Allied Tours and Transfers Limited v Coleman

[2014] NZHC 212

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2011-485-1818 [2014] NZHC 212

BETWEEN  ALLIED TOURS AND TRANSFERS LIMITED

Plaintiff

ANDJANE ELIZABETH COLEMAN First Defendant

PAUL JOHN ROSSITER Second Defendant

Hearing:                   2, 3, 4 and 20 September 2013

Counsel:                  K B Johnston and P W Michalik for Plaintiff

R P Harley and I A McCulloch for Defendants

Judgment:                19 February 2014

JUDGMENT OF GODDARD J

This judgment was delivered by me on 19 February 2014 at 12.00 pm, pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Becker and Co, Wellington for Plaintiff

Max Tait Legal, Wellington for Defendants

ALLIED TOURS AND TRANSFERS LIMITED v COLEMAN [2014] NZHC 212 [19 February 2014]

Introduction

[1]      The plaintiff, Allied Tours and Transfers Limited (Allied) is suing two of its three shareholders and directors, Ms Coleman and Mr Rossiter (the defendants).  The action is brought by the remaining shareholder and director, Mr Cameron.

[2]      The plaintiff alleges the defendants breached duties owed to it at common law, under the Companies Act 1993 (the Act) and under three separate agreements. The plaintiff seeks an order that the defendants are jointly and severally liable to pay equitable compensation to Mr Cameron in the amount of one-third of such loss as Allied may be found to have suffered.

Background facts

[3]      In 2005 Mr Rossiter, Ms Coleman and Mr Cameron agreed to go into a factoring business together.   Mr Rossiter and Ms Coleman are in a personal relationship.  Mr Rossiter is Mr Cameron’s cousin.

[4]      The defendants each have an extensive history in Wellington taxi transport. At the time of Allied’s incorporation, Ms Coleman was the sole shareholder and director of Regency Cabs Wellington (2004) Limited (Regency), which operated a taxi transport service.  Mr Rossiter was the director and chairman of Hutt and City Taxis Limited (HCT).  He was also the director of a company called Taxi Charge.

[5]      Allied was established primarily to factor taxi chits, credit card receipts and surcharged accounts.  The business was not required to register for GST because it operated solely as a financial services company.

[6]      In order to understand the issues in this case, it is necessary to briefly outline the way factoring works within the context of the taxi industry.  As Mr Cameron explained, taxi companies do not normally own and run their own taxis.  Instead, taxi companies charge drivers a levy in return for providing a brand and a booking service.  A customer can pay the driver using Eftpos, cash, taxi chit or credit card. When Allied was in operation, some credit card payments were taken using an old-style “zip-zap” machine, which produced a credit card slip.  As I understand it,

this  method  of  payment  has  now  largely  been  replaced  by  mobile  electronic terminals that accept and process credit cards.

[7]      The factoring service is both expedient and simple.  It is not economical for a driver to register as a merchant with every one of the credit card companies and taxi chit providers.  The time and cost involved in redeeming each credit card receipt and taxi chit is excessive.   Instead, a driver can sell chits and credit card receipts to a factorer for a percentage of their worth (for example, 95 per cent).  The factorer then invoices the debtor and recovers the full value of the chit or receipt, making a profit from the difference between the purchase value of the chit or receipt and the recovered  face value.   Some taxi companies provide  factoring services but taxi drivers are generally free to use any factorer.

[8]      Surcharged accounts owned by taxi companies can also be factored.   The factorer pays the driver and then invoices the customer for the fare, as well as a handling fee.  Such factoring can be beneficial to a taxi company because it enables the drivers  to  be paid  immediately out  of a third  party’s  pocket.   That  can  be preferable to the two alternatives, which are to either:

(a)      pay each driver individually when the account is paid by the customer (this requires administrative work and can incur additional bank fees); or

(b)pay each driver out of its own cash reserves and then wait for the customer to pay its account.

[9]      Mr Cameron explained that a successful factoring operation requires access to a substantial amount of cash, allowing it to pay drivers and then wait for payment from the issuers.

