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High Court of New Zealand Decisions |
Last Updated: 14 August 2018
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
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CIV-2013-404-004037
[2018] NZHC 1899 |
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UNDER
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Section 174 Companies Act 1993
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BETWEEN
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TYRION HOLDINGS LIMITED
Plaintiff
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AND
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INFRASTRUCTURE NZ LIMITED
First Defendant
PAUL FREDRIC CLAYDON
Second Defendant
INFRASTRUCTURE & CIVILWORKS LIMITED
Third Defendant
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Hearing:
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12-14, 16 February 2018
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Appearances:
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P J Napier and N J Pye for Plaintiff
M R Taylor and E E Hill for Defendants
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Judgment:
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30 July 2018
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JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 30 July 2018 at 3.00 pm
pursuant to R 11.5 of the High Court Rules Registrar / Deputy Registrar Date............................
TYRION HOLDINGS LTD v INFRASTRUCTURE NZ LTD & ORS [2018] NZHC 1899 [30 July 2018]
Introduction
[1] Tyrion Holdings Ltd owns half the shares in the first defendant, Infrastructure NZ Ltd (INZ). It alleges that in 2008 one of INZ’s directors, Paul Claydon, misappropriated INZ’s business by transferring it to another company, Infrastructure & Civil Works Ltd (ICL). Mr Claydon was (and still is) a director and shareholder of ICL. Tyrion seeks compensation from Mr Claydon and ICL equivalent to the 2008 value of its shareholding in INZ.1
[2] Mr Claydon denies any wrongdoing and says that, in any event, the conduct of INZ’s other director, Mr Blomfield, who was also a director of Tyrion at the relevant time, was such as to make it unjust and inequitable to require him or ICL to pay compensation to Tyrion. In the event of a remedy being granted, Mr Claydon and ICL say that the value of Tyrion’s shareholding in INZ at the relevant time was much less than is claimed.
Tyrion’s claim
[3] Tyrion pleaded two causes of action. The first was for breach by Mr Claydon of his statutory duties as a director under ss 131 (to act in good faith and in the best interests of the company), 133 (to exercise powers for a proper purpose), 137 (to exercise the care, diligence and skill of a reasonable director) and 140 (to disclose interests in a transaction with the company) of the Companies Act 1993. This cause of action must fail. The duties imposed by ss 131, 133 and 137 are owed only to the company itself rather than to its shareholders and therefore cannot found a cause of action by Tyrion.2 The duty under s 140 is owed to shareholders but s 169(2) precludes an action “to recover any loss in the form of a reduction in the value of shares in the company”.3
[4] The second cause of action is for oppressive, unfairly discriminatory or unfairly prejudicial conduct under s 174 of the Companies Act through the
1 Although INZ is named as the first defendant, relief is sought only against Mr Claydon and ICL.
2 Companies Act 1993, s 169(3)(d), (e) and (h).
3 See Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER at 366.
misappropriation of INZ’s business. Section 174 allows a shareholder to seek relief where it is alleged that the affairs of a company have been, are being or will likely be conducted in a manner that is “oppressive, unfairly discriminatory or unfairly prejudicial” to that person.4 The Court may make an order if it considers that it is just and equitable to do so. The section relevantly provides that:
(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 or her in that capacity or in any other capacity, may apply to the Court for an order under this section.
(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 other person to acquire the shareholder’s shares; or
(b) Requiring the company or any other person to pay compensation to a person; or
(c) Regulating the future conduct of company’s affairs.
...
[5] In Sturgess v Dunphy,5 the Court of Appeal confirmed that Thomas v H W Thomas Ltd remains the leading authority on the meaning of the expression “oppressive, unfairly discriminatory or unfairly prejudicial”.6 In that case Richardson J (in the context of the predecessor to s 174) described the three phrases as overlapping, each helping to explain the other and that:7
... 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 against some only is legitimate foundation for the complaint under s 209. 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.
4 Section 174(1).
5 Sturgess v Dunphy [2014] NZCA 266.
6 At [131].
[6] In addition to unspecified conduct that may be captured by s 174, failure to comply with s 129 (major transactions requiring approval) is deemed by 175(1) to constitute conduct that is unfairly prejudicial for the purposes of s 174. Tyrion says that one of Mr Claydon’s means of effecting the transfer of INZ’s business to ICL was the lease of INZ’s vehicles and machinery, which constituted a major transaction.
[7] Even if satisfied that the conduct in question satisfies the first limb of s 174, a remedy can only be granted if the Court considers it “just and equitable” to do so.8 In Thomas, Richardson J said:9
Fairness cannot be assessed in a vacuum or simply from one member’s point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 in particular: thus to have regard to the principles governing the duties of a director in the conduct of the affairs of a company and the rights and duties of a majority shareholder in relation to the minority; but to recognise that s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member’s interests arising from the acts or conducts of the company in that way is justifiable.
[8] In Sturgess v Dunphy, the Court of Appeal observed that:10
Wrong and remedy are closely linked. As Richardson J put it in Thomas, it is the unfairly detrimental effect of the conduct on the complaining member that brings the remedy into play. The remedy responds to that detriment, and the court acts for remedial, not punitive purposes.
