Gillies Bakery Limited v Gillespie [2013] NZHC 1608 (28 June 2013)

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Hearing:	30 October 2012
Appearances:	G J Judd QC and K J Patterson for Plaintiffs G W Hall and D T Broadmore for First, Second and Sixth Defendants B P Henry and P J Knapp for Fourth and Seventh Defendants M V Robinson and F M Kirkcaldie for Eight Defendant
Judgment:	28 June 2013

This judgment was delivered by me on 28 June 2013 at 4.45pm, pursuant to Rule 11.5 of the High Court Rules.

AND TREVOR KEITH BOSS AND BRIAN ERSKINE-SHAW AS TRUSTEES OF THE TREVOR BOSS FAMILY TRUST Second Plaintiff

AND ESTHER TCHOUA JACQUET AND TREVOR KEITH BOSS AS TRUSTEES OF THE ESTHER JACQUET FAMILY TRUST AND JEAN PHILLIPE THADDEE JACQUET AND TREVOR KEITH BOSS AS TRUSTEES OF THE JEAN PHILLIPPE THADDEE JACQUET FAMILY TRUST AND JEAN PHILLIPPE THADDEE JACQUET AND ESTHER TCHOUA JACQUET PERSONALLY Third Plaintiffs

[1] This proceeding arises out of the circumstances in which the first plaintiff, Gilles Bakery Limited (GBL), gave a guarantee of loan obligations of Yarrows (The Bakers) Limited (Yarrows) to the eighth defendant, Westpac New Zealand Limited (Westpac).

[2] At the material time, Yarrows was the holder of all of the ordinary shares in GBL, and the second and third plaintiffs were the holders of non-voting, redeemable preference shares. Both companies were in the bakery business. Yarrows had purchased the ordinary shares from the second and third plaintiffs (who are trustees of family trusts associated with Trevor Boss and Jean Jacquet, the directors of GBL). I will refer to the second and third plaintiffs as the preference shareholders. They received the redeemable preference shares as part of the consideration for the sale of the ordinary shares. Mr Boss and Mr Jacquet remained directors after the sale (as appointees of the preference shareholders) and continued to run the business on a day-to-day basis.

[3] A few months after acquiring 100% of the ordinary shares in GBL, Yarrows sought an extension of an existing loan facility with Westpac. Westpac agreed to extend the facility on several conditions, one of which was that GBL accede to a guarantee arrangement under which companies in the Yarrows group gave cross guarantees of Yarrows’ obligations and a general security agreement in support of that guarantee.

[4] Yarrows’ board of directors instructed the fourth defendant, its Group Finance Director (Mr Finnegan), and the seventh defendant, its Chief Executive Officer (Mr Pettigrew), to obtain the guarantee and security from GBL. After initially expressing reluctance, Mr Boss and Mr Jacquet signed the documents on behalf of GBL and passed them to the ninth defendant (the solicitors acting for GBL in the transaction) to allow the loan transaction to proceed.

appointed receivers. GBL’s bakery business was sold, and the proceeds of sale were

applied in reduction of the amount owing under the facility. As a consequence, the redeemable preference shares have become worthless.

[6] The plaintiffs say that Yarrows, Mr Finnegan and Mr Pettigrew are deemed directors of GBL and that they breached statutory and fiduciary duties owed both to GBL and to the preference shareholders by requiring GBL to enter into the guarantee, and by failing to inform Mr Boss and Mr Jacquet fully as to the potential consequences of doing so. They say that Mr Finnegan and Mr Pettigrew are directly liable, as the parties who carried out the instruction of the Yarrows board. They say

that Yarrows’ board1 and Westpac are liable for dishonestly assisting Yarrows in its

breaches of fiduciary duties (this claim is based on the contention that Yarrows is a deemed director of GBL). They have also claimed against the solicitors who acted for GBL, alleging breach of fiduciary duty and negligence. That claim does not need to be addressed on the applications before the Court.

[7] Three of the six members of Yarrows’ board (Messrs Gillespie, Duncan and Perry, to whom I will refer as Yarrows’ directors), as well as Mr Finnegan, Mr Pettigrew and Westpac, have applied to strike out the claims against them, or for summary judgment against the plaintiffs. They say first that a company (Yarrows) cannot be a deemed director, but in addition that the plaintiffs do not have an arguable case either on the pleadings or on the evidence for Yarrows, Mr Finnegan or Mr Pettigrew to be deemed directors, nor for a breach by them of either a statutory duty (s 131 Companies Act 1993) or a fiduciary duty. They also contend that the plaintiffs have not established an arguable case that those not directly involved (the Yarrows’ directors, Mr Finnegan in his capacity as a member of the Yarrows board, and Westpac) provided actionable assistance to any breach of duty.

[8] The plaintiffs say their pleading discloses a reasonably arguable cause of action against all defendants, and that the defendants have not shown that no cause

(b) an application by the fourth and seventh defendants for further particulars (as an alternative to the application to strike out).

[10] The plaintiffs’ application was not opposed. The third defendant did not appear (the solicitors formally acting for him had informed counsel for the plaintiffs that the third defendant would not be appearing). I confirm the order made accordingly, at the commencement of the hearing, setting aside the third defendant’s protest.

[11] Counsel for the fourth and seventh defendants advised in the course of the hearing that they would not be pursuing the separate application for particulars in light of an indication from the plaintiffs that they will be amending their statement of claim in any event. That application is dismissed accordingly.

[12] Shortly before the hearing the plaintiffs filed a further affidavit by the plaintiff Mr T Boss, sworn on 25 October 2012. There was no formal opposition to its being read (subject to counsel for the fourth and seventh defendants reserving their right to take issue with inferences that the plaintiffs appeared to be inviting the Court to draw from the facts put forward in the affidavit).

[13] Yarrows initially purchased 75% of the ordinary shares in GBL from the second and third plaintiffs in May 2001.

[14] In June 2006 Yarrows and the plaintiffs entered into an agreement under which GBL was to purchase the remaining 25% of the ordinary shares from the second and third plaintiffs, and GBL would issue to them 2.25 million redeemable

preference shares as a part consideration. The agreement provided that these preference shares would have no voting rights except in relation to matters affecting the rights that attached to those shares. The parties also agreed that Yarrows would arrange for various entities to provide guarantees of GBL’s obligations in respect of the preference shares, and that the shareholders would enter into a shareholders’ agreement and would adopt a new constitution for GBL, consistent with the terms of issue of the preference shares.

[15] Yarrows and the preference shareholders entered into a shareholders’ agreement on 25 August 2006 under which it agreed to exercise its voting rights (as the sole ordinary shareholder) to ensure that Mr Boss and Mr Jacquet (or others as nominees of the preference shareholders) remained directors. The agreement also provided that Yarrows was free to appoint additional directors, who could constitute a majority on the board. The guarantees of GBL’s obligations to the preference

[16] (mate	On rially (a)	31 August 2006 GBL adopted a new constitution which provided to the present application): for the issue of redeemable preference shares, with no voting rights;2
		and
	(b)	that whilst GBL was a subsidiary of another company, any director
		could act in the best interest of the holding company when exercising
		powers or performing duties as a director, even if such action was not in the best interests of GBL.3 A director was defined as a person appointed in accordance with the constitution.4

[17] In April 2007 the parties learned that the agreement reached in June 2006 might give rise to a tax liability. They entered into a deed declaring that the purchase

_{of the shares by GBL was void, and providing instead for the shares to
be sold to}

the ordinary shares in GBL. Mr Boss and Mr Jacquet remained GBL’s sole directors.