[10]     Each of the directors brought different contributions to Allied.  Mr Cameron’s

contribution  was  financial.    He  agreed  to  provide  funding  for Allied  of  up  to

$200,000 in the form of an interest bearing loan at 9.5 per cent (although ultimately only  $150,000  was  provided).    The  defendants  ran  the  day-to-day  operations.

Ms Coleman provided Regency’s pre-existing factoring business as the base upon which Allied could be built.  As part of the plaintiff’s claim, Mr Cameron says that Regency did not transfer all of its factoring business to Allied.  He says that Regency continued to provide factoring until it ceased trading in June 2008.

[11]     Mr  Rossiter  provided  the  expertise.    His  role  was  to  set  up  Allied  by establishing operating systems, such as the company’s invoicing mechanisms.  As Mr Rossiter was a director of Taxi Charge and HCT when Allied was incorporated, he signed an independent contractor’s agreement with Allied to enable him to begin his work establishing Allied.

[12]     As I have noted, Mr Cameron, Ms Coleman and Mr Rossiter were each directors and shareholders of Allied.   Each held one-third of the shares in Allied (although  Mr  Cameron  held  three  shares,  and  his  family  trust,  the  Lawrence Cameron Family Trust (the Trust), held the remaining 297 shares).  Until Mr Rossiter resigned as director of Taxi Charge and HCT, his shares in Allied were held on trust for him.  He became a director of Allied on 15 May 2006.

[13]     Allied was incorporated on 19 December 2005.  That same day Mr Cameron, Ms Coleman, Mr Rossiter and two of the trustees of the Trust each signed a shareholders’ agreement relating to Allied.  With the exception of Mr Rossiter who signed an independent contractor’s agreement, those same parties each signed separate confidentiality and restraint of trade agreements with Allied.

[14]     On 20 February 2006 Ms Coleman, as director of Regency, entered into a lease of premises in Hataitai (the Hataitai premises) as tenant.  She used $2,340 of Allied’s funds as an advance deposit to secure the lease.   A sublease was never entered  into  with Allied.    Instead, Allied  occupied  the  Hataitai  premises  on  an informal basis.  Regency also conducted its business from the Hataitai premises.

[15]     The location of the address was thought to be useful because it was close to the main route to the Wellington Airport and was therefore commonly used by taxi drivers.  The rent was shared equally by Allied and Regency (and Regency repaid Allied half of the amount of the advance deposit).  When Regency was sold in June

2008 Ms Coleman became the lessee of the Hataitai premises.   Mr Cameron says that Ms Coleman breached her duty as director to act in Allied’s best interests by leasing the Hataitai premises in Regency’s name and then her own, rather than in Allied’s name.

[16]     On 31 March 2006 the defendants bought In Style Travel Limited (In Style), a luxury taxi service provider in respect of which they were co-directors and equal shareholders.  In Style used the Hataitai premises as its base.  An In Style employee performed work for Allied in lieu of In Style paying a monthly portion of the rent. Mr Cameron says that In Style carried on business as a factorer from these premises, in competition with Allied.

[17]     Meanwhile, Allied proceeded through the first step of its development (taking over  Regency’s  factoring  operation)  without  incident  and  began  larger  scale factoring.   The company accrued over $2,000,000 in revenue during the financial year ending 31 March 2007.

[18]     Despite that considerable revenue, the overall financial performance of the business was unsatisfactory.   The possibility of entering into an arrangement with HCT was first raised during a board meeting on 8 June 2007.  The minutes of that meeting recorded as follows:

Discussed proposed Trading Arrangement with Hutt & City Taxis including some shared expenses and interest free loan from Hutt & City Taxis in exchange for share of profit.  Current loan arrangement to be considered.

