McCarthy v McCarthy [2012] NZHC 1555 (3 July 2012)

Last Updated: 12 July 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-0213 [2012] NZHC 1555

UNDER Part 12 of the High Court Rules

BETWEEN EUGENE GABRIEL MCCARTHY Applicant

AND ROSEMARIE MCCARTHY Respondent

Hearing: 16 May 2012

Appearances: Mr Tetzlaff for Applicant

Mr Downing for Respondent

Judgment: 3 July 2012

_{JUDGMENT OF ASSOCIATE JUDGE DOOGUE}

This judgment was delivered by me on

03 July 2012 at 4 pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Counsel:

Gaze Burt, P O Box 301251, Albany 0752 –[e-mail]

_{McFadden McMeeken Phillips, P O Box 656, Nelson – [e-mail]}

MCCARTHY V MCCARTHY HC AK CIV-2012-404-0213 [3 July 2012]

[1] This is an application for summary judgment. The plaintiff seeks to have the defendant complete the transfer of certain shares in a company purusant to an agreement between the parties.

Facts

[2] The plaintiff and the defendant were the proprietors, directors and shareholders of two companies: International Entertainment (NZ) Limited (“IENZ”), which is a New Zealand registered company, and International Entertainment (Aust) Pty Limited (“IEAUS”), which is an Australian-registered company. Both parties own 50 per cent each of both companies. The parties have had a falling out, and decided to separate their business affairs. The broad thrust of their arrangement to resolve matters was that the defendant would take over the New Zealand company, and the plaintiff the Australian company. They entered into an agreement dated 29

March 2011 (“the Agreement”). The broad objective of the agreement was to transfer the shares in each company to the party who was to have the ownership of that company.

[3] A number of steps were taken to implement the Agreement, but implementation has reached a stage where it has stalled. In effect, the defendant has declined to transfer her shares in IEAUS to the plaintiff.

The Pleadings

[4] The plaintiff has filed an application for summary judgment. The plaintiff seeks specific performance of the provisions of the Agreement that require the defendant to transfer her shares.

[5] A notice of opposition has been filed in turn. The grounds of opposition are as follows:

3.1 The plaintiff has not completed his obligations under the

Agreement, nor assisted in providing information necessary for the

completion of the defendant’s obligations under the Agreement. The equitable remedy of specific performance is not available in such circumstances.

3.2 The plaintiff is seeking specific performance of part of the defendant’s obligations under the Agreement, and ignoring other obligations and conditions of that Agreement.

3.3 The obligation sought to be enforced is conditional, and the condition has not been satisfied.

3.4 The Companies, IENZ and IEAUS, are both parties to the Agreement. However the plaintiff has not included them in the proceedings. The interests of IENZ in particular are prejudiced by the proceedings.

3.5 The Agreement appoints William Grieve as an independent person to administer the fair and equitable restructuring of IEAUS and IENZ. However, the plaintiff has not called upon him or even suggested that the parties approach him concerning the subject of these proceedings. The defendant contends that this in itself is a breach of the Agreement.

3.6 Factual matters are disputed.

3.7 The plaintiff has failed to put full evidence, and full relevant documentation via affidavit, before the Court.

3.8 It is inappropriate to determine these issues on summary judgment.

3.9 There has been "without prejudice" correspondence between the parties, conducted by the lawyers for the parties, attempting to resolve the issues in dispute. The defendant is prepared to waive privilege on that correspondence and have it presented to this Court, if the plaintiff consents to waive privilege.

3.10 The defendant signed the Agreement in good faith, in respect of its shareholding in IENZ and IEAUS.

3.11 The parties’ obligation to transfer shares must minimise adverse taxation effects, whilst at the same time complying with the relevant Laws and Legislation of both New Zealand and Australia, pursuant to cl 9 of the Agreement.

3.12 The defendant has taken the requisite accounting advice relating to the IENZ share transfer obligations, and provided that to the plaintiff. The plaintiff, however, has failed to provide advice in relation to IEAUS to the defendant. Nor has the plaintiff provided the defendant with finalised accounts for IEAUS, so as to allow the defendant to judge for herself the correctness of the timing and method of share transfer.

3.13 The defendant resigned as a director from IEAUS on or about 18

April 2011.