The relevant facts
Mr Claydon and Mr Blomfield start INZ
[9] Prior to 2005, Mr Blomfield had a variety of business interests, specifically a number of Hells Pizza franchises and a communications company, Cinderella NZ Ltd (Cinderella). He also had a connection with the developer of a subdivision in Mangawhai. Mr Blomfield approached Mr Claydon, who had many years’ experience as a civil engineer and for whom Mr Blomfield had worked briefly a few years earlier.
8 Section 174(2).
9 At 294.
10 At [148].
He suggested that they go into the civil construction business together and Mr Claydon agreed.
[10] INZ was incorporated in 2005 to undertake civil construction and engineering work.11 It had a wholly-owned subsidiary, Contract NZ (CNZ).12 INZ was responsible for obtaining and managing contracts and holding assets. CNZ undertook the physical work required under the contracts.
[11] Initially, the shareholders were: Mr Claydon (50 per cent), Blomfield Investments Ltd (BIL)13 (20 per cent) and Projects NZ Ltd (Projects NZ) (30 per cent). Projects NZ was controlled by the Mangawhai developer and was set up specifically for that development. By mid-2007 however, INZ was controlled only by Mr Claydon and Mr Blomfield, with the shareholding held by Mr Claydon (50 per cent), BIL (20 per cent) and Black Trading Ltd (BTL)14 (30 per cent).
[12] In November 2008, the shareholding changed again: Mr Claydon held 50 per cent and Black Rural Developments Ltd (BRD)15 50 per cent. BRD changed its name to Tyrion Holdings Ltd in 2012. Mr Blomfield confirmed that BRD’s acquisition of BIL’s and BTL’s shares was undertaken in an effort to move the INZ shares out of BIL and BTL, both of which were facing financial difficulty.
[13] Although there was reference in the evidence to a shareholders’ agreement, no such document was produced. Mr Claydon put $48,000 into the business and Projects NZ Ltd put $32,000. According to Mr Claydon, Mr Blomfield was supposed to contribute $20,000 but never did. According to Mr Blomfield, his contribution was to be by way of “sweat equity”. However, very belatedly (in 2013) Tyrion tendered the
$20,000, from which I infer that the arrangement was as Mr Claydon described.
13 Controlled by Mr Blomfield.
14 Controlled by Mr Blomfield.
15 Controlled by Mr Blomfield.
[14] Mr Blomfield did not hold a salaried position in the company. Mr Claydon, however, was to work full-time for a salary. The parties disagree as to what the salary was. Mr Claydon says that he and the other director, Darren Wallbank, (Mr Blomfield was not a director until 2006) negotiated a salary of $10,000 per month ($120,000 per annum). It was funded by the Mangawhai developer because INZ had no income at that stage. Mr Wallbank was also the company’s accountant at the time and he organised and coded the payments.
[15] Mr Blomfield says that Mr Claydon’s salary was only $60,000 per annum. He pointed to the statement of financial performance for the year ended 31 March 2008 (FY2008) which showed $60,000 entered for FY2007 as “shareholder salaries”, consistent with Mr Blomfield’s recollection. But they also show an entry of $75,661 as shareholders overdrawn current accounts, which seems unlikely to have come from the company because its only potential source of income in FY2007 was from the Mangawhai development and one other development, for which (as I come to later) INZ was not paid. The total amount that Mr Claydon appears to have received from the company in FY2007 was closer to his recollection and, he pointed out, he had no control over how Mr Wallbank treated the payments in the accounts.
[16] This is a convenient point to comment on the financial statements put in evidence. The only financial statements that were produced were for FY2008, which showed comparative figures for FY2007. However, they were not signed and I am satisfied from the evidence of Mr Campbell, the external accountant who succeeded Mr Wallbank, that they were draft only. Because of Mr Campbell’s explanation for thinking that they were drafts, I find that they are not reliable as regards money paid to shareholders, whether by salary or otherwise. I am therefore unable to determine which recollection of Mr Claydon’s salary is correct and it is not a significant factor in my assessment of the case.
[17] Initially, INZ operated from premises in Saturn Place, Albany. The premises were located on an upper floor and were shared with Projects NZ.16 Cinderella
16 Which held a 30 per cent shareholding in INZ, as noted above.
occupied space on the lower level. The companies shared an administrator who was located in the INZ office.
[18] By early 2006 INZ had begun preparatory work on the Mangawhai subdivision. By late 2006, however, the developer had run out of funding. INZ was owed $250,000 and there did not seem to be any immediate likelihood of payment. INZ was offered work on a subdivision in Massey through the same developer. It began that work and rendered an invoice for $140,000. There was a dispute over the invoice and in the end no money was paid at all.
[19] Given that the Mangawhai subdivision was unlikely to produce any income for the company, Mr Claydon sought other contracts. In particular, he tendered for and obtained local government work. Mr Claydon explained that such work was allocated under a tender system which required the tenderer to obtain more than 35 points over specific attributes, including management skill and financial viability.
[20] Between October 2007 and March 2008, the company entered into a number of finance agreements for the purchase of vehicles and equipment. In addition to a floating credit facility of $600,000 with the ANZ Bank, secured by a general security agreement and guaranteed by the directors, the company borrowed a total of
$378,345.50 from UDC for a Mercedes truck ($125,380), a Kobelco excavator ($93,164.50), a Mitsubishi truck ($18,000), an excavator ($100,835) and another excavator ($40,966).
