Bi v Westcoast Mining Ltd
[2023] NZHC 2736
•29 September 2023
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-418-0003
[2023] NZHC 2736
UNDER the Companies Act 1993 IN THE MATTER
of an application for relief under s 174 of the Act
BETWEEN
JIANTAO BI
Plaintiff
AND
WESTCOAST MINING LTD
First Defendant
AND
GOLDEN COAST HOLDING LTD
Second Defendant
AND
CHAO ZHANG
Third Defendant
AND
MINGHOU ZHANG
Fourth Defendant
Hearing: 6–9, 13–16 March 2023 Counsel:
R A Hearn and P Kaur for Plaintiff
J V Ormsby and M J McKay for Defendants
Judgment:
29 September 2023
JUDGMENT OF OSBORNE J
This judgment was delivered by me on 29 September 2023 at 2.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
BI v WESTCOAST MINING LTD [2023] NZHC 2736 [29 September 2023]
Introduction
[1] There is a rich historical tradition of gold mining on the South Island’s West Coast.
[2] In 2016, two men discussed a business venture to undertake gold mining on the West Coast. Two companies (“the Companies”) — the first and second defendants
— were then incorporated. The shares were owned 20 per cent by the plaintiff and 80 per cent by the third defendant.
[3] The arrangements agreed upon by the parties were not formally documented. The people involved are Chinese and the Court has heard and considered evidence regarding Chinese business culture.
[4] The business venture did not go well. By late-2018, the defendants took steps to close the operations, remove the plaintiff as a director of the Companies and issue further shares.
[5] The plaintiff commenced this proceeding for relief under s 174 Companies Act 1993 (the Act). He alleges the third and fourth defendants have conducted the Companies’ affairs in a manner that is oppressive and unfairly prejudicial to him. He seeks orders that the third or fourth defendant purchase his shares at a price determined by the Court and that they pay compensation for alleged failures.
[6] The Companies’ counterclaim is for damages for alleged breaches of fiduciary duty and negligence on the part of the plaintiff.
[7] The third and fourth defendants deny they have engaged in oppressive or unfairly prejudicial conduct. They submit the plaintiff has acted in those ways, and that his breaches of duty disentitle him to any relief under the Act.
[8] The third defendant wishes to acquire the plaintiff’s shares at a fair value, calculated at the time the plaintiff ceased to be involved in the Companies.
[9] It is common ground the individuals involved can no longer co-operate in relation to the affairs of the Companies and a solution would lie in the plaintiff’s shareholding being transferred to the third defendant.
[10] Beyond that measure of agreement, there remain significant issues as to the precise nature of arrangements entered into between the parties, the nature of contributions that each agreed to make, how they then conducted themselves, how the price of the plaintiff’s shares should be set and, if so, to what extent, if any, the conduct of any of the parties justifies relief under the Act — at common law or in equity.
[11] The third and fourth defendants deny they have any liability to the plaintiff. The third defendant therefore does not consent to the Court making an order of transfer.
The parties
[12] I will introduce the parties and identify the names I will use in this judgment. I will be adopting the English first names they have used in relation to each other throughout the trial, which will also avoid confusion in relation to those who share the same surname.
[13]The main individuals involved are:
(a)Jiantao Bi — “Freddy” — with some experience of goldmining on the West Coast (now 37 years old);
(b)Minghou Zhang — “Michael” — a wealthy resident of Hong Kong and an investor;
(c)Chao Zhang — “Jimmy” — a nephew of Michael, who was looking for investment opportunities and experience in the New Zealand mining industry;
(d)Xiaoguang Song — “Terry” — the owner of some mining rights, looking for further investment opportunities; and
(e)Richard Shangzhe Li, a US college student engaged by Michael as an assistant and an interpreter for three months in New Zealand (September–December 2016).
[14]Also involved are:
(a)Weiguo Zhong — “Mr Zhong” — owner, through Xinxin Mining Ltd (Xinxin) of Humphrey’s Gully mine;
(b)Chong Zhang — “Judy” — a niece of Michael, who attended to administration and personnel matters of the Companies, and took minutes of meetings; and
(c)Wang Yung — “David” — Freddy’s father-in-law, for whom Freddy had earlier worked in mining projects on the West Coast.
The Companies
[15] The Companies (formed for the venture) and incorporated on 30 November 2016 were:
(a)the second defendant, Golden Coast Holding Ltd (Golden Coast), the holding company; and
(b)the first defendant, Westcoast Mining Ltd (Westcoast), the operating company.
[16] Golden Coast, as the holding company, came to have three wholly-owned subsidiaries:
(a)Arahura Resources Ltd (incorporated 30 November 2016);
(b)Gold Mining Service Ltd (GMSL) previously owned by Freddy since its incorporation in 2013 and its shares transferred to Golden Coast after the incorporation of the Companies; and
(c)King Solomon Gold Ltd (incorporated in 2014 and acquired by Golden Coast in June 2017).
[17] GMSL in turn acquired one wholly-owned subsidiary, Greid Minning [sic] Ltd (Greid) (with the Greid shares transferred in April 2017, as discussed below at [38]).
Co-operation discussions and arrangements
Freddy Bi
[18] Freddy has lived in New Zealand for some years and graduated with a Bachelor of Information Science from Massey University in 2011.