3.14 The plaintiff has the sole directorship of IEAUS, but will not approve its final financial statements for the year ending 31 March 2011.

3.15 The agreement provides for a pooling of funds net of taxation, and other liabilities paid or accrued to 31 March 2011. The defendant has sought detail of what the plaintiff believes the final outcome of such pooling will be. The plaintiff has not provided this information. The defendant has not signed the final accounts for IEUS to 31 March

2011, and is uncertain as to the true position of IEAUS in relation to any pooling or future set-off.

3.16 The present proceedings seek that the defendant transfer her shareholding in IEAUS to the plaintiff but do not seek full performance of the Agreement, which would see the plaintiff likewise transferring his shares in IENZ to the defendant, and would also oblige the plaintiff to provide the financial, accounting and taxation

information to the defendant.

[6] As frequently happens, the points became somewhat more refined in argument and I have dealt with what appears to be the live issues in the judgment that follows.

The defendant’s submissions

[7] From the submissions of defendant’s counsel, Mr Downing, in this Court, the defendant’s objections to completing the share transfer agreement seem to be the following.

[8] At an early stage in the proceeding, it was said that both parties needed to take expert advice on the tax aspects of the transfer of the shares. Indeed, cl 9 of the Agreement contemplates that expert advice will be necessary. From the email exchanges, the defendant seems to have agreed with the plaintiff that such expert advice as the parties obtained ought to be exchanged.

[9] The defendant also submits that cl 6 of the Agreement requires all “funds” of both companies to be pooled and equally divided between plaintiff and defendant. Clause 7 defines “funds”. There has been an equal interim payment to both parties, but a “wash-up” is required of the balance. Clause 8 states that the payment of funds may be made by way of dividends with attached imputation credits, repayment of shareholder’s current account, or any other method.

[10] A further reason that was advanced was that the annual accounts for IEAUS had not been produced for year ended 31 March 2011. More recently the defendants accounting advisor, Mr Hurrell, has advanced the view that the Agreement between the parties necessitated a “wash-up” between them. Because the share transfers and the “wash-up” needed to take place at the same time, it is still not possible to get to the point where the shares are transferred. A related argument is that to attempt to force the defendant to transfer the shares where the wash-up had not been completed, would be to require her to carry out her part of the Agreement, when the plaintiff had not discharged his obligations under the Agreement to produce accounts for IEAUS.

[11] The defendant says she is unable to prepare accounts for the IENZ. Her accounting adviser, Mr Hurrell, states that he is unable to advise her to sign off the accounts due to a recent addition of an unexplained debt owing to IEAUS. This debt was not sanctioned by IENZ management.

[12] I shall refer to this as the “disputed IENZ payment”. The principal reason why the defendant says that she cannot complete settlement of the transaction with the plaintiff is that it is not possible for IENZ accounts to be completed at the present time. She says that the proper interpretation of the Agreement is such that it would be necessary for the parties to complete annual accounts to the year ending 31 March

2011, and that is a required preliminary step to settlement of the share transfer under the Agreement.

[13] The defendant suggests two possible bases for this approach:

a) That there would have to be an entire “wash-up” of all financial

matters between the parties before the share transfers could proceed;

b) That the objectives of cl 9 of the Agreement, which included the minimisation of any adverse taxation affects, could not be complied with without the IENZ 2011 financial statements.

[14] The second part of the above arguments were elaborated on as follows. Mr Downings’ argument was that both parties, as a result of advice that they had received from accountants, were of the view that the most tax effective way of transferring the shares would be to take advantage of the imputation credits available to the IENZ’s shareholders. This approach was linked to debit balances that both parties had in their current accounts with IENZ. The level of deficit of the plaintiff’s account was rather greater than that of the defendant’s, but that is of no import for present purposes. Apparently, the proposal was that IENZ would declare dividends, and the imputation credits would be used to avoid tax on those dividends, and payment of the current account deficits would be made by discharging the current account deficits that each party was liable to the company for.

[15] However, it was Mr Hurrell’s advice that such imputation credits would be lost if they had not first been applied before transfer of the shares. The final step in the defendant’s logic was that the declaration of a dividend and the subsequent processes could not reasonably be advanced until the financial statements had been completed. I am not sure why this is so. The defendant also placed some (albeit lesser) reliance upon a clause of the agreement stating that, in the course of the restructuring of the companies, matters were to be referred for the attention of a third party overseeing the process.

