Startup v The Village Press Limited [2016] NZHC 2957 (7 December 2016)

Last Updated: 3 August 2019

ORDER PROHIBITING PUBLICATION OF THE JUDGMENT AND ANY PART OF THE PROCEEDINGS (INCLUDING THE RESULT) IN NEWS MEDIA OR ON THE INTERNET OR OTHER PUBLICLY AVAILABLE DATABASE UNTIL FURTHER ORDER OF THE COURT.

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2016-441-134 [2016] NZHC 2957

UNDER	the Companies Act 1993
IN THE MATTER OF	The Village Press Limited
BETWEEN	WAYNE KEITH STARTUP First Plaintiff MAUREEN FRANCIS STARTUP Second Plaintiff
AND	THE VILLAGE PRESS LIMITED First Defendant MARK RHYS WELDON Second Defendant ANTHONY JOSEPH CASEY Third Defendant STUART JOHN WEBSTER Fourth Defendant ROBERT THOMAS ARMSTRONG Fifth Defendant

Hearing:	2 December 2016 (by telephone); Further evidence and submsisions on 6 and 7 December 2016
Counsel:	J R Billington QC, D M Hughes and L M Van for plaintiffs T D Gee, S J Hoff and A C Payne for defendants
Judgment:	7 December 2016

RESERVED JUDGMENT OF DOBSON J

[Challenge to without notice injunction]

STARTUP v THE VILLAGE PRESS LTD [2016] NZHC 2957 [7 December 2016]

[1] These proceedings relate to a dispute over the governance of the first defendant (TVP), a closely held company in the business of processing and marketing olive oil and associated products. The plaintiffs (the Startups) are original shareholders of TVP and Mr Startup acted as CEO of the company from around 2002 until mid 2016. The second to fifth defendants are directors and shareholders of TVP.

[2] This judgment deals with an application on behalf of the defendants to rescind or vary orders granted on the Startups’ application on a without notice basis, that have had the effect of freezing the company’s attempts to raise further capital by a new share issue that is opposed by the Startups. Time, and the pressure of other commitments, preclude a fuller analysis of the minutiae of the dealings between the parties that have led to the present dispute. This is also not the occasion for finite determinations on the disputed legal issues. For present purposes, the competing legal propositions are to be considered for the prospects of whether there are, in effect, good arguable cases for the competing positions contended for. I am mindful of the observation of Mr Gee, counsel for the defendants, that the resources for all involved to pursue the numerous company law issues that arise to substantive determination would be ruinously expensive for TVP.

[3] For the reasons I will outline below, I am satisfied that the without notice orders made by the Court on 9 November 2016 were sought on materially inadequate and misleading information. Mr Gee argued that once that was established, it was sufficient of itself for the orders to be discharged, and that TVP and the directors ought to be free of any constraint pending preparation of the proceedings for a prompt substantive hearing.

[4] The importance of the obligation for litigants, and solicitors and counsel acting on their behalf, to provide complete disclosure of all matters likely to be relevant to the Court in considering any application brought on a without notice basis will, in many situations in which that fundamental obligation is breached, justify a simple discharge of any orders that the Court has been persuaded to make. The issue for me is whether this is such a case, or whether, on the somewhat better informed basis on
which I assess the competing positions, there is nonetheless sufficient justification for some form of interim constraint on the defendants, pending substantive argument.

The background

[5] In the recent past, funding requirements for TVP have been provided by way of shareholder advances. In early 2016, Mr Startup proposed that new olive processing equipment be acquired that would involve raising bank finance of
$100,000. A board meeting in February 2016 (in the absence of Messrs Weldon and Webster) agreed to the acquisition of the equipment, subject to being able to borrow from TVP’s bank on satisfactory terms.

[6] A further meeting of the TVP board in May 2016 revealed stark differences about TVP committing to the bank borrowing needed for the new equipment, on the terms offered by its bank. It would require personal guarantees from at least some directors.¹ The board vetoed the transaction being completed. That was despite much of the equipment having been installed, and legitimate pressure from suppliers of that equipment to be paid.

[7] In early August 2016, Mr Startup was diagnosed with terminal brain cancer. At a further board meeting on 31 August 2016, Mr Startup tendered his resignation as CEO, citing medical advice that recommended he not perform any work for a period of three months.

