Monteith v Fogarty [2015] NZHC 2301 (22 September 2015)

C R MONTEITH AND M E MONTEITH v P M FOGARTY, E A SQUIRE AND J MORRELL AND RUATUKI LIMITED [2015] NZHC 2301 [22 September 2015]

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[1] The defendants/applicants seek leave pursuant to s 165(1)(b) of the Companies Act 1993 to intervene in these proceedings for the purpose of enabling the second defendant, Ruatuki Limited (the company) to defend the proceedings brought against it by the plaintiffs. Leave is also sought to bring proceedings by way of counterclaim in the name of/on behalf of the second defendant against the plaintiffs.

[2] The application is brought on the grounds that the company does not intend to/cannot defend the proceedings brought against it by the plaintiffs and that it is in the interests of the company that the proceedings be defended and the company be permitted to bring a counterclaim.

(a) The extent of the plaintiffs and defendants business association; (b) The proceedings and the parties issues;

[4] The plaintiffs are the trustees of their family trust, the Monteith Trust. The first defendants are the trustees of their family trust the Athenry Trust.

[5] The company was incorporated on 14 December 2009 for the purpose of purchasing diary stock, Fonterra shares, farm plant and equipment, and to lease land to enable the company to operate the business of a diary farm.

[6] The trustees of the Monteith Trust hold 50 per cent of the shares and the trustees of the Athenry Trust the other 50 per cent of shares in the company. The

first named plaintiff Mr Monteith and the first named first defendant Mr Fogarty are the directors of the company.

[7] On 1 June 2010 the trustees of the respective trusts became parties to a shareholders’ agreement to regulate their interests and rights as shareholders in the company. Clause 3 of that agreement provided that if the parties agreed then one party would purchase all of the shareholding of the other party at such value and on terms as they agreed but failing agreement then at value and on terms determined in accordance with the “fundamental dispute” provisions of the agreement.

[8] Further clause 3 provided that if the parties could not agree then the parties should take all steps necessary to liquidate the company.

[9] Clause 6 of the shareholders agreement prohibited the parties, without the unanimous approval of its directors, from certain activities including making material changes to the nature, scope or size of the business; ceasing to carry on its business; delegating any powers of directors; incurring expenditure or liability in excess of $5,000; entering into transactions with third parties for consideration other than cash, and the selling, transfer or otherwise disposal of any part of the assets having a value in excess of $5,000.

[10] Clause 10 of the agreement contained the “fundamental dispute” provisions by which a party may give notice to the other party of the existence of a dispute and particulars of it; requiring then the parties to meet in good faith to seek to resolve the dispute and if not resolved within 10 working days for the parties to agree on a process for resolving the dispute. Failing any agreement regarding such process the parties were to refer the dispute to Mary Cooper of Fielding to determine and that her ruling would be final and binding.

[11] The statement of claim reviewed the parties’ business activities from 31 May

2010. These comprised the entering into of deeds of farm lease with entities associated with the plaintiffs and first defendants.

[12] The plaintiffs are husband and wife but on 30 June 2013 they separated. [13] The plaintiffs plead:

(a) that in or around early December 2013 the trustees of the Monteith Trust and the trustees of the Athenry Trust entered into an oral agreement pursuant to clause 3.2 of the shareholders agreement, that the trustees of the Athenry Trust would purchase all of the Monteith Trust’s shares in the company.

(b) There was a meeting between the parties first in early June 2013 to advise the first defendants that Mr and Mrs Monteith were separating and that they did not wish to continue to hold a joint shareholding in the company.

(c) That then and in subsequent discussions to December 2013 a number of options were discussed including that one only of the plaintiffs remain as a shareholder or that the plaintiffs’ interests be sold to a third party, and, even the possibility of placing the company into liquidation.

[14] The plaintiffs say the first defendants dismissed those options and instead agreed the Athenry Trust would buy the Monteith Trust’s shares; that it was agreed a fair market value would be obtained and paid no later than 31 May 2014, being the last day of the then current diary season and it being the company’s balance date.