[19] As it happens (not strictly relevant to what follows), Freddy had a foreign exchange trading account and dealt with Michael’s Yujia Financial International Ltd (Yujia) between 2008 and 2011.
[20] In early 2013 he relocated to Greymouth to assist his father-in-law, David Wang, in the latter’s goldmining operation at Kumara. Freddy dealt with administrative matters relating to Squatters and Butlers mines.
[21] In August 2013, Freddy established GMSL. In the following years GMSL acquired four exploration permits and a mining permit (not including the interests he subsequently acquired through having GMSL purchase the shareholding in Greid).
[22] Freddy worked off and on for his father in law as he required from 2014–2015 and full-time as a manager from January 2016–August 2016. He also had a manager’s role at Mr Zhong’s Xinxin operation.
[23] Freddy in this period was looking to obtain formal qualifications in relation to mining administration through the New Zealand Qualifications Authority (NZQA). In October 2016 he obtained his National Certificate in Extractive Industries (Mining Administration Surface Extraction B Grade). He intended then to study towards his A Grade certificate, normally a 14-to-18-month programme. He was to subsequently
achieve that certificate in November 2017 by extensive travel around New Zealand to attend the relevant courses.
[24] In August 2015, Freddy purchased land at Māori Gully for $300,000 and resold it two months later to Terry Song for $1.2 million.
Michael Zhang
[25] Michael has been in business in a very significant way. On his own evidence, a currency exchange business in which he was a 35 per cent shareholder and director, Yujia, had an annual turnover of approximately NZ$1 billion in 2017.
[26] Michael and Terry Song are friends. They travelled to the West Coast in April 2016 when Terry Song was himself planning to invest in goldmining.
Dealings between Freddy and Terry Song — 2016
[27] In early 2016 Freddy was aware the owners of Southwest Energy Ltd (Southwest) had a mining operation (including freehold land, permits and machinery) and were looking to sell. Southwest’s mines were known as Butlers and Squatters. Freddy brought the Southwest opportunity to Terry Song’s attention.
The Freddy/Michael arrangement in November 2016
[28] Freddy’s pleading is contained in a Third Amended Statement of Claim (3ASOC). He seeks relief under s 174 of the Act, on the basis the affairs of the Companies have been conducted in a manner oppressive and unfairly prejudicial to him. He seeks orders that Michael and Jimmy purchase his shares at a valuation figure and pay him compensation.
[29] The unfairness arises, he asserts, because he entered an oral agreement with Michael in November 2016 which contained implied terms of good faith, loyalty and honesty, and involved the following express terms:
(a)Freddy would contribute as equity the mining and exploration permits owned by him (or through companies controlled by him) at the time of the agreement, as well as his gold mining know-how.
(b)That contribution was to be valued at $5 million.
(c)Michael would contribute $20 million in equity funding to the Companies and their subsidiaries, over a period of time.
(d)Freddy would hold a 20 per cent interest and Michael would hold an 80 per cent interest in the Companies.
(e)Freddy would be employed as the general manager of the Companies at a salary of $100,000 per annum.
(f)Freddy and Michael would each be a director of the Companies and their subsidiary companies, with Freddy being the sole executive director.
[30] The arrangements agreed in November 2016 are of fundamental importance to Freddy’s claims for relief — if important aspects of the arrangements, and especially that relating to an investment of $20 million by Michael, were not as pleaded by Freddy, the basis of his application is substantially undermined. Absent a contractual commitment by Michael to invest $20 million in the Companies, the express basis of both Freddy’s grievance and his claim for compensation falls away.
[31] Freddy pleads he did what was agreed to be done in the November agreement in that he contributed to the venture his mining assets and know-how, valued at
$5 million.
[32]Freddy pleads Michael breached the agreement by failing to contribute
$20 million within a reasonable time or at all.
[33] Freddy refers to events occurring from September 2018 when Jimmy caused the Companies’ operations to cease, removed Freddy as a director and issued fresh share capital.
[34] Freddy pleads his removal as a director was in breach of the November agreement.
Dealings between Freddy, Terry and Michael in 2016
[35] Michael came to the West Coast for a period in April 2016. He was introduced to Freddy and Freddy’s father-in-law by Terry Song. Terry and Michael were interested in purchasing the Southwest operation. Terry had entered into a heads of agreement (HOA) to purchase the business at $3.75 million plus GST. Freddy assisted Terry and Michael with some testing and in relation to the administrative aspects of the operation. A company, Golden Coast Mining Ltd (GCML) (not to be confused with the second defendant, Golden Coast), was incorporated in August 2016 for the proposed Southwest purchase. The directors were Terry Song and Michael’s nephew, Jimmy. Jimmy and Terry Song held respectively 60 and 40 shares in GCML.
[36] On the completion of due diligence Terry and Michael, in November 2016, decided not to proceed with the Southwest purchase. The final conditions attaching to the HOA were not satisfied. The HOA expired.
[37] Freddy briefly assisted Michael with negotiations with Mr Zhong over Michael’s possible purchase of Xinxin’s Humphrey’s Gully mine, beginning in early November 2016. Mr Zhong sought an asking price of $2.75 million, which he indicated would mean he would lose $2 million of what he had invested in the operation. Michael also decided not to proceed with that possible purchase following the mid-November meetings.
