Jacomb v Wikeley [2013] NZHC 707 (10 April 2013)

Last Updated: 17 April 2013

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV 2010-485-0997 [2013] NZHC 707

BETWEEN MICHAEL JOHN JACOMB, TRENE KATHLEEN JACOMB AND PETER REGINALD RICHARDSON Plaintiffs

AND KENNETH DAVID WIKELEY Defendant

Hearing: 12-14 November 2012

Counsel: G J Toebes with J W G Grant for Plaintiffs

M J W Lenihan for Defendant

Judgment: 10 April 2013

_{JUDGMENT OF THE HON JUSTICE KÓS}

[1] An economic misadventure in Chile by two former friends, now plaintiff and defendant in these proceedings.

[2] The defendant induced the plaintiffs to advance moneys to a New Zealand company with plans to mine molybdenum, copper and other minerals in Chile. The advances were characterised as loans, but not documented formally. The defendant provided personal guarantees as to 50 per cent of the plaintiffs’ exposure. The venture failed to prosper. The company failed to repay the advances. The plaintiffs now look to the defendant under his guarantees.

[3] The defendant says that, contrary to the correspondence at the time, the plaintiffs’ advances were subscriptions for capital in the mining company. Not loans. And he says that if they were loans after all, then most or all of the loans were unlawful and unenforceable. That is because they were major transactions in terms

_{of s 129 of the Companies Act 1993. Most of the lending was made without special}

JACOMB & ORS v WIKELEY HC WN CIV 2010-485-0997 [10 April 2013]

resolutions in advance. The defendant says that subsequent resolutions approving the balance of the loans did not ratify the earlier lending.

Background

[4] The plaintiffs are trustees of the Genset Trust, settled in 1993. The trust had substantial cash reserves following the sale in 2004 of its 100 per cent interest in a large electrical engineering business. The trustee principally involved in the events leading up to this litigation was Mr Michael Jacomb.

[5] The defendant Mr Kenneth Wikeley is a businessman now resident in Melbourne. By his own admission he has had a chequered career. He was at one stage a one-third shareholder in the plaintiffs’ electrical engineering business. It was one among many interests in which he was involved in the 1980s and 90s. In 1990 he was in “severe financial trouble”, following the 1987 share market crash. He resold his shareholding to the plaintiffs (albeit for three or four times what he paid for it four years earlier).

[6] In 2006 Mr Wikeley induced Mr Jacomb to invest with him in a listed company called Plus SMS Limited. The investment initially appeared to prosper. However as Mr Wikeley put in evidence:

Unfortunately the company subsequently foundered. [Mr Jacomb] lost quite a lot of money as he had bought a significant number of shares in his own right aside from our deal.

Investment in OMG

[7] In September 2008 Mr Wikeley induced Mr Jacomb to invest in another venture. Orion Minerals Group Limited (OMG) was to be back-listed on the New Zealand Exchange through a company called RLV-3 Limited. OMG’s mining interests were in Chile. Mr Wikeley was in Chile at that time. Mr Jacomb agreed on the trust’s behalf to invest US$250,000 as equity in OMG. Payment was made to Mr Wikeley for that purpose on 30 September 2008.

[8] The payment was initially structured as a loan by Mr Jacomb to Mr Wikeley, pending listing of OMG. On listing date Mr Jacomb was to receive 6 million shares in OMG, in satisfaction of that loan. Delivery of those shares was also to satisfy an earlier unpaid loan to Mr Wikeley of NZ$63,000. There was then a dispute as to the number of OMG shares Mr Jacomb was to receive, as the number of shares publicly offered increased. In November 2008 it was agreed that Mr Jacomb would receive

10 million shares in OMG, rather than the 6 million originally agreed.

Alleged loans to Edel Metals Group Limited

[9] In October 2008 Mr Jacomb went to Chile. He met with Mr Wikeley, Mr Gower (the chairman of OMG) and a Mr Joyce (an Auckland lawyer).