[18] In late 2007 Yarrows sought additional funding from its bank, Westpac. It had existing loan facilities secured by a first-ranking debenture over Yarrows’ assets and supported by a cross-guarantee and indemnity agreement with various companies in the Yarrows group.

[19] Westpac offered to provide the funding subject, amongst other requirements, to Yarrows giving further security, including GBL acceding to the cross-guarantee and indemnity agreement in place with the other companies in the group, which involved provision of security in support of its guarantee. The terms on which Westpac was prepared to extend its facilities were recorded in a letter to Yarrows dated 9 November 2007.

[20] Yarrows’ board of directors (at that time comprising the first to sixth defendants) instructed the fourth defendant, the Group Finance Director (Mr Finnegan), and the seventh defendant, the Chief Executive Officer (Mr Pettigrew), to request the guarantee (and security) from GBL.

[21] Mr Pettigrew sent Mr Boss an email on 19 November 2007 informing him that Yarrows was varying the terms of its facilities with Westpac, which required re- documentation of Yarrows’ loan. He said that this required the signature of a Gilles director, and attached a copy of Westpac’s letter containing the loan offer. He requested that GBL accept the terms by signing and returning a copy.

[22] Mr Boss replied to Mr Pettigrew (addressing the email to both Mr Pettigrew and Mr Finnegan) on 23 November 2007, confirming matters discussed the previous day. He commented that Westpac’s request for a guarantee from GBL and security over its assets “watered down” the preference shareholders’ security. He said he would be prepared to sign the letter if satisfactory alternate security was provided and noted that they had discussed either talking to Westpac again or providing further security from Yarrows’ major shareholder Mr P Yarrow, but “the latter may be

easier and keep the bank out of picture”. He concluded his email by saying “Leave it to you to come back to me”.

[23] On the same day Westpac’s solicitors sent draft security documents to Dennis King Law for review, including the deed of accession, a general security agreement and a form of a certificate as to due execution to be provided by GBL’s directors. Dennis King Law subsequently advised Westpac’s solicitors that the documents were in order.

[24] Westpac made a revised loan offer on 15 February 2008. Mr Finnegan signed the letter by way of acceptance on behalf of Yarrows, GBL as the proposed additional party, and most of the existing guarantors (Yarrows’ subsidiaries and other entities, namely trusts associated with Yarrows’ major shareholder, Mr P Yarrow).

[25] On 25 March 2008 Dennis King Law wrote to Mr Boss. The firm said at the outset that it was acting for Yarrows Group and its subsidiaries (including GBL) but not for the Jacquet/Boss interests. It said that it was unable to act for the Jacquet/Boss interests, who should consult their own advisers if they had any doubt about the matter. It explained why the guarantee was required and gave reasons why GBL should provide it. In particular, it mentioned that several parties including Yarrows’ major shareholders (Mr Paul Yarrow and the Paul Yarrow Family Trust) were guaranteeing the redemption of the preference shares, and expressed the view that GBL and the preference shareholders would be no worse off if GBL provided the guarantee.

[26] After Dennis King Law had sent Mr Boss the guarantee and provided that covering advice, both Mr Pettigrew and Mr Finnegan contacted Mr Boss requesting execution of the guarantee.

[27] On 28 March 2008, and without further discussion with Mr Finnegan or Mr Pettigrew, Mr Boss and Mr Jacquet (on behalf of GBL) executed the various documents required to give effect to the extension of the Westpac facility, including the deed of accession/guarantee and the general security agreement. The signed

(a) the board had passed a resolution approving the transaction and authorising execution of the documents (including the letter of offer of 15

(b) in approving the transaction and the documents, the board, after taking into account all relevant factors, considered that GBL was getting fair value under them;

(c) the board had determined, after taking into account all relevant factors, that GBL’s entry into (and performance of) the guarantee was in the best interests of its holding company;

(d) it had been determined that this was a major transaction for the purposes of s 129 of the Companies Act 1993 (the Act), and all of GBL’s shareholders, by special resolution, had approved the documents and the transaction, and had approved and ratified the board’s resolutions; and

[28] The documents were returned to Dennis King Law to allow it to settle the transaction.

[29] On 30 May 2011, Westpac appointed receivers to Yarrows under its debenture.

[30] In November 2011, Mr Boss and Mr Jacquet sold GBL’s business and assets. Westpac exercised rights given to it under the guarantee to require payment to it of the net proceeds of sale. The sale and payment pursuant to the guarantee left GBL

without any funds to meet its obligations in respect of redemption of the preference shares.

[31] The Court may strike all or part of a pleading if it does not disclose a reasonably arguable cause of action or defence.5 The principles that the Court applies in deciding whether a pleading discloses no reasonable cause of action were identified by the Court of Appeal in Attorney General v Prince and Gardner:6

(a) Pleaded facts, whether or not admitted, are assumed to be true provided they are not entirely speculative and without foundation.

(c) The jurisdiction is exercised sparingly, and only in clear cases where the Court is satisfied it has the requisite material.

(d) The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.

(e) The Court should be slow to strike out a claim involving a developing area of law.

[32] Similarly, the Court may give judgment against a plaintiff if the defendant satisfies it that none of the causes of action in the plaintiff’s statement of claim can succeed.7

6 Attorney General v Prince & Gardner [1998] 1 NZLR 262 (CA); they have been endorsed by the

8 Westpac Banking Corporation v M M Kembla NZ Ltd [2001] 2 NZLR 298 (CA) particularly at [61]

Krukziener v Hanover Finance Ltd.9 The principles of particular application in the present case are:

(b) Summary judgment will generally only be entered where the defendant has a complete defence to the claim, which cannot be contradicted.

(c) Although the Court will not normally resolve material conflicts of evidence, or assess credibility of deponents, it need not accept evidence that is inherently lacking in credibility: for example where the evidence is inconsistent with undisputed contemporary documents or other statements by that deponent, or is inherently improbable.

(d) Summary judgment for a defendant will not be appropriate where it is possible for the plaintiff to amend its claim so as to remedy the defects raised by the defendant.

(a) Yarrows was not an appointed (de jure) director of GBL but was deemed12 to be a director because it was a person on whose directions or instructions the appointed directors Mr Boss and Mr Jacquet were

9 _{Krukziener v Hanover Finance Ltd
[2008] NZCA 187, (2008) 19 PRNZ 162 at [26].}

10 _{All references are to paragraphs in the
second amended statement of claim.}

11 The pleading that Yarrows was a deemed director owing statutory and fiduciary duties, and of breach of those duties, is also made against Mr Finnegan and Mr Pettigrew in the same paragraphs of the statement of claim.

