International Services and Systems Limited v Woods [2014] NZHC 1056 (20 May 2014)

Last Updated: 17 June 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-003106 [2014] NZHC 1056

BETWEEN	INTERNATIONAL SERVICES AND SYSTEMS LIMITED Plaintiff
AND	MARK WOODS First Defendant ALAINA JANE BEATTIE Second Defendant

Hearing:	12 May 2014
Appearances:	Peter Hall for the Plaintiff Stuart Connelly for the Defendants
Judgment:	20 May 2014

_{RESERVED JUDGMENT OF MOORE J}

This judgment was delivered by on 20 May 2014 at 4:00pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

_Date:

INTERNATIONAL SERVICES AND SYSTEMS LIMITED v WOODS & ANOR [2014] NZHC 1056 [20 May

2014]

Introduction

[1] The plaintiff’s claims against the defendants arise out of two loan advances made by the plaintiff to the defendants in January 2008 and December 2011. The loans were for the purpose of facilitating the purchase by the defendants of two tranches of shares owned by the plaintiff.

Procedural background

[2] The matter was originally set down for hearing after the plaintiff’s application for summary judgment was dismissed on 10 October 2013. Faire AJ (as he then was) made timetabling orders for filing pleadings. A five day fixture commencing 12 May 2014 was set. By and large, the defendants have failed to comply with the Court’s directions and the matter was brought forward to be called before the Duty Judge. On that occasion, Mr Connelly, counsel for the defendants, advised the Court that apart from seeking further time to consider one issue, the defendants had exhausted their resources and did not intend to take any further steps in the proceedings.

[3] The issue which the defendants indicated they wished to argue was whether the liability of the defendants is limited to the assets of a certain trust. On that basis, the fixture on 12 May 2014 was confirmed for one day and further timetabling orders were made in relation to the filing of further evidence and submissions.

[4] At the commencement of the hearing on 12 May 2014, Mr Connelly made a brief appearance on behalf of the defendants. He advised the parties were agreed that the liability of the defendants is limited to the assets of the trust. Mr Hall, on behalf of the plaintiff, confirmed this was the case. Mr Connelly then withdrew and the formal proof hearing proceeded.

Factual background

[5] The plaintiff is a shareholding company. At all material times its managing director was Robert King. The plaintiff is the majority shareholder in United Cleaning Services Limited (“United Cleaning”). United Cleaning is a privately

owned company which operates a business providing professional cleaning services for corporate, commercial and utility clients.

[6] In 1997, Robert King’s son, Peter King, commenced employment with United Cleaning. He was appointed a director on 1 July 2008 and is presently its managing director.

[7] On 21 June 2001, United Cleaning employed the first defendant, Mark Woods. On 1 July 2008, the same date that Peter King became a director, Mark Woods also became a director.

[8] Following the breakdown of the relationship between the Kings and Mark Woods, the latter was dismissed on 13 September 2012. He subsequently resigned as a director on 26 June 2013. It would appear the reason for the breakdown of the relationship between the parties is, at least in part, rooted in the events giving rise to the present proceedings.

[9] In 2007 the plaintiff held 549,999 of the 550,000 shares in United Cleaning. Robert King held the remaining share in his personal capacity.

[10] In about March 2007, Robert King, on behalf of the plaintiff, initiated discussions with his son and Mark Woods over the potential sale of 528,000 of the plaintiff’s shares in United Cleaning. The initial proposal was that the shares would be sold, in equal portions to Mark Woods’ trust (“the Arkles Trust”) and Peter King’s trust (“the P and J King Trust”).

[11] In contemplation of this initiative, Robert King sent a proposal on behalf of the plaintiff to Peter King and Mark Woods. The proposal referred to previous discussions between the parties and, in particular, Robert King’s offer to sell them

96% of the business divided equally between the Peter King and Mark Woods’

interests.

[12] The letter concluded with the following observation:

You both need to be very aware of the commitments you are entering into and that you are prepared for the hard yards over the next few years.

I have every confidence you will succeed. The basis of how you will achieve this is by always remembering you are equal partners and must always consider each other’s opinions and interests for the benefit of the business.

[13] The proposal was signed by Robert King and countersigned by Peter King and Mark Woods as trustees of the respective trusts.