[19]     I will refer to this arrangement as the Combined Factoring Arrangement. Mr Rossiter and Ms Coleman presented Mr Cameron with a proposal that outlined a number of suggested benefits to Allied from the Combined Factoring Arrangement. These included: that wages and other costs would be shared equally by Allied and HCT; that HCT would provide an interest free loan to finance Allied’s factoring operation;  that  Parliamentary  Services  chits  and  Greater  Regional  Wellington Council chits would continue to be booked directly with Regency and In Style; a reduction in bank account fees; and that HCT would undertake the processing and invoicing of the chits (thereby reducing Allied’s workload).

[20]     Mr Cameron says that, despite some reservations, he gave his preliminary consent  to  the  Combined  Factoring  Arrangement  because  it  allowed  for  the repayment of his loan to Allied.  On 28 November 2007 Mr Cameron received an unsigned copy of the document recording the agreement. According to Mr Cameron, the agreement varied the proposals he had tentatively agreed to.  Mr Cameron’s main complaint was that the condition that Parliamentary Services would still be booked direct by In Style and Regency was omitted.   This meant that the chits would no longer “come through Allied” as they had previously.  This was important because the gross profit from redemption was 17 per cent and 12 per cent respectively of the face value of the chit.

[21]     In  summary,  the effect  of the Combined  Factoring Arrangement  was  for Allied to cease operating as a factoring company.  From that time, it sent all chits received to HCT for factoring.  HCT financed the operation and the proceeds from factoring were shared equally.  As part of the plaintiff’s claim, Mr Cameron says the Combined Factoring Arrangement was entered into in breach of the shareholders’ agreement.

[22]     It was during this time that relations between the defendants and Mr Cameron began to deteriorate.   On 20 December 2007 Mr Cameron sent a letter to the defendants outlining the following concerns:

(a)       that  Mr  Rossiter  had  set  up  unsatisfactory  operating  systems  for

Allied;

(b)the lease for the Hataitai premises was in Regency’s name but Allied’s funds had been used to secure the lease.   Allied was provided with no guarantee to secure the location;

(c)      the defendants purchased In Style, which appeared to be in direct competition with Allied; and

(d)that Allied had entered  into the Combined Factoring Arrangement with HCT without unanimous shareholder approval.

[23]     On 25 January 2008 the defendants replied to Mr Cameron’s letter, denying allegations (b), (c) and (d) and advising that (a) was an “employment dispute” to be dealt with separately.  Mr Cameron replied recommending that the parties attempt to settle their dispute.

[24]     Mr Cameron’s loan was repaid in full, plus interest, by 31 March 2008. Relations between the parties continued to deteriorate.  At an Allied board meeting on 11 June 2008 Mr Cameron raised the issue of invoice payments he said should have been made from Regency to Allied.   He said that if these invoice payments could not be tracked into Allied’s bank account then the parties would be in dispute. The meeting broke down as a result of a separate issue and Mr Cameron was unable to arrange another meeting.   Mr Cameron says he believed that the only available option was to attempt mediation in accordance with the shareholders’ agreement. An ultimately unsuccessful  mediation  was  attempted  during  the  week  beginning  10

November 2008.

[25]     On 2 February 2009 Ms Coleman emailed Mr Rossiter and Mr Cameron advising them that the lease on the Hataitai premises would expire on 28 February

2009.  She indicated she would not be renewing the lease.  Mr Cameron replied:

The trustee’s [sic] of L J Cameron Trust have been made aware that Allied will not be trading after the lease expires but the company is still registered. They and myself have no objection.

I understand that Hutt & City Taxis are taking over the business and [an employee of Allied] will be taken on by HCT.

...

[26]     On 31 March 2009 Allied ceased trading with the consent of all directors and shareholders.  Four days previously Ms Coleman had entered into an agreement for sale and purchase of a business with HCT.   Mr Rossiter was a covenantor.   The agreement records Ms Coleman as the vendor.  The business was described as “the vendor’s interest in the factoring operation”.  The agreement lists tangible assets of

$1,000 and intangible assets of $9,000. The purchase price was $10,000.

