Edel Metals Group Limited v Geier Limited [2017] NZHC 225 (22 February 2017)

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IN THE MATTER	of Part 18 of the High Court Rules and the companies Act 1993
BETWEEN	EDEL METALS GROUP LIMITED Plaintiff
AND	GEIER LIMITED First Defendant MICHAEL JOHN JACOMB, TRENA KATHLEEN JACOMB AND PETER REGINALD RICHARDSON as trustees of the Genset Trust _{Second Defendants}

Hearing:	2 February 2017
Appearances:	B Gustafson for Plaintiff N W Ingram QC and C F Foote for First and Second Defendants
_Judgment:	_{22 February 2017}

[1] The defendants have applied to strike out the statement of claim of the plaintiff, and for orders and costs, including increased or indemnity costs, against the plaintiff company Edel Metals Group Ltd (EMG) and against Mr J A Sorenson, the plaintiff’s sole director. EMG does not oppose the application for the order of strike- out nor for an order for costs against EMG on a category 3B basis. The claim of EMG is struck out.

[2] EMG opposes the order for costs to the extent that the order includes increased or indemnity costs. Mr Sorenson opposes the costs application against him. He disputes any liability for costs, let alone indemnity costs.

[3] Mr Sorenson has “acted” as a director of EMG from 20 December 2013. I say “acted” because the pleadings are challenging whether he was validly appointed. Mr Sorenson succeeded Messrs Jacomb and Wikeley as persons “acting as” directors of EMG. I say “acting as” neutrally, as there is a dispute as to whether they were properly appointed. Mr Sorenson was “appointed” a director by resolutions of the first defendant Geier Ltd and Friendship Club Ltd, Rosewall Ltd, Primula Ltd, Mr Wikeley and Sundome Enterprises Ltd, purporting to do so by way of a special

[4] The claim for indemnity costs relies on and has to meet the test in the High

¹Mr Sorenson is the majority shareholder in Sundome Enterprises Ltd, the holder of the largest block of shares after the transfers by Mr Kenneth Wikeley. Mr Sorenson appears as the director of EMG after Mr Wikeley ceased as director, on 27 September 2013 and became the sole director of 2 October of that year (Mr Wikeley ceasing to be a director). The second defendant called both men “purported directors”. It is not necessary to resolve the legitimacy of their respective appointments.

(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; ...

[5] The issue is whether or not Mr Sorenson as the director of EMG was acting improperly or vexatiously in commencing proceedings to enforce a call on shares held by the second defendants. The nominal value of those shares was $1 each resulting in a call for $5,937,500, and now a claim for that sum plus interest.

[6] This judgment comes at the end of much litigation pertaining to a former director of the plaintiff, Mr Wikeley.²

[7] The Court of Appeal judgment given by French J has a useful history of the company and its litigation as follows:³

[3] The respondents are trustees of the Genset Trust. One of the trustees, Mr Jacomb, was a friend and business associate of Mr Wikeley.

[5] Edel Metals issued 100 million shares with a face value of $1 each. Of the 100 million shares, 23,750,000 were issued to the respondents. The remaining shares (76,250,000) were issued to Geier Ltd. Geier Ltd held the shares on a bare trust for Mr Wikeley and interests associated with Mr Wikeley.

AJ; Jacomb v Wikeley [2013] NZHC 3368 per Bell AJ; and Wikeley v Jacomb [2014] NZCA

[8] Between 15 December 2008 and 27 May 2009, the respondents advanced a total of USD 1,500,060 to Edel Metals by way of loan. Mr Wikeley gave the respondents a personal guarantee for half of the loan.

[9] The mining venture was unsuccessful and Edel Metals failed to repay the respondents' advances. It was ultimately struck off the companies register for failing to file a return.

[10] On 3 June 2010, the respondents issued proceedings against Mr Wikeley in the High Court seeking payment under the guarantee. For some reason, the case was not heard until November 2012. On 10 April 2013, Kós J gave judgment in favour of the respondents for USD 862,534.50. That decision has never been appealed.