[14] The proposal provided, inter alia, the following terms:

(a) the shares would be transferred in two tranches from the plaintiff to the respective trusts as follows:

(i) on 1 January 2008, 24% of the plaintiff’s shares in United Cleaning (being 132,000 shares) would be transferred to the Arkles Trust and 24% of the plaintiff’s shares would be transferred to the P and J King Trust;

(ii) on 1 January 2011, a further 24% of the plaintiff’s shares in United Cleaning (being 132,000 shares) would be transferred to the Arkles Trust and 24% of the plaintiff ’s shares would be transferred to the P and J King Trust;

(b) vendor loans would be given by the plaintiff to the Arkles Trust and the P and J King Trust to assist the trusts in purchasing the shares;

(c) interest would be payable on the amounts of the vendor loans at 9% per annum with interest payments being made on the last day of the month;

(d) the Arkles Trust and the P and J King Trust would each enter into a deed of acknowledgement of debt with the plaintiff in respect of the vendor loans.

[15] Although the proposal originally contemplated the first tranche of shares being sold by the plaintiff to the Arkles Trust, it was later agreed that the purchasers would instead be Mark Woods and the second defendant, Alaina Beattie, in their capacity as trustees of the Mark Woods Trust.

[16] A purchase price of $360,000 was agreed for the first tranche of 132,000 shares.

[17] It was not until 31 January 2008 that the plaintiff and the defendants entered

into a deed of acknowledgement of debt (“the First Deed”).

[18] This provided, inter alia, as follows:

(a) the plaintiff would advance the sum of $360,000 to the defendants as

borrowers (“the First Advance”);

(b) the First Advance was repayable at any time on demand being made by the plaintiff;

(c) all net dividends allocated as a shareholder in United Cleaning would be paid by the defendants to the plaintiff by way of payment of principal and interest due in respect of the First Advance;

(d) interest was payable by the defendants to the plaintiff quarterly on the last day of January, April, July and October in each year on the amount of the First Advance outstanding during the preceding three months. Interest was to be calculated on a daily basis at the rate for that period determined by the Inland Revenue Department as the FBT prescribed interest rate used to determine the fringe benefit value of low interest loans provided to employees;

(e) any demand under the First Deed was to be made in writing and signed by the person making the demand.

[19] On 2 July 2008 the plaintiff transferred the first tranche of 132,000 shares to the defendants. As noted earlier, settlement of the purchase of the first tranche was made by the plaintiff leaving money in by way of vendor finance for the full amount of the purchase price.

[20] It was also agreed between the plaintiff and the defendants that the transfer of the second tranche of shares was conditional upon payment of the purchase price of

$360,000 plus all accrued interest. It was further agreed the transfer was conditional upon payment of all principal and interest owed under the First Deed.

[21] On 1 December 2011 the plaintiff entered into a deed of acknowledgement of debt with the defendants in order to assist the Mark Woods Trust in purchasing the second tranche (“the Second Deed”).

[22] The Second Deed provided as follows:

(a) the plaintiff advanced a further $360,000 to the defendants (“the

Second Advance”);

(b) the Second Advance was repayable by the defendants at any time upon demand by the plaintiff;

(c) the defendants were to ensure all net dividends allocated to them as shareholders in United Cleaning were paid to the plaintiff by way of payment of principal and interest due in respect of the Second Advance;

(d) interest was payable by the defendants to the plaintiff quarterly on the last day of January, April, July and October in each year on the same basis as the First Advance, namely it was calculated on daily basis at the FBT interest rates for that period;

(e) once all principal and interest owed by the defendants to the plaintiff under both deeds had been paid to the plaintiff, the plaintiff would transfer the second tranche of shares to the defendants. Until that time

the plaintiff would hold the second tranche of shares for the defendants as a bare trustee;

(f) any demand made under the Second Deed was to be made in writing and signed by the person making the demand.

[23] As with the first tranche, settlement took place with the plaintiff leaving the second advance in as vendor finance.

[24] After the two deeds were signed, the defendants failed to make any payments and, as a result, the plaintiff did not transfer the second tranche of shares to the defendants.