Greid purchase
[38] In 2016 Freddy entered into an agreement to purchase Greid. The company held three goldmining permits and owned a large water pump for mining. The permits related to property at German Gully and Lawson’s Flat near Kumara (I will refer to
German Gully and Lawson’s Flat collectively as “German Gully”). The contract for the purchase of the shares in Greid was entered into on 29 September 2016, Freddy using his company GMSL as purchaser. The purchase price was $300,000 which was paid on 30 September. The shares in Greid were ultimately transferred to GMSL in April 2017, after Greid had disposed of some permits that GMSL was not taking over.
[39] The permits included in the Greid sale all related to production projects, being tenure holdings that had been commissioned and were in production.
[40] Freddy understood the owners of Greid had been in severe financial distress and was of the view the shares were worth much more than the $300,000 he paid for them. The geological consultant called by Freddy in this case, John Youngson, put the total value of the permits in early 2020 at $2,903,504.
Discussions from September 2016
[41] Michael returned to the West Coast in September 2016 for the period of due diligence on the Southwest purchase. He was accompanied by Richard Li, who assisted Michael with interpretation.
[42] Around September 2016, Michael and Richard Li stayed at Terry Song’s home on the Coast.
[43] In October and November, Freddy took Michael and Richard Li to visit a number of mines, including Greid’s German Gully mines as well as Xinxin’s Humphrey’s Gully mine.
[44] On 14 November 2016, the three had a meeting at Terry Song’s house (the 14 November meeting). This was the day before the conditional agreement in relation to Southwest was to expire.
[45] Freddy, Michael and Richard Li gave evidence, including in relation to the 14 November meeting and a further meeting attended by the three the following day, 15 November 2016, at the Kumara Junction Café (the Café meeting).
[46] There were significant differences in the evidence given by Freddy on the one hand and that given by Michael and Richard Li on the other.
Evidence in common as to 14 November meeting
[47]All the meetings to which I am about to refer involved discussions in Mandarin.
[48] At the 14 November meeting, Freddy discussed aspects of the history of goldmining on the West Coast and the fact that good opportunities in the industry remained. There was discussion about existing mines, including Xinxin’s Humphrey’s Gully mine, Southwest’s Squatters and Butlers mines and the Greid German Gully mine. On the same day Freddy sent Michael by WeChat a permit map and land title relating to Humphrey’s Gully.
[49] The Café meeting took place the following day. There was again discussion about exploring mining opportunities together. Freddy and Michael specifically discussed the concept of Michael having a mentoring role against the background of Michael’s company management experience and Freddy’s lack of such experience. The two discussed (in Mandarin) the concept of a “co-operation” agreement or intention.
[50]Freddy brought permit information to the Café meeting.
[51] Following the Café meeting, Freddy and his wife hosted Michael and Richard Li at their home.
[52] Michael intended to speak to family members and other potential business partners about future investment. Michael requested further information from Freddy, including about the assets Freddy would be introducing. The following day (16 November) under the subject line “valuation” Freddy emailed Michael information in relation to Greid’s three mining permits (written in Chinese) (the 16 November email). He recorded there were 320 hectares of land within the permit areas, with an expected gold grade of 0.3 grams per cubic metre of extracted material. He suggested on the basis of a $1 million investment in machinery, there would be annual profits of $1 million. He recorded that indicated a valuation (for those permits)
of $2 million. The email then referred to exploration permits and one further mining permit (owned by Freddy’s GMSL). Freddy recorded the permit area as 5,312.781 hectares. He applied a valuation of $60,000 per 100 hectares and gave a valuation of
$3 million. Under that information, Freddy recorded:
Do you think this is OK? If you need more details please let me know. For the future investment plan, please give me more days to sort out.
The 14 November 2016 document
[53] In the course of their mid-November discussions, Freddy handwrote and gave to Michael a four-page document on which he recorded information in relation to four mines (Humphrey’s Gully, German Gully, Squatters and Butlers) (the 14 November document).
[54] Michael and Richard Li both gave evidence the 14 November document was drawn up by Freddy at the 14 November meeting and was explained by him at the meeting. In his initial affidavit filed in support of an interlocutory application, Freddy did not refer to this document — plainly, he would no longer have had it in his possession. When he came to provide his evidence for the hearing, Freddy stated he thought the document had probably been created at the Café on 15 November, but he could not be sure.
[55] I find the specific recollections of Richard Li and Michael are most likely to be reliable. I conclude Freddy wrote the document in the course of the 14 November meeting, explaining, as he did so, its contents.
[56] In the 14 November document, Freddy listed, for each mine, the operational equipment required. A 60 per cent depreciation was applied to the main equipment (such as dump trucks) while a 30 per cent depreciation was applied to other durable equipment (such as gold screens). Freddy then provided a calculation of the costs (including labour, fuel, consumption and other general expenses) for one year (calculated as 200 working days) to provide a required initial investment figure. Freddy then provided a figure for returns before and after tax over a one-year period. Freddy’s workings showed the return rate was arrived at by the total calculated return divided by the sum of equipment depreciation and total cost.
[57]The annual return rates set out in the 14 November document were:
(a)Humphrey’s Gully — 215 ÷ 136 = 158 per cent;
(b)German Gully — 146.4 ÷ 64 = 229 per cent;
(c)Squatters — 117.6 ÷ 171.3 = 69 per cent; and
(d)Butlers — 145.6 ÷ 107 = 136 per cent.
