BETWEEN ANDREW JOHN MCKAY and REES GRAHAM LOGAN as liquidators of Aisleworx Limited (in Liquidation) First plaintiffs AND AISLEWORX LIMITED (in Liquidation) Second plaintiff AND PGL ADMIN LIMITED Third plaintiff...
[2023] NZHC 3877
•22 December 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-1015
[2023] NZHC 3877
BETWEEN ANDREW JOHN MCKAY and
REES GRAHAM LOGAN as liquidators of Aisleworx Limited (in Liquidation)
First plaintiffs
AND
AISLEWORX LIMITED (in Liquidation) Second plaintiff
AND
PGL ADMIN LIMITED
Third plaintiff
AND
AISLEWORX GROUP LIMITED
First defendant
AND
DOUGLAS JAMES BARTLETT
Second defendant
Hearing: 12-16 June 2023 and 17-20 July 2023 Appearances:
M J Tingey and T L Utama for plaintiffs
M D Arthur, J Marcetic and J C Adams for defendants
Date of judgment:
22 December 2023
JUDGMENT OF JAGOSE J
This judgment was delivered by me on 22 December 2023 at 2.00pm.
Pursuant to Rule 11.5 of the High Court Rules.
………………………… Registrar/Deputy Registrar
Counsel/Solicitors:
Murray Tingey, Barrister, Auckland Chapman Tripp, Auckland
Fee Langstone, Auckland
MCKAY v AISLEWORX GROUP LTD [2023] NZHC 3877 [22 December 2023]
Contents
Background [4]
First to third causes, against Mr Bartlett: breaches of director’s duties [41]
—directors’ duties in law [45]
—was Limited insolvent? [49]
—was the restructure in Limited’s best interests, subjectively assessed? [79]
—were Limited’s assets transferred to Group? [91]
Fourth cause, against Group: knowing receipt [107]
Fifth cause, against Group: contribution order [109] Sixth cause, against Group: Property Law Act 2007 disposition [113] Seventh cause, against Mr Bartlett: Fair Trading Act 1986 [115]
Eighth cause, against Mr Bartlett: deceit [127]
Result [130]
The ‘real controversy’ between the parties [131]
Discovery [134]
Costs [136]
Schedule: clauses 5 and 6 of the January and July 2013 agreements
—January 2013 agreement
—July 2013 agreement
[1] Under a variety of causes of action relating to Douglas James Bartlett’s (Mr Bartlett) directorship of Aisleworx Limited (in liquidation) (Limited), Limited’s liquidators (Andrew John McKay (Mr McKay) and Rees Graham Logan) and PGL Admin Limited (PGL) seek relief from Mr Bartlett and Aisleworx Group Limited (Group) by way of contributions to Limited’s losses and USD 3.545 million in damages to PGL arising from the liquidators’ admission of PGL’s claim in Limited’s liquidation in that amount.1
[2] Underlying the proceeding is Mr Bartlett’s continued pursuit of development of electronic shopping carts (or ‘shopping trolleys’, in New Zealand parlance) for provision to supermarket operators under an Aisleworx brand (the Aisleworx business), including through non-party companies incorporated in the United States, Aisleworx Corporation (Corp), Aisleworx Media Corp (Media) and Aisleworx Holdings Inc (Holdings). I say ‘continued’ because Mr Bartlett’s involvement in development of electronic shopping carts predates the brand’s creation.2
1 Judgment was entered by consent on the ninth cause of action, seeking rectification of Group’s share register to maintain PGL’s shareholding, with costs reserved for determination in conjunction with trial: McKay v Aisleworx Group Ltd HC Auckland CIV-2021-404-1015, 1 May 2023 (Minute of Downs J).
2 See Cabco Group Ltd v Bartlett (2009) 6 NZELR 500 (HC) at [7]–[27].
[3] By ‘electronic shopping carts’ is meant electronic media-enabled shopping carts also providing transportation and entertainment for children accompanying shoppers and generic or locational media advertising to those shoppers and/or others in the cart’s vicinity (the cart). At issue in this proceeding is ownership of assets, including intellectual property, underpinning the cart’s development and production in the Aisleworx business.
Background
[4] Around the turn of this century, Mr Bartlett developed an original design for the cart and obtained patents for the concept in Australia, the United Kingdom and the United States of America. Mr Bartlett held the patents as trustee for his family trust, subsequently through a corporate vehicle, Matcal Limited (Matcal).
[5] The trust appears to have licenced Cabco Group Limited (Cabco), a company incorporated by Mr Bartlett on 24 April 2002 and of which he was its chief executive officer, to operate the carts subject to the patents. From about 2004, Cabco traded through a wholly-owned subsidiary in the United States. On that subsidiary’s winding-up, Cabco was put into liquidation by shareholder resolution on 27 September 2011. Prior to liquidation, in the context of dealings between Mr Bartlett and others in relation to which Mr Bartlett had given the patents as security, the trust’s patents and agreements to licence their use to Cabco appear intended for assignment to Elevation Holdings Limited (Elevation) as trustee for the Elevation Trust, of which Mr Bartlett and the others were beneficiaries, with the intention of the patents’ sale (desirably to Cabco).
[6] Mr Bartlett then began to establish the Aisleworx business. In late 2011, offering “an investment opportunity to build a business partnership with the USA’s largest retailers”, as pre-incorporation Limited’s chief executive officer and director, Mr Bartlett sought to raise funds for “the development of a business platform of electronic shopping carts in over 3000 stores throughout the United States and, over time, the European market”. Contending for Limited to have “been developing electronic shopping carts since 2002, and have had our licensees operate them in three
countries being New Zealand, Australia and the USA”, Mr Bartlett explained after Cabco’s cessation:
[Limited] has a significant business opportunity available as the Licence and Rights to utilize the relevant patents to operate electronic shopping carts have reverted to ourselves. The opportunity is for [Limited] and suitable investors to set up a new entity in the USA to develop the market, and to resurrect and fulfil the contracts that have become available.
[7] Focusing on the cart’s most modern iteration — styled a “Fun-Cart”, as depicted above — Mr Bartlett added:
…We are developing a new cart called the Fun-Cart which we will produce through a major contract manufacturer called Galloway International Ltd who has been our partner for many years. Using Galloway and our technology partners we will install Fun-Carts in over 3,000 stores throughout the US, working with between three and six of the largest retailers in the USA. Our revenue is based on selling the carts for US$1,000 to $1500 per unit, and charging service and licence fees on each cart. We believe this business capable of generating a minimum of US$5m per annum
… We would use this base of stores to launch a new concept in digital advertising to leverage the installed Fun-Carts. Our initial view is that each cart could easily generate US$2,000 pa to US$5,000 pa in digital advertising. Should this be the case 3,000 stores operating approximately 10,000 carts should generate over US$20m per annum. These revenues would be split with the retailer, allowing each retailer to turn a cost centre into a profit centre. With over 20,000 suitable large stores in the US alone the potential is significant.
… There is significant opportunity to expand the concept internationally, with enquires received every week from interested parties all around the world. Not only is there a very large international market, but also within the US by extending the premise into non-retail entities such as zoos, malls and similar areas. Perhaps the largest opportunity is to take the core of what we know and extend the concept from carts for parents into carts suitable for all users,
offering a new range of services. With over 4,000,000 traditional carts in operation the scope here is very large.
This business opportunity has several benefits other than size and scalability. Our licensee’s previous business model required it to build and pay for all the carts itself. However, it is clear that this is not necessary as the current demand from retailers to own the carts themselves proves that the carts justify the retailer to purchase them outright and recover costs through increased sales and improved customer satisfaction. In addition to this core benefit, our business model allows for very low overheads and multiple income streams, while generating new opportunities to turn the carts into a profit centre. Other key aspects are:
·The US business should generate immediate sales and profits with sales of over $4m projected in year one.
·The technology requirements related to this business are relatively low due to our previous technology programs, so lead time and development time for stage one is at a minimum.
·The barriers to entry are high. One key aspect is the relationship with the chain: once installed this technology is very difficult to extract from a store.
·We have patent protection on the key aspects of the carts and its functionality in store.
We are able to generate these benefits and develop the business without the need to access large capital resources. However it would be advantageous for us to obtain limited funding externally, as well as building a team of advisors with business experience.
On this basis we are looking to raise NZ$50,000, with a minimum investment of NZ$5,000, and in order to meet the needs of the entity called a ‘Look through Company” that will be the most tax [effective] we need at least five Shareholders. On the basis of a pre-money valuation of $500,000 for the licence and IP built up to date, this investment would represent up to 10% of the company.
[8] Pre-incorporation Limited also appears to have secured an order from Kroger, an operator of supermarkets in the United States, for 860 Fun-Carts including three-year licences for the cart and electronic media content, together with service and support, at a total price of USD 1.669 million (although the order on Kroger letterhead oddly bears the non-American date format “20/07/2012”). But Mr Bartlett’s earlier fund-raising efforts did not seem to have borne fruit because in August 2012 he told his friend, Kerrin Harrison, he was unsuccessful in obtaining finance.
[9] Mr Harrison owned and operated Pegasus Group Limited, which sold and distributed sporting goods and toys, and the associated PGL (the third plaintiff here). As an alternative to obtaining financing for Limited, Mr Bartlett asked Mr Harrison
“[w]ould Pegasus be interested in picking up the manufacturing?” as “[b]eing a distributor for carts to supermarkets has some similarities to your current business”. Mr Bartlett assessed “[the t]otal cost to set up the manufacturing would be about US$150k, and I think you could finance about $120k of that on the mould”. Otherwise Mr Bartlett would “start looking for capital, tough but doable now that I have orders”. Mr Bartlett expanded:
Rather than looking at taking over the whole production and all the elements that it entails how about you simply fund and own the mould and I license it back off you, and we split the profit of $330?
Ie You pay for the development of the cart (mostly mould) of US$155k and I pay you flat fee of US$160 per unit being 10% of the sale price of the cart. We will do between 2000 and 5000 units per year so that would be uS$320,000 to
$800,000 pa (second to third year only at the higher amount) I would suggest we do a 5 year license deal, guaranteed minimum of 1500 units a year or US$240,000 pa for 5 years. Under this deal im better off by the same amount as you, plus we have a cheaper cart so I should be able to make more sales as well.
Second option is the same as the one I originally sent you, that you end up taking over the production and manufacturing of the carts and in this case you would get all the profit on the sale but Im thinking that at this point that you don't necessarily want to have the extra involvement, hassle and uncertainty of the process of manufacturing. Still happy to go this way if it suits you, and there would be the benefit of an entry into the chains, plus you could make more money
No sweat if neither of the above works for you! As above it looks like I could fund it via pure investment in the company as well, this will be my fall back, but basically Im keen to hang onto as much of the company as I can.