[10] In the course of the visit Mr Wikeley interested him in a separate venture, involving a rock crushing machine. This machine belonged to a German-Iranian businessman called Parviz Gharagozlu. Mr Wikeley first saw it “in early to mid-

2008”. He was captivated by it. He said in evidence:

Parviz gave me a demonstration of a prototype crusher. The crusher seemed amazing to me. It could crush large rocks with copper, gold or molybdenum in them to powder in seconds. It could crush them dry or with water. Just by demonstration alone I could see that it operated incredibly efficiently compared to conventional technology. I considered it revolutionary. After I finished my visit to the plant, I immediately turned my mind to how I could get the rights to the crusher. I thought there was a fortune to be made from it. It all seemed like an amazing opportunity to me.

[11] Nothing in evidence suggested that Mr Wikeley had relevant technical qualifications or experience in mining engineering.

[12] There is disagreement on the evidence as to Mr Jacomb’s reaction to the opportunity. Mr Wikeley says that he was “completely overwhelmed” by the crusher and insisted on sole investment rights. Mr Jacomb said in evidence that he was more sceptical. He liked it, but what he had seen was a “little test crusher”. If it worked in the field “it would be very clever”. The documentary evidence at the time is silent on the issue. An enthusiastic email from Mr Jacomb in fact seems to pre-date the October inspection of the crusher.

[13] It is proper to record at this juncture that generally I found the evidence of Mr Jacomb to be more cautious, thoughtful, concessionary, and ultimately more credible than that of Mr Wikeley. He was by no means a perfect witness, and his recollection was not necessarily reliable. For instance, he initially denied authorship of an unhelpful email, but had later to retract the denial. However Mr Wikeley was in a class of his own as a witness. He was frequently evasive under cross- examination. Much of his evidence seemed calculated to deflect attention from the real issues. Or to offer somewhat improbable explanations for why documents did not mean what they appeared to say. I did not regard him as a reliable witness.

[14] As it happens, however, the key issues for consideration by the Court can largely be answered by reference to the documentary evidence. Where the viva voce evidence of Messrs Jacomb and Wikeley is in direct conflict on matters of importance, and where documents or other witnesses do not corroborate one account or the other, I prefer generally the evidence of Mr Jacomb.

[15] In issue in this proceeding is the status of four payments totalling US$1.5 million:

(a) US$500,060, advanced on 15 December 2008; (b) US$500,000, advanced on 11 February 2009; (c) US$200,000, advanced on 8 May 2009; and

(d) US$300,000, advanced on 27 May 2009.

The plaintiffs say that these payments were loans, subject to guarantees as to 50 per cent by Mr Wikeley. Mr Wikeley on the other hand says that the payments were not loans but payments by way of subscription for 23.75 per cent of the shares in a company called Edel Metals Group Limited (EMG).

[16] EMG is a New Zealand company. It was incorporated on 18 November

2008, and struck off the register in February 2012. EMG issued 100 million shares:

23,750,000 were issued to the plaintiffs, and 76,250,000 to a company called Geier

Limited. The shares had a face value of NZ$1.00, but the evidence was clear that neither the plaintiffs nor Geier paid those sums to EGM by way of capital. So the share capital remained uncalled. The defendant acknowledged that in cross- examination. So did Mr Gibson, Mr Wikeley’s accountant, who also gave evidence.

[17] As to Geier, Mr Gibson said:

Geier Limited was the majority shareholder in EMG. Geier was used as a trust company by my firm to hold shares in trust with people who are shareholders in the mining venture. I became aware from Ken that there were a number of parties in Chile who had an interest in the venture and who notionally been allocated shares in EMG. This included Ken. I say “notionally” because EMG shares were never transferred to them. The majority shareholding remained in Geier in the time that EMG was registered.

I understand that Ken has set out the respective shareholdings of each of the other parties in his evidence. My main duty was to represent the interests of Geier. I took instructions from Ken on what I should do as a director of EMG.

“Ken” is of course Mr Wikeley.

[18] Mr Gibson’s wife, Judith Burson, who practises with him as an accountant also gave evidence. She also was clear that authority as to dealing with EMG shares held by Geier reposed in Mr Wikeley. The directors of EMG were Messrs Gibson and Jacomb.

[19] EMG was the vehicle used by Messrs Wikeley and Jacomb to negotiate with Mr Gharagozlu and other Chilean businessmen associated with him to buy a mineral processing plant and equipment – including the new crusher technology. Much evidence was expended on these negotiations. I am satisfied however that the documents are an accurate guide as to the contractual and corporate obligations in fact entered.