[11] In the meantime, on 8 January 2013 (after the hearing in the High Court but before Kós J delivered his decision), Edel Metals was restored to the companies register at the instigation of Mr Wikeley.

• On 16 April 2013 Mr Wikeley as director signed a notice to the shareholders advising that the Board had resolved to:

$0.01 per share in order to provide the company with working capital and satisfy the solvency test under the Companies Act; and

(ii) offer a further 200 million new shares to the existing shareholders at an issue price of $0.01 per share.

• The notice was accompanied by a special resolution of the shareholders excluding the respondents. The resolution approved the issue of 200 million new shares to the new investor and recorded that these shares would rank pari passu with all existing ordinary shares.

• On 16 April 2013, 200 million shares were issued to the new investor, a company under the effective control of Mr Wikeley called Sundome Enterprises Ltd (Sundome). Sundome became the new majority shareholder of Edel Metals.

• The respondents not having taken up the offer relating to the additional 200 million new shares, those shares were distributed to the other shareholders (all interests associated with Mr Wikeley) at $0.01 per share.

• On 22 April 2013, Edel Metals gave notice to the original shareholders (the respondents and Geier Ltd) requiring payment of the unpaid share capital within 14 days. The notice was signed by Mr Wikeley and Ms Zhu. In response, the respondents served a minority buy-out notice on Edel Metals under s 111 of the Companies Act. There is no evidence Edel Metals complied with the notice.

[13] On 13 August 2013, the respondents filed a bankruptcy notice based on the judgment they had obtained against Mr Wikeley from Kós J. Mr Wikeley then filed an application to have the bankruptcy notice set aside.

[14] Finally in this recital of the background facts, we record that after the Associate Judge had issued his decision the directors of Edel Metals purported to revoke the previous call for unpaid share capital and resolve that a new call would be made for $0.25 per initial share (instead of $1 per share). That is, notice would be given requiring only part of the share capital to be paid. The respondents were duly served with a notice requiring them to pay $5,937,500 and in January 2014 Edel Metals issued proceedings in the High Court against the respondents seeking recovery of that amount.

[15] In the High Court, Mr Wikeley argued that the bankruptcy notice should be set aside because the principal debtor whose loan debt he had personally guaranteed (Edel Metals) had a valid claim of set-off (the unpaid share capital) against the respondents that far exceeded the amount of the loan debt. The set-off was tantamount to payment and the loan debt had therefore been effectively extinguished.

[16] It was submitted that in those circumstances, the bankruptcy notice was an abuse of process which the Court should set aside in the exercise of its inherent jurisdiction. Alternatively it was argued that s 17 of the Insolvency Act 2006 applied. Under s 17(1)(d), it is a proper ground for setting aside a bankruptcy notice if the judgment debtor satisfies the court that they have a cross claim against the creditor. Section 17 constitutes a statutory exception to the general common law rule that a judgment debtor cannot use a cross claim acquired after judgment to prevent or delay the judgment creditor from enjoying the benefit of their judgment.

[17] Section 17(7) relevantly defines “cross claim” for this purpose as meaning a counterclaim, set-off or cross demand that is equal to, or greater than, the judgment debt and that the debtor could not use as a defence in the action or proceeding in which the judgment was obtained.

coming within the statutory definition of a cross claim. He also accepted Mr Wikeley did not have to prove the cross claim was watertight. It was sufficient for him to show it was a “genuine triable claim”.

[19] However, in the view of the Judge, Mr Wikeley did not have a genuine triable claim. The Judge described the steps taken by Edel Metals under the direction of Mr Wikeley from January 2013 onwards as an “engineering of a call on shares” and “a device” to defeat the respondents' rights under their judgment. The relevant resolutions had been passed by Mr Wikeley without consulting the respondents and were clearly calculated to be to their detriment. In those circumstances, the Judge found that what had happened was oppression of a minority shareholder and that it was a “foregone conclusion” the respondents would obtain full relief under s 174 of the Companies Act.