The plaintiff ’s case

[27]     It  is  convenient  to  deal  separately  with  each  of  the  ways  in  which

Mr Cameron says that the defendants breached their duties to Allied.

Alleged breaches

[28]     Mr Cameron alleges that the defendants breached their duties to Allied by the following actions:

(a)       in carrying out factoring through In Style and Regency; (b)    in transferring Allied’s business to HCT;

(c)      in selling Allied’s remaining interest in the factoring business to HCT without unanimous approval and without accounting to Allied for the price received; and

(d)      in using Allied funds to secure a lease in Regency’s name.

[29]     In addition, Mr Cameron alleged that the defendants failed to account for a discrepancy of $24,600 that he says can be found in the financial accounts for the year ended 31 March 2007.

Factoring through In Style and Regency

[30]     Mr Cameron claims that the defendants provided factoring services through

In Style and Regency in breach of their duties to:

(a)       act in good faith and in Allied’s best interests (under s 131(1) of the

Companies Act 1993 and at common law); and

(b)not use confidential information to set up a competing business (under the separate confidentiality and restraint agreements signed by each of the defendants).

[31]     The  defendants  say  that  Regency  and  In  Style  provided  transportation services.  They say the two companies never undertook factoring work that ought to have been diverted to Allied.

The evidence

[32]     The  plaintiff ’s  claim  turns  on  whether  factoring  income  can  be  reliably identified  in  the  accounts  of  Regency  and  In  Style.    Mr  Vance,  a  chartered accountant, gave evidence on behalf of the plaintiff.

[33]     Counsel   for   the   defendants,   Ms   Harley,   raised   an   objection   against Mr Vance’s  evidence  on  the  basis  that  he  had  previously provided  a  report  for Mr Cameron  in  support  of  Mr  Cameron’s  application  for  leave  to  bring  this derivative action.1    Mr Vance had not therefore complied with the requirement of impartiality and evidence was inadmissible as expert evidence.

[34]     The Code of Conduct for Expert Witnesses requires both that an expert must be impartial and must not act as an advocate for the party calling him or her.  This line  between  advocacy  and  support  was  characterised  in  Maritime  Union  of New Zealand Inc v TLNZ Ltd as being “between persuasive/party supportive opinion evidence  (admissible)  and  opinion  evidence  that  is  partial  and/or  amounts  to advocacy for the party calling it (inadmissible).2

[35]     In  the present  case  Ms  Harley did  not  point  to  any particular  aspect  of Mr Vance’s evidence that crossed  the line described in  Maritime Union of New Zealand Inc.   Having heard Mr Vance’s evidence, I did not identify any cause to conclude that he was not impartial.

[36]     Even if this were not the case I would be inclined to allow the evidence under s 26(2) of the Evidence Act 2006.   Ms Harley’s objection was only raised after Mr Vance had given evidence, been extensively cross-examined and the plaintiff had closed its case.  Further, there is no doubt that the evidence given by Mr Vance was

within his expertise and the Court did in fact find it helpful in understanding other

1      Cameron v Coleman HC Wellington CIV-2010-485-2151, 22 June 2011.

2      Maritime Union of New Zealand Inc v TLNZ Ltd [2007] ERNZ 593 at [39].

evidence in the proceeding (in particular, the financial accounts of each of the companies involved) and in ascertaining facts that were of consequence to the determination of the proceeding.3

[37]     Turning  to  that  evidence  now,  Mr  Vance  examined  all  of  the  available financial statements of In Style, Regency and Allied and identified factoring revenue from the financial records of Regency and In Style using the methodology described as follows:

(a)      The  Regency  and  In  Style  accounts  separated  revenue  into  two accounts:   the factoring account; and the taxi account.   GST was accounted for in the taxi account but not in the factoring accounts. Because GST is payable on transportation revenue but not financial services income, Mr Vance inferred that all of the revenue detailed in the factoring account represented factoring and financial services activity that ought to have been diverted to Allied.   Mr Vance calculated Regency’s gross profit from factoring between 2007 and

2009 thus:

2007  $42,000

2008  $5,000

2009  $8,000

(b)      Mr Vance calculated In Style’s gross profit from factoring between

2007 and 2011 thus:

2007  $20,000

2008  $69,000

3      Evidence Act 2006, s 25(1).

2009  $30,000

2010  $32,000

2011  $39,000

[38]     Based  on  the  fact  that  all  of  this  revenue  should  have  gone  to Allied, Mr Vance  added  these  amounts  to Allied’s  financials  to  produce  a  consolidated statement of financial  performance.   The amounts were added to Allied’s  gross profit.  Mr Vance did not think that the additional gross profit would have increased Allied’s operating expenses.   In effect, the factoring revenue identified was added straight to Allied’s bottom line.

[39]     However, during the hearing, Ms Coleman gave evidence that the factoring accounts did in fact contain revenue derived from other GST-exempt trading.  But not revenue from factoring. According to her, Regency and In Style did not pay GST on booking fees, surcharges, consultancy fees and revenue earned from processing electronic transactions.   She said that all paper chits and credit slips were sent to Allied as per the arrangement between the directors. This effectively undermined Mr Vance’s findings, which were predicated on the premise that Regency and In Style did not carry on any other GST-exempt trading.

[40]     From the plaintiff ’s closing submissions it appears that Mr Cameron accepted that revenue derived from booking fees, surcharges, and consulting fees was not factoring income that should have been diverted to Allied.  The Court would have inevitably reached this same conclusion regardless.   Such revenue was derived as part of the transportation arm of In Style and Regency.  There was no obligation to divert it to Allied.

[41]     The  focus   therefore  is   on   whether  processing  electronic  transactions constitutes factoring, as it was intended to mean by the directors and shareholders of Allied.  If it does, such revenue ought to have been diverted to Allied.

[42]     In support of the plaintiff’s case, Mr Cameron relies on the shareholders’ agreement, which provides that the “objective of the Initial Shareholders in relation to  the  Company  is  for  the  Company  to  carry  out  transportation  and  financial services” as evidence of the parties’ agreement that all financial services income would be diverted to Allied.

[43]     The defendants’ position, however, is that processing electronic transactions was not factoring and was not an activity ever intended to be conducted through Allied.   Ms Coleman gave evidence that “when we agreed to start Allied ... the directors  of  Allied  were  very,  very  aware  of  the  fact  that  Regency  Cabs  had electronic machines in their cars ... and that that could not be factored”.

[44]     After considering all of the evidence, most of which is inconclusive either way, I have formed the view that revenue earned by Regency and In Style from electronic transactions  was not intended to  go  through Allied.   That  is because processing electronic transactions is fundamentally different from factoring taxi chits and credit card slips.

[45]     As I outlined earlier, a factoring company pays drivers for their paper chits and vouchers using its cash reserves before redeeming the paper chits and vouchers with their respective issuers.   Similarly with surcharged accounts, a factoring company factors a surcharged account by paying the driver before recovering the fare from the customer.  The factoring company takes its cut because it is relieving taxi companies from cost and administrative burden.

[46]     Drivers and taxi companies deal with electronic transactions in an entirely different manner.  According to Ms Coleman, when a customer pays using his or her Eftpos card, the money is transferred to the taxi company directly. The taxi company then distributes the payment to the driver, less a percentage for processing the transaction.   There is no lag period between a company receiving the customer’s payment via the Eftpos terminal, and the payment of the driver.  There is therefore no corresponding need for large cash reserves to pay the driver before the customer payment is received.   Simply put, there is no role for a specialist factorer such as Allied to play.

[47]     Given this difference, one would have expected specific mention to have been  made  of  electronic  processing  in  the  shareholders’ agreement  and  in  the company documentation.   That  is  particularly  so  because  transferring  electronic processing services to Allied would have been to the direct detriment of Regency.  It may be that Mr Cameron failed to appreciate the distinction between processing electronic transactions and paper chit factoring because he lacked the specialised knowledge of Ms Coleman and Mr Rossiter.  It is also perhaps unfortunate that the demand for and methodology of factoring altered significantly during the period of Allied’s operation as common methods of payment changed.  Notwithstanding, the end result is that plaintiff has failed to show that the revenue earned by Regency and In Style from processing electronic transactions was intended to go through Allied.