(i) statutory duties14 to GBL to act in good faith and in GBL’s best interests when exercising their powers or performing their duties as directors (paragraph 119); and

(ii) fiduciary duties15 both to GBL and to the preference shareholders of loyalty and good faith (not to act in a way that was contrary to their interests) and, to the extent that it was not included in the duty of loyalty, of disclosure (paragraphs 120-

(c) Yarrows breached these duties by procuring GBL to act against its interests by executing the Westpac documents and by failing to ensure that GBL and the preference shareholders (through Mr Boss and Mr Jacquet) were fully informed as to the jeopardy in which they were being placed by executing the documents (paragraphs 123-125).

(i) they caused Yarrows to agree with Westpac that GBL would accede to the group guarantee arrangements and provide security and to give instructions for Dennis King Law to act for GBL (paragraph 128);

(ii) they failed to take steps to ensure that Mr Boss and Mr Jacquet were fully informed of the circumstances which led to Westpac’s requirement to provide the guarantee and that they

15 They claim the duties were owed to GBL because the relationship came within a category that was inherently fiduciary, but alternatively say duties were owed to GBL on the same basis as to the preference shareholders, namely an entitlement to place trust and confidence in the deemed directors not to act in a way that was contrary to their interests.

(iii) they knew of the special position of the preference shareholders and took steps to assist Yarrows to obtain the benefit of the Westpac transaction knowing that the preference shareholders would suffer special harm (paragraphs 130 and

(e) Messrs Finnegan and Pettigrew were deemed directors, subject to the same duties as Yarrows, and in breach of those duties, for the same reasons given for Yarrows.16

(g) Westpac was an accessory to the breaches of duty by the deemed directors because:

(i) it knew that the preference shareholders were external to the Yarrows group and that harm to GBL was not solely a concern of Yarrows or the wider Yarrows group (paragraph 133);

(ii) it conveyed its requirement for GBL to give its support to the loan to Yarrows’ board, Mr Pettigrew and Dennis King Law but not to Messrs Boss and Jacquet as the appointed directors of GBL (paragraphs 134-136);

(iv) it required Yarrows’ board and Mr Pettigrew to get GBL to commit itself without ensuring its directors were fully informed of the circumstances leading to that requirement (paragraph 139); and

(v) provided informed consent, thereby knowing of the potential of special harm to the preference shareholders.

[35] The defendants all say that the plaintiffs cannot succeed on the claims as pleaded, and also having regard to undisputable documentary evidence. They contend that the Court can order summary judgment as there are no material facts in dispute, and that the differences between the parties arise out of the implications of those undisputed facts.

[36] The plaintiffs initially alleged that the Yarrows’ directors as well as Yarrows itself were deemed directors of GBL, and directly liable for the alleged breaches of duty. This claim was removed in the second amended statement of claim (filed after the defendants’ strike out application was filed) and the claim now made is that they are liable as accessories for giving knowing assistance to Yarrows’ breaches of duty as a deemed director.

[37] The Yarrows’ directors say that the claim against them cannot succeed unless

[38] They say first that the plaintiffs’ case is not reasonably arguable because the claim against them is predicated on Yarrows having breached duties owed as a director, and it cannot be a director (whether appointed or deemed) because s 151(3) of the Act requires that a company be a natural person.

[39] Secondly they say that if their first argument is not accepted, the claim that they were accessories to a breach cannot succeed because:

126(1)(b) of the Act, because the evidence shows that the appointed directors, Messrs Boss and Jacquet, were not required to sign the Westpac documents (they were appointed to represent the interests of the preference shareholders and were free to refuse to sign), nor were they accustomed to act on Yarrows’ instructions or direction (this was a single event rather than part of a course of conduct).

(b) Although a deemed director of GBL would owe duties generally under s 131, as GBL is a wholly-owned subsidiary of Yarrows, Yarrows (and the other deemed directors Finnegan and Pettigrew) were entitled under s 131(2) and clause 19 of GBL’s constitution to act in what they believed were the best interests of Yarrows as the holding company, even if that might not be in the best interests of GBL as the subsidiary.

(c) It would be inconsistent with the statutory rights to impose a fiduciary duty on the deemed directors which precludes them from acting in the best interests of Yarrows as the holding company when that is permitted by the Act and GBL’s constitution. Further, Yarrows was not in a position of trust warranting imposition of a separate duty of good faith: GBL’s appointed directors knew what was being sought,

there was no benefit to the appointed directors (and hence to the preference shareholders) in any further disclosure as Yarrows was entitled to appoint its own directors, who could have resolved to give the guarantee relying on s 131(2).

(d) Although a deemed director owes some duties under the Act, the duty under s 131 to act in good faith and in the best interests of GBL is owed only to GBL,17 not to shareholders (hence the provision in the Act for shareholders to bring a derivative action). There is no reason to impose on the deemed directors a fiduciary duty to the preference shareholders given the express exclusion of the statutory duties in s

131, and in the absence of direct dealings between the preference shareholders and the deemed directors on the transaction out of which some special circumstance might have arisen to justify a duty on the deemed directors inconsistent with s 131(2). This was particularly so given that there is no suggestion that such a duty should be imposed on the appointed directors.

(e) Even if the Court was to find in favour of the plaintiffs on the above points, the plaintiffs’ pleading does not disclose a reasonably arguable cause of action on dishonest assistance in any breach because:

(i) Yarrows was not in a position to enter into a binding agreement with Westpac that GBL would execute the guarantee: at most it could have agreed to procure GBL to do so, but that is not pleaded and there is no evidence of any such agreement;

(iii) only GBL could give instructions to Dennis King Law to act for it, although Yarrows did instruct the firm to act for the Yarrows group (which included GBL);

(iv) even if Yarrows did arrange for Dennis King Law to act for GBL, that could not be a breach of duty as it was still protecting GBL’s interests;

(v) it could not be dishonest of the Yarrows’ directors not to have given further information to GBL’s appointed directors in circumstances where there is no basis to impose a positive obligation on them to do so, the appointed directors were fully aware of what was being sought (accession to a loan facility of

(vi) the guarantee would have been given irrespective of whether the further information had been given to the appointed directors (given Yarrows’ entitlement to appoint its own directors who could act in Yarrows’ best interests);

(vii) the Yarrows’ directors had little or no contact with GBL’s directors, were not involved in discussions with Westpac or GBL’s directors about the guarantee, or in the instruction of Dennis King Law, and were not aware of any reason Yarrows should not request GBL to execute the guarantee.18

[40] The plaintiffs’ case against Mr Finnegan and Mr Pettigrew as deemed directors lies in the fact that they dealt directly with Mr Boss and Mr Jacquet over GBL’s provision of the guarantee, and thus came within the definition of persons in accordance with whose directions or instructions the appointed directors were required or were accustomed to act (s 126(1)(b)(i) and (ii)). This claim is advanced separately to the claim that Mr Finnegan was an accessory to breaches of duty by Yarrows by reason of his role as a member of Yarrows’ board.

directors generally in relation to Yarrows as a deemed director, as to the test under s

126(1)(b), as to the application of s 131(2) to negate any breach of s 131(1), and as to the absence of a separate fiduciary duty.