[21] By late 2007, however, there were financial troubles in Mr Blomfield’s other businesses, which would impact INZ. In December 2007, Mr Blomfield drew down
$70,000 from the INZ account without prior reference to Mr Claydon. Mr Claydon said he tried unsuccessfully to contact Mr Blomfield over the Christmas break to discuss it. When he finally did talk to Mr Blomfield, the latter’s attitude was simply that he was entitled to the money.
[22] Mr Claydon viewed Mr Blomfield’s actions as a significant turning point in their relationship and the main cause of its deterioration. Mr Blomfield himself did
not refer to this event at all in his evidence in chief, and only responded to it in his reply brief. He said that withdrawing the money was:
... an effort to recoup the costs I had incurred for the office and staff that I was funding through my other entities as all the administration staff (i.e. reception, accountant and support staff) were employed by me. I was also mindful that my shareholding was potentially going to be worthless if Paul was successful in stealing the business.
[23] His explanation in cross-examination about recouping administration costs on behalf of his other companies was unconvincing. Nor was there any reason at that time for him to imagine that Mr Claydon was intent on stealing the business. Mr Blomfield eventually acknowledged that he had withdrawn the money because he needed to alleviate the financial strain that he was under in relation to his other businesses but added:
I’ve been doing a lot of work for Infrastructure and hadn’t been paid and I felt that I needed to get some money from that business because I couldn’t afford to keep supporting it without some sort of contribution.
[24] Mr Blomfield did not give specifics of what work he had done for the company. His sales work on the Mangawhai subdivision had been paid for by the developer. There is no evidence that he had undertaken work for the company that would justify a $70,000 payment.
[25] By mid-2008, Cinderella was in liquidation and Mr Blomfield himself was in personal financial difficulty. Around that time a bailiff came to the premises to levy execution in relation to an unpaid judgment against Mr Blomfield and there was a physical scuffle in front of staff. After this incident Mr Claydon moved INZ’s offices to new premises at Paul Matthews Drive.
[26] On 6 June 2008, Mr Blomfield emailed Mr Claydon and said:
Have checked all the accounts and it seems that putting everything else aside both CNZ and INZ are losing money and this creates a pretty serious insolvency issue that we need to deal with.
Taking this into account as a director of this company I am saying that no further shareholders’ advances or shareholders’ salaries can be paid until this is sorted. If the company can not trade out of this situation without a cash injection then this money will need to come from you. I say this on the basis
that the company is not returning any profit to the shareholders and you have taken over 400k over the last few years.
If you think we should liquidate then I think we should get some advice as my understanding is that the liquidator would as (sic) you to pay back the 370k shareholder’s advance.
I strongly suggest that you get accounting advice on the current situation and what position both you and the company are in.
[27] The reference to Mr Claydon’s shareholder’s advance was, presumably, a reference to money taken, or which Mr Blomfield believed Mr Claydon to have taken, over and above his agreed drawings. Although I accept that there were shareholder advances to Mr Claydon in FY2008, I am unable to identify the extent of them; the draft FY2008 statements show $255,000 as shareholder salaries, which exceeds Mr Claydon’s own recollection of the salary he was paid. Mr Campbell thought the most likely explanation was that because of concerns about the solvency of the company at that stage, draft accounts were prepared showing shareholder current accounts as salary, mindful that, in the event of liquidation, a liquidator would look to recover overdrawn shareholder accounts from the shareholders.
[28] Later that month, in June 2008, Mr Blomfield withdrew a further $30,000 from INZ’s account without Mr Claydon’s agreement.
[29] Mr Claydon appears not to have responded to the 6 June 2008 email but there clearly were subsequent discussions because on 10 July 2008, Mr Blomfield emailed Mr Claydon:
Thanks for your call yesterday in relation to the National Bank. As you are aware I have some very serious issues to deal with and these are not limited to just INZ and CNZ. I refer you to the attached email that I sent on the 6th of June 2008. I’m still concerned about the accounts that I reviewed as INZ does appear to be running at a loss. ...
[30] On 11 July 2008, Mr Claydon responded, essentially asking Mr Blomfield why, if he was concerned about INZ’s financial situation, he had taken further funds totalling $30,000 and used INZ’s credit facilities for his own building project.
[31] That same day the National Bank wrote to INZ asking for confirmation that the directors both wished to continue operating the company’s accounts on the basis
that both directors had full access to them. If either director disagreed with that course the Bank proposed to freeze the accounts. The company’s accounts were subsequently frozen. Mr Claydon opened a separate account for the purposes of banking money coming into INZ and paying the outgoings. He said he did so on the advice of a manager at the ANZ, though that person was not called to give evidence. Nor were any bank statements relating to that account produced in evidence.
Mr Claydon starts a separate business
[32] Unbeknownst to Mr Blomfield and within days of the 6 June 2008 email, Mr Claydon had taken steps to disengage himself from Mr Blomfield and from INZ. On 11 June 2008, Mr Claydon executed two agreements on behalf of INZ with a new company, Infrastructure Contracts Ltd (ICL), which was incorporated the following month, with him as its sole director and shareholder.17 The first agreement was an “Agreement to supply Infrastructure NZ Ltd” under which ICL would supply various services to INZ, including the provision of premises and management services. The second agreement was an “Equipment Lease Agreement” under which INZ leased its vehicles and equipment to ICL. I consider both agreements in more detail later.
