Justo v Briggs [2016] NZHC 1464 (30 June 2016)

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UNDER	section 174 of the Companies Act 1993
IN THE MATTER	of RAPID ROOFING LIMITED a duly incorporated company having its registered office at Campbell Thompson Accountants, 14 Oxford Street, Richmond, Nelson
BETWEEN	RICHARD JAMES JUSTO Plaintiff
AND	GAVIN DWAIN BRIGGS Defendant

Hearing:	27 May 2016
Counsel:	L Stevens for Plaintiff G Briggs for Defendant
_Judgment:	_{30 June 2016}

[1] Rapid Roofing Ltd is jointly owned by the parties.¹Each performs complementary roles within the company. Mr Justo is the person with the technical roofing skills who is hands on with the various jobs. Mr Briggs negotiates the contracts, including pricing the jobs, sources materials and maintains business relations with various suppliers and clients. Mr Justo has long been in the industry

¹There are 300 shares. Mr Justo owns 150, Mr Briggs 100, and a Briggs’ family trust the other

[2] The relationship between the two men has broken down irrevocably. This seems to have been a quite rapid decline through the second half of 2015 and the first part of this year. However, as is not uncommon, what could be termed festering grievances are now also being aired.²

[3] The situation has come to a head because in September 2015 Mr Justo was diagnosed with rheumatoid arthritis, which has prevented him doing the actual roofing work. There have been other health scares over this period, some as yet unresolved. It has obviously been a difficult time, and Mr Justo’s reaction to medication has, it seems, not led him to be the most even-tempered of people during this period. There are complaints over his interactions with staff. His health has also understandably dominated his thoughts, and so he has not responded throughout the period to requests for the future of the company to be sorted out.

[4] This ruling addresses competing applications under s 174 of the Companies Act 1993. Mr Justo requests the Court to order that Mr Briggs buy his shares in the company. Mr Briggs requests that the Court direct that the company be placed into liquidation.

[5] The matter came on for an expedited hearing, with affidavit evidence being taken as read, and with no cross-examination occurring. My ability to assess the true merits of the many disputes is therefore significantly hindered, but this is the basis on which the matter has proceeded. That said, many of the matters of conflict are little more than bickering and will not be the subject of consideration.

(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him

²There is no shareholders’ agreement, and nor is there any provision in the constitution which

(2) If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—

(a) Requiring the company or any other person to acquire the shareholder's shares; or

(b) Requiring the company or any other person to pay compensation to a person; or

(3) No order may be made against the company or any other person under subsection (2) of this section unless the company or that person is a party to the proceedings in which the application is made.

[7] A pre-condition to the making of the orders under s 174(2) is that there has been or is likely to be “oppressive, unfairly discriminatory, or unfairly prejudicial conduct”. The commonly cited statement as to the meaning of those terms is a passage from the judgment of Richardson J in Thomas v H W Thomas Ltd:³

I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates some only as a legitimate foundation for a complaint under s 209 [the predecessor to s 174]. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.

[15] Oppressive conduct has been further judicially defined as conduct which is “a visible departure from the standard of fair dealings and the violation of the conditions of fair play”,⁵burdensome, harsh and wrongful”,⁶and a “lack of probity of fair dealing”.⁷However, oppressive conduct need not be unlawful, nor does it require bad faith.⁸

[9] It is convenient to analyse the matter through the lens of Mr Justo’s application, since his application, if granted, would have the most impact. I do not understand there to be any dispute that the company should be wound up if Mr Justo’s application fails, but that will need clarification. The conduct which is said collectively to meet the s 174(2) threshold is:

(a) Mr Briggs has been running the company down or operating it inefficiently so as to reduce its value;

(c) Mr Briggs has been unlawfully using Mr Justo’s Licensed Building Practitioner certificate, without Mr Justo’s consent, to sign off on work;

(e) Mr Briggs has formed a new company and expressed his intent to go into business in opposition to Rapid.

⁴Burnett v Patterson [2015] NZHC 1974. A series of propositions are also identified in Latimer

_{Holdings Ltd v SEA Holdings New Zealand Ltd [2004] NZCA 226; [2005] 2 NZLR 328
(CA) at [113].}

⁶_{Scottish Co-operative Wholesale Society Ltd v Meyer
[1959] AC 324 at 342 (HL).}

[10] These specifics are identified to support a general proposition that Mr Briggs is running the business down, not taking available work, and generally diminishing the value and goodwill of the business so that it fails or its value is greatly diminished. Mr Briggs will then start a new business using the goodwill of Rapid without having paid Mr Justo anything. As background to this, I note there is at present no expectation Mr Justo will be able to return to his roofing work.