[10] On 19 September 2012, on Limited’s incorporation, PGL became one of Limited’s original shareholders, holding 5,000 of Limited’s 250,000 shares. At the same time, Limited incorporated its wholly-owned subsidiary, Corp, in the United States’ Delaware. (On a further allocation of Limited shares in June 2013, PGL took up an additional 6,000 shares to bring its allocation to 11,000. Ultimately PGL was issued 32,000 ordinary shares in Limited.3)
[11] In January 2013, Limited and PGL entered into an agreement by which PGL would supply a mould and related tools for production of the carts by a third party based in the United States for Limited. The background narration recorded:
3 See [22] below.
[Limited] owns the intellectual property in the Carts and will establish a market supplying electronic shopping carts called FunCarts in the USA. PGL has agreed to procure and pay for a set of moulds from [Limited] for US$155,000, and in return [Limited] agrees to utilise these moulds to produce a minimum of 1500 FunCarts per year for the next 5 years and pay PGL US$160 per set produced.
[12] In July 2013, Limited and PGL entered into another mould agreement, this time for PGL’s supply of a mould and related tools for production of the carts by a third party based in China for Limited. That document’s background narration recorded:
[Limited] owns the intellectual property in the Carts and has established a market supplying electronic shopping carts called FunCarts in the USA. PGL has agreed to procure and pay for a set of moulds from [Limited] for US$82,000, and in return [Limited] agrees to utilise these moulds to produce a minimum of 750 FunCarts per year for the next 5 years and pay PGL US$160 per set produced until the purchase price of US$82,000 has been recovered, then US$80 per set for the life of this tool set[.]
[13] In August 2013, on Mr Bartlett’s call for funds from PGL for the moulds, Mr Harrison responded:
This will probably burn up most of what I have left.
But to be honest I am not feeling great about how this is going.
…
Things seemed to have moved a long way from what we started with. Even on the last schedule I should have received some income by now. But to date nothing.
I need to feel/see that the income is on track because all I can see is a lot going out and nothing coming in.
Can you bring up to date with exactly what’s going on and where’s the income?
and Mr Bartlett replied:
I think we are pretty much on track. my production in the US is slower than I wanted due to delays by krogers but also because I diverted my production funding into temporarily doing the interim funding of the China tool while the facility was put in place. As you know I still see this tool as being the most important to get fully into production which is only just happening.
The total timeframe and overall cart orders will still be right looking through to march of next year
Im trying to get the first payment from Krogers to be under the lease facility which would allow me to get a lot more out of it, but this should be through any day now and allow me to keep the US production.
I appreciate that both you and I have a huge amount invested, and cash is still going out from both of us, but its exactly as good as it always was probably even bigger, and I think given the delays that we have had from both your side and my side we are still looking very good and pretty much on track.
I think that the cash flow always called for around $150 to $170k needed and I still think we are on track for around that, but it would be important to get this first lot of carts finished and away in the next few weeks to get this recovers asap.
[14] In September and October 2013, Corp and Limited together entered into contracts with Carbon Estates Limited (Carbon), respectively similarly for the supply of FunCart moulds for manufacture by the same United States and Chinese manufacturers. The contracts’ narrations recorded Corp “has developed and supplies electronic shopping carts for use in retail stores” and Limited “owns the intellectual property in the Carts and has established a market supplying electronic shopping carts called FunCarts in the USA”. Under these contracts, Carbon was to pay Limited respectively USD 88,500 and USD 84,000 to purchase moulds from Limited, which Limited would licence to produce an annual minimum of 1,000 FunCarts for three years and pay Carbon USD 150 per set.4
[15] In a document dated October 2013 executed by Mr Bartlett for both parties, Limited obtained “exclusive rights to aspects” of “an electronic media concept for use in retail establishments based on the pending patent 613208” from Matcal. Pending patent 613208 concerned an “electronic billboard mounted on a themed shopping cart”. A further document, seemingly dated 25 September 2015 also executed by Mr Bartlett for both parties, purported to ‘supplement and replace’ the earlier document. The predominant difference between the documents appears to be the latter’s omission from Limited’s licence of Matcal interests in “Joint IP”, although both documents continue to refer to the parties’ joint obligations in respect of the undefined ‘Joint’ intellectual property.
[16]In April 2014, Mr Harrison observed to Mr Bartlett:
It’s the end of the first year of both contracts and clearly we are nowhere near achieving the terms or sales. Do you want to perhaps start again and just change the start date to 1 April this year?”
4 Carbon later transferred the moulds to Asset Lease NZ Limited (Asset Lease). By August 2014 agreements, Asset Lease obtained some 80,000 shares in Limited.
to which Mr Bartlett agreed.
[17] In July 2014, Corp entered into an agreement with Albertsons, another operator of supermarkets in the United States, for three years’ rental of 90 FunCarts. Later in 2014, a Kroger subsidiary, King Soopers, also contracted with Corp for three years’ rental of 94 FunCarts at 32 of its locations.
[18] On 27 August 2014, Limited entered into agreements to acquire three moulds and 204 FunCarts from Asset Lease NZ Limited (Asset Lease), respectively at purchase prices of NZD 360,000 and NZD 356,400 and by issue of 40,800 and 40,000 shares in Limited. At the same time, Asset Lease’s related company Elevation sold associated patents and all relevant intellectual property to Limited for NZD 40,000.5 These were the patents originally obtained by Mr Bartlett.6
[19] By late 2014, Mr Bartlett had become aware of serious mechanical and other problems in the carts’ manufacture. They included difficulties with electronic componentry sourced by Limited for integration into the carts.
[20] In December 2014, Mr Bartlett proposed to Mr Harrison PGL and Limited enter into an exclusive manufacturing licence agreement, by which PGL would build and ship carts for Limited for five years. On Mr Harrison’s query if the agreement was “a new or additional contract”, Mr Bartlett explained “this is a whole new contract, originally done at the request of the new investor”.7 But “in hindsight” Mr Bartlett proposed he “buy the moulds back from you for what they cost you” and proceed on the basis of the new agreement alone, in amended form.
[21] In March 2015, Mr Harrison sent Mr Bartlett copies of invoices for PGL-manufactured carts sent to New Zealand and the United States for which Limited was to pay some USD 280,400. Mr Harrison acknowledged he had received nearly USD 73,000 in part-payment, leaving USD 208,000 due. Mr Bartlett proposed PGL’s
5 By deed dated 27 August 2017, Limited disputed the agreements were enforceable but the dispute was resolved on terms: see [31], n 9 below.
6 See [4]–[5] above.
7 It is unclear if, by reference to ‘the new investor’, Mr Bartlett was referring to Flying Kiwi Angels, so-called ‘angel investors’, which became involved with Limited later in 2015, addressed at [23] below.
invoices be “altered” to reflect Limited’s “new manufacturing subsidiary”, Group, for “taxation and transfer pricing” reasons, without “[affecting] the payment schedule”.8 Nonetheless, by the end of April 2015, PGL remained unpaid.
[22] By mid-May 2015, Mr Harrison identified PGL’s unmet financial commitment for PGL-manufactured carts as then being in the region of USD 720,000. Accepting problems with the carts’ manufacture had contributed to Limited’s cashflow problems, from which Limited sought some relief, PGL agreed to suspend Limited’s obligation to pay USD 250,000 for three months on issue of a further 20,000 shares in Limited, as occurred. In early July 2015, Mr Bartlett advised he had obtained funding from investors which may enable Limited to “pay [PGL] out completely”.
[23] Mr Bartlett sought funding from Flying Kiwi Angels (FKA), a consortium of investors operating through Flying Kiwi Angels Limited and FKA Nominees Limited, managed by Rudiger Bublitz. Mr Bublitz conducted FKA’s due diligence of Limited, ultimately proposing the consortium invest NZD 500,000–1 million, of which FKA Nominees would contribute some NZD 308,000 to acquire nearly 40,000 shares in Limited. In the meantime, Mr Bartlett had obtained some USD 260,000 from Steve Shaw at Impulse Media for manufacture of carts intended for New Zealand supermarkets. Remaining unpaid, PGL declined to release the carts in its control.
[24] By late August 2015, Mr Bartlett explained to Mr Harrison — as a consequence of the terms for FKA’s investment, by which FKA “want[ed] to at least co-own the IP”
— the Aisleworx business was to be restructured:
The deal structure is like this:
-We are setting up a new company called Aisleworx Group Ltd that will be the main holding company for all the IP, effectively it will the parent company, and the one that will be sold on exit, and the one that will pay out dividends. The idea is that all shareholders swap their current shares for a share in this company, and that Aisleworx Group ltd end up owning Aisleworx ltd as close to 100% as possible, but at least 75%
8 Mr Bartlett’s reference to ‘taxation and transfer pricing’ appears to have been as a result of a 2 March 2015 discussion with accountants BDO of “potential transfer pricing issues arising from the company’s international operations”, including “the potential impact of withholding taxes on cross border payments”.
-All the new cash will go into Aisleworx Group ltd, with $1M at $7.48 per share, so we will be issuing 133,600 shares new shares for roughly 18% of the company, valuing the whole entity at $5.5m
-Asileworx ltd will stay as is and be the main trading company and will own 90% of all the country specific trading entities. Individual shareholders wont need to swap their shares for the new co, but my view is that all will do, it wont make sense not to be a part of the dividend company or the main one that will be sold on exit, and there is no disadvantage that I can see. This is the structure recommended by BDO, and sets up a very good transfer pricing scenario that will allow lots of overseas profit to come back into the company
-The new shares are preference shares, while your and my shares are ordinary shares. They sound better, but in real life there are only two effects
oIf the company is sold for less than $5.5m, then their $1m comes out first, ie if the company sells at say $7 per share so less than the $7.48 , their money comes out in full first, so they get $7.48 per share, and the balance of shareholders get
$6.75 per share
oIf the company raises more money at a rate less than they pay, ie $7.48 , then they get more shares equivalent to the same as if they had brought $1m worth of the new shares.
oIn summary the difference between preference and ordinary shares is only relevant if the company drops in value
[25] On Mr Harrison’s query as to what that meant for PGL’s outstanding invoices and supply contracts, Mr Bartlett explained:
The current company Aisleworx ltd will stay as is and still be the main trading company, its has several existing contracts and will keep on going exactly as it is, and will still own all the subsidiary companies
Aisleworx Group ltd is simply a holding company for all IP, it wont be trading at all, and wont be entering into any contracts. It will give an exclusive license to Aisleworx ltd, which it will own at least 75%, but probably 100% of Aisleworx ltd shares. You will be able to choose if you want to transfer your shares to the holding company, or leave them as they are.
