set of accounts should be used for the purpose of ascertaining the book value of the shares.

[3] In the event, I gave judgment as to liability only, because that was all that counsel then required. They were, at that time, confident that they would be able to resolve the quantum of the resulting damages claim.

[4] In the event, the parties were unable to reach agreement on a number of issues. The hearing resumed before me on 29 November 2011. I heard additional evidence from both parties. Mr Willcocks called evidence from Mr JC Hagen and from Mr DR Appleby. Both are expert accountants. Mr Teat called evidence from Mr GR Graham – also an expert accountant – and gave further evidence himself.

[5] It became apparent from the evidence given, particularly by Mr Graham, that the issues were rather narrower than either party had first appreciated. It became unnecessary to address a dividend of $58,347 which was declared in March 2000, and a loss of $25,450 which was disclosed in the 2000 financial accounts. As a result, significant agreement was able to be reached between the parties and the issues were considerably refined. I am grateful to counsel in this regard.

[6] I record the resulting agreements as follows:

(a) Damages should be assessed by deducting the book value of

50 per cent of the shares in the company, GB Teat Limited, as at the date that the parties entered into the agreement for sale and purchase of the shares, from the book value of 50 per cent of the shares as at the date that Mr Willcocks “left” the company, namely 10 November

2008.[1]

(b) The book value of the company, as at 10 November 2008, was $1.54 million;

(c) The treatment given to various items, and in particular shareholders’ current accounts, in the accounts for the year ended 31 March 1999 differed from the treatment given to the same items in the accounts prepared for the year ended 31 March 2000. The parties were unable to agree on whether the book value for the shares as at the date they entered into the agreement for sale and purchase of the shares should be determined by reference to the 1999 or the 2000 accounts;

(d) Notwithstanding the differences in the treatment of shareholders’ current accounts between the 1999 and the 2000 accounts, the parties did not require me to determine whether shareholders’ current accounts should be treated as equity (as in the 1999 accounts), or as a liability (as in the 2000 accounts);

(e) Mr Willcocks accepted that he should pay interest on the book value of 50 per cent of the shares in the company (ie the shareholders’ equity) as at the date he agreed to buy the shares from Mr Teat, at the

90-day bank bill rate applying from time to time, compounded on a weekly basis, such interest to be payable as from 3 December 1999

_{until the date that Mr Teat settles with him;}

(f) Although I heard evidence in relation to a BMW motor vehicle which Mr Willcocks introduced into the company, in the event, the parties agreed that I did not need to determine any issues in relation to that vehicle. They resolved these matters as between themselves;

(g) Mr Teat agreed that he should pay interest at the Judicature Act rate applying from time to time on $770,000, being 50 per cent of the agreed book value of the company as at 10 November 2008, from such date as I determine is appropriate until the date of payment to Mr Willcocks;

(h) The “buy in” price payable to Mr Teat by Mr Willcocks, together with accumulated interest, should be offset against the “exit price” payable by Mr Teat to Mr Willcocks, together with accumulated interest.

Matters in Issue

[7] It follows that there are only two primary matters I am required to determine, namely:

(a) whether the book value of the company should be determined by reference to the 1999 accounts or the 2000 accounts, and

(b) whether Mr Teat should be liable to pay interest at the Judicature Act rates applying from time to time as from 10 November 2008, when Mr Willcocks “left” the company, or from some later date, on the basis that it would have taken some time to settle the accounts, and determine the amount Mr Teat was required to pay out to Mr Willcocks.

[8] In addition, Mr Parmenter for Mr Willcocks asked me to amend the interim judgment in one respect and he sought costs on a 2B basis.

1999/2000 Accounts?

[9] The accounts for the year ended 31 March 1999 were prepared by Mr Erskine-Shaw. Mr Erskine-Shaw had been the company’s accountant for a number of years, and he had prepared its accounts on a consistent basis for a lengthy period. The accounts showed total shareholders’ equity as at 31 March 1999 of

$394,567.16. That equity included monies held in the existing shareholders’ current accounts. Mr Teat had a current account of $159,704.30, and Mrs Teat had a current account of $82,324.66.