[20] On 16 November 2008 Mr Wikeley emailed Mr Jacomb and Ms Burson. His email states:

While we all control all the shares in EDEL, lets put a director resolution in place on Monday. It will acknowledge that Mike (Maybe Powerlands Ltd?) has a shareholder loan of USD1 million to EDEL Metals Group Limited. It

can say this has been done by a cash payment to 100$ subsidiary in Chile Orion Minerals Group Ltd (to be renamed EDEL Metals group Ltd) soon. We can agree to have the loan for 18 months with a capitalised interest of USD100,000 for the 18 month shareholder advance period. Lets get this done Monday, sign off directors, resolutions etc. Then next day put the shares in trust for PARVI etc. I think this is the simplest and best way to acknowledge and protect Mikes USD1 million advance, putting it against the NZ owning company. This way when the documents and bank accounts are ready in Chile, Mikes money (USD1 million) can just be sent in cash.

“Mike” is of course Mr Jacomb.

[21] As a result on 17 November 2008 Ms Burson prepared a directors’ resolution (and a shareholders’ resolution - “as it is a major transaction”). The directors’ resolution was duly signed by Mr Jacomb and Mr Gibson as directors of EMG. It provides as follows:

RESOLVED: That funding of US$1 million be obtained to fund the Chilean operations.

RESOLVED: To recommended to the shareholders for approval the loan that Mr Jacomb has offered to provide either directly or through a nominee at a rate of 6.67% p.a. for the period of the loan. Said loan not to exceed 18 months in total from date of drawdown and interest is contingent upon demand for payment being made by Mr Jacomb on or after the 18 month period has expired.

[22] The shareholders’ resolution would have approved the directors obtaining a loan of US$1 million to fund the company’s Chilean operations. It provided for execution by Mr Gibson (for Geier) and the plaintiffs (as trustees of the Genset Trust). It appears from the evidence that a copy was given to Mr Jacomb to sign, but it does not seem to have been executed.

[23] After receipt of these two documents, Mr Jacomb emailed Ms Burson1 noting that he understood from Mr Wikeley that the loan would be “US$1m loan interest at

10% compound each month. Repayment within one year if not sooner if the company having available funds”. Later the same day Mr Jacomb emailed Ms Burson. His email appears to contain a quotation from another email by

_{Mr Wikeley reading:}

1 Copied to Mr Wikeley.

Mike that can’t work. What I suggested if capitalised over 18 months is fair for USD100,000 interest. Remember we have to bring the money back from Chile and the idea is for the facility to be there until the business is at least paid off over 12 months. My idea is we never bring it back. Do the stock market float and pay you back out of that or from the Hong Kong account.

In his email to Ms Burson, Mr Jacomb indicated that that approach was acceptable to him.

[24] Two days later, on 19 November 2008, Ms Burson emailed Mr Jacomb suggesting that he have his lawyer register a charge over the current and future assets of the company “to provided (sic) security against the loan being made to the company”.

[25] It is I think perfectly clear from the communications thus far that what is being provided for here is a loan. No shareholder, least of all Mr Wikeley and the other Chilean business interests he was said to represent via Geier, was paying up share capital. Nor was Mr Jacomb. His contribution could have been structured as payment of share capital, but that would have been inconsistent with the other shareholders who were making no such contributions to EMG. So the payment was structured as a loan.

[26] On 29 November 2008, before the first tranche payment was made, Mr Wikeley and Mr Jacomb were both in Chile. In a meeting there, Mr Wikeley wrote the following on a page on Mr Jacomb’s diary:

I Kenneth David Wikeley will be responsible for half the amount paid into Chile from Edel Metals Group Limited into Edel Metals SA Chile. If it all go [sic] wrong I will be personal [sic] responsible for 50% of the loss that Mike Jacomb has paid into Edel Metals Group Limited NZ/Edel Metals Group SA Chile. This amount will be less any profit on 5 million shares given free to Mike Jacomb in RLV 3 (Orion Minerals Group Limited) NZ stock market RLV.

The note is signed by both Mr Wikeley and Mr Jacomb.

[27] Mr Jacomb said that he insisted on being given this personal guarantee before advancing any funds. Further, Mr Wikeley had assured him of his substance so that he was able to meet that guarantee.

[28] On 15 December 2008 the first transfer of US$500,060 was made. Apart from the preceding resolutions and guarantees, none of the advances were formally documented. There is, therefore, no formal contract of loan governing any of the four advances.