[15] The statement of claim pleads that correspondence between lawyers recorded the agreement to purchase and the proposal of a process for reaching agreement upon value and terms. The plaintiffs say their lawyers informed the first defendant’s lawyers of a desire to reach agreement by 20 December 2013 and that otherwise the

dispute resolution provisions of clause 10 of the shareholders agreement would apply; that although the first defendant’s lawyers did not respond, that there were direct discussions between the parties towards reaching an agreement upon the value of the shares.

[16] The plaintiffs plead details of attempts to obtain livestock valuations; and claim that on 3 March 2014 Ms Squire of the first defendants forwarded an email from the Athenry Trust chartered accountants stating that once valuations for livestock, plant and equipment and Fonterra shares had been received, a share value could be determined and agreed – that the Athenry Trust would then purchase the Monteith Trust’s shares as close as possible to 31 May 2014.

[17] The statement of claim pleads in length details of communications between the parties and their advisors between 6 March 2014 and 30 May 2014. The plaintiff Ms Monteith is a chartered accountant and on 28 May 2014 she assessed Monteith Trust’s half share in the equity of the company at a value of $1,510,143. On 28 May

2014 the trustees of the Monteith Trust met with the first defendant’s chartered accountant and on 30 May 2014 that accountant submitted an increased offer on behalf of the Athenry trust to purchase the first defendant’s shares for $962,834. That offer was not accepted.

[18] Then, and over some 10 pages comprising 89 paragraphs the plaintiffs plead details of how it is they claimed the first defendants have treated the company as their own to the detriment of the plaintiffs. Examples pleaded include:

(a) Athenry Trust having submitted an invoice for management fees in the sum of $57,500 and then paying that invoice from the company’s bank account.

(b) Thereafter that the first defendants would not provide an undertaking that further payments would not be made from the company’s bank account without Mr Monteith’s consent.

(c) That between 3 June 2014 and 26 September 2014 the first defendant’s used internet banking to cause the company to make various payments totalling $96,360.36 including payments of over

(d) The first defendants caused the company to pay income tax in the sum of $78,000 in June 2014 without consultation or approval of Mr Monteith.

(e) That Athenry Trust engaged its own accountant to provide advice to the company regarding its tax affairs, without consultation or advice from Mr Monteith.

(f) When on or about 17 June 2014 the plaintiffs requested the ASB Bank to freeze the company’s account, two days later the first defendants solicitor wrote to the plaintiffs solicitor asserting, it is claimed, for the first time that the Athenry Trust had never agreed to buy the Monteith’s trusts shares in the company. That letter also raised issues claiming that some of the company’s stock was on the properties of plaintiff entities without the consent of the Athenry Trust; and asserted claims of an interest on behalf of the first defendants of the right to purchase some of the company’s stock and its Fonterra instruments; that the Athenry Trust planned to offer employment to the company’s employees; and that demand would be made upon the company for repayment of the Athenry Trust’s loan advance.

(g) That the aforesaid letter was written on behalf of the first defendants but by the solicitor that acted for the company.

(h) On 20 June the first defendants prepared an invoice in the name of the company and addressed to the Athenry Trust seeking payment on behalf of the company in the sum of $1,219,040.25 for 885 of the company’s cows – an invoice that was not copied to the plaintiffs, nor

		consented to by them; and that the company received payment in respect of that invoice on 20 June 2014;
	(i)	That the first defendants prepared a second invoice in the name of the company and addressed it to the Athenry Trust which sought payment
		of behalf of the company from the Athenry Trust of $990,806.65 for 667 of the company’s cows which invoice also was not copied to the
		first defendants nor consented to by them.
	(j)	A third invoice was delivered and sent in similar circumstances
		seeking payment for $101,154 for 179 of the company’s cows but in respect of which the company received no payment.
	(k)	At about that time also the first defendant’s incorporated a new company, Ruatuki Farm Limited of which the first defendant’s were
		directors and the Athenry Trust the shareholder. At the same time the first defendants procured the termination of the employment of the
		company’s employees and had Ruatuki Farm Limited reemploy them.
	(l)	On 20 June the first defendants acquired the possession, benefit and
		use of the company’s feed-on-hand which had a book value of $108,685.35 but for which no consideration was received.
	(m)	On or about 20 June the first defendants acquired the possession, benefit and use of the company’s plant and equipment which had a
		book value of $161,000 but for which the company received no consideration – that the plaintiffs were not informed nor consulted
		about the matter.
[19]	The	plaintiffs plead that on 20 June their solicitors wrote to the

company’s/first defendant’s solicitor claiming that the first defendant’s trust had failed to meet in accordance with the “fundamental dispute” provisions of the shareholder agreement and that Ms Cooper be appointed to determine the dispute as to share value. Attempts to do that failed because both Ms Cooper and her

nominated substitute advised they could not act except with the consent of the trustees of the Athenry Trust.