[42] Mr Finnegan and Mr Pettigrew also say that the claims against them cannot succeed either as pleaded or on the basis of the evidence before the Court, because:

(a) Legal responsibility for any risk lay with the appointed directors (Messrs Boss and Jacquet) or with the shareholders (this was a significant transaction requiring a shareholders’ resolution, which the shareholders provided).

(b) It is not pleaded, and could not be pleaded that either Mr Finnegan or Mr Pettigrew occupied the position of a director of GBL (s 126(1)(a)): they were acting on behalf of Yarrows at all times, and did not step outside that role to be a (de facto) director of GBL.

(c) The pleading is that they were deemed directors because they were persons on whose instructions or directions the appointed directors were required or were accustomed to act (s 126(1)(b)). However, both the pleading and the evidence is that they were officers/employees of, and acted for, Yarrows (GBL’s 100% shareholder). There is nothing

to show that they acted in respect of their own interests, so as to make them personally responsible.

(d) Even if it could be argued that the corporate veil can be lifted and that s 126(1)(b) can apply to them personally, the plaintiffs’ pleading and evidence do not meet the statutory test:

(i) there is no evidence that they personally (as distinct from Yarrows as GBL’s shareholder) were persons on whose instructions or directions the directors were required to act. Even if Mr Boss’ evidence that they “told” the appointed directors to sign and made “hurry up” telephone calls “demanding” execution of the documents has to be taken as provable for the purpose of this application, that falls short of a requirement to act (which has a connotation of some power to compel);

(ii) the evidence of their contact with the appointed directors is limited to the one-off request to execute the guarantee documents. This does not constitute the continuing conduct required by the phrase “accustomed to act”: the plaintiffs’ evidence that Mr Finnegan attended GBL’s annual general meetings is an insufficient basis for an inference that the directors were accustomed to act on his directions.

[43] In respect of the claim that he was an accessory to Yarrows’ alleged breach of fiduciary duty, Mr Finnegan adopts the submissions made on behalf of the Yarrows’ directors but adds that there are no particulars of any dishonest conduct to support the pleading that the requests he made of the appointed directors were not the actions of an honest person.

Yarrows could not be a deemed director, that even if it could it was entitled at law

and under GBL’s constitution to act in its own best interests, and that the pleaded facts could not support a claim of breach of fiduciary duty. It contends that the claim of dishonest assistance must therefore fall away.

[45] In addition, Westpac says that this case has an entirely different character to those where the courts have held persons personally liable for assisting a company in breaches of trust or fiduciary obligations (Royal Brunei Airlines Sdn Bhd v Tan19and subsequent “dishonest assistance” cases). This is because the plaintiffs in effect are seeking equitable relief from the legal consequences of their own actions in signing the accession deed and general security agreement. Westpac says:

(a) The claim that Yarrows, Mr Finnegan and Mr Pettigrew procured GBL to sign the documents in breach of statutory and fiduciary duties cannot succeed in face of the facts that they sought legal advice (but did not pursue the advice given), resolved that GBL should enter into the documents, and gave a certificate that they had made all due inquiries.

(b) The claim that Yarrows, Mr Finnegan and Mr Pettigrew breached duties by failing to ensure that Mr Boss and Mr Jacquet were fully informed as to the jeopardy in which GBL and the preference shareholders were being placed therefore cannot succeed.

(c) In any event, Westpac’s conduct, when assessed objectively and in light of surrounding circumstances cannot possibly be described as “dishonest” so as to attract liability for dishonest assistance: its requirement for additional security from GBL as a condition of extending the revised facilities to its parent Yarrows was “perfectly routine”.

(d) The claim that Westpac was liable by virtue of not having taken steps to ensure that Mr Boss and Mr Jacquet (representing the interests of

(i) Westpac had no duty of disclosure to GBL as a commercial guarantor, and was entitled to assume that GBL’s directors had made enquiries of its parent borrower in that regard;20 and

(ii) Westpac was entitled to assume that GBL had received competent advice from its solicitor.21

(a) Whether Yarrows can be a deemed director (because it is not a natural person).

(b) Whether the plaintiffs have an arguable case that Yarrows, Mr Finnegan or Mr Pettigrew are deemed directors: is there a sufficient evidential basis of a “requirement” to complete the guarantee or that GBL was accustomed to act on the instructions of any one of them.

(c) Whether Yarrows, Mr Finnegan or Mr Pettigrew have breached any duties (whether to act in GBL’s best interests, or to deal fairly with GBL) when the law and GBL’s constitution permitted its directors to act in the best interests of Yarrows as the holding company.

(d) Whether it is arguable that Yarrows owes fiduciary duties of loyalty or disclosure to GBL.

(e) Whether it is arguable that Yarrows owed any duties to the preference shareholders.

[47] All the plaintiffs’ claims other than the direct claims against Mr Finnegan and Mr Pettigrew are predicated on Yarrows’ being deemed a director in terms of s 126. The relevant part of the section for this application is subsection 1, which reads:

(a) A person occupying the position of director of the company by whatever name called; and

(i) A person in accordance with whose directions or instructions a person referred to in paragraph (a) of this subsection may be required or is accustomed to act; and

(ii) A person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; and

(iii) A person who exercises or who is entitled to exercise or who controls or who is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; and

385, 386A to 386F, and clause 3(4)(b) of Schedule 7, a person to whom a power or duty of the board has been directly delegated by the board with that person’s consent or acquiescence, or who exercises the power or duty with the consent or acquiescence of the board; and

(d) For the purposes of sections 145 to 149, and clause 3(4)(b) of Schedule 7 of this Act, a person in accordance with whose directions or instructions a person referred to in paragraphs

(a) to (c) of this subsection may be required or is accustomed to act in respect of his or her duties and powers as a director.

[48] This definition has been described as an inclusive definition,22 allowing a wide purposive approach to interpretation of the section.

[49] The defendants say that these claims cannot succeed as the provision in s 151(3) of the Act that a director must be a natural person applies as much to a deemed director as to an appointed director. They say that s 126 must be construed in the context of the Act as a whole, including s 151 and particularly s 151(3) which

	151	Qualifications of directors
	(1) (2)	A natural person who is not disqualified by subsection (2) of this section may be appointed as a director of a company. The following persons are disqualified from being appointed or
	(3)	holding office as a director of a company: [Categories of persons omitted] A person that is not a natural person cannot be a director of a
	(4)	company. A person who is disqualified from being a director but who acts as a
		director is a director for the purposes of a provision of this Act that imposes a duty or an obligation on a director of a company.
[50]	I do	not accept the defendants’ submission on this point. I read these two

sections as having different purposes. Section 151 addresses qualification for appointment as a (de jure) director, whereas the extended definition of director in s 126 addresses the responsibility of persons other than appointed directors who act in various ways in the management of the company.23

[51] Counsel for the plaintiffs submitted that there is no reason in principle, or based on the language of s 126(1), to exclude a company from being one of the

22 HLH Equity Trading Limited v White HC Tauranga CIV-2009-470-40, 24 May 2010 at [60]–[61].

This is a decision on a similar provision to s 126(1) in the Securities Act 1978: the Companies Act definition was used to find that the definition in the Securities Act was an exhaustive, and therefore narrower, one.