[8] Since that meeting, the remaining directors have taken initiatives to raise further capital, which the Startups allege in their statement of claim are contrary to provisions in TVP’s constitution. On 26 September 2016, the directors issued to all shareholders a pro rata renounceable rights capital-raising offering. The offer was for 10 additional shares for every one share held by all shareholders, to be issued at a subscription price of $0.11 per share. The capital raising sought $302,000.

1. The terms of the bank’s offer are somewhat equivocal. Mr Startup treats it as requiring a personal guarantee only from him, whereas the defendants consider the requirement was for guarantees from all directors.

[9] TVP’s constitution requires the approval of shareholders by a special resolution (that is, a majority of 75 per cent of the votes of those shareholders entitled to vote and voting on the question). The board’s initiative on the share issue had not been put to shareholders. At the core of the Startups’ substantive claims is the objection that the proposed capital raising is unlawful unless and until a special resolution of shareholders has been obtained. The Startups’ position is that on the pre- dispute status of the share register, they hold 25.83 per cent of the shares, which would entitle them to block the capital raising on the terms proposed by the directors.

[10] Another complaint raised by Mr Startup is that he has been removed as a director without his consent. The defendants’ rejoinder is that his resignation at the August board meeting extended to his position as director. Mr Startup protested that he had not agreed to resign at the August meeting, and on 4 October 2016 tendered a resignation notice under s 157(2) of the Companies Act 1993. That issue is not relevant in the present context.

[11] By 11 October 2016, the directors had received indications that seven out the eight shareholders would participate fully in the rights offer. The capital raised would be over $250,000. The directors proposed that a special resolution of the shareholders be circulated for individual execution, to approve the issue of shares in terms of the company’s constitution.

[12] Thereafter, on 26 October 2016, the company gave notice that the resolution would be put at a special meeting of the company to be held on 10 November 2016.

[13] These proceedings were filed in the Napier Registry of the Court on 9 November 2016. The documents included a without notice application for interim injunction that was considered the same day by Clark J. On the basis of the initial documents filed by the Startups, Clark J restrained TVP from passing the proposed resolution for the issuance of shares under a rights issue, or for any resolution approving future issue of shares, and restrained the issue of any further shares in TVP pending determination of the substantive proceeding.
[14] The defendants moved promptly to challenge the orders made without notice. The Court closure and disruption caused by the 14 November 2016 earthquakes delayed any consideration of the defendants’ application. I arranged on 1 December 2016 to hear counsel at short notice on 2 December 2016, and convened a hearing at
2.30 pm that day to hear argument. To accommodate Mr Billington QC’s other commitments, the hearing was conducted by telephone.

Criticisms of the Startups’ without notice application

[15] Mr Gee cited three examples of inaccurate or misleading information on matters relevant to the Startups’ without notice application.

[16] First, at Mr Weldon’s instigation, the board had retained an investigating accountant, Mr Fernandes, to prepare a report in mid 2016 on the financial status of TVP. Mr Fernandes produced three reports and in Mr Startup’s 7 November 2016 affidavit, which was the source of factual background justifying the without notice application, he complained that:²

... At no stage did [Mr Fernandes] speak with either one of us before preparing and issuing his final report. I simply do not understand how he could have prepared these reports without speaking to myself or Maureen, ...

[17] Mr Fernandes has disputed Mr Startup’s statements, citing an extensive sequence of meetings, telephone conversations and email exchanges that he had with Mr and Mrs Startup prior to publishing his final report.

[18] Mr Startup’s rejoinder is unconvincing. He claims to have taken the point only that there were no discussions between Mr Fernandes producing his second, and then his third (final) report. That explanation is not reconcilable with the broader terms of the complaint in his earlier affidavit.

[19] Secondly, Mr Startup complained that he had not been given any prior notice of any proposals to issue new shares, and includes within that a criticism of the directors issuing shares to themselves, but excluding him, that had the effect of reducing his previously recorded shareholding below 25 per cent.

² At [46].

[20] Mr Gee argued that the scope of that complaint was misleading when Mr Startup had in fact approved an earlier issue of shares to directors in lieu of the company being able to pay directors’ fees to them. An affidavit by Mr Armstrong exhibited emails on 25 July 2016 between Mr Weldon and all directors, and Mr Startup’s response, in which Mr Startup responded:

I vote in favour of this proposition.

Do we need to communicate this to other (minority) shareholders – who will see their shareholdings diluted?