[33] Mr Claydon’s explanation for starting ICL was that he was not making progress trying to resolve the dispute with Mr Blomfield over the $70,000 and that Mr Blomfield had been openly talking to third parties about the disputes between them, which had caused INZ’s work to dry up. Moreover, with INZ’s bank accounts frozen it could not repay the finance debts owing on the machinery. The lease agreement was a means of ensuring that those debts were paid. In short, he considered that INZ was not going to succeed and that his personal reputation was suffering from his association with Mr Blomfield. He decided to move away from Council work and into road maintenance and construction work, which ICL still does.
[34] By August 2008, Mr Blomfield was aware of the steps that Mr Claydon had taken. He gave evidence that on 1 August 2008, he and Mr Claydon met at a café to discuss INZ and CNZ. He claims to have accused Mr Claydon of stealing INZ’s business and appropriating it for himself and that Mr Claydon acknowledged that to
17 Infrastructure Contracts Ltd later changed its name to Infrastructure & Civil Works Ltd.
be the case but said that as Mr Blomfield had no money there was nothing he could do about it. Mr Claydon denied the allegation in his brief of evidence.
[35] Mr Blomfield was not cross-examined on his allegation. Mr Napier invited me to treat Mr Blomfield’s evidence as unchallenged. I decline to do so because Mr Claydon had denied the allegation in his brief of evidence, gave that evidence without objection from Mr Napier and was not cross-examined on it. It is a matter of weight. I have reached the conclusion that, with the passage of time and the depth of ill-feeling between these men, neither of their recollections is particularly reliable. It is possible that Mr Claydon said something that Mr Blomfield interpreted as an acknowledgement but the evidence is insufficient to make a finding.
[36] Mr Blomfield’s solicitors, Knight Coldicutt, wrote to Mr Claydon on 12 August 2008, referring to the fact that no income was coming into the INZ bank accounts and that Mr Claydon had incorporated a new company with a similar name. It was put to Mr Claydon that he was using the assets, resources and the name of INZ to conduct business for the benefit of an unrelated company and that, if true, it would constitute a serious breach of his director’s duties to INZ and his contractual obligations under the shareholders’ agreement.
[37] Mr Claydon’s solicitors, Dyson Smythe & Gladwell, responded the same day. They made no reference at all to Mr Claydon’s new company but, in relation to the issue of the company’s bank accounts, advised that, since INZ’s own accounts had been frozen “all monies received have been banked into a separate account and only expenses properly payable by the company have been paid out of that account”.
[38] Over the next several months, Mr Claydon and Mr Blomfield exchanged emails regarding INZ. At one stage, it was proposed that Mr Claydon would purchase Mr Blomfield’s shareholding in the company but that did not eventuate.
[39] In December 2008, Mr Blomfield uplifted a cheque from the Waitakere Council offices that was intended for INZ. Mr Claydon asked the Council to cancel the cheque, which it did, but Mr Blomfield intercepted a second cheque, and used it
for his personal purposes. The amount was approximately $99,000 and INZ was subsequently reimbursed by the bank.
[40] During 2009, there were statutory demands served on INZ, including by legal advisers engaged by Mr Blomfield in respect of matters that seem unlikely to have been for INZ’s benefit. Nevertheless, Mr Claydon dealt with those, usually paying the amounts involved. The ANZ commenced proceedings against Mr Claydon in relation to amounts owing by INZ and guaranteed by him, which he paid.
[41] It is not clear how long Mr Claydon intended the situation to continue but in July 2009 something happened to prompt a change of course. The Mercedes truck that ICL had leased from INZ and was using for contract work was taken from a construction site in Raglan. In cross-examination, Mr Blomfield acknowledged that it had been removed on his instructions. The truck was retrieved several months later and, according to Mr Claydon, it had sustained some damage.
[42] Mr Claydon also said that about that time the Waikato District Council, with whom he had been negotiating for a variation to the Raglan contract, advised him that INZ was no longer eligible for the work given the dispute between the directors. This incident caused Mr Claydon to re-evaluate INZ’s position. ICL stopped paying the lease on the vehicles and equipment, which resulted in INZ defaulting on the UDC loans. Mr Claydon negotiated with UDC for the surrender by INZ of the equipment and then entered into a fresh agreement for ICL to purchase the vehicles and equipment. The purchase price was market value and it is not contended otherwise. Although INZ was not wound up, this spelled the end of its ongoing operation as a construction company.
[43] On 30 November 2009, ICL invoiced INZ under the management and lease agreement. The invoice was for a variety of costs, including Mr Claydon’s management services at $95 per hour. The total was $186,985. The largest single item was $56,000 for unspecified insurance payments. The next largest item was $35,280 for liquidated damages. The third largest item was $25,000 to close INZ’s National Bank account. Smaller amounts were claimed as relating to Mr Blomfield’s damage to equipment and machinery. A credit of $24,500 was shown for tools and vehicles
transferred to ICL. The invoice was never paid; Mr Blomfield says he did not know of it at the time.
Did Mr Claydon misappropriate INZ’s business?
[44] INZ’s undertaking is said to have comprised the heavy construction and earthmoving equipment, the benefit of its contracts, the benefit of its business relationships, money held in bank accounts, the benefit of unpaid invoices and work in progress, the benefit of employment relationships with staff, vehicles, office equipment and goodwill and branding.