[11] I will address the specific points, but begin with some general observations. In this I am assisted by an independent report prepared, at the Court’s direction, in which the recent financial performance of the company is analysed.

[12] It is clear that Rapid has been a profitable business, and still is. There has been some decline in sales, but also a significant decline in the cost of sales which has off-set this to some extent. The year ending March 2016 has indeed declined in all respects from the previous years, but the bulk of this came following Mr Justo’s ill-health.

[13] The business seems to have worked well when both men were healthy and compatible. However, the basic lack of formal agreements, and controls on drawings, has come into sharp relief once the relationship deteriorated. Problems that were known and tolerated before have been difficult to curtail once tolerance ended.

[14] An example of the lack of firm rules is the situation of drawings. It seems there was a general agreement as to weekly drawings, but then also a capacity to exceed this at will for personal matters via the company credit card. For a period Mr Justo’s withdrawals became excessive, as I assess it. This was only able to be addressed by the accountant allocating off-selling lump sum payments to Mr Briggs.

[15] My reading of the evidence leads me to conclude that once the pressure came on with Mr Justo’s ill-health and unavailability, the business was not structured well enough to sustain itself. The relationship deteriorated, and it has all gone downhill rapidly.

[16] I do not accept it has been established Mr Briggs ran the business down. The independent report does not support this submission, and the circumstances were such that a conservative approach by Mr Briggs was appropriate. Mr Justo has the technical skills, and it seems they are at a high level. But that means he must be available to do the work, and since September he has not been. It was sensible for Mr Briggs to have been cautious in what work he took on while the uncertainty prevailed.

[17] The evidence does not allow me to form a firm view as to whether assistance could have been imported to offset Mr Justo’s loss. Nor am I able to say, if it could, why that has not happened. There are allegations of lack of effort and counter allegations of being too picky that cannot be resolved on the papers.

[18] It is not necessary to say more on this proposition as I consider these passages from the independent report undermine the plaintiff’s allegation against Mr Briggs in this regard:

The results show that the business has been very profitable over the three year period. The 2015 year was particularly strong as a result of an improved gross margin percentage (31% compared to 26% in 2014).

The 2016 result is significantly down from the previous year due to a 28% decrease in Sales and a drop in the gross margin percentage (28% compared to 31% in 2015). While the decrease in the Sales is significant it is not alarming in itself given that one of the two working shareholders’ ability to contribute to the business is the year was significantly reduced due to illness.

[19] Mr Justo analysed the profit made from sales of “folding materials” in the

2015 to be 40 per cent. Had the same margin been achieved in 2016 the returns would have been $46,788 higher. Mr Justo notes many sales are for cash, and expresses concerns about the absence of this sum of money.

[20] The accountant was asked to assess if there was any evidence of irregularity. The nature of the folding business made the issue difficult to assess as there are

cuttings left which are not accurately recorded, and which may or may not be usable. Further difficulties with assessment are identified. The end result is that there is no support proffered for Mr Justo’s allegation.

[21] This is a serious allegation and I am not satisfied on the present evidence there is any substance to it.

[22] I am unable to get to the heart of this without cross-examination. There are examples where Mr Briggs has signed off where the certificate holder should have. But it is clearly done on a “pp basis”. I would be surprised that Mr Justo would agree to such an arrangement. However, Mr Briggs was not pretending in any way. How he signs makes it clear that it is not him purporting to certificate, and he says he has been doing this for some time. It is not a matter I can resolve on the papers.

[23] Mr Briggs indeed did this, but it is not legitimate to take it in isolation. The business needs both men operating and as Mr Justo became sick, it became a flawed business. Mr Briggs could see this and wanted to sort things out for the future. Mr Justo was not up to addressing future plans and so did not respond on matters he should have.

[24] I see a threat to close the business as a frustrated response to a worsening situation in which Mr Briggs could not get Mr Justo to engage (probably understandably given his health situation). I do consider Mr Briggs showed impatience in wanting a resolution given Mr Justo’s health concerns.

[25] In terms of oppressive conduct, I do not view the threat this way. If Mr Justo cannot do his expert job, then absent replacing him (and that does not seem to have been possible), closure is an inevitable outcome. I do not see a need to detail the various communications and non-responses that have occurred between the two. I accept Mr Briggs wanted to get matters sorted, I accept Mr Justo did not engage, and I accept that was probably due to simply not feeling able to; but that does not deny

the fact that there was no response. Mr Briggs faced a very uncertain situation with a business partner who was essential yet unavailable, could not discuss the future, and with whom his relationship had totally collapsed.

[26] In April Mr Briggs and his wife established a new company. The evidence is that it is a shell, with no bank account, assets, or business. Its name, however, is BD Roofing Ltd, which is presumably indicative of the nature of the enterprise that would be conducted under it.