[20] It is pleaded that the company’s/first defendant’s solicitor was contacted regarding the company’s debt to a farm supplier, but that solicitor did not inform the plaintiffs; that the supplier served a statutory demand on the company but the solicitor did not advise the plaintiffs and as a result the statutory demand expired unsatisfied on 24 September 2014. Also issues arose subsequently regarding the payment of other debts of the company and how in each case it is claimed the first defendants sent a cheque and requested the creditor to contact the plaintiffs for the other signature required for that cheque.

[21] It is pleaded the first defendants allowed one of the company’s farm leases to expire and how the lease of that land was subsequently picked up by another company entity owned by the first defendants; and that the first defendants had placed stock on that land without providing the company with consideration for that grazing.

[22] In summary it is the plaintiff’s position that in December 2013 a binding agreement was reached between the plaintiffs and first defendants regarding purchase of the Monteith Trusts shares in the company; that although the parties did not agree on all essential terms, including the purchase price, the agreement contained all necessary machinery provisions for those essential terms to be determined.

[23] The plaintiffs claim their trust is owed $1,510,144. The plaintiffs say the first defendants are estopped from claiming otherwise. They say the position adopted by the first defendants is in breach of the shareholders agreement. Finally it is claimed the first defendants have conducted the affairs of the company in a manner that is, and that acts of the company have been, oppressive, unfairly discriminatory and/or unfairly prejudicial to the plaintiffs.

[24] That pleading on behalf of the first defendants comprises a document of 37 pages and 153 pleaded paragraphs.

[25] It is not intended to review allegation by allegation each claim of the plaintiffs responded to by the first defendants. However, in brief:

(a) The first defendants deny they agreed to purchase the shares at fair market or at any other value;

(b) That although they agreed to discuss a possible purchase, appropriate terms and conditions were not agreed upon;

[26] Regarding allegations that the first defendants treated the company as their own, the first defendants have carefully, and item by item responded to each of those allegations raised by the plaintiffs.

(a) There was no agreement and therefore no breach of an agreement for sale and purchase agreement of shares;

(b) No estoppel occurred because no agreement was made; (c) There was no breach of the shareholder agreement;

(d) That it was the plaintiffs’ actions and not theirs which did or may have caused loss to the company.

[28] By their counterclaim the first defendants plead the plaintiff Ms Monteith was deemed to be a director of the company and it was she who purported to make

governance decisions on behalf of the company and through whom the plaintiffs conducted the affairs of the company in an oppressive, unfairly discriminatory and unfairly prejudicial manner affecting the first defendants. In short it is claimed she failed to keep full and accurate records of herd numbers, of the plant and equipment owned, and as well, by unilaterally freezing the company’s bank account on an occasion. It is asserted she failed to act in good faith and to exercise her powers as a deemed director for improper purpose and by failing to exercise the care diligence and skill she should have. In that regard the first defendants have provided particulars of those aspects of alleged failure.

The first defendant’s application to intervene to enable the company to defend the plaintiffs proceeding

[30] Leave is sought by the first defendants to bring counterclaim proceedings in the name of the company against the plaintiffs.

[31] The application is supported by the affidavit of the first defendant Mr Fogarty. He refers to the company being set up in 2010 after the first defendants invited the plaintiffs into a joint venture to conduct a dairy farming business. He said the first defendants provided part of the dairy herd and provided the finance necessary to conduct the business; that they lent the company money and leased two of their farms to it. He said the plaintiffs had little money with which to enter into the joint venture.