[45] Under the lease agreement dated 11 June 2008, Mr Claydon transferred a number of items of vehicles and heavy machinery to ICL.18 This was not a major transaction as is alleged. A major transaction includes, relevantly, the disposition of assets of a company the value of which is more than half the value of the company’s assets before the disposition.19 A company cannot enter into a major transaction unless it has been approved by special resolution or is contingent on approval by special resolution.20 There was no evidence as to the value of the company’s assets in July 2008. The nearest helpful evidence is the statement of financial position for the year ended 31 March 2008, which shows the company’s total assets at $1,170,423, of which
$435,369 were fixed assets recorded in the depreciation schedule. The vehicles were shown in that schedule as having a book value of $109,529 and the plant and equipment a book value of $314,774. The lease agreement therefore accounted for less than 40 per cent of the company’s gross assets. Even if an inter-company loan to CNZ of $33,287 were included, the value of the equipment and vehicles would still be less than half the value of the company’s assets.
[46] The lease payments were sufficient to meet INZ’s obligations to UDC. But the effect was of the lease was that INZ no longer had the means of completing its existing contracts. It is true that the lease did not specify an expiration date and so, on normal
19 Companies Act 1993, s 129(2).
20 Companies Act 1993, s 129(1).
principles, could be terminated on reasonable notice but Mr Claydon was, clearly, not going to do that.
[47] On the same day as he executed the lease, Mr Claydon signed the agreement to supply services to INZ under which ICL would provide services to INZ. The agreement provided:
The description of services and goods are as below, but not limited to:
...
[48] Although the agreement is couched as providing valuable services to INZ, that appearance concealed the reality of the situation. On his own account Mr Claydon was contractually committed to the management of INZ. There was no need for INZ to pay ICL to manage its business. Nor did it need premises. As at 11 June 2008, INZ did not require the services that ICL was to provide.
[49] On the evidence, INZ had only two existing contracts as at June 2008.21 Mr Claydon denied transferring those contracts from INZ to ICL. He said that ICL simply completed the work and satisfied INZ’s contractual obligations (and lost money doing so). This acknowledgement shows that existing work in progress was transferred to ICL. Whether ICL made money out of them or not is impossible to say on the state of the evidence and, in any event, that it is not the point.
[50] I do not consider that there was any significant movement of staff to INZ’s detriment. I do not accept Mr Ries’ evidence regarding the level of staffing (as opposed to the use of contractors) because it is not consistent with the financial statements which do not show a high staff cost compared with the revenue and cost of sales figures (I find that I can rely on the draft FY2008 statements in matters other than shareholder salaries and current accounts).
[51] As to INZ’s other assets, there was no evidence that money actually held in INZ bank accounts was wrongly transferred to ICL because the existing bank accounts had been frozen. It is, however, incontrovertible that ICL received monies payable to INZ. The circumstances in which those monies were received meant they were impressed with a trust and ICL was bound to account to INZ for them. Mr Claydon’s evidence was, essentially, that he used money payable to INZ to discharge INZ’s debts. There was no evidence produced to support this assertion but I find, on the balance of probabilities, that it is true because, as Mr Blomfield acknowledged, no trade creditor appears to have gone unpaid and the company was never liquidated at the instigation of a trade creditor.
[52] This leaves the question of goodwill, an asset that is difficult to precisely describe. It has been described in Lindley & Banks on Partnership as:22
It is generally used to denote the benefit arising from connection and reputation; and its value is what can be got for the chance of being able to keep that connection and improve it. Upon the sale of an established business its goodwill may have a marketable value, whether that business if that of a
21 A drainage improvement project – Tirimoana and Manhattan Heights – and a retaining wall project in Titirangi.
22 Roderick I’Anson Banks Lindley & Banks on Partnership (20th ed, Sweet & Maxwell, London) at (10-223), see Short v Gray HC Auckland CIV-2008-404-2232, 9 June 2010 at [43], which referred to this proposition.
professional man or of any other person. But it is plain that goodwill has no meaning except in connection with a continuing business ...
[53] I do not consider that much, if any, goodwill attached to INZ by mid to late 2008. The dispute between its directors was obviously common knowledge. Its bank accounts had been frozen. I accept Mr Claydon’s evidence that the dispute had caused work to dry up.
[54] In summary, at the beginning of June 2008 INZ had an experienced and well- regarded managing director, premises, equipment, relationships with contractors, and work to meet its outgoings (including under its finance agreements). After June 2008, ICL had taken over its equipment and premises and Mr Claydon was directing his energy into finding work for ICL. The effect would be that, within a few months, INZ would have lost its equipment permanently and would have no further work coming in. It must be said that, in substance, INZ’s undertaking had been transferred to ICL. It must also be said that INZ’s shareholders associated with Mr Blomfield (at that stage BIL and BTL) were unfairly prejudiced by these events. Whether Tyrion, which acquired its shares later in 2008, was also prejudiced is a matter I consider later.