23 These directors are called de facto directors (which generally requires an assumption of functions that are properly discharged only by a director: Re Hydrodam (Corby) Ltd (in liquidation) [1994]

2 BCLC 180, 183). See also Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA and SC).

In the circumstances of s 126(1)(b) the definition extends beyond that general case to persons commonly called “shadow directors” which includes persons on whose instructions or directions the appointed directors are accustomed to act: Secretary for State v Deverell [2001] Ch 340, [2000] 2 All ER 365 (CA). The latter case has received obiter support in Ithaca (Custodians) Ltd v Perry Corporation [2004] 1 NZLR 731 (CA).

persons included in the extended definition, and that to do so could potentially frustrate the purpose of the section in circumstances where an entity that meets the definition of person24 but is not a natural person involves itself in the affairs of the company. He submitted that there was support for this interpretation in the decision of this Court in Krtolica v Westpac Banking Corporation,25 and in the view of leading New Zealand academic, Professor Watts.26

[52] Counsel for the Yarrows’ defendants acknowledged that there is English and Australian authority where a company has been found to be a deemed director but argued that that did not assist in construing s 126, as neither the English nor the Australian legislation prohibited a company from being a director. He submitted that the New Zealand authorities should be distinguished as both were based on

Australian authority27 and did not take into account the fact that the Australian

legislation is silent on whether or not a company can be a director. Furthermore the Court’s comments in Krtolica were “technically” obiter as the Court found on the facts that the person was not a deemed director.

[53] I accept the submission of counsel for the plaintiffs. Given the different purposes of the two sections I do not see that the absence of a provision in the Australian legislation comparable to s 151(3) needs to dictate a different interpretation to our legislation.

Is it arguable that Yarrows, Mr Finnegan or Mr Pettigrew were deemed directors?

[54] The plaintiffs’ case is that each of Yarrows, Mr Finnegan and Mr Pettigrew come within the provisions of s126(1)(b), and particularly subsections (i) and (ii), because the appointed directors were required or accustomed to act on their

25 _{Krtolica v Westpac Banking Corporation
[2008] NZHC 1; [2008] NZCCLR 24 at [187].}

26 _{Peter Watts Directors’ Powers and
Duties (LexisNexis, Wellington, 2009) at 2.12(c).}

27 The Court in Krtolica, above n 25, relied on an Australian academic article and Peter Watts relied on the decision of the Federal Court of Australia in Ho v Akai Pty Ltd (In Liquidation) [2006] FCAFC 159 at [27].

[55] There has not been any judicial consideration of the phrase “may be required” (it is not in equivalent English or Australian legislation) but it suggests an element of obligation on the part of the appointed directors to follow the instructions or direction.28

[56] The phrase “accustomed to act” has been judicially considered on a number

to acts not on one individual occasion but over a period of time and as a regular course of conduct.

(b) In Re Hydrodam (Corby) Ltd (in liquidation), in commenting on the requirements for being found a shadow director, the Court held that the phrase needed:30

...a pattern of behaviour in which the board did not exercise any discretion or judgment of its own....

(c) In Australian Securities Commission v A S Nominees Ltd the Court said that it did not require that there be directions or instructions embracing all matters involving the board but rather:31

...as and when the directors are directed or instructed, they are accustomed to act as the section requires....

The question the section poses is: Where ... is the locus of effective decision-making?

28 The need for some obligation is supported by the legal commentators: refer Lynne Taylor

“Expanding the Pool of Defendant Directors in a Corporate Insolvency” (2010) 16 NZBLQ 2 at

29 Re Unisoft Group Ltd (No 2) [1994] BCC 766 (Ch), at 775A-B. See also Secretary of State for

31 Australian Securities Commission v A S Nominees Ltd [1995] FCA 1663; (1995) 133 ALR 1, at 52 – 53.

(d) These authorities were reviewed and endorsed by the English Court of Appeal in Secretary for State v Deverell which summarised its view in the comment:32

What is needed is that the board is accustomed to act on the directions or instructions of the shadow director. As I have already indicated such directions and instructions do not have to extend over all or most of the corporate activities of the company; nor is it necessary to demonstrate a degree of compulsion in excess of that implicit in the fact that the board are accustomed to act in accordance with them.

(e) In Ho v Akai Pty Ltd (In Liquidation)33 the Federal Court of Australia applied the general propositions in Secretary of State v Deverell and Australian Securities Commission v A S Nominees Ltd in finding that

...though the purpose of the definition is to identify those persons, other than professional advisers, who have real influence in, or indeed control of, the corporate affairs of a company, it is not necessary that such influence or control should be exercised over the whole field of its corporate activities...; and

...the influence or control exercised by a shadow director may be strategic in character, defining the context in which, or conditions upon which, the company operates, or else contriving the transactions of significance to the company....

[57] It is a question of fact whether Mr Boss and Mr Jacquet were required or accustomed to act on the instructions or directions of any one of Yarrows, Mr Finnegan and Mr Pettigrew. The defendants say that the plaintiffs’ allegation that Mr Boss and Mr Jacquet were required or accustomed to act on their instructions or

_{directions, unsupported by any particulars, and in light of indisputable
facts,}34 _does

not disclose a reasonable cause of action. In addition, they say that the claim cannot succeed having regard to the indisputable facts, therefore summary judgment should be entered.

2006 Shareholders’ Agreement, as representatives of the preference shareholders, with Yarrows having the power to appoint its own directors.

(b) There is no pleading, or any suggestion in the evidence, of any obligation on GBL’s directors to follow any instructions or directions from any of these three.

(d) The allegation as to instructions or directions in respect of execution of the guarantee is the only pleaded instance of the GBL directors following any instructions or directions.

[59] Counsel for Mr Finnegan and Mr Pettigrew adopted the above, and also submitted that:

(a) There was no pleading, nor a suggestion of any evidence to support a pleading, that Mr Finnegan or Mr Pettigrew assumed a role as director of GBL (or were held out in that way).

(b) The plaintiffs’ pleading was that they were Yarrows’ Finance Director and Chief Executive Officer, and were charged with seeking the guarantee.

(c) There was no pleading or evidence to suggest that GBL’s directors were required to or accustomed to act on any instructions or directions given other than as a representative of Yarrows.

(d) The only evidence of direct involvement was a suggestion in Dennis King Law’s email to Mr Boss that he had been in telephone contact with Mr Pettigrew prior to sending that email, and the telephone conversations with the alleged “demand” for execution of the documents. Counsel acknowledged that this evidence had to be accepted for the purpose of this application, but argued that it could not satisfy the requirements of the section.