[21] Mr Startup has a separate objection at being excluded from the shares issued to other directors in lieu of payment of their directors’ fees. TVP’s rejoinder to that is that he was being paid a salary as CEO that, in conventional business terms, was treated as remuneration for all his responsibilities, including attendances as a director.

[22] The defendants’ criticisms of misleading non-disclosure in the application include the scope of Mr Startup’s complaint at being excluded from directors’ initiatives. His complaint is heightened by the impression given that he had no forewarning of any issues of shares. In fact, he was included as a matter of course, and indeed approved, the earlier July 2016 initiative to address the company’s inability to pay directors’ fees.

[23] Thirdly, Mr Startup complained in his original affidavit that he had not been provided with a copy of the 10 for one offer conveyed to all shareholders on 26 September 2016, and that he only became aware of it by communications with other minority shareholders. That claim adds significant flavour to the criticism of the directors, in purportedly excluding him from an initiative that could potentially dilute the Startups’ shareholding. It casts the company and the directors in a poor light. It was entirely wrong, as Mr Startup has subsequently acknowledged. His explanation is that the documents came in when he was ill. Making every allowance for the traumatic disruption caused by terminal cancer, that is quite inadequate to excuse a material misleading of the Court when asking it to intervene on a without notice basis.

[24] A further, less specific, criticism of the impression conveyed by the terms of Mr Startup’s original affidavit was that it suggested Mr Startup remained concerned
for the orderly business of the company, in the sense that the Startups still identified with its aims and supported the business. The defendants complain that is misleading to the extent that blunt communications from Mr Startup to the other directors in recent months indicate his determination to harm TVP’s fortunes, irrespective of the impact on the value of the Startups’ own shareholding. There is also evidence that the Startups are actively helping a direct competitor of TVP that has set up premises opposite TVP, including contacts with both suppliers of raw materials to TVP, and existing or potential customers for TVP’s products.

[25] The non-disclosure of that less specific feature of the dispute is more difficult to criticise. An applicant moving without notice certainly should disclose it, but its omission has more nuanced effect. It is the type of factor that one would expect to be elicited promptly once papers were provided to the defendant interests on a Pickwick basis.

[26] Mr Gee made two further material criticisms of the Startups’ conduct in seeking injunctive orders without notice. First, that the Startups contrived to present the Court with an extremely urgent application, when that urgency was of their making, by delaying the commencement of their proceedings. All shareholders had been given 14 days’ notice of the meeting on 26 October 2016, and the extensive affidavit completed by Mr Startup on 7 November 2016 must have taken a reasonable period to prepare. The defendants were completely taken by surprise when served with the Court order. I agree with Mr Gee that in a commercial dispute of this type, the defendants could reasonably expect at least a letter inviting them to change the course against the contingency that court orders would be sought. Further, that the court papers would be provided promptly, on a Pickwick basis, to advisers known to be acting for the defendants.

[27] Secondly, Mr Gee argued that the without notice application was sought on terms substantially overstating a claim that damages would not be an adequate remedy. The Court is often required to resolve rights and entitlement to damages where a faction controlling a company is found to have made material changes in contravention of restraints in its constitution. In such cases, counterfactual analyses of the financial position that would have pertained for the complaining parties can be quantified. That
submission is justified as a general proposition. There are features of this dispute that raise questions about the ability to adequately quantify losses if the Startups’ claims of conduct contrary to the constitution are made out, and also legitimate concerns at the utility of such a right in any event.

[28] Cumulatively, these criticisms of the terms on which the Startups moved for orders on a without notice basis do justify their rescission. The factors I have reviewed warrant criticism of the Startups, and indeed on the state of information currently available to the Court, those responsible for filing the documents.³ The extraordinary course of invoking the Court’s coercive powers without affording an opportunity to the party adversely affected must be very carefully constrained. Respect for the rules is harmed by any conduct where the applicant persuades the Court to make such orders without the full and frank disclosure on which the system depends.

[29] If I got to this point, Mr Billington urged that I look afresh at the merits of a holding position. That plea to assess the merits of interim relief starting over again on the competing positions now presented ignores the potentially disqualifying effect of the plaintiffs having “come to equity without clean hands”. Injunctive relief is a component of the equitable jurisdiction of the Court, and a fundamental guiding principle of equitable intervention is that those seeking it must have conducted themselves in a proper manner in all relevant respects. The inadequate and misleading disclosure in the without notice application disqualifies the Startups. The issue therefore becomes whether they can bring a case for interim relief on notice on such compelling terms that the Court recognises the imperative in granting a measure of relief, irrespective of the breach of the standards expected in their conduct as litigants in the proceeding thus far. Put another way, the usual assessment of the balance of convenience starts, in this case, tilted substantially in favour of the defendants.