[55] I stop short, however, of attributing INZ’s demise (and any loss to the shareholders) entirely to Mr Claydon’s actions. INZ already faced serious problems as a result of the circumstances I have described. Its bankers were sufficiently concerned about the dynamics between Mr Claydon and Mr Blomfield to freeze the company’s bank accounts. Self-evidently, no construction company can function without a bank account. Securing work from local authorities required the confidence of the council concerned in the management skills and financial viability of the tenderer. I accept that INZ had lost, or was in the process of losing, that confidence. INZ relied almost entirely on Mr Claydon’s expertise in the industry and, as long as he remained a director, he was bound to apply his knowledge and expertise for the benefit of INZ. But the ill-feeling between him and Mr Blomfield created a serious risk of Mr Claydon resigning as a director and starting a new business. Had he done so, the shareholders could not have complained.
The value of Tyrion’s shareholding
[56] Tyrion claims the value of its 50 per cent shareholding as at July 2008. There was substantial agreement between the parties as to the approach to be taken to valuing the shareholding. Tyrion’s expert witnesses, Mr Beylefeld, and Mr Claydon’s expert witness, Mr Martin, together with INZ’s external accountant at the time, Mr Campbell, produced a joint statement. They agreed that:
(a) The appropriate valuation method is a capitalisation of future maintainable earnings (CFME) method;
(b) The appropriate standard of value is that of “fair value”;
(c) No discounts for the lack of control would be appropriate;
(d) The appropriate date of valuation is July 2008; and
(e) The debt in INZ as at the valuation date was $383,000.
[57] There were, however, important matters that the experts did not agree on. In particular, Mr Beylefeld considered that the MYOB accounting ledger for the first four months of the 2009 financial year should be taken into account, whereas Mr Martin and Mr Campbell did not. There was disagreement over whether a loan shown in the MYOB records as owing by CNZ to INZ should be taken into account. Most significantly, the experts disagreed over the appropriate multiple to apply to the EBITDP figure.23
[58] Mr Beylefeld’s valuation of the Tyrion shareholding as at July 2008 was
$232,000. Mr Campbell valued the shareholding at $43,000. Mr Martin valued it at
$44,425. I indicate now that I preferred the evidence of Mr Martin.
[59] The three accountant witnesses agreed on the approach to be taken. The first step was to identify the enterprise value of the business. This required the valuer to
23 Earnings before interest tax depreciation and proprietors’ salaries.
determine the expected future maintainable earnings (FME) as at the valuation date and then to determine the appropriate multiple to apply to that sum. The next step was to deduct the external debt of the business and, finally, to add surplus assets not used in deriving the earnings.
[60] The FME of the business was difficult to assess because of the limited historical data and lack of forecasts at the valuation date. Mr Martin considered it preferable to have five years’ worth of financial data, including at least one year of forecast from the date on which the valuation was being performed. However, as I have noted, the only reasonably reliable financial information available for INZ related to FY2007. The draft FY2009 financial statements and the figures recorded therein for FY2007 averaged $211,500. Mr Martin considered that was the appropriate FME. Mr Campbell took a lower figure of $190,000, applying a discount to reflect the uncertain economic conditions that existed in mid-2008. (Mr Martin preferred to reflect that risk in the multiplier).
[61] Mr Beylefeld’s assessment of the FME was $275,000, significantly higher than either Mr Campbell or Mr Martin and reflected his view (based on the MYOB ledger) that the first four months’ performance in the FY2009 was so much better than the previous year that it should lift the average annual EBITDP to $265,000 and, moreover, he considered that the business was “heading towards an EBITDP of
$607,000 for FY2009”. I do not accept this view. Messrs Martin and Campbell did not consider the MYOB ledger sufficiently reliable to take into account and, in the usual course, I would agree. In this case, however, because the financial statements themselves are not completely reliable, I think it is permissible to take the MYOB statements into account, though approaching them with caution.
[62] However, I accept Mr Martin’s view that it is not appropriate to project the four-month result in a linear manner over the full year without full information about what work INZ actually had available to it. In this regard, I accept Mr Claydon’s given evidence that work had dried up as a result of the dispute between him and Mr Blomfield becoming public knowledge. I note too that Mr Beylefeld’s optimistic view of the FME was contrary to the view the directors themselves were expressing at
the time. I therefore consider the appropriate figure for the FME is $211,500, the average of the figures shown in the FY2008 draft financial statement.
[63] I turn next to the multiple to be applied. The multiple is used to recognise the relative risk of an investment in any particular business and is usually derived from market transactions using comparable companies. Unfortunately, limited information was available about actual sales achieved for comparable businesses. Statistics from BizStats, included by Mr Beylefeld in his brief of evidence, was also used by Mr Martin and Mr Campbell as the basis for finding an appropriate multiple, though recognising that it represented only a limited number of businesses, and information about the specific businesses was not available because the data was anonymised.
[64] The average for Auckland would have been 2.25. For reasons he did not explain, Mr Beylefeld took a multiplier of 2.5. Mr Campbell took a multiplier of 2.1, and Mr Martin 1.9. Mr Martin’s lower multiplier reflected his view that the likely effects of the emerging GFC ought to be taken into account because it could have been expected to reduce earnings for a period. Mr Beylefeld did not make any allowance for this factor because he considered that the significance of the events that later culminated in the GFC were not evident in July 2008. On this point, I prefer Mr Martin’s view.
[65] Mr Martin pointed out that the GFC had actually started in 2007 with the collapse of the sub-prime mortgage market in the US and he noted that Bridgecorp (a significant funder of property developers) had also collapsed that year. He did not accept the proposition put to him in cross-examination, based on the statistics for concrete production, that as at July 2008 the construction industry had not been affected by the GFC, because that statistic frequently reflected the state of existing contracts coming to fruition rather than accurately indicating the likely level of future work.