[25] On 4 October 2012, Robert King, on behalf of the plaintiff, made written demand of the defendants requiring them to immediately repay the first and second advances together with all accrued interest owed up to 30 September 2012.

[26] The demand also provided that if the defendants were unable to immediately pay the amount demanded, the plaintiff was prepared to accept, in full and final settlement of the monies owed under the deeds:

(a) an executed share transfer transferring the first tranche of shares back to the plaintiff;

(b) an executed deed of renunciation confirming the second tranche of shares held by the plaintiff for the defendants were held by the plaintiff in its own right.

[27] The demand was sent to the defendants enclosing the deed of renunciation, a directors’ resolution, a shareholders’ resolution and a director’s resignation for signing by the defendants. There was no response from the defendants to this correspondence.

[28] On 4 April 2013, the plaintiff’s solicitors wrote to the defendants’ solicitors

making a further demand and requiring compliance by 5:00 pm on 11 April 2013.

The following day the defendants’ solicitors sought an extension of the deadline. This was refused. The defendants have failed to comply with the solicitors’ demand.

The claims

[29] The plaintiff filed the present proceedings on 6 June 2013. Subsequently a first amended statement of claim was filed on 17 October 2013. The defendants filed a statement of defence to the first amended statement of claim on or about

30 October 2013.

[30] The first amended statement of claim pleads two causes of action, namely:

(a) judgment for $476,591.87 made up of the unpaid amount of the First Advance of $360,000 together with interest of $116,591.87 calculated according to the FBT interest rate from 2 July 2008 to 30 April 2013. Interest on the sum of $360,000 is also sought calculated in accordance with the FBT interest rate from and including 1 May 2013 until the date of judgment and costs;

(b) judgment in the sum of $388,223.01 made up of the unpaid amount of the Second Advance of $360,000 together with interest calculated according to the FBT interest rate from 1 January 20012 to 30 April

2013, together with interest on the sum of $360,000 at the FBT

interest rate from 1 May 2013 until the date of judgment and costs.

[31] As at 31 March 2014 the total amount of the plaintiff’s claim for the unpaid

principal and interest was $903,803.38.

[32] The statement of defence to the first amended statement of claim pleads four defences:

(a) the second advance was not made by the plaintiff to the defendants by way of a vendor loan on or about 1 January 2012;

(b) Robert King advised Mark Woods that despite the deeds providing the loan sums were payable on demand the First Advance, the Second Advance and all accrued interest owed under the deeds were only repayable “in a wash up upon the sale of the business”;

(c) the Mark Woods Trust has repaid the sums of $45,253.71 and

$36,754.29 to the plaintiff by way of reduction of principal owed under the deeds;

(d) the defendants entered into the deeds as trustees of the Mark Woods

Trust and their liability under the deeds is limited to the assets of the

_{Mark Woods Trust.}

Issues

[33] In his minute of 10 October 2013, Faire AJ identified four issues in these proceedings:

(a) Has the plaintiff advanced monies to the defendants as pleaded in the first amended statement of claim?

(b) Have the deeds of acknowledgement of debt been varied or have some of their provisions been waived?

(c) Has there been a partial repayment of the principal and/or interest claimed?

(d) Is the liability of the defendants limited to the assets of the Mark

Woods Trust?

[34] I shall deal with each of the issues in turn.

Issue A: Has the plaintiff advanced monies to the defendants pleaded in the first amended statement of claim?

[35] The defendants deny the Second Advance was made to them by way of a vendor loan.

[36] The plaintiff submits that there are two reasons why, as a matter of contractual intention, the parties agreed the Second Advance would be made by the plaintiff to the defendants on 1 January 2012.

[37] The first is that clause 1 of the Second Deed provides that the Second Advance would remain outstanding as a debt payable by the borrowers to the lender on demand from 1 January 2012. The arrangement of a vendor providing finance by leaving money in is commonplace. This was the arrangement under the First Deed. In the absence of evidence of an exchange of cash, cheques or other securities the plaintiff leaving moneys in must have been the intention of the parties.