You seem to have some concerns about it, but im not sure why, and I think its because I haven’t been able to explain it correctly. Currently Aisleworx ltd holds no IP, but we are about to apply for several patents that should be held in a separate company. It makes sense for this to be the main holding company. Are you sure you don’t want to catch up and talk through it? As shareholder it’s a better structure, as supplier its exactly the same, you are not disadvantaged in any way, and there is no less security.
[26] In separate correspondence to shareholders, Mr Bartlett explained the “[k]ey benefits of the restructure”:
- It transfers the old IP from my trust where it was originated into an entity that we can all share and benefit from, and sets up an entity which new IP
can be safely held, Its is our plan to go for several new patents over the next 6 months, and we need a non trading entity to have a home for them.
- It allows us to charge license fees to all our overseas companies to help with transfer pricing, and this entity will be able to collect 10.5% of all media revenue via licensing so its a very effective transfer pricing mechanism that will make the company much more tax efficient. This together with markups on cart sales from Aisleworx ltd will form the main revenue streams to bring distributable profits back in to nz in an efficient way .
- It is safer to hold the IP in a non trading company, rather than a trading company should there be major litigation related to the trading company itself. For this reason Aisleworx ltd holds no direct IP, although of course it holds several important contracts and will continue to own 90% of the international subsidiaries.
- It allows a staggered and more flexible exit, ie it could allow the main operation arms to be sold, but still collect license fees. It allows the main independent countries to be sold off independently.
[27] By 1 September 2015 agreement between Limited, PGL, Impulse Media and Mr Bartlett, Mr Bartlett agreed to procure Limited or Group to pay PGL NZD 200,000 “as a first priority payment upon receipt of funds from [FKA] in return for [PGL] to release Impulse Media’s FunCarts”. As the value of those carts was some larger USD 193,000, the agreement also provided for PGL to receive all revenues ordinarily payable to Limited from the carts’ operations in supermarkets until the balance was fully paid.
[28] Mr Harrison continued to press Mr Bartlett for advice on Limited’s payment of PGL’s outstanding invoices. In response, by exchange of emails on 2 September 2015, Mr Bartlett indicated without further investment “we can only pay any balance as the carts are installed”, meaning to pay PGL from funds received from supermarket operators. When Mr Harrison asked, in the context of Mr Bartlett’s generation of interest for investment, how Limited had addressed the present debt to PGL, Mr Bartlett responded:
From a technical accounting point we have only taken the bases invoice taken up in the accounts, as per our agreements.
We will pay the other invoices in advance, then turn them back in cash as we install them.
On Mr Harrison’s contest to that explanation, Mr Bartlett replied:
The position is the same, our deal was always that we would pay you on installation, and we have been set up for that. For absolutely no fault of yours
we cant get the boards working to get to an install stage. Ive said im happy to pay you in advance of our understanding until we can install the boards and then get carts into store so we can turn them in cash.
[29] In about September 2015, Limited also entered into an agreement with Gwendoline Grace Holdings Limited (GGH) for the supply of moulds and ancillary hardware for production of carts by the Chinese manufacturer for Limited. That agreement’s narration recorded Limited “has developed and supplies electronic shopping carts for use in retail stores” and “owns the intellectual property in the Carts and has established a market supplying electronic shopping carts called FunCarts internationally”. Under the agreement, GGH was to pay Limited NZD 100,000 to purchase moulds from Limited, which Limited would use to produce an annual minimum of 1,000 FunCarts for three years and pay GGH USD 25 per set, plus a monthly NZD 3,450 for that period.
[30] On 20 September 2015, through Mr Bartlett executing for all parties, an agreement was entered into between Corp, Group and Limited. The agreement proposed Group as “the registered proprietor of the FunCart and media program”, for which Corp sought to be exclusive licensee and sales agent in the United States, Canada and South America. On 25 September 2015, also through Mr Bartlett executing for all parties, Group acquired from Mr Bartlett and Matcal all intellectual property rights associated with the carts together with assignment of Limited’s licence.
[31] Then, also on 25 September 2015, Limited’s shareholders, including Mr Bartlett and PGL but excluding Asset Lease,9 agreed to a “share swap” one-for- one of their shares in Limited for initial shares in Group and Group issued some 6,400 shares to Matcal in consideration of the acquisition of its intellectual property and assignment of licence. FKA and GGH agreed to invest “up to” NZD 1 million in Group, for which the Group shareholders would agree to Group issuing shares to them.
[32] Group’s assets (whatever they may have been) since may further have been transferred to Media or Holdings (Limited’s related companies registered in the United States). Media appears to operate a “Digicart” business in the United States,
9 By deed dated 26 August 2017, Asset Lease’s shares in Limited were swapped one-for-one for shares in Group, which Mr Bartlett was to use best endeavours to sell or underwrite the sale to pay Asset Lease some NZD 1,914,000, such to settle their disputes.
the cart using “screens that play media relevant to its location”, which seems an evolution of the Aisleworx business. Media’s shareholding includes FKA.
[33] Mr Harrison continued to pursue Mr Bartlett’s unpaid balance, particularly as Mr Bartlett had asserted control over carts in the United States. Mr Bartlett responded:
[M]y view is that as you delivered them to the nominated place, albeit unfinished, that we own them from there, but of course we have not as yet paid for them. While we would say that payment is not due until they are finished and have been installed in stores, as you know we have agreed to make a without prejudice payment for them ahead of the due date as it was not your fault that the circuit board is faulty.
Mr Bartlett added:
As far as im aware I have fully paid you for all assembled and delivered FunCarts. The amounts that are outstanding are advance payments that im making to help the situation as the issues with the boards while not your fault have effected your ability to deliver fully assembled carts and have had a obvious huge cashflow impact. The amounts you specify are not a debt as stated in the agreements, and I do not acknowledge them as such.
[34] When Mr Bartlett sought PGL manufacture further carts, Mr Harrison said “I can not accept orders or ship stock without being sure you can pay. I am working under the agreements we have signed”. Without prejudice to those agreements, by agreements dated 31 March 2016, Limited and PGL agreed PGL was the beneficial owner of the delivered carts for which it would be paid by Limited passing on payments for the carts’ sale or from funds obtained in crowd-sourced capital raising.
[35] Nonetheless, on 26 May 2016, Mr Bartlett advised Mr Harrison he instead had used funds obtained from such capital raising to pay for componentry required to complete the carts’ manufacture. Mr Harrison reinforced PGL’s right to payment. Subsequent correspondence to the end of the year illustrated Mr Bartlett agreeing payment was due, but requiring quantification in various aspects and diverted by the prospect PGL might instead sell the carts to offset its expenses.
[36] It is agreed on the pleadings Limited ceased trading at some point after the restructure, at least by March 2017.
[37] On 20 September 2017, Limited was put into receivership by Impulse Media as creditor in amounts determined at arbitration (ultimately some NZD 422,000). The receivers’ first report recorded Limited had ceased trading prior to receivership and had no assets for realisation. The receivership concluded on 28 February 2019 after a 2 January 2019 settlement between Limited and Impulse Media in terms of issue to Impulse Media of shares in Group and a cash payment.
[38] Meanwhile, in April 2018, Group and Media entered into an agreement with GGH by which Group would acquire the mould from GGH on terms of cash and Group shares reflecting the unpaid balance of payments due under Limited’s September 2015 agreement with GGH. Contractual payments had ceased in mid-2017.
[39] On 6 June 2019, as Limited’s shareholder, Group appointed Victoria Toon to liquidate Limited. PGL submitted a claim for some USD 25 million, later revised to USD 3.8 million. By mid-2020, Ms Toon admitted PGL’s claim only in the amount of some USD 284,000. On her later resignation, new liquidators were appointed, ultimately being the first plaintiffs in this proceeding, Andrew McKay and Rees Logan. PGL then submitted a revised claim of some USD 3.6 million to the liquidators.
[40] The new liquidators largely admitted this claim. The difference was by reason of Ms Toon’s assessment being based on the terms proposed in December 2014, and Mr McKay’s on the terms of the preceding January and July 2013 agreements. Mr McKay assessed PGL’s claim at USD 3,545,516.17, comprising:
Accepted claims: USD 162,353.73;
Penalty interest on the accepted claims: USD 113,975.44; Carts not delivered: USD 119,522.87;
Penalty interest on carts not delivered: USD 80,585.90; Guaranteed quantities not fulfilled: USD 2,122,460.34; and
Penalty interest on guaranteed quantities not fulfilled - $946,344.90.
Mr McKay explained, by ‘accepted claims’, he meant “invoices that have not been paid for” for deliveries of carts “ordered and unpaid for”.
First to third causes, against Mr Bartlett: breaches of director’s duties
[41]Section 131 of the Companies Act 1993 provides:
Duty of directors to act in good faith and in best interests of company
(1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.
(2) A director of a company that is a wholly-owned subsidiary may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.
(3) A director of a company that is a subsidiary (but not a wholly-owned subsidiary) may, when exercising powers or performing duties as a director, if expressly permitted to do so by the constitution of the company and with the prior agreement of the shareholders (other than its holding company), act in a manner which he or she believes is in the best interests of that company’s holding company even though it may not be in the best interests of the company.
(4) A director of a company that is carrying out a joint venture between the shareholders may, when exercising powers or performing duties as a director in connection with the carrying out of the joint venture, if expressly permitted to do so by the constitution of the company, act in a manner which he or she believes is in the best interests of a shareholder or shareholders, even though it may not be in the best interests of the company.
(5) To avoid doubt, in considering the best interests of a company or holding company for the purposes of this section, a director may consider matters other than the maximisation of profit (for example, environmental, social, and governance matters).
[42] Section 133, titled “Powers to be exercised for proper purpose”, provides “A director must exercise a power for a proper purpose”, and s 137 provides:
Director’s duty of care
A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation,—
(a) the nature of the company; and
(b) the nature of the decision; and
(c) the position of the director and the nature of the responsibilities undertaken by him or her.
[43] Those each are duties owed to Limited.10 The liquidators and Mr Harrison together allege Mr Bartlett breached these duties and seek, under s 301, he be required to compensate Limited or pay Mr Harrison. Section 301 provides:
Power of court to require persons to repay money or return property
(1) If, in the course of the liquidation of a company, it appears to the court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—
(a) inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and
(b) order that person—
(i)to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or
(ii)to contribute such sum to the assets of the company by way of compensation as the court thinks just; or
(c) where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.
(2) This section has effect even though the conduct may constitute an offence.
(3) An order for payment of money under this section is deemed to be a final judgment within the meaning of section 17(1)(a) of the Insolvency Act 2006.