[60] Counsel for the plaintiffs did not respond directly to the contention that there was no obligation on GBL’s directors. He relied instead on Mr Boss’ evidence that there was a limitation on them in terms of capital expenditure and directors’ fees, and that Yarrows “cracked the whip” on any matters that were important to it, and was able to do because of its ability to appoint its own directors. He argued that a finding of fact was required as to whether that satisfied the test under s 126(1)(b), and that that finding could not be made on an application for summary judgment.

[61] In relation to the claim against Mr Finnegan and Mr Pettigrew, counsel for the plaintiffs submitted that there was sufficient evidence before the Court for an arguable case. This was in the evidence from Mr Boss as to Yarrows’ oversight of GBL’s management, Mr Finnegan’s attendance at annual general meetings, and the evidence as to Mr Finnegan and Mr Pettigrew’s direct involvement in procuring execution of the guarantee and other documents. He submitted again that it was a matter of fact, to be explored and determined at trial, whether their actions came within the definition in s 126(1)(b).

[62] The plaintiffs have given no particulars to support the bald allegations in paragraphs 89 and 90 of the statement of claim. I have considered the evidence to assess whether there is a possibility of amendment or provision of adequate particulars to support those general allegations. I find that the evidence before the Court does not support the very general pleading that GBL’s directors were required

to follow the instructions or directions of Yarrows, Mr Finnegan or Mr Pettigrew, or suggest that there could be a basis for that claim. Instead, the provision in GBL’s constitution for Yarrows to appoint its own directors is a clear indicator to the contrary: Mr Boss and Mr Jacquet were not required to act on Yarrows’ instructions or directions. I find that the plaintiffs cannot meet this aspect of the test.

[63] I am not satisfied, however, that there is sufficient material before the Court to allow me to find that the plaintiffs’ claim that GBL’s directors were accustomed to act on Yarrows’ instructions or directions (the second approach under the test) cannot succeed at trial. If the plaintiffs had relied just on the circumstances surrounding the execution of the guarantee I would have found that that could not satisfy the requirement for a course of conduct. However, in submissions counsel for the plaintiffs put their case on the basis that it was the continuation of a course of conduct that had applied over the period of their relationship. Although this is not pleaded, and no particulars have been given of any earlier instances where the plaintiffs allege they followed Yarrows’ instructions, there is just enough in Mr Boss’ evidence of continuing oversight by Yarrows’ board to suggest that they could amend their pleading to show a reasonably arguable cause of action in this respect. If the application rested on this point I would give the plaintiffs opportunity to amend their claim.

[64] I am not persuaded, however, that there is any basis for extending that finding to the claim against Mr Finnegan and Mr Pettigrew. Even on the plaintiffs’ own pleading and evidence, they were acting as representatives for Yarrow. The plaintiffs needed to show that they stepped outside that role. There is nothing on the evidence before the Court to suggest that there is any basis for that.

[65] Counsel for the plaintiffs submitted that Mr Finnegan could also be deemed a director under s 126(1)(b)(iii), on the basis that he signed the acceptance of Westpac’s letter of offer of 15 February 2008 on GBL’s behalf. I reject that argument both on the basis that there is no pleading to support that proposition, and because there is no evidence to suggest that the plaintiffs could succeed on that allegation even if the claim was amended, as Mr Finnegan clearly signed that letter acting for Yarrows as GBL’s shareholder.

[66] In summary, therefore, I accept that there remains a prospect that the plaintiffs could have an arguable case that Yarrows was a deemed director, but not Mr Finnegan or Mr Pettigrew.

[67] The plaintiffs contend that they have a clearly arguable case, capable of succeeding, that Yarrows breached duties as a deemed director, because as a deemed director it was required to act in the best interests of GBL and it could never be in GBL’s interests to enter into the commitment to Westpac when GBL did not need it. They say that Yarrows was similarly in breach of its duty to act in good faith by requiring GBL to enter into this commitment, given its knowledge of the Yarrows group’s financial situation, at least without ensuring that the appointed directors were fully informed. Counsel for the plaintiffs placed great weight on there being a conflict of interest between Yarrows’ own interests and the interests of GBL, and dicta in the decision of the House of Lords in Scottish Co-operative Wholesale

Society Ltd v Meyer,36 that a parent company has an obligation in the conduct of its

[68] The defendants say that the plaintiffs’ case is answered by s 131(2) of the Act, which permits a director of a wholly owned subsidiary to act in what he or she believes is the best interests of the parent company even if that is not in the best interests of the subsidiary, provided it is expressly permitted to do so by the constitution of the company. They referred to case authority to the effect that the only qualification on this entitlement was that it was subject to duties that the

directors owed to creditors or that were imposed by its constitution.37 Further, only

the interests of current creditors needed to be considered, and then only when the company was insolvent or near insolvent,38 in which case consideration was limited

35 The arguments and conclusions in this section would also apply to the claim against Mr Finnegan and Mr Pettigrew had I found them to be deemed directors.

36 Scottish Co-operative Wholesale Society Ltd v Meyer [1958] 3 All ER 66, particularly at 84–85 (Lord Keith) and 87-88 (Lord Denning).

37 H Timber Protection (In Receivership) v Hickson International plc [1995] 2 NZLR 8 (CA), at 12–

38 Nicholson v Permakraft (NZ) Limited (in liquidation) [1985] 1 NZLR 242 (CA) at 249.

to whether the company was able to meet creditors.39 However, directors cannot rely on s 131(2) where the same action would be a breach of s 135 (reckless trading).40

[69] It is common ground that clause 19 of GBL’s constitution expressly permits GBL’s directors to act in the interests of Yarrows as its holding company, even if that is not in GBL’s interests. However, the plaintiffs do not contend that execution of the guarantee was a breach of duty to creditors as contemplated by Nicholson v Permakraft,41 but say that the defendants cannot avail themselves of s 131(2) to escape their duties under s 131(1) because clause 19 applies only to appointed directors, and not to a deemed director. This is because the definition of “director” in the constitution refers only to appointed directors.42

[70] The defendants advance two reasons for saying that the plaintiffs’ argument

(a) A deemed director must have all the rights of an appointed director, including the rights under the constitution; and

(b) The liability of a deemed director cannot be greater than the liability of an appointed director, particularly in circumstances where the appointed director cannot be in breach of duty for the same act.

[71] The defendants say that Mr Boss and Mr Jacquet were clearly permitted to act in the best interests of Yarrows when executing the guarantee, and it would be an absurdity to treat a deemed director differently.

[72] The plaintiffs argue that neither point is tenable. They contend that the extension of the definition of director under s 126 is only in respect of duties (not rights).43 Given that there was an entirely different basis for liability between the two

_{(liability was accepted by appointed directors either in terms of the
constitution or}

40 Kings Wharf Coolstore Limited (in receivership and in liquidation) v Wilson (2005) 2 NZCCLR

43 Relying on the observation of Peter Watts in Directors’ Powers and Duties, above n 26 at 8.

under the Act, whereas liability is imposed on deemed directors under s 126), it did not follow that a deemed director could not have any greater liability than an appointed director.