The plaintiff’s submissions

[16] In reply, Mr Tetzlaff for the plaintiff addressed the defendant’s opposition to summary judgment in the following ways.

[17] Mr Tetzlaff took the position that accounts were not necessary. It was quite clear, in his submission, that the company would be able to pay the necessary dividend to clear the shareholders current account deficits.

Discussion

Preparation of accounts

[18] The starting point is to consider what the Agreement provided for. First, each of the parties would reciprocally acquire the shares of the other party in the two companies, with the result that the plaintiff would own IEAUS, and the defendant would own IENZ. It is an important matter of background to appreciate that the agreement was signed on 29 March 2011, and there were only two days in which to effect the transfer of shares.

[19] In cl 5, the parties also agreed to do everything possible to have the full financial statements of the companies as at 31 March 2011 prepared and made available to the other parties “as soon as reasonably possible”. They agreed to equally divide the cash assets of the two companies “immediately”. The reference to immediately must of course be taken to be spoken on 29 March 2011.

[20] Clause 9 provides that the parties, by taking proper accounting advice, shall ensure the transfer of the shares, and the splitting of the funds, to be conducted and timed in such a manner, so as to minimise any adverse taxation effects, whilst complying with the relevant laws of New Zealand and Australia.

[21] At cls 12 and 13 of the Agreement, there were indemnity provisions whereby the parties mutually indemnify each other against any GST, PAYE, income tax or other liabilities “paid or accrued to 31 March 2011”. There was a separate indemnity relating to IENZ’s possible redundancy liabilities.

[22] The relationship between cl 5 (requiring provision of the accounts) and cls 12 and 13 (the indemnity provision) is significant. Because there were no accounts for the year ending 31 March 2011, it was uncertain as to what liabilities had accrued or been incurred at that date. The objective of this arrangement seems to be to ensure that these uncertain liabilities would be shared equally. No doubt this was designed to ensure that one party would not be left with significantly larger liabilities owed by his or her company than the other party. I regarded it as significant that the parties did not include a provision for the sharing of profits. I conclude that the parties were content to take their chances with whatever the 2011 profit result may be, but in the case of “liabilities”, each side would provide an assurance to the other by, in effect, underwriting 50 per cent of the respective figures for the other party’s company.

[23] I am not sure what the extent of the obligation to carry out the suggested “wash-up” is, but if it means that there would be something additional to the implementation of the debt indemnity, I do not consider that it correctly reflects the parties’ contractual intentions.

[24] The next issue is the defendant’s professed inability to complete the financial

accounts ending 31 March 2011, given the disputed IENZ payment.

[25] Even if there was proper proof that the IENZ payment was in dispute, and that it was other than than de minimis, I still would not think that it should delay completion of the accounts. Presumably, if the defendant does not accept that IENZ is responsible for the debt, she can decline to have the company recognise it as a

valid liability. It will then be up to the plaintiff to attempt to overcome the defendant’s opposition. Even at that point, prior to any transfer of shares, assuming that the parties are 50 per cent shareholders, IENZ is unlikely to accept the IEAUS liability. Thereafter, once the share transfer is effected, the plaintiff will no longer be a director of the IENZ and will not be able to force IENZ to meet the obligation. It will then be for the directors of IEAUS to take steps, if they deem them prudent, to enforce the posited liability.

[26] The requirement in the Agreement that the parties arrange for company accounts to be drawn up within a reasonable time is designed to ensure that any indemnity claims are brought out into the open sooner rather than later. That, for example, is one reason why the defendant could have an interest in accounts being prepared promptly for IENZ.

[27] I next consider if the obligation to provide accounts has a wider significance. If, for example, there was to be some further division of the company’s assets as at the balance date 31 March 2011 ("further" in the sense that the division of the liquid assets represented only part of the division of the overall assets), then possibly in the example I have given, the plaintiff might have an interest to see what further entitlements he might have arising out of IENZ in the light of the latest accounts. But it might have been expected that such an important aspect of the agreement would be specifically covered, and so that seems not to have been the intention of the parties.