[20] The Judge accordingly dismissed the application to set the bankruptcy notice aside. In a subsequent decision, the Judge also refused to grant a stay of the bankruptcy proceedings pending this appeal.

[8] This particular litigation is linked to the call referred to in paragraph [19] of the judgment of the Court of Appeal, described by Bell AJ as “engineering” and a “device”.⁴The litigation was before the Court of Appeal because Mr Wikeley was appealing against the decision of Bell AJ dismissing an application by the respondents in that case (defendants in this case) to have a bankruptcy notice set aside. Having seen how French J described the background events, it is useful to go

[43] The call-up of the shares had its origins in an elaborate and highly contrived series of events engineered by Mr Wikeley. On the face of it, the steps he took commencing in January 2013 are suggestive of bad faith and impropriety, impacting on the validity of the call-up. The steps taken call for an explanation from Mr Wikeley, but other than saying the company needed to give itself more working capital, none has been forthcoming. We refer in particular to the artificial inflating of the shareholding and the highly questionable shareholders' resolution that shares issued at $0.01 per share would rank pari passu with existing shares of $1 each. We note that Edel Metals' constitution mandated a share price of $1 and that the Sundome shares were issued in breach of the respondents' pre-emptive rights. Other dubious aspects include the restoration of the company to the companies register at the behest of a person who was neither a shareholder nor a director at the time, the transfer of the one share to Mr Wikeley in breach of the company constitution, and the removal of Mr Jacomb as a director.

[44] We are mindful that at this stage not all the evidence about the unpaid share capital is before the Court, a point strongly emphasised by Mr

PRNZ 386 (CA)] makes clear, the onus is on Mr Wikeley to satisfy the Court that his claim is genuine and triable. In the absence of any explanation about

[9] Upon the dismissal of Mr Wikeley’s appeal against bankruptcy he was adjudicated bankrupt. Mr Sorenson became the sole director of the company after Mr Wikeley lost his status as director.

[10] Mr Wikeley exits from the stage after the Court of Appeal refusal to set aside his bankruptcy notice. Enter Mr Sorenson who was held out as, and acted as, the sole director. Mr Sorenson is the majority shareholder in Sundome Enterprises Ltd, holder of the largest, by number, block of shares in EMG, but issued at the value of 1 cent per share.

[11] On 20 December 2013, Mr Sorenson was the sole director of the company. He resolved to revoke Mr Wikeley’s previous call on the 100 million shares allocated initially to Geier Ltd and Genset Trust. He then made a new call of 25 cents per initial share in the 100 million shares issued to Geier Ltd and the Genset Trust — the second defendants.

[12] There was no general meeting of shareholders of the company to discuss and approve the calls, nor to authorise the commencement of these proceedings. It was, therefore, clearly a decision of Mr Sorenson the sole director of the company. It was undoubtedly a serious decision to try to collect on this call. The case was fought hard procedurally before Mr Sorenson abandoned the litigation.

[13] In January 2014, EMG, controlled by Mr Sorenson, commenced proceedings in the High Court. The claim sought a judgment against the first defendant in the amount of $19,062,500 together with interest at the rate of 10 per cent per annum, payable from 20 January 2014 until payment and costs. It sought judgment against the second defendants in the lesser sum of $5,937,500 at the same rate of interest from the same date.

[15] The claim was defended by the second defendants. They denied there was any valid resolution to issue 100 million shares to the shareholders of EMG for a consideration of $1 per share and they denied that there was any valid resolution to issue 23,750,000 shares to them and 76,250,000 shares to Geier.

[16] The second defendants obtained orders for security for costs, which were not met. As security for costs was conditional on continuance of the litigation, Edel’s claim on the share call has failed.