[30] Mr Billington challenged the defendants’ claim that completing the new share issue to provide working capital was extremely urgent. He criticised the absence of any current financial statements disclosing the relative urgency of the need for additional working capital. That carries with it the question as to whether a further

³ High Court Rules, r 7.23.

injection of funds from the remaining shareholders could only occur by means of subscription for further shares. There was no evidence excluding the prospects of the remaining shareholders being prepared to make advances on other terms.

[31] The Startups have been pressing for some time for updated financial information to enable them to contest the need for the share issue on a fully informed basis.

[32] The defendants have resisted provision of any current financial data because of the commercial sensitivity in doing so, when the remaining directors see the Startups as direct competitors intent on harming the company.

[33] In the principal affidavit for the defendants in support of their application to rescind the orders, Mr Armstrong claimed that the need for the further funds anticipated to be raised by the new share issue is extremely urgent. There is some evidence that tends to support his proposition, but Mr Billington’s point is a valid one. In particular, there is no adequate reason why shareholders (or at least those directly involved in the governance of the company) would not be prepared to advance a significant part of the amount the directors propose to raise by the share issue, by way of shareholder advances. For instance, assuming the directors have the courage of their convictions that the course they have proposed is lawful, then shareholder advances could be accepted on terms that the company intends to transform such advances into subscription for shares on the terms already offered, once the lawful entitlement of the company to do so is confirmed, or settlement of the dispute with the Startups is achieved so that opposition to their proposal is removed.

[34] Accordingly, at the conclusion of the hearing by telephone, I issued a minute directing that the defendants were to provide the Startups’ solicitors and counsel, and an independent accountant retained, current financial data that provides a sufficient picture of the company’s financial position to justify the claimed urgency for the share issue to proceed. I also required clarification from the defendants on why shareholder advances had to occur by means of subscription for additional shares in terms where the outcome would so substantially dilute the previous shareholding percentages of non-participating shareholders. All such data was to be provided subject to
confidentiality undertakings that exclude the Startups from access to the information provided.

[35] The timetable I set required the further information and submissions on it to be completed by 4 pm on 6 December 2016. That was delayed somewhat by the process of completing confidentiality acknowledgements on terms satisfactory to the defendants. The sequence of provision of information, submissions on its effect and reply to it was not completed until 12.10pm on 7 December 2016.

[36] I am persuaded that the urgency claimed by the defendants is made out. The circumstances of TVP’s business require a further injection of working capital on the scale achievable by the responses to the share issue. Before receiving the further information, I reflected on the feasibility of the directors being prepared to commit the amounts they had subscribed for new shares as advances, subject to the company recognising that they will be transformed into subscriptions for the shares once the way was clear to do so. The further information confirms informal arrangements for that to occur.

[37] However, quite reasonably, the directors take the view that they cannot expect minority shareholders to agree to transform the terms on which their subscriptions have been received.

[38] I have considered and rejected the prospect of the allotment being completed in respect of the non-director shareholders who have subscribed, so that the subscriptions on behalf of the directors are to be treated as advances until the matter can be resolved. The Startups’ interest in preventing the share issue cannot, on the position reached at this point, justify the complications and potential risks that such a partial restraint would create.

[39] If, free of the constraint imposed by the Court orders made on 9 November 2016, the directors proceed to allot the shares, they will be doing so on clear notice that the lawfulness of doing so is under challenge. The Startups’ challenge for conduct in breach of the constitution, and therefore in breach of relevant provisions of the Companies Act, is clearly arguable. Although numerous intriguing and potentially
difficult issues would arise in quantification of damages, I am not persuaded that such a task is not one that could not be reasonably undertaken.

[40] I accordingly discharge the orders. I defer consideration of any entitlements to orders as to costs, pending developments in the proceedings.

Dobson J

Addendum:

[41] Following release of this judgment, the defendants requested that it not be publicly released. This request is justified. Accordingly, there is to be no publication of the judgment until further order of the Court.

Solicitors:

Anthony Harper, Auckland for plaintiffs

Minter Ellison Rudd Watts, Wellington for defendants