[73] Counsel for the plaintiffs also submitted that the point was determined in any event by the wording of s 131(2), which limited the exception to the express terms of the constitution. Counsel argued that it would be putting a strained interpretation on s 131(2) to have it apply to a person who was subject to liability because he or she was interfering in the management of the company.

[74] I accept that s 126 imposes duties on, rather than gives rights to, persons who are deemed directors. However, the duty imposed must include any accepted qualifications on the duty. The question, therefore, is whether the qualification to the duties in s 131(1) found in s 131(2) applies in this case. It would be an extraordinary thing for a constitution to make express provision for a de facto or shadow director. However, that is not to say that a provision in the constitution affecting a director cannot, for that very reason, apply to a person who is deemed to be a director.

[75] The object of s 126 is to impose obligations on persons who are not appointed directors but who involve themselves in the management of the company. It is to make them subject to the same duties as the appointed directors, rather than to create a greater liability. On that reasoning, the provisions of the constitution applicable to the conduct of directors should apply, by necessary implication, to a deemed director as a person subject to the duties of an appointed director. Applying that to the present case, I find that clause 19 extends, by necessary implication, to a deemed director, and on that basis s 131(2) applies to allow Yarrows (as a deemed director) to act in its own best interests.

[76] I do not consider that Scottish Co-operative Wholesale Society Limited v Meyer assists. First, it was a case dealing with oppression of minority rights, which concerns an entirely different provision in the Act, in circumstances where voting rights of a minority shareholder were being interfered with by a majority shareholder. In this case Yarrows owns all the voting shares, and the preference shareholders’ concerns relate to the sufficiency of their security. I see no reason to

apply its reasoning to impose a duty which the relevant section (s 131(2)) expressly excludes. Secondly, if it is not a breach of duty to act in the best interests of the holding company, something more must be required before the same act can be said to be in breach of a duty of good faith. No particulars are pleaded of the lack of good faith, and the only matter raised in Mr Boss’ evidence that seemingly could be pleaded is Yarrows’ knowledge of the financial position of the group. However, that is the underlying aspect of the claim of conflict of interest, which is excused in the case of a holding company. It does not, in my view, add anything more so as to give a separate factual basis for a statutory duty of good faith.

_{Is it arguable that Yarrows owed fiduciary duties of loyalty or
disclosure to}

[77] The plaintiffs also base their claims against the Yarrows’ directors and Westpac on an alleged breach of fiduciary duties of loyalty and disclosure. Counsel for the plaintiffs submitted that these duties were aligned to, but existed independently of, the statutory duties in s 131(1).45 This claim is again founded on the conflict of interest between Yarrows and GBL, and the proposition that acting against the interest of a beneficiary is a classic example of a failure to act in good faith (relying on Scottish Co-operative Wholesale Society Limited v Meyer).

[78] Prior to the Companies Act 1993, directors were subject to fiduciary duties at common law. Directors’ duties that were previously recognised by the common law were incorporated into the Act, without it being a codification. For that reason the fiduciary duties owed by a director at common law can exist alongside the duties prescribed by the Act. However, the application of fiduciary principles is limited to guiding the application of the statutory duties and addressing circumstances not dealt

equitable remedy.47 A fiduciary duty in loyalty and good faith has been imposed in such circumstances (for example, where company assets were transferred to an entity

_{associated with the director at less than fair value and at a time when
the company}

44 Again this section of the judgment would apply to Mr Finnegan and to Mr Pettigrew if I had not found that the claim that they were deemed directors could not succeed.

45 _{Referring to Peter Watts,
Directors’ Powers and Duties, above n 26, at [6.2].}

47 Baroni v Crotty [2006] NZHC 961; (2006) 3 NZCCLR 261 (HC); Sojourner v Robb [2008] 1 NZLR 751 (CA).

was insolvent or the transaction has led to its insolvency,48 and where a director diverted orders from the company to another company in which he had an interest, resulting in a finding that he had failed to act in the company’s best interests)49 but never where the duty is co-extensive with the statutory duty of good faith.

[79] However, where a fiduciary duty of good faith exists, the director must hold the honest belief that an action is taken in the best interests of the company.50 Courts will generally presume a director has acted in good faith unless he or she has acted in a way that no director with an understanding of fiduciary duties would act.51

[80] The plaintiffs plead that Yarrows had fiduciary duties not to act against GBL’s interests, and to act in good faith. The claim that there exists a duty not to act against GBL’s interests cannot succeed as it is inconsistent with Yarrows’ statutory right to act in its own best interests. The claim based on a duty to act in good faith suffers from the same objection as the statutory claim. It relies on the same matters as the claim not to act against the interests of GBL, and there is no obvious reason to impose a separate duty in circumstances where Mr Boss and Mr Jacquet (experienced businessmen) knew what the guarantee was for and that it “watered down” the preference shareholders’ security. Further, they had opportunity to seek further information, yet elected to sign the documents after having legal advice from the lawyer purportedly acting for GBL and without seeking any further information. Even if it could be argued that it was possible for a duty to exist (based on the principle is Scottish Co-Operative), there could not be any breach in those circumstances.

[81] Similarly, the same (indisputable) facts do not give rise to any separate duty of disclosure by Yarrows to GBL’s appointed directors or the preference shareholders, in the absence of any request for further information. There is also force to the argument for the Yarrows’ directors that nothing would be achieved by

_{imposition of the duty as even on the plaintiffs’ case that the
directors did not have a}

48 Sojourner v Robb; Victoria Street Apartments Limited (In Liq) v Sharma HC Auckland CIV-2009-

choice in the matter, provision of the information could not benefit the plaintiffs because Yarrows could appoint its own directors and its appointees could have executed the documents validly.

[82] For all of these reasons I find that the plaintiffs do not have an arguable case for imposition or breach of fiduciary duties.

[83] The preference shareholders claim is based on a claim that they had a fiduciary relationship with Yarrows on the basis that they were entitled to place trust and confidence in it not to act in a way which was contrary to their interests.52 This inherently fiduciary relationship is said to flow from Yarrows’ role as a deemed director. Given the finding I have made in that respect, I do not need to address this point but I will do so briefly.

[84] In my view the claim cannot succeed as fiduciary duties can only be imposed where there have been dealings directly between shareholders and directors and special circumstances arise in the course of those dealings to give rise to the relationship of trust and confidence.