[48]     On the basis of the above conclusions, Mr Cameron has failed to establish on the balance of probabilities that the revenue containing within the factoring accounts was derived from factoring.  I find therefore that Mr Cameron has failed to discharge the onus of establishing that Regency and In Style undertook factoring in breach of the defendants’ directors duties to Allied.

[49]      One final matter must be addressed under this heading.  During the course of cross-examination, Ms Coleman gave evidence that Regency took a .5 per cent “cut” for “processing” of paper chit transactions.   Mr Cameron says this cut deprived Allied of income it should have been earning.  But Ms Coleman’s evidence is that Regency was entitled to take a small “cut” for “processing”.  Neither party pointed to company documentation that could confirm whether this was part of the original arrangement or not. As a result, I am unable to make a finding on this point.

Transfer of Allied’s business to HCT

[50]     Mr Cameron claims that the defendants’ decision to implement the Combined Factoring Arrangement breached their directors’ duties in two respects: first, the Combined Factoring Arrangement was not in Allied’s best interests;4 and second, the

Combined Factoring Arrangement was a major transaction and therefore required the

4      Companies Act 1993, s 131(1).

unanimous consent of all of the shareholders (pursuant to cl 11.2 of the shareholders’

agreement and s 129 of the Companies Act 1993).

First alleged breach

[51]   Mr Cameron claims that the Combined Factoring Arrangement was implemented on terms that were unfavourable to Allied.

[52]     The law on a director’s duty to act in good faith and in a company’s best interests is well settled.  In Hedley v Albany Power Centre Ltd (in liq) Wild J stated that in order to form a view about what was in the best interests of a company, the directors needed to:5

(a)      identify the options available to the company;

(b)assess each of those options: its present and prospective value to the company; its advantages and disadvantages, again both present and prospective; and

(c)      compare each option on the basis of (b).

[53]     A  director  complies  with  the  duty  in  s  131  if  the  director’s  primary motivation is to act in a manner that the director genuinely believes to be in the best interests of the company.6

[54]     It is clear from the evidence that both of the defendants believed that the

arrangement with HCT was in Allied’s best interests.  In his letter of 20 December

2007,  Mr  Cameron  put  it  to  the  defendants  that  the  Combined  Factoring

Arrangement was unfavourable to Allied. The defendants said in reply that:

the loan will be due for repayment and how do you believe [Allied] could trade without funds?  Are there items in previous minutes that suggest that you are going to renew the $150,000?

5      Hedley v Albany Power Centre Ltd (in liq) [2005] 2 NZLR 196 (HC).

6      John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Brookers, Wellington, 2013) at [15.2.2].

[55]     Mr Cameron’s own evidence is that:

to trade publicly, the factor needs access to a fairly large amount of cash, so it can pay drivers in cash for their chits and receivables and can afford to wait for payment from the issuers while still continuing to trade.

[56]     That cash had initially been provided by Mr Cameron.  But at the time the arrangement with HCT was entered into, Mr Cameron’s loan had been repaid and there was no suggestion that he would provide further advances. Allied itself had not accumulated sufficient capital from trading to sustain a factoring operation on its own.  It recorded a deficit of $10,741 for the year ended 31 March 2006; a deficit of

$9,733 for the year ended 31 March 2007; a profit of $4,868 for the year ended

31 March 2008; and a deficit of $969 for the year ended 31 March 2009.

[57]     The central tenet of Mr Cameron’s case is that there ought to have been more profit from factoring.  Had Allied been profitable, it may not have been necessary to enter into the Combined Factoring Arrangement.   But Mr Cameron has failed to show that these poor financial results occurred as a result of the defendants conducting factoring through Regency and In Style.