[38] Secondly, the plaintiff held the second tranche as a bare trustee while the funds under both deeds remained owing to the plaintiff. Clause 4 of the second deed expressly provided that once all interest and principal owing under both deeds had been repaid, the remaining 24% of shares would be transferred to the defendants. The evidence supporting the proposition that the plaintiff was holding the second tranche of shares as a bare trustee is to be found in the payment of the shareholder dividends. On 29 June 2012, United Cleaning paid the defendants a shareholder dividend of $36,754.29. This was calculated on a 48% shareholding of which the defendants owned 24%. The fact the dividend paid out was based on the full 48% shareholding confirms the second tranche of shares was being held by the plaintiff as a bare trustee for the defendants.

[39] This conclusion is reinforced by a letter written by the defendants’ solicitors to the plaintiff’s solicitors dated 17 May 2013. That letter states, inter alia:

1.1 Pursuant to the deed of acknowledgement of debt dated 1 December

2011, clause 4, the 24% shareholding referred to in that debt, is held by International Services and Systems Limited as bare trustee.

1.2 The sole beneficiary of the bare trust arrangement is Mark Woods and Alaina Jane Beattie as trustees of the Mark Woods Trust.

1.3 As you will no doubt be aware, the role of the bare trustee is very limited with the bare trustee generally having power to only act on instruction of the beneficiary. Accordingly, in relation to the 24% shareholding in United Cleaning Services Limited, our client instructs that the bare trustee (being International Services and Systems Limited) is not to undertake any action or exercise any right or do any other matter in relation to the shareholding without the express written direction of the beneficiary. This includes exercising voting rights attaching to the shares.

1.4 In view of the pending shareholder meeting, our client requires that International Services and Systems Limited provide a written undertaken that as a bare trustee of the shares it will comply with the requirements of clause 1.3 (above). If the undertaking is not provided by 5:00 pm on Monday, 20 May 2013 our client will have no option but to seek an injunction to protect its position.

[40] Additionally, the use of the word “repaid” in other documentation plainly

infers that the defendants considered the loan monies were an advance. In paragraph

9(c) of the defendants’ statement of defence the defendants plead that the shareholder dividend paid to them by United Cleaning was repaid to the plaintiff by way of reduction of principal owed under the second deed. The use of the word “repaid” is repeated in paragraph 19 when the defendants pleaded the amount claimed by the plaintiff under the second deed was wrong because it had not been adjusted for dividend payments repaid.

[41] The defendants would not have sought to “repay” the dividend to the plaintiff if the second advance had not been made to them. Obviously, if the second advance had not been made there would have been no monies for the defendants to repay.

Issue B: Have the deeds of acknowledgement of debt been varied or have some of their provisions been waived?

[42] This issue relates to the defendants’ claim that despite the express wording of the deeds regarding the repayment of principal and interest, Robert King agreed to vary the deeds so that the principal and interest owed was only repayable “in a wash up upon the sale of the business”. While the exact meaning of the expression “wash up upon the sale of the business” is unclear, the inference the defendants seek to be drawn is that Robert King orally agreed to vary the deeds so that any outstanding

debt payable under them would not be required to be repaid to the plaintiff until the sale of the business. This is referred to in Mark Woods’ affidavit where he states at [7] that after expressing reservations around the original offer made to him by Peter King and his concerns about the “large amount of money”:

[Robert King] told me not to worry about the debt, that as long as I continued to run the company at a good profit, the debt, both business and personal, could be sorted out in a wash up upon the sale of the business.

[43] Similarly, in relation to the transfer of the second tranche Mark Woods stated:

Once again [Robert King] sat me down in his office and said don’t worry about the debt, the same arrangements still stands it will be sorted when the company is sold.

[44] The plaintiff denies that there was any such arrangement. In their affidavits, Robert and Peter King strongly reject the “wash up” claim. Robert King’s evidence is that having purchased the business in the early 1980s it had always been his passion to build it up and create a legacy. He deposed that it had always been his intention as he neared retirement to hand the business over to family members and people within the business who helped build it. He stated he never once contemplated selling the business or the shares in United Cleaning to any competitor or outside purchaser in the 30 years he had been involved in the ownership of the business.

[45] Furthermore, he said that he never discussed such an idea with the directors or shareholders. He said the most likely purchaser of United Cleaning would be a competitor who would strip the cleaning contracts out of the business, use those contracts in its own business and shut down the newly acquired business. He said that given his long connection to the company and his loyalty to his staff, he had never contemplated selling and wanted to see the business endure. Indeed, it was for that very reason that he offered to sell the shares in United Cleaning to his son and the first defendant because he believed both men were the right people to take control of the business and facilitate his orderly exit.