(4) In making an order under subsection (1) against a past or present director, the court must, where relevant, take into account any action that person took for the appointment of an administrator to the company under Part 15A.
[44] The liquidators’ and PGL’s particular allegations focus on Limited’s restructure, said to have involved a transfer of its assets to Group for inadequate consideration in disregard of creditors’ interests, and failing then to put Limited into liquidation. They say Mr Bartlett did so to strip Limited of assets otherwise available to meet creditors’ claims and did so “intentionally, recklessly or negligently”. Thus Limited and its creditors suffered loss, and Mr Bartlett benefited from the transfer of Limited’s assets to Group. Mr Bartlett responds, except for Limited’s fixed assets in
10 Companies Act, s 169(3).
the United States transferred to Group for fair market value, no assets were transferred from Limited to Group and, in any event, Limited had no debt to PGL.
—directors’ duties in law
[45] It is well established directors’ primary duty to act in the best interests of the company requires to take into account the interests of creditors when the company is insolvent or nearly so.11
[46] But that is not a duty to creditors.12 Rather, it is “vital” to the best interests of the company in “maintaining solvency”,13 that “the company is able to pay its debts as they fall due, in the normal course of business”, and “the value of [its] assets is greater than the value of its liabilities, including contingent liabilities”.14
[47] The s 131 test is subjective as to what “the director believes to be the best interests of the company”, qualified by s 133’s obligation to exercise powers for a proper purpose.15 Directors’ performance of their statutory duty of care under s 137 is assessed objectively.16
[48] In circumstances of breach, relief may be ordered after taking into account “all of the circumstances, including the nature of the breach, the level of culpability and what is required to hold a director to account”,17 “tailored towards the combination of breaches found”.18
11 Madsen-Ries v Cooper [2020] NZSC 100, [2021] 1 NZLR 43 at [31], citing Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) at 250 and 255; and Sojourner v Robb [2006] 3 NZLR 808 (HC) at [102] (upheld in Sojourner v Robb [2007] NZCA 493, [2008] 1 NZLR 751), [112]–[115] and [177]. Similarly, Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113 at [142]–[143].
12 At [31], n 17.
13 At [32].
14 At [34], referring to s 4, Companies Act.
15 At [113(c)].
16 At [112].
17 At [162].
18 At [162].
—was Limited insolvent?
[49] A critical question, therefore, is if Limited was insolvent or nearly so at the time Mr Bartlett proposed the restructure. The assessment significantly is bedevilled by the complete absence of formal financial statements or accounting records for Limited.
[50] The default position is Limited, if having 10 or more shareholders,19 should have had annual audited financial statements and annual reports signed by Mr Bartlett as its director,20 unless having opted out by special resolution.21 At least at the time of the restructure, Limited had 16 shareholders. There was no evidence they had approved any resolution to opt out of those requirements. Mr Bartlett nonetheless perceived no audit was required of Limited’s accounts, in express reliance on his comprehension of s 196 of the Companies Act.22
[51] A company’s financial statements for the prior seven years are required to be kept at its registered office or at another place notified to the Registrar.23 Failure to do so is an offence by each the company and director.24 Failure to prepare such audited financial statements also is an offence by each the company and director.25
[52] Instead, Mr McKay drew on informal financial statements obtained from variously Ms Toon, Mr Bartlett, another Limited and Group shareholder (GGH’s Paul Seagar), and an accounting firm. The statements had diverse balance dates and some were presented on a consolidated basis for Limited, Group and Corp. I apprehend the statements largely were developed as management accounts in the companies’ operation or retrospectively in response initially to Ms Toon’s enquiries. If any comply with generally accepted accounting practice is not obvious.
19 Companies Act, s 200(1)(d).
20 Sections 201, 207 and 208.
21 Section 207I.
22 Section 196 is an overview section — explaining pt 11, subpt 2 “imposes financial reporting requirements on” specified companies including “every other company with 10 or more shareholders (unless the shareholders of the company opt out of compliance)” — as “only a guide to the general scheme and effect of this subpart”.
23 Section 189(1) and (4).
24 Section 189(5).
25 Section 207G.
[53] Mr Seagar — who acted as Group’s “virtual CFO” for a time, through his chartered accountancy firm — described the statements as “disgraceful” from an accounting perspective. He resigned from that role on 11 September 2020, partially on grounds Mr Bartlett had “failed to provide us with access to the financial records, general ledger, bank accounts or indeed any records” of Group or its related companies. He said, in his role, the statements had “raised continual alarms” for a variety of articulated substantive and procedural accounting reasons. He noted, at a February 2019 annual general meeting Group shareholders had voted for Limited’s accounts to be audited, but he did not believe that had been undertaken.
[54] Mr Bublitz also resigned as Group’s director on 11 September 2020 because the absence of audited accounts risked his personal liability. He noted the draft financial statements were prepared by Mr Bartlett personally. Mr Bublitz had approved none. He never saw “the underlying company records”, which were “controlled” by Mr Bartlett. He sought Mr Seagar’s involvement to establish “independent accounts by a registered firm of chartered accountants”, but Mr Seagar was not given access to Limited’s or Group’s financial records. Mr Bublitz extensively was cross-examined on the draft financial statements as “the only information before the Court to determine the financial position where there’s no other accounts”, and in particular illustrating Limited had “become a fully-owned subsidiary of [Group] and sold its US assets to [Corp] for depreciated market value of 225,000” and Limited’s assets had “just been taken for no value”, resulting in Limited’s insolvency.
[55] Irrespective of the statements’ formal shortcomings, Mr McKay noted the statements proffered for the years ending 31 December 2014 and 2015 omitted to include the August 2014 debts to Asset Lease and Elevation,26 and those he assessed owing to PGL in 2015. Had they included those liabilities, of NZD 756,000 in 2014 and NZD 3.416 million in 2015, Mr McKay considered Limited would have failed to meet either limb of the statutory solvency test.
[56] If Limited had August 2014 debts to Asset Lease and Elevation is obviated by the terms of their settlement.27 I disagree with Mr McKay’s assessment the settlement
26 At [18] above.
27 At [18], n 5 above.
“effectively acknowledged” Limited’s prior debt to Asset Lease and Elevation; to the contrary, the settlement only records the parties’ dispute of the August 2014 circumstances and the terms for its resolution. I have no evidence from Asset Lease or Elevation.
[57] Thus Limited’s solvency at about the time of the restructure turns on PGL’s contended debt, which remained unpaid. Mr Bartlett resists such liability on the basis difficulties in the carts’ manufacture caused Limited and PGL progressively to change the basis of their obligations, under which Limited only was to pay on (PGL’s assembly and) delivery of the carts. Nonetheless Limited paid PGL in advance on occasion to obtain delivery.
[58] At issue are the January and July 2013 and the December 2014 documents, referred to respectively at [11], [12] and [20] above.
[59] The January 2013 document was to operate until 31 March 2018. It provided for PGL progressively to pay USD 155,000 to Limited on unspecified dates in 2013, for Limited’s payment to a United States manufacturer for the construction of moulds for the carts, on which PGL obtained “full ownership” of the moulds and a licence for all associated intellectual property for the carts’ manufacture and supply. Limited was to pay PGL an amount in relation to each cart produced.
[60] The intention was Limited would secure a contract for the carts’ production also in the United States, which PGL agreed Limited could instruct “in the production of the components necessary to assemble the FunCarts from time to time to fulfil orders for the FunCarts”. Limited remained “liable in all respects for payment to the USA Manufacturer and performance and delivery to its customers”.
[61] Limited was to pay PGL USD 160 “per set produced by this tool … 45 days following installation”, late payments attracting interest at 14 per cent per annum. PGL was to produce a monthly invoice “for the relevant production numbers of Carts confirmed by the US Manufacturer and [Limited]”.
[62] Limited guaranteed “minimum sales of 1500 Carts per financial year for five years, or 10,000 Carts whichever comes first”, and was annually to pay any shortfall “as if 1500 Carts had been produced”. In the event of any shortfall in production or being unpaid, PGL was entitled to “[c]onvert any loss of revenue on sales below 1500 Carts into shares of [Limited]”, require Limited to acquire the moulds at their purchase price or take over possession of or production from the moulds. Those remedies appear intended exclusive: if Limited refused to acquire or instruct the United States manufacturer, PGL could choose one of the alternative remedies specified or “proceed against [Limited] to comply”.
[63] The July 2013 document was to similar effect, there to run to 31 August 2018. It provided for PGL progressively to pay USD 82,000 to Limited on specified dates in 2013, for Limited’s payment to a United States manufacturer for the construction of the moulds, on which Limited acknowledged “all ownership in the moulds is vested in PGL”. It asserted Limited was “entitled to and owns all intellectual property in the moulds to be assigned and licenced to PGL”. Limited was again to pay PGL an amount on each cart produced.
[64] The intention now was Limited would secure a contract for the carts’ production in China “for the assembly and production of the Carts utilising the moulds to fulfil its orders”. Limited remained “liable in all respects for payment to the USA Manufacturer and performance and delivery to its customers”.
[65] Limited still was to pay PGL USD 160 “per set produced by this tool”, but now only “until the cost of the tool is recovered and thereafter [USD 80] per set”, payable on the 20th day of the month “following installation”, late payments attracting interest at 14 per cent per annum. PGL still was to produce a monthly invoice “for the relevant production number of Carts confirmed by the US Manufacturer and [Limited]”.
[66] Limited now guaranteed “minimum sales of 750 Carts per financial year for the period of this agreement, or 5,000 Carts whichever comes first”, and was annually to pay any shortfall “as if 750 Carts had been produced”, but open to being “offset against the following years production payments”. In the event of any shortfall in production or being unpaid, PGL was entitled to “[c]onvert any loss of revenue on
sales below 750 Carts into shares of [Limited]”, require Limited to acquire the moulds at their purchase price or take over possession of or production from the moulds, again as apparently exclusive remedies.
[67] The July 2013 document made additional provision for PGL’s involvement (through “a nominated subsidiary”) in “the following aspects of the product and assembly process”:
(a) Upon recipe of an order from Aisleworx, PGL staff shall place orders with relevant manufactures to delivers an appropriate number of components to assemble the required number of carts
(b) Upon delivery of the FunCart [components] PGL staff shall check these parts off against an agreed specification for each part
(c) PGL staff shall assemble and test each cart to an agreed specification
(d) PGL staff shall arrange for the delivery of the assembled and tested carts stacked into a suitable container to a nominated location
PGL was entitled then also to be remunerated for its costs and expenses, plus a 15 per cent margin, “by [Limited] or a nominated customer … no later than 14 days after the FunCart has been delivered and installed in the store”.