[58]     As it was, Allied’s precarious financial position was the reason why the Combined  Factoring Arrangement  was  implemented.  Simply put,  there  were  no other alternatives available to Allied’s directors that would have enabled Allied to continue trading.  It cannot be said therefore that the defendants were not acting in Allied’s best interests when they entered the Combined Factoring Arrangement.

Second alleged breach

[59]     Counsel for Mr Cameron argued that the transfer of Allied’s business to HCT is a major transaction.  That was the focus of both parties.  In my view however, it is unnecessary to resolve whether the Combined Factoring Arrangement constituted a major transaction.  That is because cl 11.1 of the shareholders’ agreement provides that the Board must not make any significant decisions or carry out any significant actions without the written consent of all of the shareholders.  It provides further that if  there  is  any  reasonable  doubt  as  to  whether  such  decisions  or  actions  are

significant, the Board must advise all of the shareholders, who must then come to a unanimous decision on the issue.

[60]     There  is  no  doubt  that  the  transfer  of Allied’s  business  to  HCT  was  a significant decision.  It represented a complete change in Allied’s business structure. It meant that Allied ceased to operate as a factoring operation.  Instead, it became a conduit that processed chits and credit card slips before passing them on to HCT. This type of decision is exactly why cl 11.1 was put in place:  to protect the interests of Mr Cameron and the trustees of the trust, as minority shareholders of Allied.  As such,  the  defendants  were  required  to  gain  the  unanimous  approval  of Allied’s shareholders before implementing the arrangement with HCT.  Their failure to do so was a breach of cl 11.1 of the shareholders’ agreement.

Quantifying loss

[61]     In order to receive compensation, the plaintiff must reliably quantify the loss suffered  as  a  result  of  the  Combined  Factoring Arrangement.    Mr  Vance  gave evidence  as  to  the predicted  effect  of the Combined Factoring Arrangement  on Allied’s revenue.  In his opinion, the adjusted results of the 2007 financial year (as calculated by him) are indicative of the profitability that Allied would have achieved had the Wellington Factoring Arrangement not been implemented.   He used this amount  to  predict  the  lost  income  from  the  Wellington  Factoring Arrangement between 2008 and 2013.

[62]     There are two problems with using this methodology to quantify loss.  First, as I have already found, the results of the consolidated statement of financial performance  prepared  by  Mr  Vance  cannot  be  relied  on  because  In  Style  and Regency were carrying out GST-exempt trading aside from factoring.  Second, the evidence shows that if the arrangement had not been implemented Allied would likely have  been  forced  to  cease  trading.    It  does  not  therefore  make  sense  to speculate on any loss caused by the Combined Factoring Arrangement.

[63]     I  find  therefore  that  the  plaintiff  has  not  proved  that  it  suffered  any quantifiable loss from the defendants’ breach of cl 11.1 of the shareholders’ agreement.

Sale of Allied’s remaining interest in the factoring business to HCT

[64]     Mr  Cameron’s   claim   under  this   heading   can   be  dealt   with   swiftly. Ms Coleman entered into an agreement for sale and purchase of Allied’s factoring operation to HCT.  The agreement lists a purchase price of $10,000.  She is required to  account  to Allied  for  this  amount.    I order  that  Ms  Coleman  pay  equitable compensation to Mr Cameron of $3,333.33 (one-third of the purchase price).

Use of Allied funds to secure lease in Regency’s name

[65]     As noted above, the Hataitai premises were initially leased in Regency’s name. When Regency ceased trading Ms Coleman took over the lease.  Mr Cameron says that Ms Coleman breached her duty as a director to act in Allied’s best interests by  not  registering  the  lease  in Allied’s  name.    According  to  Mr Cameron,  this disadvantaged Allied towards the end of its trading life because it had no control over the Hataitai premises.  If the lease had been in Allied’s name, any significant decisions about the lease would have required the unanimous consent of all of the shareholders.