[17] There is no doubt that at all material times the key decision maker to issue these proceedings was Mr Sorenson. The security for costs ordered by Faire J were not large ($45,000) when compared to the size of the original claim. Plainly Mr Sorenson decided not to pursue the litigation. This decision, however, came only last year and after numerous procedural steps, including discovery, generating fees incurred by the second defendants in the order of $900,000.

[18] The plaintiff is unlikely to be able to meet significant costs. So for practical purposes the key issue is whether Mr Sorenson should be liable for costs in his personal capacity as director and, if so, whether he should be liable for indemnity costs.

[19] It was quite an extraordinary step for Mr Sorenson to endeavour to call the capital on these shares. He did so in the face of the very severe criticism by the Court of Appeal, set out above.⁶That criticism was specifically drawn to his attention by an email from Mr Jacomb, one of the second defendants, before Mr Sorenson commenced proceedings. He nonetheless litigated, eyes wide open. His principal argument in opposition to personal liability for costs was to seek shelter behind the corporate veil.

(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or

[21] EMG does not oppose an order striking out its claim, on the basis that it is due to non-payment of the security of costs orders. It does not, however, make any admission about the underlying strength of its claim. EMG particularly opposes indemnity costs being ordered against it and increased or indemnity costs being ordered against Mr Sorenson. An important submission made by EMG at the outset is that EMG’s conduct and that of Mr Sorenson prior to the commencement of these proceedings in February 2014 must not be taken into account in assessing costs in the proceedings. The allegations of impropriety pre-commencement are also disputed.

[22] It is further submitted by the plaintiff that it is an exceptional case only where costs will be awarded against a non-party, in this case Mr Sorenson. Normally it is only available against litigation funders, but is not limited to them.⁷

[23] In respect of Mr Sorenson, the argument is that there is currently a judgment of the High Court recording that the defendants owe EMG $23.5 million in unpaid share capital.⁸If that judgment is correct and the defendants can pay that sum then EMG is solvent and if the Court orders costs, EMG is entitled to rely on that judgment as a set-off. That finding does not bind the second defendants. The parties to those proceedings were Messrs Jacomb and Richardson, also the second

defendants in these proceedings. They were suing Mr Wikeley, now bankrupt. EMG and Geier Ltd were not parties. Mr Jacomb, on behalf of the Genset Trust, had loaned Mr Wikeley US$250,000 intended to be equity in another venture, Orion Minerals Group Ltd (OMG). There then followed four further payments totalling

_{US$1.5 million. But there was a dispute as to what they were for. Mr
Wikeley said}

⁸This is the effect of Kόs J’s judgment in Jacomb v Wikeley [2013] NZHC 707.

they were payments by way of subscription for 23.75 per cent of the shares on issue to Genset and its trustees in EMG. Having reached this point in the analysis, paragraph [16] Kόs J’s judgment reads:⁹

100 million shares: 23,750,000 were issued to the plaintiffs, and 76,250,000 to a company called Geier Limited. The shares had a face value of NZ$1.00,

sums to EGM by way of capital. So the share capital remained uncalled. The defendant acknowledged that in cross-examination. So did Mr Gibson,

[24] Kόs J’s judgment then carries on to consider plans to use EMG to take up another opportunity in South America to buy a mineral processing plant and equipment which came with new crusher technology. The judgment goes on to analyse the discussions between Mr Wikeley and Mr Jacomb and Ms Burson as to resolving financing issues. This leads to a conclusion that what was being provided

[25] Mr Jacomb was not prepared to advance money without being given a personal guarantee by Mr Wikeley. This was a finding of fact.¹¹The judgment records that Messrs Jacomb and Wikeley prior to a second transfer of money agreed to formalise the guarantee.¹²The guarantee was a personal guarantee by Mr Wikeley made on 11 February 2009 beginning:¹³

[26] The venture failed. EMG has not repaid the advances by the Genset Trust and so the trustees, the same second defendants in these proceedings, pursued Mr Wikeley for judgment as a guarantor. They obtained it and in due course that led to Mr Wikeley’s bankruptcy. There is nothing in the reasoning or decision of that case which creates an issue estoppel, let alone a res judicata, as between EMG,

_{Mr Sorenson, and the defendants in these proceedings. As the foregoing
analysis}

demonstrates, the statement “the shares had a face value of NZ$1” was essentially part of a narrative and unrelated to the proof of the advances and the personal guarantee of Mr Wikeley and his subsequent personal liability.