[58] In his evidence, Freddy referred to the 14 November document as calculations he did to explain “different mining models” to Michael. He described his calculations as “just examples” because it would be impossible to do a proper model without detailed information about such matters as gold grades and yields. He described the examples as being given to “teach Michael about mining in answer to his questions”. He stated he did not intend or expect Michael to take the example figures as being reliable.
[59] Michael, in his evidence, said that Freddy put together the 14 November document as a demonstration of the mining returns that could be generated at the four mines. He noted the four mines were not randomly selected by Freddy — they were the Humphrey’s Gully mine (being considered by Michael for purchase from Xinxin), the Squatters and Butlers mines (being considered by Terry Song and Michael for purchase from Southwest), and German Gully. Michael said that Freddy was referring to German Gully (owned by Greid) as “his” mine.
[60] In his evidence, Michael rejected any suggestion by Freddy that Freddy did not intend or expect the model and returns in the 14 November document to be taken as reliable. He said that Freddy came to him specifically for the purpose of trying to convince Michael to invest in Freddy’s mine and to demonstrate that the returns upon investment in the German Gully permit would be much greater than taking up the other opportunities that were then available (Freddy’s return rate for German Gully being 229 per cent, with Humphrey’s Gully the highest of the other three at 158 per cent).
[61] Richard Li’s evidence as to the 14 November meeting was similar to Michael’s. He stated that Freddy used the four mines in question (all visited recently) as examples in order to outline a forecast about likely investment requirements and likely returns. He added that Freddy indicated the German Gully mine had the highest gold returns out of any of the mines Michael had been looking at.
[62] I find that Freddy’s document was drawn up by him at the 14 November meeting and explained in the way described by Michael and Richard Li. It is they who have the more specific recollection of the event at which Freddy drew up the document. In terms of the detail provided by Freddy in the document, it makes little sense that the figures were being explained merely as examples to “teach Michael about mining” — that could have been done with one or two abstract examples. It makes much more sense that the document was prepared and provided to Michael by Freddy, as a person whom Michael understood to have knowledge of particular West Coast mines, to provide Michael with Freddy’s view of the potential returns to be obtained from the four mines in question. Each of those mines was either already under arrangements or consideration by Michael for purchase (Humphrey’s Gully, Squatters and Butlers), or understood by Michael to be a mine owned by Freddy (German Gully), in which Freddy was keen to involve Michael in some form of joint venture.
The outcome of the 14–15 November discussions
[63] In the course of their discussions on 14 and 15 November 2016, Freddy and Michael discussed co-operating with one another in mining activities.
[64] Freddy, in his evidence, stated that after he had taken Michael to see German Gully, Michael said he wanted to invest in Freddy’s company. Freddy said he told Michael he had enough money to run his own mining operation and did not need Michael’s investment.
[65] Freddy said Michael then talked about big plans for purchasing Westcoast gold resources, getting several big mining operations running and that “after several years we could list our company on the share market”.
[66]More specifically, Freddy recorded in his affidavit evidence:
24Michael explained to me that he wanted to invest in my companies and together grow a larger mining operation on the West Coast. He said he had $20 million to invest and asked me what percentage shareholding I would want if I contributed all my permits and committed my personal knowledge and networks. I thought about that and the next day I said I would want 20% of the business which was equivalent to $5 million based on Michael’s $20 million commitment. This took into account that Michael insisted that he was to be the major shareholder with control of the venture, and that his money was to be invested over time instead of all upfront.
25Michael was happy with that. Based on our discussions, we agreed:
(a)I would contribute my two mining companies and their permits and other assets.
(b)He was to contribute $20 million in funding over time.
(c)In accordance with the respective contributions above, Michael would be an 80% shareholder and I would be a 20% shareholder. We would each be directors of the companies.
(d)We would use the $20 million in funding to acquire other high-quality gold mining permits and necessary equipment, operate the permits, and to construct infrastructure as required to utilise the permits.
(e)We would establish a new holding company, and a separate mining operations company.
(f)I would be employed by the mining operations company at a salary of $100,000 per year.
26.Unfortunately, we did not record our investors agreement in writing.
27.To clarify, at the time we reached agreement in November 2016 we did not undertake a valuation of my permits or shares. Michael asked my how much of the venture I would want to become involved, assuming he was investing $20 million. I told him I would want 20%. That is how the $5 million figure came to be, which is used in our subsequent correspondence.
[67] The evidence of Michael and Richard Li differed significantly from Freddy’s. They said that, during the 14 November meeting, Freddy explained his mine, German Gully, had the highest gold resource returns of any Michael had been looking at, but Freddy did not have enough funds to operate the mine. Michael stated Freddy then asked him to invest with Freddy. Richard Li referred to Freddy’s invitation as being for Michael to “co-operate with him”.
[68] Michael and Richard Li said it was at the 14 November meeting that (as I found) Freddy drew up the 14 November document.
[69] Michael and Richard Li said Michael and Freddy then made an appointment to continue discussions the next day, Michael asking Freddy to bring with him all the documents relevant to the profitability of the mine.
[70] On the same day (14 November) Freddy sent his WeChat message to Michael with documents relating to the Humphrey’s Gully mine.