[46] On the evidence, I accept there was no “wash up agreement” which, given Robert King’s usual practice of recording these sorts of matters in writing, there is no evidence to support.

[47] In my view, it is also noteworthy that the first time the wash up allegation was raised was in the first defendant’s affidavit sworn on 24 July 2013. This was almost 10 months after the plaintiff’s solicitors first wrote to the defendants demanding payment of the monies owed under the deeds and almost four months after the plaintiff ’s solicitors wrote to the defendants’ solicitors in respect of the deeds. If the defendants were sincere in their believe that a “wash up agreement” did exist it is both surprising and counter-intuitive that they did not raise it in correspondence earlier.

Issue C: Has there been a partial repayment of the principal and/or interest claimed?

[48] The defendants plead they repaid the dividends ($45,253.71 and $36,754.29) in reduction of the principal sums owed under the deeds. However, despite repeated requests made by the plaintiff’s solicitors of the defendants to provide it, no evidence confirming these repayments have ever been provided to the plaintiff. Furthermore, extensive checks have been made by the plaintiff’s financial controller for the purpose of confirming whether or not such payments from the defendants have been received by the plaintiff, United Cleaning or Robert King.

[49] This thorough review, which involved analysing all relevant bank statements for the period between 1 May 2011 and 24 July 2011, provided no evidence of the receipt of any payments which might support the defendants’ claim. Furthermore, Robert King’s personal accounts were examined both by Peter King and the plaintiff’s financial controller. Again, there is no evidence of any payments being received.

[50] For that reason, I am satisfied that there has been no repayment, partial or otherwise, of the principal and/or the interest claimed.

Issue D: Is the liability of the defendants limited to the assets of the Mark Woods

Trust?

[51] As previously noted in this judgment, the plaintiff accepts that the liability of the defendants is limited to the assets of the Mark Woods Trust.

Result

[52] Accordingly there shall be judgment against both defendants as follows:

(a) In respect of the first cause of action:

(i) Unpaid amount of first advance $360,000.00 (ii) Interest on first advance from 2 July 2008 to

30 April 2013 116,591.87

_{Total $476,591.87}

(iii) Interest on the sum of $360,000.00 at the FBT interest rate from and including 1 May 2013 until the date of judgment.

(b) In respect of the second cause of action:

(i) Unpaid amount of second advance $360,000.00 (ii) Interest on second advance from 1 December

2012 to 30 April 2013 calculated at FBT

interest rate 28,223.01

_{Total $388,223.01}

(iii) Interest on the sum of $360,000.00 at the FBT rate from 1 May

2013 until date of judgment.

Costs

[53] The plaintiff has applied for indemnity or increased costs. The Court of Appeal has usefully summarised the difference between indemnity and increased costs. In Bradbury v Westpac Banking Corporation it was held that:¹

The distinction among our three broad approaches: standard scale costs;

increased costs; and indemnity costs may be summarised broadly:

(a) standard scale applies by default where cause is not shown to depart from it;

(b) increased costs may be ordered where there is failure by the paying party to act reasonably; and

(c) indemnity costs may be ordered where that party has behaved either badly or very unreasonably.

[54] I am not satisfied that indemnity costs are appropriate in this situation. Indemnity costs are awarded only in truly exceptional circumstances,² which do not exist in the current situation. However I do accept that increased costs are appropriate under r 14.6(3)(b) in light of the defendants’ persistent failure to comply with the directions of the Court which has contributed unnecessarily to the time and expense of the proceeding.

[55] As a result the plaintiff is entitled to costs against the defendants on a 2B

_{basis with a 50 per cent uplift.}

Moore J

Solicitors:

P Hall, Matamata

S Connelly, Auckland

¹ _{Bradbury v Westpac Banking Corporation [2009] NZCA 234; [2009] 3 NZLR 400, (2009) 19 PRNZ 385 (CA) at [27].}

² Hedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [8]; confirmed in Bradbury v

Westpac Banking Corporation, above n 1, at [28].