[29] Messrs Jacomb and Wikeley thereafter agreed, prior to the second transfer, to formalise the guarantee. On 5 February 2009 Mr Wikeley emailed Ms Burson and Mr Jacomb asking Ms Burson to draft an agreement, to be signed by Mr Gibson under power of attorney. The intended agreement was as follows:

MAIN IDEA

Mike Jacomb through the Genset Trust ... has loaned USD1 million to Edel

Metals Limited ...

Kenneth David Wikeley (Auckland) hereby agrees that he is personally liable for USD500,000 of this debt, in the event that the debt was not repaid to the Genset Trust as per the loan agreement Edel Metals Limited. It needs to be recognised that the Genset Trust has so far paid USD500,000 of the loan and will be completing the final payment of USD500,000 within the next seven days, at which time the personal guarantee will be fully in effect.

[30] In a subsequent email Mr Jacomb explained to Ms Burson:

Can you have this “personal guarantee” drawn up and signed so I can release

to (sic) final $US500,000.

....

Judith, the reason for this PG is I am currently putting up all the funds with no down side to Ken should matters go wrong.

[31] On 9 February 2009 Mr Wikeley wrote to Ms Burson (copied to Mr Jacomb)

as follows:

Dear Judith, I know you are away in Australia, so lets get this done before

Wednesday if possible, or if not Wednesday, when you are back at the latest.

Mike Jacomb through Genset Trust has a loan for USD1 million to Edel

Metals Limited (NZ). This loan also has interest capitalised for 18 months

@ 10% interest.

I have agreed with Mike the following.

Kenneth David Wikeley is personally responsible for 50% of the USD1 million liability plus the interest. So the personal guarantee should reflect this, and say that I am liable for the 50% in full, or any residual amount left of the loan, plus interest at the end of the 18 month loan period.

[32] Mr Jacomb immediately responded:

I look forward to this being completed as agreed and I will pay the

$US500,000 upon receipt of the PG to The Genset Trust. This final payment making a total of $US1,000,000 will be the full and final payment I will be making to this project any other money required will have to be found by others. The Genset Trust is to remain the first and highest priority for any repayments from Edel and the same with regards to Ken’s PG.

[33] On 11 February 2009 Mr Gibson (as attorney for Mr Wikeley) executed the following guarantee:

I Kenneth David Wikeley ... hereby agree to give the Genset Trust and Mike

Jacomb a personal guarantee (PG).

The PG shall cover 50% of the loan from Genset Trust for USD$One (1) million to Edel Metals Limited (NZ) which is for an 18 month period. At the end of the Loan period for the USD$One (1) million plus interest for 10% (per annum) if there is any still outstanding loan left, Kenneth David Wikeley is personally liable for 50% of the outstanding debt plus the outstanding interest at the expiry of the eighteen (18) month loan period.

[34] The same day the second tranche of US$500,000 was advanced.

[35] The 8 May 2009 US$200,000 payment was preceded by three instruments

(all executed on 28 April 2009):

(a) A second directors’ resolution signed by Messrs Gibson and Jacomb.

It recommended shareholders approve “the increase in the loan that Mr Jacomb offered”. It referred in other places to the transaction being a “loan”.

(b) A shareholders’ resolution signed by the three plaintiffs and Mr Gibson as director of Geier. It approved “an increase in the loan of USD1.0 million by USD200,000 to fund the company’s Chilean operations.” Plainly in context it is a reference to the advances made (and to be made) by the plaintiffs.

(c) A further guarantee signed by Mr Wikeley personally, increasing his personal guarantee by US$100,000.

[36] A similar process preceded the 27 May US$300,000 payment: directors’ and shareholders’ resolutions, and guarantee. There is a shareholders’ resolution entered on 22 May 2009 approving “an increase in loan of USD1.2 million by and (sic) additional US$300,000 to fund the company’s Chilean operations.” And a further and similar guarantee (executed by Mr Gibson on Mr Wikeley’s behalf), increasing his personal guarantee by US$150,000.

Default

[37] In due course the venture failed. EMG has not repaid the plaintiffs’ advances. Demand was then made of the defendant, under the guarantees. That demand has not been met.