[68] The December 2014 document was presented in different form. It proposed PGL “will build and ship FunCarts for [Limited] based on submitted orders and to an agreed specification and pricing as per Schedule One”, under an exclusive licence for such manufacture and supply of 5,000 carts annually for five years, renewed annually thereafter unless terminated on notice. Schedule One was blank, but the body of the document anticipated the price would achieve a margin reducing from 30 per cent to 15 per cent, depending on the increasing number of carts produced annually. PGL would undertake to deliver ordered carts within 10 weeks of their order in multiples of 67 to fit a standard shipping container, for Limited’s payment “within 30 days of delivery of the container to a specified local address”. Limited would provide new moulds to PGL and acquire the existing mould from PGL at cost.
[69] The July 2013 document in evidence is signed as an agreement by Limited and PGL. The January 2013 and December 2014 documents are not. Mr Bartlett and Mr Harrison both say their respective companies entered into agreements specified by the 2013 documents. Neither say their respective companies entered into the 2014
document. There is no evidence PGL was reimbursed its expenses in acquiring the moulds, which Mr Bartlett identified a condition precedent of the 2014 document.28
[70] Mr Bartlett says only Mr Harrison was “happy” with the 2014 document, and PGL subsequently invoiced Limited in terms of a “bill of material costing” said to incorporate the 2014 document’s margins. I do not see the ‘bill of material costing’ as indicative of the prevailing agreement. It is referable only to PGL’s assembly of carts, which PGL was to do under the July 2013 agreement for separate reimbursement of costs and expenses plus a margin. Mr Harrison explained the bill of materials was prepared by Mr Bartlett, not PGL.
[71] Clauses 5 and 6 of the January and July 2013 agreements are set out at the Schedule to this judgment. So far as the payment per cart produced by Limited is concerned, PGL was not to be paid on invoice in terms of the agreements’ cls 6, but “following installation”. In the event of any shortfall in minimum numbers of carts to be produced by Limited, the agreements’ cls 5 made provision for an annual wash-up payment.
[72] A first issue is what ‘following installation’ means. For the plaintiffs, Murray Tingey argued in opening ‘following installation’ “can only mean installation of the plastic cart body parts (produced from the relevant mould) into a FunCart”. Under cross-examination, Mr Harrison accepted ‘installation’ meant “installation into the stores” in the context of delivery to Limited’s customers, but also it meant “when we put the components into the cart we were installing all the components into the cart”.
[73] I do not consider the first and last are viable interpretations of the contractual words.29 If payment was due when each cart was produced, the contract more likely would have used that word, particularly as it defined the quantum of payment by reference to each “set produced by this tool” (emphasis added). ‘Production’ also is used in connection with quantification of the guaranteed minimum. ‘Installation’ is
28 See [20] above.
29 Firm PI 1 Ltd v Zurich Australian Insurance [2014] NZSC 147, [2015] 1 NZLR 432 at [60]–[61] and [63], approved in Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 636 at [43] as “settling the general approach to contractual interpretation”.
some other concept, more meaningfully referable to Limited’s liability for “delivery to its customers”, when Limited knew it was entitled to be paid for the delivered cart and therefore was underwritten for its payment to PGL. That is explicit in the July 2013 agreement’s provision for PGL’s separate remuneration for assembly. It also was explicit in Mr Bartlett’s original description of the scheme for investment in Limited.30 PGL’s invoices’ references to the per cart payment also as a “royalty” is more consistent with a derivative rather than originating entitlement to the per cart payment.
[74] Whether payment to PGL was of remuneration calculated from costs and expenses plus a margin or on a per cart basis, neither was due until the cart was delivered to Limited’s customer and installed in the customer’s store. If that is not commercially sensible, as Mr Tingey argues, it nonetheless is the agreement PGL entered:31
[C]ommercial commonsense is not to be invoked retrospectively. The mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language.
The amounts due may be relatively modest because, as Mr Harrison explained, “we actually never shipped any, any assembled carts”.
[75] A second issue is the interplay between cls 5 and 6 such that, if PGL was not paid an amount for each cart within a period ‘following installation’, it only had its contractual remedies. The issue arises because the respective cls 5.4 make those remedies available in the event of Limited’s failure either to produce the requisite annual number of carts or “to pay the difference of payment” to PGL, “or there is default of a material provision of this agreement that is not remedied” on notice. ‘Difference of payment’, particularly with the following cls 5.4(i) reference to “loss of revenue on sales” of carts, clearly is addressed to payment as if the relevant minimum number of carts had been produced, and not of unpaid sums per cart.
[76]But cls 7.1(i) specify:
30 See [7] above.
31 Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [19], accepted in New Zealand Carbon Farming Ltd v Mighty River Power Ltd [2015] NZCA 605 at [103]–[104].
A material default shall be identified as
(i) Failure to pay make [sic] payments on due date as per section 6;
(ii) Failure to produce or pay for [1500/750] units per year as per section 5;
(iii) If either party goes into receivership, is liquidated or otherwise enters into a compromise with its Creditors [as defined in Clause 15].
That appears a reference to cls 5.4’s “default of a material provision of this agreement”. ‘Material default’ is not otherwise referred to in the 2013 agreements. Thus failure to make the per cart payment also exclusively may engage cls 5.4’s remedies.
[77] Alternatively — if any non-payment gives rise to a debt due to PGL, as Mr McKay’s ‘accepted claims’ may be, which Mr McKay explained meant of “delivered carts” — it may be too modest to outweigh Limited’s apparent 2013 and 2014 assets respectively of NZD 670,000 and NZD 1.4 million. Mr McKay assessed those claims and interest (if correctly calculated at 14 per cent, rather than a lower rate from a later date as appears agreed in email correspondence between Mr Harrison and Mr Bartlett) as amounting to approximately USD 276,000.32 I do not know. I cannot make that assessment from the evidence before me, which primarily is founded on the correctness of the liquidator’s admission of PGL’s claim as based on its invoices. But, as payment is due only when the cart was delivered to Limited’s customer and installed in the customer’s store, the invoices do not found PGL’s claim. Accordingly I consider the liquidators’ admission of PGL’s claim significantly to err in its quantification. I am not prepared to consider the admission conclusive of Limited’s liability to PGL.
[78] Limited’s insolvency based on such disputable liabilities therefore cannot be taken as given or nearly so. In that respect, the exercise of Mr Bartlett’s duties in determining to restructure Limited needed not to engage the interests of creditors. The pleaded improper purpose of defeating creditor interests cannot be ascribed to the restructure. Mr Bartlett’s exercise of care, diligence and skill is not thereby open to challenge.
32 That sum may or may not be aligned with Ms Toon’s acceptance of PGL’s claim at USD 284,000.
—was the restructure in Limited’s best interests, subjectively assessed?
[79] I turn then to consider the balance of the plaintiffs’ claims of Mr Bartlett’s dereliction of duty as director. Those are pleaded to be as to the restructure itself, and in particular if it involved the transfer of its assets to Group for inadequate (or no) consideration, and thereafter failing to put Limited into liquidation, as incapable of being considered in Limited’s best interests.
[80] The starting point is Limited’s apparent objective to obtain profit from provision of carts to supermarket operators. Such required the plastic bodies of carts to be manufactured from proprietary moulds, often owned by others as a condition of funding their production, and fitted out with hardware for functionality. The precise function was a developing concept, moving from child transportation and entertainment to transmission of electronic media, as was the basis on which operators took the carts, from acquisition to lease (and then from electronic entertainment for children to information for shoppers, and if to transmit their own or others’ media), and ultimately funded by electronic media sales alone.
[81] As addressed at [97] below, manufacture for supply of carts to Limited relied on no asset exclusively owned by Limited. Rather the Aisleworx business relied predominantly on knowhow, drawn from Mr Bartlett’s experience and developed into manufacturing and supply contracts and their specifications. If that relied on any registered intellectual property is moot.
[82] In preparation for the restructure’s intended transfer of intellectual property from Matcal to Group, Mr Bartlett’s lawyers advised the pending patent application 613208 and its international protection had expired or was abandoned in January 2015. The lawyers considered the restructure documentation should address only “the unregistered IP rights”. Mr Bartlett appeared to consider the expired or abandoned applications nonetheless had some residual value. He responded “[w]e are going to let this application lapse and file a new one in the US rather than NZ”, subject to awaited advice on the patent’s international protection.
[83] The carts nonetheless were the vehicle for Limited’s profit, from supply of which to supermarket operators Limited’s shareholder value arguably stood to benefit.
As Limited’s assets after manufacture, they were dependent on production from moulds owned and funded by third parties, and then of value only to the extent they were suitable to be put into operation and for which there was demand.
[84] Limited’s initial projections of demand from supermarket operators proved optimistic, further undermined by significant cart production design and construction issues. Regardless if it was Limited or PGL (or Asset Lease, Elevation, GGM or others) who bore the risk of investment, there was inadequate return on capital expended in the carts’ manufacture. Mr Bartlett therefore continued to seek investment in the Aisleworx business, to which FKA responded (and drew at least GGM in support).
[85] FKA’s response was founded in its comprehension from a due diligence exercise headed by Mr Bublitz, as “[i]nitial teething with the physical deployment of carts and the electronic distribution of media advertising problems have been ironed out”, media sales offered “lucrative upside” if their effectiveness could independently be established to potential supermarket operators. The due diligence report was measured, observing the Aisleworx business had no protection from competition except for the terms of its production and supply contracts. The report ascribed to the Aisleworx business a “pre money [valuation] of $4.5M”.
[86] Mr Bublitz explained “[a] pre-money valuation is a means for determining what percentage ownership of a business an investor will obtain for investing an agreed sum”. It was “not indicative of the realisable value of the start-up business if put up for sale at that time”, as “it is difficult to ascribe value to start-ups by using orthodox valuation [methods/methodologies]”. He additionally did not consider Limited’s registered intellectual property had “any meaningful value”. Rather “[t]he value was in [Mr Bartlett]’s connections in the US, and how this would translate into gaining market share”.
[87] The predominant incentive for change to the corporate structure under which the Aisleworx business was conducted came from FKA’s terms for its investment. Mr Bublitz explained:
It is FKA’s standard practice to require the ringfencing of any registered IP of the companies in which it invests. We do this to ensure that, if something goes wrong with the business, we don’t also lose all the IP which may have some residual value. Accordingly, the 2015 restructure to have Aisleworx Group Limited hold the IP was a condition precedent of our investment.
Mr Bublitz accepted under cross-examination, if the patent had expired, “[w]e didn’t need the ringfencing but we didn’t know that at the time and there was the condition [precedent] of our investment”.