[27] It would have been better if Mr Briggs, as a director of Rapid, had not done this whilst Rapid was trading. However, the evidence does not establish that the company is to be used in opposition to Rapid whilst Mr Briggs is involved in Rapid. It is plainly there for the future, but at this stage nothing more. Other than forming the company, no action has been taken that is detrimental to Rapid. It is indicative of Mr Brigg’s future plans and to that extent undermines his evidence of not being decided about the future.

[28] It is important to recall the import of Richardson J’s passage in Thomas, and avoid a compartmentalisation of these various issues. Has Mr Briggs used his role in the company, or will he, to the unjust detriment of Mr Justo? Has there been conduct lacking fairness which has been oppressive to Mr Justo; or will there be?

[29] I am constrained by the lack of any testing of the evidence, and so express myself with caution. However, on a reading of the papers, in both the immediate period of the past nine months and earlier, I do not consider it can be said Mr Briggs has acted in this way. Mr Justo has his suspicions but there is little objective material to support them, and considerable material to suggest the current situation owes more to Mr Justo’s actions. Some of these were beyond his control, but not all of them.

[30] The circumstances of the cash withdrawals made by Mr Justo provided a further legitimate concern for Mr Briggs. The point was reached where the office administrator sent an email to both men warning that the level of withdrawals put the company at risk. The reasons behind the withdrawals gave Mr Briggs a real basis for concern for the future. I do not accept counsel’s suggestions that what is done with money is irrelevant. Under the rules in place, it seems that there were no limits on personal withdrawals. When the level of withdrawals is too great, in terms of assessing the future it is legitimate to take account of what they are for.

[31] The evidence has not satisfied me that Mr Briggs has acted in a manner that is oppressive or unfairly prejudicial to Mr Justo. Any downturn in what is still a profitable company is due to the unavailability of an integral part of the business. If Mr Justo continues to be unavailable, then the business would need to somehow offset that, which to date has not been possible. I cannot on the papers be satisfied that is due to Mr Briggs.

[32] It is not necessary to assess whether, had the threshold been met, I would have made the order sought. For the parties benefit I indicate that I would have been unlikely to do so. The one matter the parties seemed to agree on was their complementary roles. I do not consider it would be just and equitable to direct one to buy the shares of the other. This is particularly so of directing Mr Briggs to buy the company without Mr Justo’s high level of expertise. I appreciate that the value of the shares would reflect the absence of this “asset”, but it is in my view a more fundamental undermining of the premise on which the company exists.

[34] In relation to the conduct already analysed, I equally am of the view that on the papers I am not satisfied Mr Briggs has established the threshold. The evidence is that the withdrawal issue is being addressed, and each party can point to periods of absence by the other. Each alleges poor performance by the other in carrying out

their roles in relation to certain jobs. Each rehashes events long past. None of the evidence, in my view, is of sufficient seriousness to amount to prejudicial or oppressive conduct, nor does it indicate such conduct is likely to occur.

[35] The defendant’s approach on the hearing was to focus on the plaintiff’s application that he buy the plaintiff out. However, there is his application under this same section for a liquidation order and out of caution I consider whether Mr Justo’s current actions in relation to the impasse may meet the threshold. The defendant has highlighted the inability to get a decision or response out of Mr Justo, his unavailability to do his work and his resistance to obtaining a replacement.

[36] As I noted, although I understand the anxiety, I consider Mr Briggs was somewhat impatient in wanting a response. On the untested evidence I cannot see that another few months would have been crucial from the point of view of the business. It also appears from evidence filed in relation to an application for interim relief that Mr Justo has been searching for replacements. I am not satisfied he would oppose initiatives to enable the company to proceed profitably.

[37] Finally, I note for completeness there is an allegation by Mr Briggs that Mr Justo had been “moonlighting”.⁹It is denied by Mr Justo. The work was a one-off event. I cannot resolve on the papers its true nature but am satisfied it would not anyway be influential in the proper determination of the case.

[38] Mr Briggs has not satisfied me that there has been or will be oppressive or unduly prejudicial conduct allowing me to consider relief under s 174(2).

[39] The applications under s 174 are declined. If the parties want some other order by consent, an application can be filed.

⁹Mr Justo had made an allegation that Mr Briggs had incorrectly priced a job for a friend.

[40] I see no basis on which the defendant should not be entitled to costs on a 2B

basis, together with reasonable disbursements to be fixed by the Registrar if necessary. However, the parties can file memoranda if necessary.

High Court of New Zealand Decisions

Justo v Briggs [2016] NZHC 1464 (30 June 2016)

High Court of New Zealand

Justo v Briggs [2016] NZHC 1464 (30 June 2016)