[71] The three men met the next day, as arranged, at the Kumara Junction Café. Michael and Richard Li say all Freddy brought with him were some maps of his permits. They say Michael told Freddy he would not be able to undertake any due diligence without more information. Michael, in his evidence, contrasted the German Gully mine with the Humphrey’s Gully mine on which Michael had been conducting due diligence for the HOA with Southwest to purchase the Humphrey’s Gully mine (for $2.75 million). Michael referred to that mine’s large blocks of freehold land and its equipment, and viewed it as involving “medium sized operations”. He contrasted that with the German Gully mine which had a mineable area of less than 20 hectares, with permits of “little value”.
[72] Both Michael and Richard Li said at the meeting Freddy discussed his wish to work with and learn from Michael — Michael said Freddy asked him to be “a mentor” to him in relation to any potential investment.
[73] In his evidence, Michael, as an experienced businessmen said he expected there would be difficulties with Freddy’s proposed goldmine project. His wish was to be involved with larger projects that were self-sustaining rather than being directly involved in growing a small project.
[74] Michael and Richard Li said Michael then talked to Freddy (in Mandarin) of the two of them having a “co-operative intention”, with only Michael’s nephew, Jimmy, being directly involved as a co-director and primary shareholder with Freddy (as Jimmy was to have been with Terry Song on the Southwest project).
[75] In his evidence, Freddy denied he heard anything about Jimmy during the 14/15 November meetings.
[76] Documents produced in evidence show that in the following week — on 25 November 2016 — both Freddy and Jimmy signed the necessary documents for the Companies Office to incorporate the companies that would be used. That included Westcoast and Golden Coast. In each case Jimmy held 80 shares and Freddy 20 shares, and the two were directors.
[77] Returning to the subject matter of the discussions between the parties at the Café meeting, it is common ground that Freddy and Michael discussed the formation of the two companies and how each of them would be involved. There are differences as to the detail of that discussion.
[78]The key part of Freddy’s affidavit evidence is set out above at [66].
[79] In his affidavit evidence, Michael spoke of the express discussion of a two-stage approach. His evidence was:
67.I suggested that we take a two-stage approach for what Freddy was suggesting. This has been referred to as our “cooperative intention” because that is what I called it at the time. I had already spoken to Jimmy about Freddy’s suggestion, and I proposed that in the first stage only my nephew Jimmy would be directly involved and would be a co-director and the primary shareholder with Freddy. Up to that point it had been intended that Jimmy would be a co-investor with Terry in SWE project. If Freddy and Jimmy’s project went well, along the lines that Freddy was representing, then I would raise up to
$20 million for one or two large operations.
68.I explain more about the rationale for doing it this way later in this affidavit. Freddy agreed to undertake stage 1 with Jimmy as the initial investor and his co-director/major shareholder.
69.I proposed that at Stage 1, Freddy and Jimmy would incorporate companies with Jimmy holding most of the shares. Jimmy would inject funds for the initial equipment and funding. Freddy would contribute his mining resources. I also asked that Freddy promise not to compete or hold any other gold resources during any shared projects.
70.Freddy was keen for me to be involved even in stage 1 with Jimmy and for me to guide them and mentor them with the project. He wrote in the last paragraph of his email to me on 31 July 2018:
“Regarding management of the company, M is older and more experienced than F, F highly respects M’s suggestions. When the company was established F stated that [he has] ‘no experience in managing the company, wish to be assisted and guided by M’ …”
71.I wanted to remain involved so that I could have confidence about investing in any major project opportunities that might arise.
72.I spoke to Jimmy about this again to confirm matters. Jimmy also wanted me to remain involved. It was agreed that I would take on a consulting and mentoring role with them during stage 1 whilst Freddy looked for potential projects that I might invest in.
73.If stage one was successful, I proposed raising no more than
$20 million for one or two large projects in which I would be directly involved as a director and shareholder. These funds were to be utilised to acquire a large high-quality gold resource on the West Coast as well as supporting mining equipment.
74.I still asked Freddy for various documents including:
(a)Ownership documents for the mining permits;
(b)Testing and valuation reports;
(c)His CV;
(d)A working schedule for initial equipment and funding;
(e)A future investment plan.
75.Freddy promised to provide these to me. I made it clear to Freddy that I particularly required these if operations were going to move to stage 2 because I would need to speak to family and other potential business partners.
[80] Richard Li, who was present at both meetings, gave similar evidence to that of Michael. In relation to the two-stage approach in particular, he recorded:
41.Freddy said in that meeting that he hoped to learn from Michael and wanted to work together to grow the company from scratch. Michael was hesitant about this but then suggested that they take a two-stage approach to their potential projects. Michael said that he would seek Jimmy’s consent in relation to the two stages that he proposed. The first stage he suggested as that Freddy and Jimmy would incorporate companies with 20% and 80% respective shareholdings. He said that Jimmy would inject funds for the initial equipment and funding requirements and Freddy would inject his mining resources on the basis that he promised not to hold any other gold resources or engage in competitive business outside of the company. Michael said that Freddy and Jimmy would both work together with good faith and matching goals for the long-term growth of the company.
42.Michael then said that the launch of Stage 2 would be contingent on the success of Stage 1. If the venture went well, Michael would raise no more than $20 million in funds and Freddy would use that money to acquire large high quality gold resources on the West Coast as well as supporting mining equipment at a reasonable price.