[88] FKA submitted a draft subscription and shareholders’ agreement, along with a draft constitution for Group, to Limited. As Limited’s lawyers explained, these were the terms upon which FKA proposed investing up to NZD 1 million, in return for up to an 18 per cent interest, in Group. Such investment was proposed:
… subject to … Limited being restructured so that existing shareholders swap shares in … Limited for shares in [Group] (so that [Group] becomes the holding company of … Limited) and the satisfaction of some other conditions.
The “other conditions” were:
… (i) approval by FKA’s board; (ii) agreement on the terms of an employee share plan for employees to acquire up to 10% of [Group]’s post money capital; (iii) capitalisation of existing loans; (iv) transfer of all intellectual property into [Group] ownership; and (v) obtaining all required third party consents (if any).
[89] Mr Tingey argued, given Mr Bartlett’s knowledge of the patent’s expiry, the restructure introducing Group thus was unnecessary, the implication being it cannot have been in Limited’s interests. But introduction of Group to the corporate structure was sought by FKA as a condition of its investment, which the Aisleworx business required. To that extent, Limited being the primary conduit of that business, the restructure could be seen subjectively by Mr Bartlett as in Limited’s best interests. Mr Bartlett’s role as director — in promoting and securing shareholders’ agreement to the restructure, to achieve the conditions for FKA’s investment in Aisleworx’s business
— was not conducted contrary to Limited’s best interests or pursued for improper purpose.
[90] There also is some suggestion in the evidence the Aisleworx business’ corporate structure change was desirable to achieve regulatory transfer pricing compliance by establishing ‘arm’s length’ trading between related companies dealing
with each other in different jurisdictions. If the latter was an objective, as there is at least some evidence of its contemplation, it is unclear how the changed corporate structure particularly was intended to further it. I disregard regulatory transfer pricing compliance as forming any part of Mr Bartlett’s objective as director in achieving the restructure.
—were Limited’s assets transferred to Group?
[91] That leaves the issue of any transfer of Limited’s assets to Group. This also is a convenient point to discuss intellectual property issues given rise in this proceeding.
[92] Formally, the steps to effect the restructure are set out in the 25 September 2015 restructure and pre-incorporation agreement between Limited’s shareholders and Group. The agreement’s narrative records, after issue of further shares to each Mr Bartlett (15,315 shares, in discharge of a NZD 119,000 shareholder loan to Limited) and another, the steps were:
(iii) incorporate [Group] and complete a share swap so that the Shareholders become shareholders in [Group] (in the same proportions that they hold shares in … Limited) and [Group] becomes the holding company of … Limited;
(iv) [Group] issues shares 6,435 ordinary shares to Matcal Limited (“Matcal”) in exchange for Matcal transferring all of its intellectual property rights to [Group] and assigning its licence with … Limited to AGL;
(v) the Shareholders entering into the [Group] Subscription and Shareholders Agreement with FKA Nominees Limited and approving a new constitution for [Group]; and
(vi) [Group] issuing shares to Flying Kiwis Angel Investors nominee company, Flying Kiwis Nominees Limited (or its respective nominees), in accordance with the Subscription and Shareholders’ Agreement.
[93] The January and July 2013 agreements between Limited and PGL asserted Limited’s ownership of “the intellectual property in the carts” (as did similar agreements with Carbon and GGH).33 In particular, ‘intellectual property’ expansively was defined as “copyright, patents, designs, trade marks, trade names, goodwill rights, trade secrets, confidential information and any other intellectual proprietary right or
33 See [11]–[12], [14], [29], [59] and [63] above.
form of intellectual property”. (This is the “IP Assets” pleaded by the plaintiffs, as explained below.)
[94] Limited warranted to PGL it owned “all intellectual property rights inherent in the design of the carts and the moulds”, and the embedded sale and purchase agreement stipulated Limited was “entitled to and owns all intellectual property in the moulds to be assigned and licenced to PGL for the duration of the supply arrangement or supply agreement between PGL and [Limited]”. But, with one prospective exception, those are not the agreements by which anyone obtained shares in Limited. The exception is if PGL had sought to exercise its alternative remedy under the January and July 2013 agreements to “[c]onvert any loss of revenue on sales below [1500/750]
Carts into shares of [Limited]”.34
[95] There is no evidence PGL (or any other shareholder) acquired shares in Limited on Limited’s representations as to ownership of intellectual property, whether in the January and July 2013 agreements or otherwise. PGL’s initial acquisition of shares in Limited predated the January and July 2013 agreements. Mr Harrison’s evidence was PGL acquired the shares on the basis of an “investor memorandum” provided to him by Mr Bartlett, which specified only “the Licence and Rights to utilize the relevant patents to operate electronic shopping carts have reverted to [Limited]”. Subsequent acquisitions similarly were not founded on any representation as to Limited’s ownership of intellectual property. The 20,000 bulk of PGL’s 32,000 shares arose separately from Mr Harrison’s offer to resolve non-payment issues.35
[96]The plaintiffs plead:
The IP Assets, know how, confidential information about operation of Aisleworx business and all contractual and other rights required to operate the business, including the IP Assets, the legal and/or beneficial shareholding in [Corp] (together the Transferred Assets) were transferred from [Limited] to [Group] sometime between September 2015 and June 2016.
In further particularisation they say the transferred assets include:
34 See [62] and [66] above.
35 See [22] above.
… goodwill and the business combination of those asset[s] representing the future economic benefit arising from the other assets acquired in a business combination that are not individually identified and separately recognised.
In other words, everything used in the conduct of the Aisleworx business.
[97] The sharp end of the Aisleworx business is the provision of electronically- enabled carts to supermarket operators for use by shoppers. So, working back from there, Limited’s assets are the contracts for such provision directly or through Corp (including revenues therefrom);36 the carts in their manufactured or assembled states (until sold or unless otherwise pledged);37 the contracts by which Limited obtained the carts’ manufacture and assembly;38 the contracts by which Limited obtained use of moulds for the carts’ manufacture;39 any residual or reacquired ownership of moulds directly by Limited;40 and any right to use intellectual property as was required for such manufacture, assembly and provision. The evidence is that last incorporates Limited’s licence from Matcal.41
[98] Nothing in the restructure alienated any of those assets from Limited. The only asset transfer anticipated by the restructure was to assign Limited’s licence from Matcal to Group, meaning Limited retained use of the licence.
[99] However — on 20 September 2015, shortly before the restructure — a licencing and services agreement was entered into between Limited, Group and Corp.42 As the restructure had yet to occur, Group was not then incorporated. Under that agreement, Group would provide FunCarts to Corp by “transfer[ring] ownership of existing carts and associated production getup” and delivering “[f]uture carts” to Corp, for Corp’s “full ownership, management, control of placement, operations, advertising, marketing and all aspects of FunCarts in United States”, in consideration of which Corp would pay Group “fees … and purchase existing carts and associated getup including moulds and parts for $200,000”. Other references to monetary amounts in the agreement expressly are to “USD”.
36 See [8] and [17] above.
37 See [11]–[12], [14] and [29] above.
38 See Schedule, cls 5.1.
39 See [11]–[12], [14], and [29] above.
40 See [9], [11]–[12], [14], [20], [29], [62], [66] and [68] above.
41 See [15] above.
42 See [30] above.
[100] I understand ‘existing carts and associated getup’ to mean at least Limited’s inventory landed in the United States. Group had nothing otherwise to ‘deliver’. ‘Full ownership [of] … all aspects of FunCarts in United States’ then may incorporate all Limited’s assets for that purpose, beyond inventory to mould, manufacturing and supply contracts and inherent intellectual property.43 Limited, while described as “Assignor” and a party to the agreement, does not otherwise feature in the agreement. The agreement was not signed for Corp, but for Media (which then was not incorporated), all signatures being by Mr Bartlett. Mr Bartlett said he “made about six or seven different mistakes in that agreement and very unfortunately did not pay proper attention”.
[101] There is no documentation of any prior transaction by which Group obtained Limited’s carts or other assets. A document purporting to be Limited’s asset register at 31 December 2016 — depicting disposal of Limited’s “US Assets” of carts, moulds and tools for NZD 225,000 — is matched by Limited’s receipt of such a payment on
29 September 2015. But the payment’s narration as “EQUITISEPROCEEDS FKA225K+100KEXT” in Limited’s bank account records indicates the payment is of investment in Limited (corroborated by Limited’s subsequent payment of NZD 200,000 to PGL).44
[102] As with the various informal financial statements tendered in evidence,45 the asset register also is of indeterminate provenance. Without at least apparent foundation in contemporaneous transactional documents,46 I do not believe any of their contended summaries. I am not prepared to rely on any and disregard all of them. Similarly, I disregard Mr Bartlett’s representations of facts not supported by contemporaneous documents. I particularly view Limited’s asset register record of NZD 225,000 received for disposal of its assets in the preceding year as entirely fabricated. Similarly, the explanation in Limited’s “Profit and loss Consolidated” accounts for the years
43 See [97] above.
44 See [27] above.
45 See [52] above.
46 Discovery by Group was surgical at best, sparse in reality and wholly unsatisfactory in respect of the matters at issue in the proceeding, Mr Bartlett preferring to rely on contended disclosures to the liquidators in the course of the liquidation as meeting the balance of the defendants’ discovery obligations. I address the plaintiffs’ last-minute application for discovery of documents relating to Media and Holdings at [134]–[135] below.
ending 31 December 2014 and 2015, expressly prepared retrospectively for Ms Toon’s review as liquidator:
In September 2015, [Limited] became a fully owned subsidiary of [Group], and under this restructure sold its US based assets to [Corp] for depreciated market value being $225k.
[103] The materiality of the 20 September 2015 agreement appears to be it (or actions taken purportedly in pursuance of it) effectively alienated Limited’s assets ultimately to Media,47 whose shares Mr Bartlett valued in 2022 in connection with the “Digicart” business in the United States at NZD 85 to NZD 126 per share. This value is sought to be compared to the NZD 7.85 per share by which FKA obtained its shareholding in Group. It might also be compared to the NZD 7.77 at which Mr Bartlett’s shareholder loan was discharged in connection with the restructure.48
[104] Be that as it may, so far as it purports to deal with Limited’s assets, the agreement plainly is a nullity. Nothing in the agreement contends to transfer anything in Limited’s ownership to Group, whether or not for Group’s transmission to Corp (or Media). Nothing in the evidence establishes Group had any Aisleworx business assets then to transfer or deliver. I am not assisted by Mr Bublitz’s concessions under cross-examination “Group took all the assets of [Limited] and then dealt with it as it wished”. That characterisation is not supported by the evidence.