Conclusion

[38] The effect of the documentary evidence could hardly be clearer. A loan of US$1.5 million was made by the plaintiffs to EMG. And a personal guarantee was given by Mr Wikeley as to 50 per cent of capital and interest repayable. On the face of things, summary judgment might be entered.2

[39] So what are the defences?

Defences advanced

[40] The defences advanced are as follows:

(a) There was no loan at all from the plaintiffs to EMG. All the money advanced was simply a payment of cash in return for the allocation of

_{shares in EMG.}

2 It was sought at an earlier stage, but denied on the basis that the application was then premature:

Jacomb v Wikeley HC Wellington CIV-2010-485-997, 1 November 2010.

(b) If the advances were a loan (which is denied) then it is not enforceable because the initial US$1 million was a major transaction under s 129 of the Companies Act 1993, and requisite shareholder resolution was not obtained. Subsequent shareholder resolutions executed by Mr Gibson lacked authority from Mr Gharagozlu (as beneficial shareholder), and did not ratify the earlier breach in relation to the US$1 million advance.

(c) If Mr Wikeley is liable in full or in part under the guarantee, the equitable doctrine of marshalling applies and the plaintiffs’ claim should be reduced by the value of the 12 million OMG shares held by Mr Jacomb.

(d) In the alternative, equitable set off should be ordered against the plaintiffs’ claim to the value of the 12 million OMG shares transferred by Mr Wikeley to the plaintiffs as collateral.

First defence: subscription not loan?

[41] I have set out in the first section of this judgment the relevant communications. Despite the plain terms of the documents set out above, Mr Lenihan submitted that the funding nonetheless was a payment by way of capital, not loan.

[42] He referred in his submissions to six email communications. Three of these post-dated the four payments. In my view none of them alter the effect of the apparent terms of the shareholders’ and directors’ resolutions, the guarantees, or Mr Wikeley’s own emails of 16 November 2008 and 5 and 9 February 2009. Indeed as late as August 2009 Mr Wikeley was still calling it a “loan” in email communications with Mr Jacomb.

[43] It was suggested that use of the word “paying” rather than “lending” is somehow probative of a payment by way of capital rather than loan. I disagree, particularly when the emails are read in context rather than in isolation. The absence

of the word “loan” in such isolated instances, given the other documents, is beside the point. All the more so when Mr Wikeley seems to have been at pains to conceal from the Chilean businessmen (who had a beneficial interest in the Geier-held shares in EMG) that the plaintiffs’ payments were, as the instruments he was executing at the time plainly showed, a loan.

[44] Mr Wikeley’s present contention that what he structured, and described at the time, as a loan was in fact subscription for share capital is in my view opportunistic nonsense.

Second defence: unlawful major transaction, unratified?

[45] This defence centres on the fact that the shareholders’ resolution prepared by

Ms Burson on 17 November 2008 was never executed.

[46] Mr Lenihan submits for Mr Wikeley that the first two advances (totalling US$1 million), if loans, would have been major transactions in terms of s 129 of the Companies Act 1993. They required approval by 75 per cent or more of the shareholders of EMG. That was not obtained.

[47] Section 129 provides as follows:

129 Major transactions

(1) A company must not enter into a major transaction unless the transaction is—

(a) approved by special resolution; or

(b) contingent on approval by special resolution. (2) In this section,—

assets includes property of any kind, whether tangible or intangible major transaction, in relation to a company, means:

(a) the acquisition of, or an agreement to acquire, whether contingent or not, assets the value of which is more than half the value of the company's assets before the acquisition; or

(b) the disposition of, or an agreement to dispose of, whether contingent or not, assets of the company the value of which

is more than half the value of the company's assets before the disposition; or

(c) a transaction that has or is likely to have the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company's assets before the transaction.

(2A) Nothing in paragraph (b) or paragraph (c) of the definition of the term major transaction in subsection (2) applies by reason only of the company giving, or entering into an agreement to give, a charge secured over assets of the company the value of which is more than half the value of the company's assets for the purpose of securing the repayment of money or the performance of an obligation.

(2B) In assessing the value of any contingent liability for the purposes of paragraph (c) of the definition of major transaction in subsection (2), the directors—

(a) must have regard to all circumstances that the directors know, or ought to know, affect, or may affect, the value of the contingent liability; and

(b) may rely on estimates of the contingent liability that are reasonable in the circumstances; and

(c) may take account of—

(i) the likelihood of the contingency occurring; and

(ii) any claim the company is entitled to make and can reasonably expect to be met to reduce or extinguish the contingent liability.