[66]     It is doubtful that it would have made any difference if the lease were in Allied’s name.  Mr Cameron’s own evidence is determinative on this point.  He said in his affidavit that if Allied had been profitable it could have taken over the lease in its own right or found other premises. Allied took neither of those actions because it was not profitable, not because the lease was in Ms Coleman’s name.   It was not therefore disadvantaged in any way.

[67]     In any event, when Ms Coleman emailed Mr Cameron advising him that she would not be renewing the lease he had no objection because Allied had ceased trading.  It is difficult for him to now complain that the situation would have been any different had the lease, which was due to expire on 28 February 2009, been in Allied’s name.

[68]     I find therefore that Ms Coleman did not breach her duties to Allied by registering the lease first in Regency’s and then her own name.  Even if she were in breach, Allied did not suffer any quantifiable loss as a result.

The $24,600

[69]     The final matter to be determined is whether the defendants should have to account for a discrepancy of $24,600 that Mr Cameron says exists in the 2007 financial year.  The issue of tracking payments received by Allied was a source of discontent amongst the parties throughout Allied’s trading life.   Mr Cameron was concerned that Allied had not received payment for all of the invoices it sent out to redeem chits.  As a result, he examined Allied’s financial records for the relevant period.  He identified five unpaid invoices that were issued between May and June. The value of these invoices totalled $57,445.75.   From this amount, he subtracted

$32,847 worth of unexplained payments that were made to Allied.   This, he said, resulted in a discrepancy of $24,600.

[70]     Counsel for Mr Cameron submitted that if all of the invoices had been paid to Allied, it would be a simple matter for the defendants to show when the money was received.  They have not done so.  I accept this submission.  The defendants had full access  and  control  over  Allied’s  financial  accounts  throughout  its  trading  life. Despite this, they did not challenge Mr Cameron’s methodology or analysis, during the hearing.  Ms Coleman said only that “there was never a shortfall in the plaintiff’s accounts... All large TaxiCharge payments were direct credited to Allied’s accounts”. That is insufficient to displace the evidence of the discrepancy put before the Court by Mr Cameron.

[71]     The question is how this discrepancy should be dealt with now.  One option is to order the defendants’ to pay equitable compensation of one-third of $24,600 to Mr Cameron.  The second option is to calculate the effect of the discrepancy over Allied’s lifetime.

[72]     Mr Vance gave evidence as to the effect of the 2007 Allied gross profit being

$24,600 larger.  First, he added $24,600 to his estimate of loss for each of the years he reviewed (seven and a half years from 2007 to the half year ending September

2013).   This amounted  to an additional $184,500 of losses.   Second,  he added

$80,000 to the estimate of the value of the business in 2013.  Third, he increased the

uplift for the effect of the election in 2011 by $14,750.  Plainly these numbers are predicated on the basis that:

(a)       the same discrepancy would recur in each year after the year ended

31 March 2007; and

(b)      Allied would have remained trading.

[73]     However, Mr Cameron did not produce any evidence to suggest that the same discrepancy would recur in each year after the year ended 31 March 2007.  Nor is there any reliable evidence to indicate that an additional $24,600 gross profit in the year ended 31 March 2007 would have enabled Allied to continue trading past 2009. As a result, Mr Vance’s numbers cannot be relied upon to quantify loss.

[74]     The fairest option therefore is to order that the defendants’ pay Mr Cameron

compensation of $8,200, being one-third of the amount of the discrepancy.

Result

[75]     The defendants are ordered to pay equitable compensation in the amount of

$8,200 to Mr Cameron.

[76]     Ms Coleman is ordered to pay equitable compensation in the amount of

$3,333.33 to Mr Cameron.

Costs

[77]     Mr  Cameron  succeeded  in  establishing  that  Ms  Coleman  breached  her directors’ duties in two respects; and in establishing that Mr Rossiter breached his directors’ duties in one respect.  He did not, however, succeed in relation to the main cause of action; viz that the defendants conducted factoring through In Style and Regency.  On the basis of that outcome, it is appropriate for costs to lie where they fall.

Goddard J