[105] Finally, it was put strongly to Mr Bartlett in cross-examination Limited was insolvent at the time of the restructure, Mr Bartlett responding Limited “had run out, ran out of money in about, in about June or July [2015]” and was unable to pay due wages but rejecting it was insolvent. Nonetheless, that was not the basis for the liquidators’ and PGL’s claim for Mr Bartlett’s contribution. Rather the pleaded breaches of duty were focused on performance of Mr Bartlett’s duties given rise by the restructuring and its consequences. As I have explained, they were not breached in those terms.
[106]I therefore will dismiss the plaintiffs’ first three causes of action.
47 See [32] above.
48 See [92] above.
Fourth cause, against Group: knowing receipt
[107] Without transfer of Limited’s assets to Group,49 the plaintiffs’ pleaded case for Group’s knowing receipt cannot succeed, and also will be dismissed.
[108] Liability for knowing receipt here may alternatively have been founded on the 20 September 2015 agreement by Mr Bartlett’s transfer of Limited’s assets, in breach of trust as director, to Corp’s benefit, received with knowledge of the breach.50 “The remedy for knowing receipt is the restoration of what was unconscionably received …”.51 But Corp is not a party to this proceeding, although Mr Bartlett’s commonality as sole signatory of the agreement would have established the requisite knowledge.
Fifth cause, against Group: contribution order
[109] Section 271 of the Companies Act enables the making of orders for pooling of assets of related companies, if “just and equitable”, so as to obtain their joint liquidation or the related company’s payment to the liquidator of claims made in the other’s liquidation. Only the latter is sought, under s 271(1)(a). Group is a company “related to” Limited because it owns all the shares in Limited.52
[110]Section 272 provides guidance for the making of such orders:
Guidelines for orders
(1) In deciding whether it is just and equitable to make an order under section 271(1)(a), the court must have regard to the following matters:
(a)the extent to which the related company took part in the management of the company in liquidation:
(b)the conduct of the related company towards the creditors of the company in liquidation:
(c)the extent to which the circumstances that gave rise to the liquidation of the company are attributable to the actions of the related company:
49 See [98] above.
50 Green & McCahill Holdings Ltd v Ara Weiti Development Ltd [2022] NZCA 218, (2022) 23 NZCPR 259 at [78], citing Lynton Tucker, Nicholas Le Poidevin and James Brightwell Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) vol 2 at [42-023].
51 Enright v Newton [2020] NZCA 529, [2021] 2 NZLR 412 at [110], n 53, citing McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405 at [40] (citing Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 at [31]).
52 Companies Act, s 2(3)(b).
(d)such other matters as the court thinks fit.
…
(3) The fact that creditors of a company in liquidation relied on the fact that another company is, or was, related to it is not a ground for making an order under section 271.
In considering if to make such orders, the Court is to balance policy considerations for and against the companies’ separate legal personality, predominantly by reference to if the company in liquidation operated as “a separate commercial entity” from its relations.53
[111] The 20 September 2015 agreement plainly represents the means by which Limited — at the hands of its director, Mr Bartlett — lost control of its assets to its subsidiary, Corp. It did so prior to the restructuring. But Group, not then incorporated and more importantly not in any event having the assets in its ownership, had nothing to do in that diversion. And Limited had no later material operation, whether or not separately from Group. Limited’s subsequent activities appear to have been devoted to prior dispute resolution, by one means or another, with PGL and Impulse.54 Although Mr Bartlett claims Limited continued to trade for supply of carts in New Zealand and the United States, there is no independent evidence of such.55 Group’s only apparent function was as Limited’s sole shareholder after the restructure,56 and owning the intellectual property licenced to Limited.57 Mr Bartlett also contends Group obtained a majority shareholding in Corp in return for its provision of NZD 2 million to Corp.
[112] Accordingly, I see no basis on which to order Group pay creditors’ claims in Limited’s liquidation, even in principle (as remaining dissatisfied of the liquidators’ quantification of those claims).58 I also will dismiss the plaintiffs’ fifth cause of action.
53 Steel & Tube Holdings Ltd v Lewis Holdings Ltd [2016] NZCA 366, (2016) 11 NZCLC 98-045 at [27].
54 See [34] and [37] above.
55 Possibly Limited also was involved in paying for componentry: see [35] above.
56 See [25] above.
57 See [30]–[31] above.
58 See [76]–[77] above.
Sixth cause, against Group: Property Law Act 2007 disposition
[113] Part 6, subpt 6 of the Property Law Act 2007 enables “a court to order that property acquired or received under or through certain prejudicial dispositions made by a debtor (or its value) be restored for the benefit of creditors”.59 A ‘prejudicial disposition’ is one made by an insolvent or nearly insolvent debtor “with intent to prejudice a creditor, or by way of gift, or without receiving reasonably equivalent value in exchange”.60
[114] The plaintiffs allege such a disposition was established by transfer of Limited’s assets to Group. As I have found no such transfer occurred,61 I will dismiss the plaintiffs’ sixth cause of action.
Seventh cause, against Mr Bartlett: Fair Trading Act 1986
[115] PGL seeks alternatively to recover from Mr Bartlett the amount of its claim in the liquidation as damages under the Fair Trading Act 1986 for his misrepresentations of Limited’s ownership of intellectual property in the carts in the January and July 2013 agreements,62 which PGL asserts it entered and performed in reliance on Mr Bartlett’s representations. I do not understand the assertion PGL performed its obligations under the agreements in reliance on the representations; if it performed its obligations under the agreements, it did so because those were its obligations.
[116] PGL contends those agreements also were entered (and performed) in reliance on earlier representations by Mr Bartlett as to that intellectual property in connection with an invitation to Mr Harrison to invest in Limited. However, as I have explained,63 that invitation was express Limited only had licence to use the registered intellectual property then owned by Matcal. Otherwise Limited had and retained ownership of any intellectual property inherent in the manufacture and operation of the carts.
59 Property Law Act 2007, s 344.
60 Section 346.
61 At [98] above.
62 See [11]–[12], [59]–[67] and [93]–[94] above.
63 At [95] above.
[117] Nonetheless, the January and July 2013 agreements’ narrations plainly asserted Limited “owns the intellectual property in the Carts”. (The agreements’ operative text is more measured, referring to intellectual property “inherent in the design” of carts and moulds,64 rather than in carts’ operation.) At least in respect of the registered intellectual property it only was licenced by Matcal to use, that is inaccurate. Mr Bartlett’s explanation under cross-examination he understood ‘ownership’ to encompass Limited’s “beneficial ownership” by reason of its licence to use Matcal’s intellectual property is belied by his prior specification of rights under the licence.65
[118] As with much of Mr Bartlett’s evidence, the explanation smacks of hindsight rationalisation and I do not believe it. So too with his explanation in evidence Limited’s “main function” only was to “[coordinate] the building of FunCarts”, in attempted contradiction of his earlier explanation to shareholders the restructure was to have Limited “continue in its main role as the core trading company holding many contracts and being the main ownership vehicle of the international subsidiaries”.66
[119] Section 9 of the Fair Trading Act provides “[n]o person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. The section is “directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances”.67 No misleading or deceptive intention or actuality is required; it is enough the conduct had that potential.68
[120] Sections 43(1) and 43(3)(f) entitle recovery of the amount of any loss or damage suffered, or likely to be suffered, by PGL “by conduct of” Mr Bartlett in contravention of a relevant provision of the Act. ‘By conduct of’ is to adopt a “common law practical or common-sense concept of causation”,69 to identify if “the
64 See [94] above.
65 See [6] above.
66 See [24]–[26] above.
67 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [28].
68 At [28]. See also AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 (CA) at 152.
69 Red Eagle Corporation Ltd v Ellis, above n 67, at [29], citing Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514 at 525.
particular claimant was actually misled or deceived by the defendant’s conduct” and then:70
If the court takes the view, usually by drawing an inference from the evidence as a whole, that the claimant was indeed misled or deceived, it needs then to ask whether the defendant’s conduct in breach of s 9 was an operating cause of the claimant’s loss or damage. Put another way, was the defendant’s breach the effective cause or an effective cause?
There must be “a ‘clear nexus’ between the conduct and the loss or damage”.71
[121] On a finding of such statutory liability, damages are awarded in the amount of money (so far as money can do it) necessary to put the plaintiff in the position it would have been if the Act had not been contravened; not the position it would have been in had the representation been true.72 The “normal measure” of loss is if “what has been acquired is worth less than what was paid” including wasted expenditure,73 and “not merely a disappointed expectation of being better off than [the plaintiffs] now find themselves”.74
[122] Analytically, by ‘in trade’, PGL must be taken to mean Mr Bartlett’s provision of the draft agreements to PGL for its acceptance then “to procure and pay for a set of moulds from [Limited]”. The draft agreements’ representation predominantly was in connection with Limited’s establishment of “a market supplying electronic shopping carts called FunCarts in the USA”. In the January 2013 agreement, that establishment was prospective; the July 2013 agreement contended it had occurred.
[123] In either case, the market’s potential was the foundation for PGL’s funding of Limited’s production of moulds for the carts (and, under the July 2013 agreement, for PGL’s assembly).75 From that perspective, whether Limited itself owned or licenced relevant intellectual property rights is immaterial. The impugned representations
70 At [29].
71 At [29], citing Goldsboro v Walker [1993] 1 NZLR 394 (CA) at 401 and referring at n 19 to Cox & Coxon Ltd v Leipst [1999] 2 NZLR 15 (CA) at 38.
72 Cox & Coxon Ltd v Leipst, above n 71, at 22; endorsed by Harvey Corporation Ltd v Barker
[2002] 2 NZLR 213 (CA) at [13].
73 Harvey Corporation Ltd v Barker, above n 72, at [14].
74 At [15].
75 The agreements also provided for PGL’s derivative licence from Limited to use associated intellectual property: see [59] and [63] above. There is no suggestion PGL’s licence was ineffective.
accordingly are not misleading in those ‘particular circumstances’, or even if so PGL was not actually misled. Indeed, through Mr Bartlett’s invitation to Mr Harrison to invest in Limited, PGL knew of the correct position.
[124] PGL plainly assessed there was potential for a market to be established commercially and financially to justify its provision of funding for Limited’s production of moulds for the carts. PGL entered into the agreements on that basis. There is no evidence the market failed to be established to any desirable proportion or in a reasonable time by reason of Limited’s licence rather than ownership of relevant intellectual property. Instead, establishment of an active market was delayed by manufacturing difficulties and uncertainty as to media effectiveness.76
[125] Thus there can be no suggestion what PGL acquired was worth less by reason of either the representations’ inaccuracy or Mr Bartlett’s conduct in making them. In any event, PGL’s claimed loss in Limited’s liquidation is not sourced in Mr Bartlett’s representation, but Limited’s non-payment of its contended debts.