[81] To the extent there are differences (and there are significant differences) in the evidence of Freddy and Michael as to the structuring discussions, I prefer the evidence of Michael. I am satisfied Michael (as both he and Richard Li say) would have discussed with Freddy his intention to have Michael’s nephew Jimmy take up a shareholding with Freddy in the two companies to be formed. Michael is clearly a person who values his financial standing and reputation highly — it rings true he would have little appetite for a public association with what were effectively two modest start-up mining companies operating in a jurisdiction he was unfamiliar with, with the risks such companies have. The involvement of Jimmy as a shareholder was a model Michael had already adopted in relation to the proposed Southwest venture. It is entirely consistent that he would have wanted and discussed the same model in his initial dealings with Freddy. There is no reason for him to have held back a discussion on that aspect when the two were discussing the detail of their structuring arrangements.
[82] Michael’s evidence was supported by Richard Li. Richard Li struck me as a straightforward witness, who frankly recognised in cross-examination that he did not recall the events of 2016 “particularly well”. But in response to a proposition that there had been no discussion of Jimmy’s involvement during the Café meeting, he stated:
Michael did mention Jimmy’s involvement. He had described what I had outlined in my statement as the two stage approach where the first stage would involve Jimmy.
[83] The fact the two companies were incorporated days later (30 November 2016) with Jimmy and Freddy as the shareholders and directors, without any record of communication from Freddy at that time questioning the introduction of Jimmy, further suggests Jimmy’s involvement was not news to him at that point.
[84] I am satisfied Michael’s intended involvement of Jimmy as shareholder and director was discussed at the Café meeting.
[85] It follows that I reject Freddy’s evidence that there was discussion that Michael would be an 80 per cent shareholder.
[86] I also find there was discussion, as Michael and Richard Li say, of “co- operation” between Michael and Freddy. Two companies were to be formed, one a holding company and the other an operating company. The shares in Freddy’s GMSL and Greid would all be transferred to the holding company. There would be a two-stage approach — stage one involving the company formations with Freddy and Jimmy as the initial co-directors and shareholders, and stage two involving Michael, if the project went well, subsequently contributing up to $20 million to acquire other high-quality goldmining resources.
[87] On 21 November 2016, Freddy emailed Michael a “Working Schedule” in which he set out some estimations of what might be spent on German Gully (“total costs of $3.81 m”) and also information about two larger, potential acquisitions:
Estimated price about 10 million for Andrew Birchfield Mine [at Ianthe] Estimated price exceed 10 million for John Dunbie’s permits [at Ross]
[88] This “Working Schedule” document prepared by Freddy himself is entirely consistent with the two stage approach which Michael and Richard Li say had been discussed by Michael and Freddy.
[89] The findings of reliability I have made in relation to other aspects of the mid-November discussions also point to the likelihood the evidence of Michael and Richard Li on the specific structuring discussions is also the more reliable. The aspects of structuring discussion to which they refer make the most commercial sense for an experienced businessman venturing into arrangements with a person of modest management experience and someone of whom he had relatively little knowledge. The proposition that Michael made a commitment on 15 November, after two days of discussions, to contribute $20 million in equity to the two companies is implausible. I find the discussion as to Michael’s involvement was that he would be a mentor to Freddy at stage one and, in the event stage one went well, was prepared to raise up to
$20 million to enable the later acquisition of a limited number of high-quality goldmining resources.
[90] As I come to below from [220], the venture did not end well. Whether or not Michael’s structuring discussions with Freddy in mid-November 2016 could be characterised (as Freddy contends) as some form of commitment to a two-stage process (albeit of a conditional nature), the commitment never would have crystallised because the condition as to the success of stage one was not satisfied.
The 20/80 shareholding split — $5 million/$20 million
[91] The parties also differed in their evidence as to why Freddy’s proportion of shares was set at 20 per cent. Freddy stated the 20/80 split was decided upon in this way (reproduced from [66] above for convenience):
27. … at the time we reached agreement in November 2016 we did not undertake a valuation of my permits or shares. Michael asked my how much of the venture I would want to become involved, assuming he was investing $20 million. I told him I would want 20%. That is how the $5 million figure came to be, which is used in our subsequent correspondence.
[92] In other words, Freddy’s evidence is he wanted a 20 per cent shareholding if Michael was investing $20 million.
[93] Freddy explained later in his evidence that, after Michael left the West Coast following the 15 November meeting, his 16 November email to Michael (above at [52]) was sent to allow Michael to show his business partners the values of the permits Freddy was transferring to the two companies to “justify the $5M value”. He explained, on the basis of that email, that a figure of $2 million represented the German Gully mine ($1 million for machinery and $1 million for “annual profits”) and
$3 million represented Freddy’s permits held in GMSL (5,312.781 hectares at $60,000 per 100 hectares equals $3 million).
[94] Michael’s evidence was that there was never a discussion about $5 million with Freddy for his permits. He stated he never would have promised to invest $20 million and given Freddy a 20 per cent share without even knowing what assets Freddy was introducing. Michael stated he found it incomprehensible that Freddy would suggest he agreed to value the permits at $5 million when the permits had no track record, and the Southwest permits had a substantial track record that could have been acquired for
substantially less than $5 million (the consideration under the HOA being
$2.75 million). Michael noted Freddy’s GMSL (on the documents since produced) had a negative equity at the time of $36,000.
[95] On this issue, as with the previous issues relating to the mid-November discussions, I prefer Michael’s evidence. Nothing Freddy had provided up to that point amounted to information that would reliably inform a valuation of Freddy’s companies, or their assets, on which an experienced businessman such as Michael would reach a view as to a substantial valuation figure, let alone one as high as
$5 million.