(3) Nothing in this section applies to a major transaction entered into by a receiver appointed pursuant to an instrument creating a charge over all or substantially all of the property of a company.

[48] No accounts for EMG were in evidence. Mr Gibson gave evidence that EMG was a holding company, did not trade, did not have a bank account, did not have an auditor, and did not file a tax return. As Mr Gibson put it, “it was a holding company without any assets or trading”, and so no tax return was filed. In his opinion, EMG was assetless. In my view, as I will explain later, that is not correct as a matter of law, at least for the purposes of s 129.

[49] The 17 November 2008 draft shareholders’ resolution prepared by Ms Burson was given to Mr Jacomb in Auckland to arrange execution. He was on his way to Chile. There was some suggestion in the case put by the defendant that Mr Jacomb

was required to obtain signatures from the Chilean businessman behind Geier. It was not put with much force, and plainly is unsustainable. The draft resolution provided for execution by the three plaintiff trustees and by Mr Gibson on behalf of Geier. Subsequent shareholders’ resolutions actually executed, in April and May

2009 for the succeeding third and fourth payments, were signed by Mr Gibson (and by the three plaintiff trustees).

[50] To accede to this defence I would need to find two things: (a) that the loan or loans were major transactions; and

(b) that the loan or loans were not ratified by shareholders in accordance with s 177 of the Companies Act 1993.

Is this a major transaction?

[51] To constitute a major transaction for the purposes of s 129 of the Companies Act 1993, the transaction would need to involve EMG incurring a liability (including a contingent liability) the value of which is more than half the company’s assets before the transaction.3 It is plain that a loan incurred by the company will be a major transaction if the liability to repay exceeds half the value of the assets of the company.

[52] “Assets” are defined in s 129(2) of the Act, as “property of any kind, whether tangible or intangible”. As Prof Watts has said4 the definition does not make clear whether these are gross or net assets. Prof Watts takes the view (which I share) that the better view is that they are gross assets.5 That is the more literal meaning. A “net asset” reading would require one to read in the concept of “assets minus liabilities”.6

In terms of the purpose underlying s 129, a gross asset approach seems to achieve a

_{better balance between governance and shareholder interests. As Prof Watts says:}

3 _{Companies Act 1993, s 129(2)(c).}

4 _{Watts Directors Powers and Duties (Lexis Nexis, Wellington, 2009) at 36.}

5 _{The matter was left open in Cudden v Rodley CA67/99, 31 March 1999.}

6 Although Prof Watts does suggest (at 37) that the first reference to “assets” in s 129(2)(a) – which does not apply here – should be read as net rather than gross. But the second reference should be to gross assets.

If the section embraces net assets values, companies which are near insolvency would need to pass nearly every transaction before the shareholders. Hence, directors of a company with liabilities $1 less than assets would need to consult shareholders to buy a couple of pencils, even though in gross terms the company’s assets were still quite large.

[53] In the present case, Mr Lenihan accepted that if Mr Gibson’s evidence was right that EMG had no assets, then even a $10 loan would be a major transaction needing shareholder approval.

[54] In the present case I have limited information on which to form a view. No detailed accounts or values have been presented.7 But it is clear that in subscribing for shares in EMG, the shareholders had approved (1) capital of NZ$100 million (2) issue of that share capital in full, but (3) on an entirely unpaid basis. It is common ground before me that, subject only to the question of whether the US$1.5 million payment by the plaintiffs was by way of capital, no other capital payment had been received by the company.