[85] In this case there can be no reason to impose a fiduciary duty to the preference shareholders. This is because the only statutory duty under s 131(1) is owed to the company,53 and the preference shareholders had no dealings with Yarrows or its directors over the guarantee. Furthermore there was no basis to impose a duty on the appointed directors,54 and even less so Yarrows as a deemed

52 _{The relationship was inherently fiduciary:
Chirnside v Faye [2007] 1 NZLR 433 (SC) at [75].}

Is it arguable that the Yarrows’ directors knowingly assisted any breach of

[86] To establish liability as an accessory to a breach of fiduciary duty, it is necessary to prove dishonesty: Royal Brunei Airlines Sdn BHD v Tan.55 Dishonesty is tested by an objective standard.56

(a) Actual knowledge that the transaction is one in which the assistor cannot honestly participate; or

(b) A sufficiently strong suspicion of breach of trust that it is dishonest to decide not to enquire, coupled with a deliberate decision not to make enquiry, less the enquiry result in actual knowledge.

[88] The knowledge of the alleged assistor of the following matters can be relevant in determining honesty:58

(a) The nature and importance of the proposed transaction; (b) The nature and importance of his role in the transaction; (c) The ordinary course of business;

[89] The plaintiffs contend that they have established a prima facie case against

_{the Yarrows’ directors in their
pleading,}59 _{which is supported by the
evidence of Mr}

56 _{Westpac NZ Ltd v MAP and Associates Ltd
[2011] NZSC 89, 3 NZLR 751 at [26].}

Boss and the defendants’ own evidence.60 Essentially their case is that the Yarrows’ directors caused Yarrows to engage in the conduct which constitutes the breach. The actions that the plaintiffs say constitute providing assistance were the Yarrows’ directors’ agreement with Westpac that GBL would execute the guarantee, and the instructions they gave, or caused to be given, to Dennis King Law to act for GBL.61

[90] I do not accept that an honest and reasonable person in the position of the Yarrows’ directors would have seen any need to enquire into whether Yarrows was in breach of any duties at the time GBL’s directors entered into the guarantee. Yarrows was unable to, and did not, make an agreement with Westpac. At most it could (as GBL’s shareholder) agree to procure GBL to execute the guarantee, but that has not been pleaded and there is no evidence of any such agreement. I accept the submission on behalf of the Yarrows’ directors that even if Yarrows had given such an assurance, it was entitled to do so acting on its own behalf, not as a deemed director. Similarly, even if Yarrows did instruct Dennis King Law to act for GBL as distinct from the Yarrows Group, there is no reason to treat that as a breach of duty given that Dennis King Law would then have been protecting GBL’s interest.

[91] The plaintiffs also plead that it was dishonest for the Yarrows’ directors not to ensure that GBL’s directors were fully informed and gave informed consent to the guarantee.62 I see no basis on which to impose an obligation to that effect in the absence of any request for information by Mr Boss or Mr Jacquet given the information that was provided to them.

[92] In circumstances where it is incontrovertible that the Yarrows’ defendants had little or no contact with GBL’s directors, were not involved in the discussions regarding the guarantee, were not personally involved in the instruction of Dennis King Law and had no reason to believe that Yarrows was not entitled to request a guarantee, I do not accept that there is any basis on which a claim of dishonest

[93] The plaintiff’s case for contending that Westpac was an accessory to Yarrows’ breaches is that it instigated Yarrows to get GBL’s commitment, with knowledge of matters that put it on in enquiry. The principle factual basis for this argument is that the appointed directors did not sign the letter of offer (and Westpac would have known, or ought to have known, that Mr Finnegan was not an appointed director). They say that Westpac could not be acting honestly by failing to enquire as to whether GBL’s directors were fully aware of the perils and were freely committing to the guarantee. As a result, they contend that an honest person in Westpac’s position would have appreciated that it was disadvantageous to GBL to give the guarantee, and would have been aware of the existence of the preference for shareholders, and that therefore the potential harm resulting from the execution of the guarantee was not just limited to Yarrows or the Yarrows group generally.

[94] Counsel for the plaintiff submitted that Westpac’s role had to be considered in light of all the circumstances, and that it was not possible for the Court to determine this matter conclusively against the plaintiffs on the evidence before the Court on a summary judgment application. He also submitted that the claim would be amended to include a pleading that there was a further element of dishonesty in requiring GBL to accede to the guarantee without being sure that GBL, as distinct from the holding company, was making that decision.

[95] The critical aspect of the plaintiff’s claim against Westpac is whether Mr Finnegan’s execution of Westpac’s letter of offer on behalf of GBL was sufficient to put Westpac on enquiry. That contention needs to be examined in the context of the alleged breach of duty, namely that Yarrows did not ensure that GBL’s directors and preference shareholders were fully informed of the potential peril of giving the guarantee. When put in that context, the significance of the acceptance of the letter of offer by Yarrows as 100% shareholder falls away. Westpac would have been aware that the loan documents had to be executed by GBL, and that the directors were required to certify that the transaction had been fully approved by its shareholders. If it was a major transaction for GBL (and there is an argument for

that) the preference shareholders would also have been required to approve it.63 In those circumstances, and given that both GBL’s appointed directors and Dennis King Law on GBL’s behalf gave certificates that the documents had been approved that gave Westpac valid priority over all other interests, it is difficult to construct any case for grounds for suspicion sufficient to put Westpac on enquiry and render it potentially liable for dishonest assistance.

[96] Counsel for the plaintiffs argued that there were aspects of the directors’ certificate that were incorrect. If that is the case, it is something that counts against GBL’s directors, rather than against Westpac. There is no evidence to suggest that Westpac had any knowledge at all to question the accuracy of the certificate.

[97] I find that there is no evidential basis to support the pleading that Westpac dishonestly assisted any breach, or any evidence to support the view that the plaintiffs could succeed in this argument, and on this basis also I find that the plaintiffs’ claim against Westpac cannot succeed.

Can the proceeding be saved by a claim that the defendants were joint tortfeasors?

[98] In the course of argument, counsel for the plaintiffs submitted that the plaintiffs also had an additional basis for a claim (not yet pleaded) against all defendants that they were joint tortfeasors with Yarrows in its breach of s 131. He advanced this argument as an alternative to the claim for dishonest assistance, and on the basis that it did not require a finding of dishonesty. He submitted that it would be determined purely on the basis of participation in the breach of statutory duty.

[99] This claim also has no prospects of success given my finding that Yarrows is not a deemed director, and that Westpac does not owe any tortious duty to GBL as a

63 _{On the basis that it potentially affected
their rights: Companies Act 1993, s 117.}

6464 See O’Donavan & Phillips, the modern contract of guarantee (English Edition, Sweet & Maxwell, London, 2010) at 4-2124-22 and Shivas v BNZ 1990 2 NZLR 327 (HC) at 363 – 364.

[102] Counsel did not address me as to costs. The defendants have succeeded, and are entitled to costs. Prima facie I regard scale 2 costs as appropriate, however as counsel did not address me on this, I reserve costs. If the parties are unable to reach agreement, the defendants are to file memoranda seeking costs within 15 working days, and the plaintiffs are to file a memorandum in response within 20 working

BETWEEN	GILLES BAKERY LIMITED First Plaintiff Continued over.../
AND	KEVIN JAMES GILLESPIE First Defendant Continued over.../

High Court of New Zealand Decisions

Gillies Bakery Limited v Gillespie [2013] NZHC 1608 (28 June 2013)