[96] Significantly, Freddy stated in his evidence-in-chief that he and Michael, at the time they reached agreement in November 2016, did not undertake a valuation of Freddy’s permits or shares. Freddy confirmed in cross-examination that the two of them did not value Freddy’s “company”.
[97] I find that what occurred at the Café was a quick decision on the part of Freddy and Michael to embark on what had been discussed as stage one. The decision implicitly recognised that Freddy was bringing to the venture assets of some value but relatively untested and in need of significant capital if they were to generate profits. Michael would be offering both mentorship on which Freddy placed importance and a reliable source of financial backing for the potential acquisition of significantly more valuable mining operations later, if stage one proved successful.
[98] I find the first reference to a $5 million valuation came not at the Café meeting but when Freddy sent Michael the next day the 16 November email (above at [52]).
[99] I find the 20/80 split was arrived at, at the Café meeting, not by a calculation starting from a $5 million figure for Freddy’s assets. Rather it was agreed in a relatively arbitrary fashion based on Michael’s indication he would expect the shareholding to be split 20/80. Freddy acceded to that proposed split because of the importance he attached to Michael becoming involved, not because of some mathematical analysis based on a ratio between agreed asset values and an agreed sum of future capital injections. This conclusion is reinforced by the subsequent
accounting of money and assets made available to the Companies by Freddy and Jimmy — all were introduced as shareholder loans, not as equity. In the case of Freddy’s assets, they were represented in the accounts as a loan of $332,980.
Freddy’s employment
[100] Freddy pleads that a term of the November agreement was that he would be employed as the general manager of the Companies at a salary of $100,000 per annum. In his affidavit evidence, Freddy referred to agreement that he would be employed by the mining operations company at a salary of $100,000 per year, but without reference to the role of “general manager”.
[101] By the 3ASOC, Freddy referred to the termination of his employment around 30 September 2018 and asserted his termination had caused him financial loss of
$100,000 per annum from that date.
[102] Michael, in his evidence, did not identify (in detail) any discussions during the November meetings as to how Freddy would be employed by the Companies. He referred (his [69], reproduced at [79] above) that he asked Freddy to promise not to compete or to hold any other gold resources during the shared projects. At the very least it was implicit in the discussions between the two that Freddy, with his mine management experience, was to have a management role of some nature in the Companies.
[103] In Mr Ormsby’s cross-examination of Freddy, he asked him whether it was agreed, when Freddy came to be executive director with Jimmy, that he (Freddy) would be paid a salary for that role or $100,000 per year. Freddy agreed his salary was set at $100,000 but said that was the result of the discussion between himself and Michael.
[104] Michael, in his affidavit, stated his discussion with Freddy was that Freddy and Jimmy would work in the mining operation and both be executive directors. He stated, however, that the first discussion of “salary” was just before the company was about to begin operating in April 2017. Michael referred to WeChat exchanges beginning
on 2 April 2017 in which he suggested an appropriate annual salary would be
$100,000, with an additional $50,000 “upon meeting the profit requirement”.
[105] In the exchanges that followed, Freddy negotiated with Michael for a significantly higher figure.
[106] It appears clear from the WeChat exchanges commencing on 2 April 2017, when the German Gully operation was about to commence, that that is when Michael and Freddy came to negotiate and resolve a management salary for Freddy. While the contemporaneous records do not identify an ultimate agreement on the $100,000 figure, the evidence of both recognised that figure was arrived at.
[107] While fixing of the salary level was not a detail of the agreement reached in the November discussions, I find it was a matter left to be resolved in November 2016 and finally agreed in April 2017.
[108] Implicitly, the agreement finally reached was that so long as Freddy occupied the management position he would be paid an annual salary of $100,000 (or such other salary as subsequently agreed at Board level).
Directorships
[109] Freddy pleaded he and Michael agreed each would be a director of the Companies (and their subsidiary companies), with Freddy the “sole executive director”.
[110] I have found above (at [84]) that the involvement of Jimmy as shareholder and director was expressly discussed in the course of the November discussions, in reaching the November agreement, by Michael and Freddy and that it was Jimmy who was to be a director.
[111] In his affidavit evidence, Freddy stated only that it was agreed he and Michael would each be directors, not referring to any discussion as to Freddy becoming a “sole executive director”. There was nothing in the evidence to support a conclusion that the appointment of either Freddy or Jimmy would be permanent, and would enure
regardless of changes in the circumstances of either of the Companies. I find that what was agreed was simply that, upon incorporation of the Companies, Jimmy and Freddy would be the two directors. Nothing in that implied there could be no later alteration of that arrangement.
[112] There is no basis on the evidence to uphold Freddy’s pleading as to his being “sole executive director”. Had Freddy given such evidence, I would have rejected it. On his own evidence, he was clearly not to be the sole director. It is also clear that Michael’s intention was to have Jimmy actively involved in and learning about company governance, at the same time owning 80 per cent of the shares. It is implausible to suggest Michael would have allowed a situation in which Jimmy surrendered to Freddy the amount of control that is suggested by the title “sole executive director”.