[10] The accounts for the year ended 31 March 2000 were prepared by Mr Willcocks. He changed the treatment of the shareholders’ current accounts. Rather than treating them as an asset, he showed them as a non-current liability.[2] A statement of movements in shareholders’ equity for the year ended 31 March 2000 was prepared. It showed equity at the beginning of the financial year at $61,505. From this was deducted the net deficit for the financial year of $25,450, and a GST

adjustment of $4. This resulted in a net equity of $36,051. The statement recorded the dividend declared of $58,347. The movement in the shareholders’ equity was – ($22,296). Further, Mr Willcocks’ recast the 1999 accounts shown for comparative purposes in the 2000 accounts. His accounting methodology showed that owners’ equity for the 1999 year was $152,539, and that owners’ equity for the year ended 31

March 2000 was $68,738, made up as follows: (a) share capital – $75,000

(b) capital reserve – $16,034

(c) accumulated losses – ($22,296) (d) resulting total equity – $68,738

[11] Mr Parmenter submitted that the book value of the shares as at the date of the agreement for sale and purchase of the shares should be assessed by reference to the

2000 accounts. He based his submissions in this regard on the evidence of Mr Appleby given at the initial hearing in September 2010. Mr Appleby considered that the 2000 accounts should be preferred, because:

(a) a dividend was declared to the existing shareholders, Mr and Mrs

Teat, prior to Mr Willcocks’ involvement; (b) a loss was shown in the 2000 accounts, and

(c) there were imputation credits shown in the 1999 accounts.

Mr Parmenter also submitted that Mr Willcocks started work with the company in December 1999, that that date was rather closer to 31 March 2000, and that in the absence of updated accounts, the nearer accounts should be used.

[12] Mr Stewart QC for Mr Teat argued that the 1999 accounts should be preferred. He referred me first to the evidence given by Mr Willcocks. He noted that Mr Willcocks acknowledged that he did not undertake any due diligence prior to reaching agreement with Mr Teat, and that he accepted that as at September 1999, he did not know what the book value of GB Teat Limited was. When Mr Willcocks was asked if it was a smart thing to agree to purchase shares without knowing what the price would be, he said that he had the management accounts up to the end of August

1999 which showed that the company was operating at a loss – “I mean I had a pretty good idea from that that it wasn’t going to be a zillion dollars”. Mr Stewart also referred to each of the reasons advanced by Mr Appleby for preferring the 2000 accounts. He submitted that GB Teat Limited did not make a trading loss for the year ended 31 March 2000. Rather, it made a trading profit of $45,709. He argued that the loss recorded in the accounts resulted from the fact that a dividend was declared to the existing shareholders. That dividend however was in reality a “money go round” to extinguish an existing debt owed to the company by an entity known as the Clonmel Trust. There was no net alteration in the company’s cash position; the company’s balance sheet was simply tidied up. Mr Stewart also noted

that in any event, the dividend was declared and documented in March 2000, and that the discovered documents showed that Mr Willcocks prepared all relevant papers in relation to the declaration of the dividend. He also referred to Mr Willcocks’ evidence and argued that he placed no importance on the imputation credits. He submitted that the factual scenarios relied on by Mr Appleby for expressing his preference did not exist on the evidence.

[13] I was also referred to the evidence of Mr Graham. Mr Graham gave evidence at the initial hearing that it was common practice to base “transaction metrics” for small businesses off the most recently completed set of accounts. When this was put to Mr Appleby in cross-examination, he accepted that they should form the starting point.

[14] In my view, the most important evidence is that given by Mr Willcocks. Mr Willcocks was an experienced and competent businessman. He chose to enter into an agreement to buy shares from Mr Teat without seeing the company’s accounting records, and without requiring that settlement accounts be prepared. He did not suggest to Mr Teat that the sale price should be based on the March 2000 accounts. In my view, Mr Willcocks is bound by the agreement he negotiated and he cannot belatedly try and introduce a term requiring that the book value of the shares be determined by reference to a set of accounts that did not exist at the time the agreement for sale and purchase was entered into. To suggest otherwise would be unfair to Mr Teat.