[32] Mr Fogarty says the purpose of the joint venture was that the first defendants would supply the land and finance and the plaintiffs would supply the dairy farming expertise and accounting expertise; that Mr Monteith had managed dairy farms previously and Mrs Monteith was an accountant.

[33] Mr Fogarty said that after the Monteith’s separated discussions were entered into about the possibility of the first defendant’s purchasing the Monteith's shareholding, but he said no agreement was reached.

[34] Mr Fogarty said herd records were in disarray, were incomplete and in “disorder”. He provided details of why accurate records were required and how lack of those would affect stock value. He asserts there were a large number of animals missing or unaccounted for in the books.

[35] Mr Fogarty deposed that when no agreement could be reached regarding the plaintiffs desire to exit the company that the plaintiffs then unilaterally arranged for the company’s bank account to be frozen. This he said caused “enormous difficulties” to the company.

[36] Mr Fogarty describes Ms Monteith’s valuation of the plaintiffs’ shares as illogical and he offered reasons for this view.

[37] Mr Fogarty provided examples of why he considered there were irregularities concerning “Mrs Monteith effectively controlling the books and bank accounts of the company”.

[38] Regarding the cows in possession of the new company entity of the first defendants, Mr Fogarty notes that the first defendants will ensure that an appropriate amount is paid to the company in respect of those cows. He states that once the litigation has been resolved the company will be in the position to either go into liquidation with an appropriate division of funds being made between shareholders, or one of the shareholders can purchase the other parties shareholding. From the first defendants point of view he advises they have no real need for the company because of the new farming company operating and set up in the name of their new entity.

[39] Mr Fogarty considers the parties are in a stalemate situation where one director is suing the company but that it appears that director refused authority to allow him to take steps to ensure the company receives an effective defence.

[40] In summary Mr Fogarty says there are 104 missing cows and only the plaintiffs will be able to account for those. He expresses reasons why he considers the company owes the Athenry Trust for plant that is missing or has been replaced by

the trust. He believes the company should be able to claim for losses alleged to have occurred for late payment of tax – a responsibility Mrs Monteith could have avoided.

[41] It is the applicants’ case the plaintiffs are suing both the first and second defendants and in particular that breaches of the shareholders agreement pertaining to the company are alleged. Also it is noted that the plaintiffs fourth/alternative cause of action was filed pursuant to s 174 of the Companies Act 1993 claiming to that the first defendants have conducted the affairs of the company by acts that have been oppressively, unfairly discriminatory and/or unfairly prejudicial to the plaintiffs.

[42] Counsel for the applicants argues that it is being claimed the company has acted in that way towards the plaintiffs.

[43] Counsel argues the plaintiffs appear to allege both defendants are jointly and severally liable. Defendants counsel submits therefore it appears the plaintiffs want a “clean run” in their action against the company and wish to proceed against the company without the company having any ability to defend itself.

[44] The first defendants, by Mr Fogarty, seek leave to intervene for the purpose of defending the proceedings on behalf of the company; that if leave was not granted then it would result in an unfair situation whereby an equal shareholder and director of the company could bring proceedings against the company, but prevent the other equal shareholder and director from taking steps on behalf of the company to defend those proceedings. It follows, submits counsel that if the plaintiffs can claim against the company then the company ought to be in a position to counterclaim against them.

[45] Addressing matters for consideration upon the defendants’ application counsel submits:

(b) That the company is asset rich and will be able to meet the costs of any case involved;

(d) Because Mr Fogarty claims the company has a good defence and that the company is owed money by the plaintiffs.

[46] Counsel submits that a final accounting between the plaintiffs and defendants cannot occur until such time as it is known whether there is any debt to the plaintiffs or whether the plaintiffs have a debt to it. Counsel submits in this case we have a deadlock where one director forbids the other from taking action on behalf of the company. Counsel refers to two authorities as examples for leave having been

minority shareholders who complained about the director’s excessive remuneration and an interest free loan having been obtained. In the other, Porrit v Weir ²there was a deadlock between equal shareholders and co directors regarding a director having used the company to receive a personal advance and then blocking attempts to recover the money owing.

[47] Counsel submits in this case it is plainly arguable that a director has acted in a way so as to cause loss to the company in relation to 100 missing cows, and “freezing” the company’s bank account causing claimed losses; and in failing to account for assets which had been removed.