[27] Finally it is submitted that the Court would be “piercing the corporate veil” without justification by ordering Mr Sorenson to pay the company’s costs in proceedings to recover a debt.

[28] The critical question to ask at this stage is: why did Mr Sorenson, having obtained control of EMG, elect to make call upon 25 per cent of Genset Trust’s unpaid capital, without holding a general meeting of the shareholders, and issue Court proceedings to collect it?

[29] Mr Sorenson’s reasons for ceasing to pursue the claim following the security for costs judgment of Faire J¹⁴was that he says he believed that the trustees of Genset Trust were removing assets from the Genset Trust, that the dispute was becoming very personal and difficult to deal with, with offensive correspondence, and he offered to discontinue on the basis that all parties agreed there would be no issue as to costs.

[30] I find these reasons rather strange, given that he was abandoning a claim of well in excess of $5 million when interest is added, which in his opinion was settled liability, noted in the judgment of Kόs J.

[31] In Metalloy Supplies Ltd v MA (UK) Ltd, the United Kingdom Court of Appeal discussed the occasions on when a costs order could be made against a non- party.¹⁵Millet LJ said:¹⁶

The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make

¹⁵_{Metalloy Supplies Ltd v MA (UK) Ltd [1996] EWCA Civ 671; [1997] 1 WLR
1613 (CA).}

the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be mollified.

[32] I note and emphasise Millet LJ’s qualification that an absence of liability depends upon the absence of some impropriety or bad faith. To the contrary, if the proceedings are improper, relief can be obtained without piercing the corporate veil.

“Piercing the corporate veil” is an expression rather indiscriminately used to describe a number of different things. Properly speaking, it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal entity ... But when we speak of piercing the corporate veil, we are not (or should not be) speaking of any of these situations, but only of those cases which are true exceptions to the rule in Salomon v A Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22, i e where a person who owns and controls a company is said in certain circumstances to be identified with it in law by virtue of that ownership and control.

[18] English law has no general doctrine [of abuse of rights that allow breaches of the corporate veil]. But it has a variety of specific principles which achieve the same result in some cases. One of these principles is that the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest. The same legal incidents will not necessarily apply if they are not. The principle was stated in its most absolute form by Denning LJ in a famous dictum in Lazarus Estates Ltd v Beasley [1956] 1 QB 702, 712:

“No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. [...]”

_{Prest v Petrodel Resources Ltd, the ability of a court to pierce
the corporate veil}

¹⁷Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415 at [16] per Lord Sumption

arises only in strict circumstances and in the absence of an already-established common law remedy by which the veil will not in fact be recognised. That principle was recognised by Elias J in Premier Softgoods Ltd v Warnock, where her Honour said that to hold a director or major shareholder of a company liable for costs would cut across basic principles of corporate personality and would be inappropriate “in the absence of a compelling reason”, such as bad faith on the part of the director.

[35] In the presence of impropriety, therefore, the person making the call will be responsible for the consequences.

[36] Accordingly, I am of the view that Mr Sorenson’s argument that I cannot “pierce the corporate veil” is misguided. It is not necessary for this Court to pierce the veil, because this is not the sort of case in which Mr Sorenson can rely on the veil. Mr Sorenson had no genuine commercial reason for the call. The call on the shares by Mr Sorenson was opportunistic, deliberate, unfair and unprincipled. It was an abuse of his fiduciary obligations as a director, as he held himself out to be. It was not a bona fide exercise of his duties as a director, assuming in his favour that he was lawfully a director. It was improper. The absence of a general meeting is tangible evidence that the decision to issue proceedings was taken in the absence of good faith. In that context, he cannot now resist costs being ordered against him.