[15] The evidence that I have heard suggests that unless settlement accounts are prepared, it is common practice to determine the book value of the shares in a company by reference to the most recently completed set of accounts.

[16] In my view, Mr Willcocks is stuck with the 1999 accounts, and the book value of the shares in the company has to be determined by reference to those accounts. The opinions expressed by the expert accountants are no more than ex post facto rationalisations indicating why in their respective opinions one set of accounts should be preferred over the other. Those retrospective opinions cannot affect the agreement that the parties entered into.

[17] Moreover, and in any event, I accept Mr Stewart’s submission that the factual scenarios relied on by Mr Appleby in expressing his preference for the 2000 accounts do not, in fact, exist on the evidence.

[18] Accordingly, I hold that the accounts for the year ended 31 March 1999 should be used for the purpose of assessing the book value of the company.

Date for Commencement of Interest Payments by Mr Teat

[19] As I noted in my interim judgment, Mr Willcocks called on Mr Teat to honour the agreement to sell the shares, but Mr Teat refused to accept there was any agreement between them. Mr Willcocks alleged that Mr Teat’s denial was an act of repudiation, which he accepted on 10 November 2008. He argued that the agreement was cancelled as at that date, and he claimed damages for the “fair value” of 50 per cent of the shares in the company as from that date.

[20] Mr Stewart did not dispute that the agreement had been cancelled as from 10

November 2008. Rather, he submitted that, realistically, it would have taken the parties some time to finalise the separation accounts, and to calculate the “exit price” that Mr Teat should pay in respect of Mr Willcocks’ one-half interest in the business. He submitted that Mr Teat’s liability to pay interest should be deferred for a 90-day period to allow for this reality.

[21] Mr Parmenter accepted that realistically it would have taken a short time to finalise what amount should be paid to Mr Willcocks. He referred to his pleadings. He argued that the cause of action accrued as at 10 November 2008 and sought that interest should be payable from that date. He accepted that if Mr Willcocks had not been dismissed on 10 November 2008, there would have been an arrangement whereby he worked until the accounts were prepared and he departed, and that he would then have been paid out. He was content to leave the issue in my hands.

[22] The power to award interest is contained in s 87 of the Judicature Act 1908. The section provides that the Court may, if it thinks fit, order that there shall be included in the sum for which judgment is given interest as such rate not exceeding

the prescribed rate as the Court thinks fit on the whole or any part of the debt or damages for the whole or any part of the period between the date when the cause of action arose and the date of the judgment.

[23] The Court’s discretion is fourfold. It can decide: (a) whether to award interest at all;

(b) whether to award interest on all or any part of the damages;

(c) whether to award interest for the whole or part of any period between the date when the cause of action arose and the date of judgment; and

(d) whether to award interest at the maximum prescribed rate, or some lower rate.[3]

The discretion is to be exercised as the justice of the case requires.[4] The ability to award interest enables the Court to properly compensate a successful plaintiff for his or her loss. An award of interest is not intended to punish a defendant.

[24] There is no fixed rule for the commencement date of an interest award. The section sets a parameter – it can start from the date that the cause of action arose, and justice will often require that interest run from that date to the date of judgment.[5]

[25] Here, there is no dispute that the cause of action arose on 10 November 2008. The proceedings were commenced promptly, and no criticism can be levelled against Mr Willcocks in this regard. However, I accept the reality that it was impossible, as at 10 November 2008, to determine what sum was payable by Mr Teat to Mr Willcocks. There is no direct evidence before me as to how long it would have taken to prepare the appropriate separation accounts. I do note, however, that the

_{accounts for the year ended 31 March 2000 were prepared promptly. They were}

.

signed on 5 June 2000. So were the accounts for each of the years during which Mr Willcocks was associated with the company. The accounts for 2001 were signed on 31 May 2001; the 2002 accounts were signed on 24 May 2002; the 2003 accounts were signed on 7 May 2003; the 2004 accounts were signed on 18 May

2004; the 2005 accounts were signed on 12 May 2005; the 2006 accounts were signed on 30 May 2006; the 2007 accounts were signed on 27 June 2007; the 2008 accounts were signed on 12 June 2008. It is clear from the evidence that Mr Willcocks was a competent administrator and accountant, and that the company’s financial records under his stewardship were tidy, and readily accessible. In my view, the evidence suggests that separation accounts could have been prepared promptly, within say, six weeks of the date that Mr Willcocks left the company.