[55] On the premise, as I find, that none of the share capital had been paid, the unpaid capital of NZ$100 million represented a contingent asset of EMG (just as the liability to be called on to pay represented a contingent liability on the part of the shareholders).8 Uncalled capital - nowadays a somewhat rare beast – is a receivable, a contingent asset of the company9 that may be called up by receivers and

liquidators.10 Whatever its precise treatment according to current accounting

standards, it is I think to be viewed as “property of any kind, whether tangible or intangible” for the purposes of s 129. First, s 129 is I think to be given a reasonably inclusive interpretation when it comes to the meaning of “assets”. The expansive wording in s 129(2) suggests that. Secondly, by parity of reasoning, to the extent that contingent liabilities are part of the evaluation provided for under s 129(2)(c), then contingent assets might logically form part of the very broadly defined “assets”

_{against which such liabilities are weighed. Thirdly, in this particular case}

7 See the observations of the Court of Appeal in Shell (Petroleum Mining) Co Ltd v Todd

_{Petroleum Mining Co Ltd CA70/05, 3 August 2005 at [62] as to the need for such evidence.}

8 _{Re Russian Spratts Patent Ltd [1898] 2 Ch 149 (CA).}

9 See e.g. Deegan and Samkin New Zealand Financial Accounting (McGraw Hill, North Ryde,

_{2011) at 446.}

10 Receiverships Act 1993, s 15(1); Companies Act 1993, s 97(2). See Re Phoenix Bessemer Steel

Co Ltd (1875) 44 LJ Ch 683 (Ch D).

shareholders have subscribed for shares on the basis that they are liable contingently to pay up capital when called upon to do so by directors. The latter they have empowered for that purpose. Where, as here, no capital payments have been made at all and the company has no other assets to fall back on, it follows necessarily that to operate at all it will need to borrow. If contingent assets, such as uncalled capital, are excluded from “assets” for s 129 purposes, the result would be that directors would have to go to shareholders on every occasion they wished to borrow even the meanest sum. That would be nonsensical given the structure the shareholders had established and mandated in the first place.

[56] From this it must follow that for s 129 purposes the gross assets of the company in November 2008 were at least NZ$100 million. It follows, also, that EMG’s liability under the loan arrangement for US$1.5 million (for up to 18 months, and at an interest rate of 6.7 per cent per annum) did not require shareholder approval. As is perfectly obvious, the directors of the company could have called on the shareholders to meet its ultimate liability to repay the plaintiffs’ loan. In the event share capital was called up in full by the directors of the company, the plaintiffs would have been liable to pay considerably more to the company than they would have received from it.

[57] In this context there is a real artificiality about an insistence on prior shareholder approval of that loan transaction. This transaction was not one “of which the investors have had no warning and which will abruptly transform the nature of the Company”.11 That approach reflects the observations of the Law Commission preceding s 129:12

The provision is based on the view that some dealings have such far- reaching effects that they should be referred to shareholders. Shareholders should not find that massive transactions have transformed the company they invested in without warning. Clearly, unless the constitution of a company restricts its activities, all shareholders will have to accept a large measure of change. Normally that may be achieved over some time, permitting the shareholder who does not like the direction the company is taking to leave or to exercise his rights to call management to account. What we are concerned

11 Central Avion Holdings Ltd v Palmerston North City Council [2006] NZHC 674; (2006) 3 NZCCLR 311 (HC) at

_[153].

12 Law Commission Company Law Reform and Restatement (NZLC R9, 1989) at [499].

about is abrupt and substantial change which transforms the nature of the enterprise.

[58] I conclude that the plaintiffs’ lending was not a major transaction for the

purposes of s 129 of the Companies Act 1993.

Later shareholders’ resolutions

[59] The third and fourth payments were, as I have said, accompanied by prior shareholders’ resolutions. An argument was made by Mr Lenihan, on behalf of Mr Wikeley, that the plaintiffs cannot rely on those resolutions. That is because Mr Jacomb, one of the plaintiffs, was said to have known that Mr Gharagozlu and the other Chilean businessmen had a beneficial interest in over 50 per cent of the shares in EMG. It was submitted that Mr Jacomb knew that Mr Gibson could not have had actual consent of these gentlemen to vote on the shareholder resolutions regarding the April and May 2009 advances.

[60] I do not accept that submission on the basis of the evidence before me. But in any event, it was clear on the evidence:

(a) the other shareholder whose vote was required on the resolutions was

Geier;

(b) Mr Gibson (as director of Geier, and signatory to the shareholders’

resolutions in that capacity) took his instructions from Mr Wikeley;

(c) so far as Mr Jacomb was concerned, Mr Wikeley was representing the

Chileans’ interests; and

(d) each of Mr Gibson and the plaintiffs executed the shareholders’

resolutions in April and May 2009 in good faith.

[61] None of the Chilean businessmen behind Geier gave evidence.