[37] Mr Gustafson argued that I could not take into account Mr Sorenson’s conduct prior to the commencement of these proceedings, citing Paper Reclaim Ltd v Aotearoa International Ltd.¹⁹I do not take that conduct directly into account. Rather, it is that Mr Sorenson’s knowledge that these prior events had been severely criticised by Bell AJ, Kòs J and the Court of Appeal, which renders improper his decision to proceed with instituting proceedings.

¹⁸_{Arklow Investments Ltd v MacLean HC Auckland
CP49/97, 19 May 2000 at [20].}

¹⁹Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 (CA) at [160] per

That the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party.

[39] Mr Gustafson contended that the total costs were so large that they could not have been reasonably incurred. He agreed that he could not challenge Faire J’s classification of the case as category 3, but contended that the sum vastly exceeded costs payable on a category 3C basis, which, in theory at least, should have produced a sum about two-thirds of the actual costs. Such a submission is available as Rule

14.6 is discretionary as to applications, as increased costs are an alternative to indemnity costs.

[40] Counsel for the second defendants have filed copies of all the fee notes. The fee notes are very detailed as to attendances. The general criticism is that fees totalling approximately $900,000 are simply unjustified, because they are so far away from the schedule costs. These are fee notes raised by reputable solicitors and a member of the Inner Bar. It is always easy to criticise in a general fashion the size of legal fees, after a case has been abandoned by the protagonist.

[41] The second defendants were having to challenge conduct of Mr Sorenson. There were significant hurdles to do so: accepting that he was a director, accepting that the shares did have a nominal liability of $1 each, and accepting that there was no pre-condition for calling of an annual general meeting before making a call. This all made the outcome of the litigation uncertain. The claim was over $5,937,500. Were the claim successful, even if interest of 10 per cent was not recovered, as sought, interest would run under the Judicature Act 1908 from the date the cause of

action arose,²⁰virtually automatically, at the prescribed rate of 7.5 per cent per

annum, subject to being varied at any time by the Governor-General by Order-in- Council.²¹Against the call sum, that amounts to $445,312.50 per annum. Allowing say three years for the litigation, which would not be unreasonable, interest would amount to $1,335,937.50. Added to the judgment sum, the final liability would be

[42] Putting to one side the litigation cost risk, $900,000 as a percentage of say

$7.3 million is approximately 12 per cent. I do not consider a fee in the range of 12 per cent of the total sum at risk as excessive. There is no basis for this Court finding there has been any over-charging. It is not for this Court to question the fee notes.

[43] Mr Sorenson was in control of EGM. He exercised his powers without regard to the purpose for which they were given, without regard to his fiduciary obligations. It is only when the context is fully understood, when the observer knows what the director knew, that a finding of impropriety can and has been made. It was only after discovery that Mr Sorenson threw in the towel.

[44] I have been particularly impressed by the fact that conduct of EGM’s directors had been criticised severely by the judiciary. In the face of that, Mr Sorenson, without calling a general meeting, and thus without getting the support from the shareholders of the company for the purpose for which he was using the money, made the call “improperly”, as that standard is used in Rule 14.6(a).

[45] In exercise of the discretion given to this Court in Rule 14.6(1)(b), I order that Mr Sorenson and EMG pay the actual costs and disbursements, being reasonably incurred by the defendants. The question of interest is reserved.

[46] The defendants are entitled to costs on these proceedings. These costs are reserved. I will receive submissions limited to 10 pages each, exchanged in advance.

High Court of New Zealand Decisions

Edel Metals Group Limited v Geier Limited [2017] NZHC 225 (22 February 2017)