[26] Moreover, there was nothing to stop Mr Teat making a payment on account.

[27] In the circumstances, I am satisfied that a short deferral is appropriate to recognise the realities of the situation. I consider however that the 90-day deferral sought by Mr Stewart is excessive. A six-week deferral better accords with the reality of this particular company. I direct that interest is to run as from

22 December 2008.

Further Amendment of the Interim Judgment

[28] Mr Parmenter submitted that I had missed out an element of the claim in my interim decision. He noted that he had asserted in the amended statement of claim that the parties agreed that there would be an equal sharing of profits. He asked me to consider amending the judgment to refer to this issue, and to accept that the parties had agreed that there would be an equal sharing of profits.

[29] The reason for that request is that there is a claim raising this issue before the Employment Relations Authority. That claim results from the alleged summary dismissal of Mr Willcocks. Mr Parmenter was anxious to have this aspect of the matter repaired, to avoid the necessity for spending “a lot of time proving to the [Authority] that the agreement included an equal profit share”.

[30] There was no slip. Whether or not the parties agreed that there should be an equal sharing of profits was not canvassed at the initial hearing as to liability. I did not inadvertently omit to refer to that issue.

[31] I did note in my interim judgment the profits that were paid to Messrs Willcocks and Teat during the eight-year period from 2001 to 2008.[6] I also referred to the sharing of profits, and considered that this was evidence relevant to the formation of the alleged agreement for sale and purchase.[7] However, I did not go further than that. Whether or not the parties agreed to share profits is a matter that will have to be determined by the Employment Relations Authority. It is not a matter that was argued before me, or over which I have jurisdiction, given the proceedings before the Employment Relations Authority.

Costs

[32] Mr Parmenter seeks costs on a 2B basis. Mr Stewart accepts that it is appropriate to fix costs on this basis.

[33] Mr Parmenter annexed to his submissions a costs schedule. I invited Mr Stewart to peruse that schedule, and indicate whether or not there were any items that he disagreed with.

[34] I have received a memorandum from Mr Stewart, advising that there are several matters in the schedule where the costs sought are disputed. It is not appropriate to deal with those issues at this point because Mr Parmenter has not had the opportunity to respond. However, I do not intend to delay the release of this judgment.

[35] I fix costs in favour of Mr Willcocks on a 2B basis. Further, I direct that

_{Mr Willcocks is to be entitled to his reasonable disbursements.}

[36] I would hope that the parties will be able to reach agreement in relation to costs and disbursements. If no agreement is reached, then I direct that the plaintiff is to file a memorandum in relation to costs and disbursements within 10 working days of the date of this judgment. Mr Stewart is to file any memorandum in response within a further 10 working day period. I will then deal with the matter on the

_{papers, unless I require the assistance of counsel.}

Wylie J

---

[1] I record that Mr Willcocks says that he was unfairly dismissed. He has raised a personal grievance against the company. That personal grievance is to be heard by the Employment Court and it is on hold pending determination of this proceeding.

[2] This should not be seen as a criticism of Mr Willcocks. The preponderance of the expert evidence I heard, including that from Mr Graham, suggested that Mr Willcocks was correct in accounting terms to treat the shareholders’ current accounts as a non-current liability, because they were repayable to the existing shareholders and because there was no legally enforceable agreement that the current accounts should be converted into shares or equity.
[3] _{Andrew Beck and Others McGechan on Procedure, Volume 2 at [J87.01].}
[4] Wilson & Horton Ltd v Attorney-General [1997] 2 NZLR 513 at 530; Day v Mead [1987] 2 _{NZLR 443 at 463.}

[5] Day v Mead at 463

[6] _{Willcocks v Teat HC Rotorua CIV-2008-463-784, 27 December 2010 at [23].}

[7] At [39](b).