[66] Finally, Mr Beylefeld put a value of $249,000 on INZ’s goodwill, which he considered comprised customer relationships, the portfolio of historic work and an assembled workforce. Mr Campbell and Mr Martin did not ascribe any goodwill to the business. I prefer the latter view. This business had been operating for only three
years. It had a limited track record and its reputation had suffered from the public deterioration in the directors’ relationship. There was no assembled workforce; it was a construction company that operated mainly on the basis of independent contractors.
[67] The next step required the adding back of surplus assets. Mr Beylefeld put the surplus assets at $160,000, of which $90,000 represented a debt by CNZ to INZ. CNZ existed only to undertake work for INZ. Mr Martin considered that this amount should be treated as eliminated on a consolidated basis and therefore ignored. I prefer this view; moreover, the general tenor of the evidence satisfies me that the debt was, more likely than not, unrecoverable.
[68] There was some disagreement between the parties as to whether, and, if so, to what extent, the performance of ICL ought to be taken into account in valuing INZ. I have concluded that ICL’s performance is not a factor that I should take into account. This is because no ICL financial statements were produced for the critical year, FY2009. Financial statements were produced for FY2010 and FY2012. However, Mr Martin’s view was that, whilst one might look ahead to the end of the 2010 year, looking beyond that would be speculative.
[69] Mr Martin’s opinion, which I accept, was that INZ’s entire shareholding was worth $88,850, calculated as follows:
Estimated FME $211,500.
Multiplier with risk weighting 1.9
Enterprise value (lower band) $401,850 Less: external debt $383,000
Add: surplus assets $70,000 Equity (share) value $88,850
[70] Thus, Tyrion’s shareholding in July 2008 was $44,425.
Is it just and equitable to grant a remedy?
[71] As already discussed, the granting of a remedy depends on my being satisfied that it is just and equitable to do so. This means taking into account all the circumstances I have discussed earlier: the effect of Mr Claydon’s actions on INZ and its shareholders, the value of INZ’s business, the prospects that INZ had of continuing its business and Mr Blomfield’s conduct.
[72] Mr Napier argued that Mr Blomfield’s conduct could not be taken into account in considering whether a remedy should be granted because it had not been pleaded as an affirmative defence. I do not accept that. The discretion under s 174 is not to be limited by a pleading point. Mr Blomfield was also a director of INZ at the relevant time and also took steps that affected INZ. It is clear that I must take his conduct into account.
[73] Looking first at Mr Claydon’s conduct, I find that he was motivated to salvage what was left of INZ’s business for the benefit of its creditors and, by doing so, to protect his own reputation and secure a foundation for his new company. I also find that Mr Claydon knew that his conduct was wrong; at the latest, Knight Coldicutt’s letter of 12 August 2008 explicitly put him on notice of the fact. The omission of any response to this allegation in the letter sent by Mr Claydon’s solicitors in reply leads me to conclude that he fully appreciated what he was doing and went ahead anyway. In my view, he took a calculated gamble that Mr Blomfield’s financial difficulties would preclude any action being taken against him.
[74] In reaching this view, I do not overlook the fact that, in my view, Mr Claydon was almost entirely responsible for such success as INZ had enjoyed. Mr Claydon alone had the skills, expertise and contacts to secure and manage profitable civil construction work. Mr Blomfield’s contribution seems, on the evidence, to have been minimal and his personal financial difficulties adversely affected INZ. Nor do I overlook the fact that Mr Claydon was free to resign from INZ to start another business. Those facts do not justify maintaining his position as a director of INZ while advancing INZ’s interests.
[75] I turn, then, to Mr Blomfield’s conduct. In FY2008, companies he controlled, Cinderella and BRT, received loans from INZ totalling slightly over $85,000. I infer
that these loans were unrecoverable. Mr Blomfield personally took $70,000 from the company in December 2007 and a further $30,000 in June 2008, at the very time he was expressing concern about the company’s solvency. By August 2008, he realised that Mr Claydon was shifting INZ’s assets to ICL but, apart from having Knight Coldicutt write to Mr Claydon, he took no action. Finally, in December 2008, he misappropriated $99,000 from funds destined for INZ. Fortunately, the reimbursement of that sum by the bank meant that INZ did not suffer as a result, but it was a blatant act done to benefit himself with no regard for the effect on INZ.
[76] I find that Mr Claydon and Mr Blomfield both acted with disregard for their respective obligations and both profited personally at INZ’s expense. On one view, Mr Claydon profited to a greater extent because he emerged with a functioning business which he was able to build on. But as against that, he dealt personally with the creditors, including the outstanding bank debt that both he and Mr Blomfield had guaranteed, paying approximately $23,000 to resolve that debt. Mr Blomfield, who was bankrupted in 2010, was not in a position to contribute to it.
[77] There is one final factor that I consider relevant. The valuation of the shareholding was carried out as at July 2008 but Tyrion did not acquire its shares until November 2008. Although the valuation evidence was confined to July 2008, I am satisfied that INZ’s financial position (and therefore the value of its shares) had deteriorated significantly by November 2008 because, by then, its bank account had been frozen for several months, it had no current work and no prospect of work.