[48] Counsel rejects claims that in reality no claim is made by the plaintiffs against the company but is confined to claims against the first defendants. Counsel queries why any claim should be brought against the company at all if that was the case.

[49] Regarding the plaintiffs claim having been made against the company because the company had acted oppressively because the first defendants caused it to

do so, counsel enquires as to why the plaintiffs claim could not have been brought solely against the first defendants.

[50] Counsel criticises the plaintiffs argument that the defendants can recover any losses suffered by the company as a result of the plaintiffs actions by seeking damages based on the corresponding loss of value of their shareholding. Such a position, submits counsel, is not supported by the decision of the English Court of Appeal in Prudential Assurance Company Limited v Newman Industries Limited

No.2 ³. In that case the Court held the shareholders had no personal right of action

against company directors to recover loss which is caused by a reduction in shareholding value if that loss was merely a reflection of the loss suffered by the company.

[51] Counsel submits the plaintiffs’ case is about a breach of directors duties owed

[52] It is the applicant’s position that any claim by the company will involve the same evidence as the claims brought against the first defendant and there ought to be a common purpose in ensuring the claims affecting all affected parties be heard together.

[53] The plaintiffs claim does not seek a remedy against the company. Even the s 174 fourth/alternative cause of action is about how it is claimed the first defendants conducted the affairs of the company and how the first defendants have used the company to acquire and obtain the benefit of assets belonging to the company without the knowledge of the plaintiffs and in a manner causing a reduction in the value of the company.

[54] In essence it is about allegations of deceit of company officers, and of claims of personal benefit having been obtained.

[55] Primarily the claim asserts a binding agreement was entered into for the purchase of the plaintiffs’ shares by the first defendants. The details of those allegations have already been traversed as has the first defendants’ position in opposition.

[56] The fourth/alternative cause of action alleges the first defendants as trustees of the Athenry Trust having conducted the affairs of the company in a manner that was oppressive, unfairly discriminatory and/or unfairly prejudicial to them as shareholders. As a result of that conduct the fourth cause of action also alleges that the acts of the company itself have been oppressive, unfairly discriminatory and/or unfairly prejudicial to the plaintiffs.

[57] The relief sought by the plaintiffs in this regard is an order that either the first defendants or the company itself purchase the plaintiffs shares for $1,510,144 or pay compensation.

[58] The focus of the first defendants counterclaim is that it was not them but the plaintiffs as trustees of the Monteith Trust who conducted the affairs of the company in a manner that has been oppressive, unfairly discriminatory and unfairly prejudicial. They claim it was the plaintiffs’ failure to keep proper herd records, failure to keep proper records of plant and equipment; failure to manage the day to day farming operation competently, failure to explain the whereabouts of missing stock; and unilaterally freezing the company’s bank account causing it repudiate its obligations.

[59] The first defendants second counterclaim cause of action alleges a failure to account for missing cows which reduced the value of the first defendants’ shareholding in the company.

[60] The third counterclaim cause of action alleges breaches of duties as directors of the company in the manner already described.

[61] The fourth counterclaim cause of action alleges breaches by the plaintiffs of the shareholders agreement.

[62] It is clear from s 165(2) of the Act that the Court must consider the prospects of success in granting the application to bring a derivative claim. Leave will be granted if the company does not intend to bring or defend proceedings – otherwise as it should be able to. Usually a Court will consider whether it is in the company’s interests that the conduct of the proceeding should not be left to the directors or the determination of the shareholders as a whole.

[63] It is clear s 165 confers a broad discretion. The second defendant is a commercial joint venture company the shares of which are owned by the trusts of the plaintiffs and the first defendants.

[64] The relationship between those trusts soured from about the time the Monteiths marriage broke up and the plaintiffs had discussions with the first defendants about the sale of the plaintiffs’ shares. Before then the parties’ relationship appears to have been workable. There is little evidence of business concerns having been raised. Rather the situation deteriorated from about the end of May 2014. The actions of Mr Fogarty in particular became a target of complaint by the plaintiffs. Now the evidence of both sides is that the actions of the other has affected the functioning and value of company assets.