[28] The parties might have taken the view that in order to get a prompt separation of their business interests, they would simply assume that the underlying value in the two companies should be treated as being approximately equal, and that they would be satisfied if they received one half of the liquid assets each.

[29] For all of these additional reasons, I do not consider that the preparation of the 2011 accounts can be a reason for holding up the share transfers.

[30] Clause 9 makes it clear that one of the objectives of the agreement is the

“splitting of the funds”. This refers to the liquid funds or cash that were in the

possession of the parties at the relevant date under the agreement. There is an assumption underlying the agreement that the amount so distributed will not exceed the capital reserves of the company, shown by its most recent trading period. It was plain, however, that the cash distribution was to go ahead immediately. This is evidenced by the fact that the cash to be distributed was the cash in the bank accounts of the companies at midnight on the day before they signed the Agreement. That fact was not going to be changed by drawing of accounts or by any other matter.

[31] If it later turned out that the company paid out more in the distribution than it could afford to, then there was no mechanism that expressly required the parties to pay back into the company. In the worst case, the company could have been made insolvent, if the words of the agreement are taken literally. It seems likely that cl 13, albeit not felicitously stated, was designed to take care of that position. The requirement that the parties pay to the company one half of the “liabilities” could refer to current and term liabilities as at 31 March 2011 and, it seems, be extended to cover the position where the aggregate of the liabilities exceeded the assets of the company, in which case the parties, having drawn down on the liquid assets of the company affected, would have to repay under the covenant contained in cl 13.

[32] The parties by their own conduct have confirmed that their intention was that the liquid assets of the company should be distributed as at 29 March 2011. No one thought it necessary to wait for accounts to be drawn up for the financial year before they did so. The distribution agreement was in theory a hazardous one from the perspective of the individual companies because it could leave the companies without adequate working capital. But no doubt the proprietors of these closely held companies knew the broad overall position of the companies’ finances, and decided that such an approach could be taken without risk.

[33] On the other hand, the Agreement was silent on the question of whether the parties would be entitled to additional dividend in the event that the profits earned in

2011 and other retained profits turned out to exceed the amount of the cash distribution. Absent the taking of accounts, the Agreement could result in an inequality of treatment between the parties. One company might have had larger net

assets than the other, and to the extent that those net assets were in excess of the amounts distributed, there might be unequal amounts of undrawn profit available to the new owners of each company. But there was no mechanism requiring an adjustment in that circumstance. There was no provision modifying the rights of the shareholders to receive a distribution of the profits of the company proportional to their shareholdings (which in this case, were equal).

[34] The transfer of shares in each company would not directly affect how much each party would obtain under the Agreement. There was no requirement to value the shares in each company, and to adjust it for differences in value, and to require for any such differences.

[35] This indicates that this Agreement reflected a desire by the parties to immediately separate their business affairs without waiting for the completion of mechanisms that might have been expected in a more orderly extrication as shareholders from one of the companies that the other was to acquire. In these circumstances, it is difficult to understand why there should be any delay in carrying out the transfer, unless the delay was required to enable the parties to achieve their objective of splitting the companies’ shares in the most tax efficient way by having recourse to tax imputation credits. But it is clear that that the parties had satisfied themselves on this point very quickly, before they split the liquid funds between them. It would seem that the preliminary distribution, which amounted to AUD $260,922 to each of the parties, was indeed structured in such a way as to take advantage of the imputation credits.

[36] Mr Hurrell has said that in his opinion, that there needed to be a “wash-up”, and that process could not take place until IENZ completed its accounts. He further opined that it would be imprudent for the defendant to complete the share transfer until the “wash-up” had been completed. He was also the view that it was impossible to carry out a completion of the financial statements for year ended 2011 in relation to IENZ because there had been “the recent addition of a debt” owing to IEAUS which was “not explained or sanctioned by IENZ management”. The question then is whether Mr Hurrell is correct in his view that the share transfer should be held up while the accounts were completed.

[37] There are a number of points that can be made about Mr Hurrell’s assertions. First, no evidence is provided that there has been any “addition” of a debt owing to IEAUS. Secondly, if the debt is not properly owing, then the directors of IENZ for the time being can decline to accept it as a proper liability of the firm. Thirdly, it must be the case that the accounts could be completed to a satisfactory stage with, if necessary, a note in the accounts referring to the disputed liability. But I apprehend that what Mr Hurrell is contending for goes further than questions of propriety of completing the annual financial statements. It is implicit in his position that the defendant is not required to go any further in implementing settlement of the agreement by transferring shares until all debts that have accrued in the 2011 year have been identified and paid, where and to the extent appropriate, by the plaintiff.