[126] Far from ‘a clear nexus’ between Mr Bartlett’s conduct and PGL’s loss, this cause of action echoes Richard III’s lament.77 I will dismiss this cause of action also. I therefore have not required to determine if the claim is out of time. When time may have expired would depend on a presently indeterminate counterfactual in which the impugned representations were material.
Eighth cause, against Mr Bartlett: deceit
[127] Mr Bartlett’s provision to PGL of the draft agreements’ references to Limited’s ownership of intellectual property, coming after his accurate explanation to Mr Harrison for the purposes of investment in Limited, is a slender reed on which to establish an action in deceit:78
[In] order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice. Secondly, fraud is proved when it is shewn
76 See [85] above.
77 “A horse, a horse! My kingdom for a horse!”: William Shakespeare Richard III, act 4, sc 5.
78 Derry v Peek (1889) 14 App Cas 337 (HL) at 374, approved in Amaltal Corp Ltd v Maruha (NZ) Corp Ltd [2007] 1 NZLR 608 (CA) at [48] (not disturbed on further appeal: Maruha Corporation v Amaltal Corporation Ltd [2007] NZSC 40, [2007] 3 NZLR 192 at [24]).
that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false . . . To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth.
Critically, the representation’s context matters: there must be “conscious indifference to the truth”.79 Resultant loss or damage is “a fundamental requirement”, assessed “to put the claimant in the position he or she would have been in if the representation had not been made”.80
[128] For the same reasons as I have explained in relation to the Fair Trading Act cause, the impugned representations were immaterial to Limited’s establishment of a market to justify PGL’s funding of the moulds (or assembly of the carts). Thus Mr Bartlett cannot be depicted as consciously indifferent to their truth for the purpose of their inclusion in the agreements. PGL would have been in the same position, determining to enter into agreements for funding of moulds (and assembly of carts) with derivative licences to use intellectual property, whether or not Limited owned the intellectual property itself.
[129]This eighth cause of action also fails.
Result
[130] For those reasons, noting judgment to have been entered on the ninth cause of action, I dismiss each other pleaded cause of action.
The ‘real controversy’ between the parties
[131] Mr Bartlett’s conduct as represented by the 20 September 2015 agreement — alienating control of Limited’s assets to its subsidiary, Corp, without any form of compensation to Limited — appears an obvious breach of his ss 131 and 137 duties to Limited. For the purposes of s 301, it also may be his misapplication of Limited’s property. Mr Bartlett’s conduct purportedly under the 20 September 2015 agreement
79 Amaltal Corp Ltd v Maruha (NZ) Corp Ltd, above n 78, at [50].
80 At [55]–[56].
may be thought the source of the “real controversy” between the parties under this cause of action.81 But that is not what was pleaded.
[132] I may make any amendment to the claim that is “necessary for determining the real controversy between the parties”.82 As the parties do not include Corp or Media, that cannot be an amended claim of their liability for knowing receipt of Limited’s assets. I would however entertain an application to amend the claim to include the liquidators’ claim for relief against Mr Bartlett under s 301 of the Companies Act in respect of the 20 September 2015 agreement and its consequences, to be brought on the basis of the evidence at trial.
[133] If that is a course the liquidators wish to pursue, counsel should file a (desirably, joint) memorandum — setting out a timetable for filing such application together with the proposed amendment, and such other steps as may be thought necessary for its determination — within ten working days of the date of this judgment. Otherwise this proceeding substantively is determined in terms of [130] above.
Discovery
[134] My 14 June 2023 minute addressed the plaintiffs’ 2 June 2023 application for further discovery, set down for hearing on the first day of trial.83 The application was founded on concerns corporate restructuring may have rendered Group assetless, and sought discovery of documents relating to Media and Holdings as comprehended transferees of Group’s assets.
[135] I declined then to determine the application as “[requiring] me effectively to take a view of the substance of the parties’ cases, which may be at odds from that I am to find at trial”.84 Given my conclusion Limited’s assets at issue were not transferred to Group,85 that is what has occurred, with the result the application is dismissed.
81 High Court Rules 2016, r 1.9(2); Flat Bush Finance Ltd v Body Corporate 172108 [2021] NZCA 622 at [17].
82 High Court Rules, r 1.9(2).
83 McKay v Aisleworx Group Ltd HC Auckland CIV-2021-404-1015, 14 June 2023 (minute of Jagose
J) at [1].
84 At [4].
85 See [98] above.
Costs
[136] Costs remain reserved for determination on memoranda to be filed and served in accordance with a timetable yet to be directed.
—Jagose J
Schedule: clauses 5 and 6 of the January and July 2013 agreements
—January 2013 agreement
5 Minimum number of Carts per year
5.1 Aisleworx shall enter into an agreement with The Plastic Professionals, 1501 Owner Avenue, Atlantic, Iowa 50022, USA (“the USA Manufacturer”) for the assembly and production of the Carts utilising the moulds to fulfil its orders. AISLEWORX shall not be the Agent of PGL in doing so and shall remain liable in all respects for payment to the USA Manufacturer and performance and delivery to its customers.
5.2 Aisleworx guarantees minimum sales of 1500 Carts per financial year for five years, or 10,000 Carts whichever comes first. A financial year is 1 April, through to 31 March. Carts produced prior to 1 April 2013 are included in 2013 financial year.
5.3 In the event that Aisleworx does not produce 1500 Carts per year Aisleworx will pay the difference between the actual amount produced and 1500 Carts per year, and on the 20 of the month following each financial year (1st April) pay the balance of the difference in production as if 1500 Carts had been produced.
5.4 Should Aisleworx not produce 1,500 units per year, or fail to pay the difference of payment to PGL within 60 days of the end of the relevant financial year, or there is default of a material provision of this agreement that is not remedied within 60 days of receipt of notice in writing so to do, PGL shall have the right to:
(i)Convert any loss of revenue on sales below 1500 Carts, into shares of Aisleworx at relevant value. Relevant value is set at 4 times turnover or 10 times profit, whichever is higher; or
(ii)Require Aisleworx purchase the moulds back for the amount paid for the moulds; or
(iii)Issue an instruction to the USA manufacturer of the Moulds and the Carts that it is to cease producing moulded parts for Aisleworx, and that at PGL's discretion it shall either take possession of the mould, ask the manufacturer to hold the mould on PGL's behalf or shall proceed with manufacturing components using the moulds on PGL's behalf under a new arrangement.
5.5 In the event PGL exercises its rights under clause 5.4(ii) all rights, ownership and intellectual property in the moulds shall be vested in and transferred to PGL without limitation by Aisleworx and Aisleworx shall do all things and sign all documents necessary to vest these rights in PGL absolutely.
5.6 In the event Aisleworx is unable or unwilling to comply with any of clauses 5.4(i)(ii) and (iii) PGL shall be at liberty to choose an alternative remedy as listed in that subclause to the provision elected or to proceed against Aisleworx to comply.
6 Payment
6.1 The FunCart payment is US$160 per set produced by this tool, payable by Aisleworx to PGL via a nominated US dollar bank account 45 days following installation. Aisleworx shall instruct the USA manufacturer to provide PGL with monthly production figures for the Carts and shall also provide PGL its figures by way of corroboration. Figures shall be the 20th day of each month. A monthly invoice will be produced for the relevant production numbers of Carts confirmed by the US Manufacturer and Aisleworx by PGL.
6.2 All sums payable by Aisleworx under this Agreement shall be made in full without deduction, set-off or counterclaim and, except to the extent required by law, free and clear of any deduction on account of Aisleworx or otherwise.
6.3 Interest shall accrue at 14% per annum on any sum due not payable on due date.
—July 2013 agreement
5 Minimum number of Carts per year
5.1 Aisleworx shall enter into an agreement with Yilli Roto Mould and Assembly co 1034 Yuantong Bride rd Shanghai China (“the China Manufacturer”) for the assembly and production of the Carts utilising the moulds to fulfil its orders. AISLEWORX shall not be the Agent of PGL in doing so and shall remain liable in all respects for payment to the USA Manufacturer and performance and delivery to its customers.
5.2 Aisleworx guarantees minimum sales of 750 Carts per financial year for the period of this agreement , or 5,000 Carts whichever comes first. A financial year is 1 April, through to 31 March, starting April 1 2014 Carts produced prior to 1 April 2014 are included in 2014 financial year.
5.3 In the event that Aisleworx does not produce 750 Carts per year Aisleworx will pay the difference between the actual amount produced and 750 Carts per year, and on the 20 of the month following each financial year (1st April) pay the balance of the difference in production as if 750 Carts had been produced. This payment can be offset against the following years production payments
5.4 Should Aisleworx not produce 750 units per year, or fail to pay the difference of payment to PGL within 60 days of the end of the relevant financial year, or there is default of a material provision of this agreement that is not remedied within 60 days of receipt of notice in writing so to do, PGL shall have the right to:
(i)Convert any loss of revenue on sales below 750 Carts, into shares of Aisleworx at relevant value. Relevant value is set at 4 times turnover or 10 times profit, or at company value of US$5m whichever is higher
(ii)Require Aisleworx purchase the moulds back for the amount paid for the mould.
(iii)Issue an instruction to the USA manufacturer of the Moulds and the Carts that it is to cease producing moulded parts for Aisleworx, and that at PGL's discretion it shall either take possession of the mould, ask the manufacturer to hold the mould on PGL's behalf or shall proceed with manufacturing components using the moulds on PGL's behalf under a new arrangement.
5.5 In the event PGL exercises its rights under clause 5.4(ii) all rights, ownership and intellectual property in the moulds shall be vested in and transferred to PGL without limitation by Aisleworx and Aisleworx shall do all things and sign all documents necessary to vest these rights in PGL absolutely.
5.6 In the event Aisleworx is unable or unwilling to comply with any of clauses 5.4(i)(ii) and (iii) PGL shall be at liberty to choose an alternative remedy as listed in that subclause to the provision elected or to proceed against Aisleworx to comply.
6 Payment
6.1 The FunCart payment is US$160 per set produced by this tool, until the cost of the tool is recovered and thereafter it is US$80 per set payable by Aisleworx to PGL via a nominated US dollar bank account on the 20th of the month following installation. Aisleworx shall instruct the China manufacturer to provide PGL with monthly production figures for the Carts and shall also provide PGL its figures by way of corroboration. Figures shall be the 20th day of each month. A monthly invoice will be produced for the relevant production numbers of Carts confirmed by the US Manufacturer and Aisleworx by PGL.
6.2 All sums payable by Aisleworx under this Agreement shall be made in full without deduction, set-off or counterclaim and, except to the extent required by law, free and clear of any deduction on account of Aisleworx or otherwise.
6.3 Interest shall accrue at 14% per annum on any sum due not payable on due date.
3
11
1