[65] The plaintiffs’ proceeding is founded on claims that the parties reached agreement with the defendants to acquire their shares. That fundamentally explains the nature of the first three causes of action. The fourth cause of action is about claims that the defendants have, through Mr Fogarty, conducted themselves in a way which has affected the company share value. The defendants defence and counterclaim blames the actions of the plaintiffs for any adverse outcome to share value.

[66] But, at its core this is a case based on the claim of an agreement for the sale of shares and about actions of parties that may have affected that share value.

[67] It is a claim between two trusts each of which owns half of the shares. There are only two shareholders. There are only two directors. In due course there will have to be an enquiry into the various claims of actions of those shareholders and

directors and clearly expert evidence will be required for comment in that investigative outcome upon the extent to which the company’s equity has been affected. But it will be only in that respect i.e. about the value of the shares that the company becomes involved because the reality is that short of liquidation it will be the first defendants who will acquire the plaintiffs’ shares.

[68] There is no purpose in the company taking a position in this dispute. It does not need to be represented much less by Mr Fogarty or the first defendants.

[69] It is unclear about the extent to which the company continues to trade. Certainly the character of its commercial activities has significantly altered. It appears much of its business is now being managed by Mr Fogarty and the new company he has formed. Mr Fogarty promises to account for that stock being managed by his new company.

[70] We are not here talking about an entity the activities of which will continue as was originally planned and put into place. The business was about two families combining their skills to create a new business venture. The business was only ever going to be successful if nothing challenged the parties’ good faith, and the trust and expectations each had in the other.

[71] In reality there is no claim against the second defendant. Obviously it will be affected in the outcome. Either the plaintiffs’ shares will be acquired or liquidation will occur. Liquidation appears to be an inevitable outcome anyway. There is nothing the company can do which will likely affect those outcomes.

[72] Claims are not made in this proceeding directly against the company. The plaintiffs claims do include acts of the company that have been oppressive, unfairly discriminatory and/or unfairly prejudicial but these claims flow, as plaintiffs counsel submits, naturally from the preceding allegation that the trustees of the Athenry Trust have conducted the affairs of the company oppressively.

[73] As much is obvious by the counterclaim proposed for the company for that reiterates the counterclaim already filed by the first defendants. Both of those

pleadings are based on alleged failures by the trustees of the plaintiffs in relation to record keeping, stock reconciliation and farm management and as well about the freezing of the company’s bank account.

[74] This Court agrees there is a clear risk of duplication and of double recovery if the company was to be actively involved.

[75] The matters contained in the proposed derivative counterclaim will be advanced and litigated in any event through the first defendants already filed counterclaim.

[76] If eventually there appears some purpose for representative action on behalf of the company to investigate those issues raised by both sides in this proceeding, then that ought properly to be left to a liquidator after taking independent advice.

[77] Counsel for the plaintiffs submit that by permitting Mr Fogarty to bring claims against the trustees of the plaintiffs on behalf of the company would be to allow the trustees of the first defendants trust to use the company to continue with the very sought of oppressive and prejudicial conduct complained of, and which led to the issue of the current proceedings. Whether that is so or not, it is the Court’s clear view it would not be just and equitable for the company to take an active and partisan role in the present proceeding.

[78] Mr Fogarty’s application for leave to intervene in these proceedings for the purpose of enabling the company to defend those proceedings, and for leave to bring proceedings by way of counterclaim in the name and on behalf of the company against the plaintiffs is refused.

[80] Mr Fogarty shall pay the plaintiffs costs on a 2B basis together with disbursements approved by the Registrar.

BETWEEN	CARWYN ROSS MONTEITH AND MICHELLE EILEEN MONTEITH Plaintiffs/Respondents
AND	PATRICK MAURICE FOGARTY, ERIN AVIS SQUIRE AND JO ANN MORRELL First Defendants/Applicants
	RUATUKI LIMITED Second Defendant

Hearing:	18 September 2015
Appearances:	D Kerr for the Plaintiffs/Respondents G W Calver for the First Defendants/Applicants
_Judgment:	_{22 September 2015}

High Court of New Zealand Decisions

Monteith v Fogarty [2015] NZHC 2301 (22 September 2015)