[38] I do not accept the defendant’s contentions. The agreement did not contemplate that such a process would be followed. Further, it was the parties’ intention to share liabilities when they included the indemnity provisions in cls 12 and 13. The extent of those liabilities is not clear. The issue that arises on the summary judgment application is whether there is an arguable defence, as per r

12.2(2) of the High Court Rules.

[39] That issue may be summarised as whether the defendant is entitled to withhold further performance of the Agreement until such time as all liabilities that may ultimately prove to have been contracted in the 2011 financial year have been identified and the plaintiff has met his one half share of them.

[40] This question is nothing more and nothing less than one of interpretation of the contract. The courts routinely consider the meaning of contracts in the course of summary judgment applications and even in involved cases, attempt to come to reach a judgment about what the contract means. This will not always be possible. Mr Downing in this case suggested to me that I could not reach a satisfactory view about the meaning of the contract because I did not have before me the “factual matrix” that would enable me to do so. The first comment I make is that I had before me at the hearing on 16 May 2012 pleadings and affidavits totalling some 140 pages. Affidavits have been exchanged over the period 23 January 2012 to 7 May

2012. I consider that it is unlikely that there is any additional evidential material that

the parties could have put before the Court that is not already there that would be relevant to the background in which the agreement was entered into. Mr Downing did not attempt to be any more specific about the aspects of the factual matrix that were not in the affidavits. In the absence of such specificity, I am not prepared to defer a judgment while a further examination of the factual background is carried out by the parties.

Reference of dispute

[41] The defendant argued that cl 11 was relevant to the question of specific performance. Clause 11 provides:

11. The parties agree that William Grieve shall be responsible for administering the fair and equitable restructuring of IEAUS and IENZ (in accordance with this agreement) as between the parties and that the general manager and financial controller of IENZ and IEAUS shall report directly to him until the completion of such re- structuring.

[42] Mr Tetzlaff submitted that a provision of this kind was not an arbitration agreement that the parties were obliged to undertake before the Court could adjudicate on the dispute, with an order for stay being forthcoming if necessary in these proceedings until the arbitration had taken place. He submitted in the alternative that if the agreement had the effect of being an arbitration agreement, the defendant was not entitled to a stay, because by taking steps in the proceeding, she had lost any right to an order for stay.

[43] I do not see that there is anything in the point concerning Mr Grieve’s intervention to assist the parties to implement their agreement. The tone of cl 11 is that Mr Grieve will assist the parties to execute the agreement and to bring about the objectives provided for in the agreement. It does not refer any disputes of the parties to Mr Grieve and that is not necessarily its implied meaning. In any event, I agree with Mr Tetzlaff that the defendat has submitted to the jurisdiction of this Court by taking steps in this proceeding. I do not intend to make any further reference to the clause.

Conclusion

[44] The decision I have come to is as follows. I do not accept that there was any requirement that settlement of the share transfers should be deferred until all possible liabilities of the company had been received and considered. It is true that counsel for the defendant has only mentioned the possible claimed liability to IEAUS, to which Mr Hurrell referred in his affidavit. But this must be seen in light of the operation of the indemnity provisions in cls 12 and 13. The meaning that the defendant is contending for is too wide in my view. Its general affect would be that so long as there was still a possibility of an additional “liability” accruing to the company, then the defendant would be justified in declining to proceed with settlement. That could take some years. In any event, I consider that the interpretation the defendant advances is at variance with the indemnity provision contained in the agreement. It is possible, but unlikely, that the parties agreed that they would have the right to decline settlement, as a type of security pending resolution of all possible claims the one company might make against the other. If such liability emerged after settlement, then, and only then, would they need to have recourse to the indemnity arrangements.

[45] However, given the accelerated mechanism for the division of the company underlying the structure of the Agreement, I cannot accept that the parties intended the defendant’s interpretation of the Agreement.