[62] Mr Lenihan eventually conceded that the later resolutions could not be said to be invalid because the individuals behind Geier had not signed them. The shareholder was Geier, and Mr Gibson was authorised to sign on its behalf.

Did the shareholders ratify anyway?

[63] Section 177 of the Companies Act 1993 provides:

177 Ratification of certain actions of directors

(1) The purported exercise by a director or the board of a company of a power vested in the shareholders or any other person may be ratified or approved by those shareholders or that person in the same manner in which the power may be exercised.

(2) The purported exercise of a power that is ratified under subsection (1) is deemed to be, and always to have been, a proper and valid exercise of that power.

(3) The ratification or approval under this section of the purported exercise of a power by a director or the board does not prevent the court from exercising a power which might, apart from the ratification or approval, be exercised in relation to the action of the director or the board.

(4) Nothing in this section limits or affects any rule of law relating to the ratification or approval by the shareholders or any other person of any act or omission of a director or the board of a company.

[64] It is difficult to view the two shareholders’ resolutions of 28 April and

22 May 200913 as doing anything other than ratifiying the entire extent of the lending by the plaintiffs. Each refers to the current lending level, and approves an “increase” of it. Cross-examined on the subject, Mr Gibson (who signed the resolutions for Geier) accepted that they represented an endorsement of the earlier borrowing. It is I think utterly artificial to view those resolutions as merely approving the discrete additional funding, but not approving the expressly referenced prior funding.

[65] There is no question that the two resolutions are special resolutions for the purposes of the Act. They were signed by 100% of the shareholders in EMG.

Conclusion

[66] It follows that I find that the transactions are loans, guaranteed to the extent of 50 per cent by the defendant, and that liability cannot be avoided on the basis either that the loans were unapproved or unratified major transactions.

Third defence: marshalling?

[67] The plaintiffs concede that twelve million shares in OMG14 were transferred to them, by or on behalf of the defendant, as security for the EMG loans. I find that the security given was by the defendant as guarantor, rather than by EMG as principal debtor. It follows that the whole (rather than half) of the benefit of that security must be accounted for against the defendant’s debt.

[68] The plaintiffs say, however, that the shares have a value that is either nil or negligible. The only evidence before me was of:

(a) last sales stated in January 2009 at 24c per share (although no one suggests that such a price might now be commanded);

(b) sale by the plaintiffs of one million OMG shares between

14 December 2009 and 13 September 2011, raising NZ$9,631 (or

0.96c per share).

Mr Gibson in evidence suggested that OMG’s share had a more positive net tangible asset-backing, at about 2.3c per share. It is difficult however to make much of that number if the market manifests a very different public perception of value. The plaintiffs, holding a minority interest, are in no position to achieve a share price reflecting net tangible assets, rather than the market price.

[69] There is really no substantial controversy on this issue, and it is not necessary for me to traverse the authorities cited by Mr Lenihan on marshalling and subrogation. That is because, responsibly, Mr Toebes accepts that the value of the twelve million shares transferred by way of security must be accounted for, and that

Mr Wikeley is entitled to be subrogated to the plaintiffs’ security. In other words, the

plaintiffs cannot have enforcement of the secured debt and still keep the security.

[70] Given the uncertainty as to what value (if any) to accord to the OMG shares, the practical solution commending itself to the Court (and which I discussed with counsel at the hearing) is to order that:

(a) The plaintiffs must account for the sales proceeds of any of the security already sold, in reduction of the judgment debt;

(b) On satisfaction of the judgment debt by the defendant, the plaintiffs must transfer to him the remaining OMG shares held by them by way of security.

Fourth defence: set off?

[71] In light of my conclusion on the third defence, it is unnecessary to discuss the fourth defence.

Result

[72] Judgment for the plaintiffs in the sums claimed in the amended statement of claim dated 25 January 2011, subject to the provisions of [70] above.

[73] I reserve leave for the parties to apply for clarification of the final terms of judgment if the foregoing is not, as I think it to be, abundantly clear.

[74] The plaintiffs are entitled to costs. If not agreed, brief memoranda may be filed. They are not to exceed five pages. The plaintiffs must file within 28 days of judgment. The defendant must file within 14 days of service of that memorandum.

Stephen Kós J

Solicitors:

JTLaw, Wellington for Plaintiffs

Jones Young, Auckland for Defendant