[78] There was no evidence as to the terms on which Tyrion acquired the shares but I find that Mr Blomfield’s control of both the transferors and transferee of the shares meant that Tyrion knew exactly what state INZ was in when it took the shares. The fact that the events leading to INZ’s financial decline occurred before Tyrion acquired its shares does not preclude it from bringing this claim, a matter already considered and determined by Brewer J earlier in this proceeding.24 However, Tyrion’s
24 Tyrion Holdings Ltd v Claydon [2015] NZHC 428, [2015] NZAR 689 at [23], citing Re Quickdome Ltd [1988] BCLC 370 (Ch), Bermuda Cablevision Ltd v Colica Trust Ltd [1998] AC 198 (PC) and Lloyd v Casey [2002] 1 BCLC 454 (Ch).
knowledge of the state of INZ when it acquired its shares is relevant to the exercise of the discretion.
[79] In Bermuda Cablevision Ltd v Colica Trust Ltd, the Privy Council confirmed that a shareholder that acquired shares in the knowledge that the affairs of the company were being conducted unlawfully was nevertheless entitled to apply for relief under the equivalent of s 174 for the reasons explained by Lord Steyn:25
By its express terms s 111 covers both past and future conduct. In the present case the petitioner complains of unlawful conduct which is continuing. Moreover, the prejudicial effect of such conduct is increasing as the years pass and Cablevision’s profits increase so that ever larger amounts are paid out of the profits of Cablevision to Atlantic. The shareholders of Cablevision, including Colica, are locked into that position without limit of time. Moreover, it is realistic to accept that Colica’s prior knowledge will be shared by any incoming member. If Colica is debarred from presenting a petition, the effect will be to shut out complaints by any new members, ever, and thus to facilitate the continuation of Cablevision carrying on business unlawfully. That is a most unattractive result. ... It is entirely orthodox to say that a petitioner who bought shares with prior knowledge of all relevant matters is entitled to proceed on the basis that the statutory contract containing the by- laws ... must be regarded as tempered by the provisions of the Companies Act 1981 ... and indeed by the general law. To that extent such a shareholder may have a legitimate or reasonable expectation that he may be able to put matters right. Such a shareholder may have the necessary locus standi to present a petition, and the court may have jurisdiction to grant relief under s 111. Their Lordships are therefore satisfied that the generality of the wording of s 111(1) is not qualified by a barred presentation of a petition by a member who had prior knowledge of the grounds of the petition. ...
[80] However, Lord Steyn then added:26
A cautionary note must be entered. Prior knowledge of the matters complained of in a petition will almost always be a most relevant consideration in deciding cases under s 111. Sometimes it will be decisive. But there may be cases, perhaps relatively rare, where this fact may be outweighed by sufficiently cogent countervailing factors. The fact that shareholders are locked into a position where a company is continuing to carry on business unlawfully may be such a factor.
[81] In Lloyd v Casey the question of standing was extended to allow a shareholder with only a beneficial interest at the relevant time to sue but the question of prior knowledge that Lord Steyn had commented on did not arise.27 That question was,
25 At 212, applied in Lloyd v Casey.
26 At 212.
27 Above n 24.
however, considered by the New Zealand Court of Appeal in Gavigan v Eichelbaum.28 The shareholder claiming under s 174 held only an option to acquire the shares at the time of the impugned conduct and was therefore neither a legal nor a beneficial owner at that time. Kós P, giving the reasons for the Court, said:29
... We agree with the conclusion in Lloyd v Casey that a shareholder has standing to claim oppression of a minority in respect of a period prior to registration of their shareholding when their holding was a beneficial one.
...
... The extension of standing given in Lloyd v Casey to a subsequent shareholder to complain of events during the period when he was a non- registered beneficial shareholder is understandable. But it is another thing again to conclude that s 174 offers relief for events occurring when that shareholder was a mere option holder. Particularly one who then exercises the option in the knowledge of the events complained of.
(emphasis added)
[82] Applying that statement, it is relevant that Tyrion had no interest of any kind in INZ at the time Mr Claydon’s actions actually affected INZ’s value. This is not a case where a shareholder seeks to rectify an ongoing situation; INZ has not traded for years and Tyrion has no interest in seeing it resume trading. It seeks only financial compensation for the value of the shares as at July 2008. However, it acquired its shares at a time when their value was less than it was in July 2008 and did so in full knowledge of the company’s financial situation. In these circumstances, I consider that the prior knowledge of the claimant’s shareholding is a matter to be taken into account and weighs against the exercise of the discretion.
[83] Looking at all of the factors that I have identified, I am satisfied that it is not just and equitable to require the defendants to pay Tyrion compensation.
Result
[84] The plaintiff’s claims are dismissed.
28 Gavigan v Eichelbaum [2017] NZCA 412, [2018] 2 NZLR 530.
29 At [65]–[66] (citations omitted and emphasis added).
[85] Counsel did not address me on the matter of costs. I note that costs were reserved in the earlier application determined by Brewer J. I invite counsel to file memoranda as to costs for both that application and the substantive claim:
(a) On behalf of the second and third defendants, within 10 working days of the date of this judgment;
(b) On behalf of Tyrion Holdings Ltd, within a further 10 working days; and
(c) Any reply within a further seven working days.
P Courtney J
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URL: http://www.nzlii.org/nz/cases/NZHC/2018/1899.html