[46] In my view, if it ever is established that IENZ owes a liability to IEAUS in respect of the matters that Mr Hurrell mentioned, then the defendant will be able to activate the indemnity provisions of the contract. The intention of the parties, as discerned from the Agreement, was to the effect that neither party could withhold performance of the basic obligations contained in the agreement as a type of security for any further liabilities that might emerge and which accrued in the 2011 financial year.

[47] In my view, the underlying submission that Mr Downing made, to the effect that the plaintiff is inviting the Court to direct the defendant to perform her side of the contract when the plaintiff has only partly met his obligations, is misconceived.

The question that the Court must ask itself, inter alia, when considering specific performance, is whether the pursuing party is willing and able to meet his or her obligations under the contract. There is nothing in the plaintiff’s stance that suggests he is not. At the present time, the plaintiff’s only obligation is to provide a share transfer. He has done so. He has had financial accounts prepared for IEAUS. The fact that there are no accounts at this stage for IENZ is not his fault, and if it is a breach of obligation on the part of anyone, it is on the part of the defendant.

[48] Reference was made at the hearing before me to the fact that the plaintiff had filed an amended statement of claim that differed from the original statement of claim, in that it omitted orders under one of the two heads originally sought. The order now sought is as follows:

(a) An order for specific performance compelling the Defendant to comply with the terms of the agreement, in particular by transferring the defendant’s 519 shares in IEAUS to the plaintiff forthwith.

[49] In my view, the defendant has not established that she has a defence to the plaintiff’s claim. I see no reason why an order ought not to be made in the form sought and I grant the order sought.

[50] I grant leave to the parties to apply for such further directions as may be necessary. I would not expect that either party would misuse this reservation of leave for improper purposes, such as a delaying device.

Costs

[51] Both parties agreed that costs, if awarded would be on a category 2 basis.

[52] The presumption is that the party who has been successful should have costs. I see no reason to depart from that approach in the circumstances of this case. The defendant is to pay costs on a 2B basis together with disbursements fixed by the registrar. There is, however, another costs issue that requires a brief comment.

[53] During the course of the hearing, I raised with counsel apparent breaches of the High Court Rules that occurred during the phase when the pleadings and

affidavits were being prepared. Specifically, I took up with Mr Downing the fact that his client had filed a further affidavit in the proceedings after the plaintiff had filed affidavits in reply. I drew to Mr Downings’ attention that such a step, even if not explicitly forbidden by the Rules, is not sanctioned by the Rules and is contrary to good practice. Litigants who claim that additional material has been included in affidavits filed in reply have the protection of r 7.26, which restricts affidavits in reply to new matters raised in the notice of opposition or affidavit of the respondent. The Court has undoubted power to decline to read any portions of an affidavit in reply that offend against this Rule. The defendant’s proper procedural recourse was to invite the Court to make such an order. If the case were an exceptional one, the defendant could seek urgent directions from the Court granting leave to file a further affidavit in reply. But it is not permitted for the defendant to take it upon himself or herself to file still further affidavits, as the defendant did in this case. That matter would, but for one factor, have resulted in a possible augmentation of the costs to be awarded if an award of costs was called for against the defendant. I will return to this topic shortly.

[54] When my attention was drawn to the additional affidavits filed by the defendant, rather than carry out an enquiry into the circumstances in which the defendant filed further affidavits, it seemed to me to be a better use of the time to get on with the hearing, particularly given Mr Tetzlaff’s sensible approach that he did not oppose proceeding, despite the additional affidavit.

[55] Mr Tetzlaff, again sensibly, accepted that his client had filed additional affidavits in reply to the defendants’ offending affidavits. He agreed that doing so was not in accordance with practice or the Rules. He stated in mitigation that he had only done so because Mr Downings’s client had improperly filed a further affidavit after the plaintiff’s affidavits in reply were in.

[56] The defendant, by a breach of the Rules, provoked the filing of further affidavits that are not contemplated by the Rules. On the other hand, there was not time to go into the question of whether the plaintiff’s affidavits in reply had raised new material rather than being restricted to issues that were strictly in reply. Had the plaintiff being in breach of the Rules then it would not be fair for the defendants to

be singled out for penalty for retaliating in regard to that breach of the Rules. For those reasons, it does not seem to be necessary to penalise the defendant by an

_{augmented costs order.}

J.P. Doogue

Associate Judge