Freddy’s CV
[113] Michael gave evidence (which I accept) that, during the November discussions he asked Freddy for a number of documents including Freddy’s CV, and that Freddy promised to provide those. Michael stated he made it clear to Freddy that he particularly required those documents if operations were going to move to stage two because he would need to speak to family and other potential business partners.
[114] After Jimmy and Freddy established the Companies, Freddy emailed a CV (in Chinese) to Michael on 1 December 2016 with the comment “please have a look if it is OK. If not I can make changes.”
[115] The “CV” was a mixture of a traditional curriculum vitae, observations as to the scale of the German Gully mine, and a statement of Freddy’s future plans.
[116] Freddy included under a heading “Skills”, “A Grade Quarry & Senior Mine Manager Licence achieved in early 2017”. Freddy explained in the narrative that the licence is the “highest-level manager licence for the mining industry in New Zealand”. He explained it usually takes more than three years of study but he had taken courses in different cities and visited many mines “to shorten the study period”. What the CV
was clearly intended to represent was that Freddy would have finalised that qualification by “early 2017”.
[117] It transpired, following the commencement of this proceeding and production of documents, that Freddy’s B Grade Managers Licence had been issued as late as October 2016. In his evidence, Freddy explained that he may have finished earlier than that “because the certificate is always delayed”.
[118] In relation to the indication in Freddy’s CV that he would obtain his A Grade Licence in early 2017, Freddy accepted in cross-examination that the A Grade qualification usually involves a 14–18-month programme. When it was suggested to him that it would have been impossible to get his A Grade Licence between October 2016 and the beginning of 2017, he explained he had been told by a person at the qualification body that, if he flew all around New Zealand, he could finish the qualification in six months. In the event, it took Freddy until November 2017 to obtain that licence. He did not further explain in his evidence what the suggested difficulty was that he encountered in obtaining his licence. The obvious inference is that it took him longer than he expected to identify courses around New Zealand and to travel to them in order to shorten what could otherwise have been the 18-month qualification period.
[119] This matter, while not seemingly important if viewed in isolation, assumes significance when a central pleading of Freddy’s is that his agreement with Michael contained implied terms of good faith, loyalty and honesty. Freddy must have appreciated that Michael was attracted to working with him because of his apparent expertise and qualifications in goldmining. Freddy must also have fully appreciated the commercial pressure that would exist for those involved to have a mining operation up and running and producing returns at the earliest date. The undisclosed need for Freddy to be going to unusual lengths over the following year to obtain a qualification that he had indicated he would have in early 2017 was not going to be conducive to sustaining a relationship of good faith, loyalty and honesty, or of encouraging a potential business partner to venture further with him.
The co-operation agreement: conclusion
[120] In the course of their November discussions, Michael and Freddy reached a number of points of agreement on what they expressly referred to as their “co- operation”.
[121]The agreement envisaged two stages of co-operation.
[122] At stage one, the Companies would be formed, one a holding company and one an operating company. Freddy and Michael agreed:
(a)the Companies would be incorporated;
(b)Freddy would hold 20 per cent of the shares in each and Jimmy the remaining 80 per cent of the shares;
(c)Freddy and Jimmy would, upon incorporation, be the directors of the Companies;
(d)Freddy would have a management role (with the salary and other details to be determined);
(e)Freddy would transfer his mining interests into the Companies, either directly as assets or by transferring the shares in the relevant company to become a subsidiary of the Companies;
(f)Freddy, during any continuing period of “co-operation”, would not compete or hold any other gold resources;
(g)Freddy would pursue other high-quality goldmining opportunities which, if taken up, would be taken up at stage two of the “co- operation”; and
(h)Michael would provide support to the Companies and to Freddy and Jimmy as a mentor.
[123] In the event the operation of the Companies at stage one proved successful and additional further high-quality goldmining assets were identified for acquisition and agreed upon, there would be a stage two. Michael would then make available funding of up to $20 million to achieve any such acquisitions through a fresh company structure in which Michael would own 80 per cent of the shares and be a director, while Freddy would own 20 per cent of the shares and be a director.
[124] Stage one of the “co-operation” was commenced through the incorporation of the Companies, the transfer of Freddy’s assets to them, the employment of Freddy as manager, and the commencement of operations at the German Gully mine.
[125] In summary, what then followed was a period, through to March 2018, in which some mining operations were carried out and some steps were taken to acquire assets, with Jimmy advancing money to fund operations. As I come to below from [220], the period from March 2018 saw a deterioration in the relationship between Freddy on the one hand and Jimmy and Michael on the other. Mining by the Companies ceased in early October 2018, after Freddy initially agreed that operations should cease. Discussions ensued between Freddy and Michael about their “uncompleted co- operation agreement” which Freddy initially accepted, following discussion, was at an end. At shareholders’ meetings on 25 October 2018 (and subsequently), Freddy was removed as a director. In January 2019 notice was given to shareholders that Westcoast was seeking to raise further funds by an issue of shares, with the stated purpose of recommencing mining operations.
[126] Upon incorporation of the Companies (that is Westcoast and Golden Coast) and the transfer of assets into them, stage one of the agreed co-operation between Michael and Freddy was in place and was to be worked through. Freddy had introduced his assets and would continue to work for the Companies. Jimmy, for his part, introduced the funds necessary for the Companies’ operations and also worked for the Companies.
[127] As I come to from [220], the Companies, in the following period, did not achieve the level of success Michael required before committing himself to the stage two level of co-operation. Stage two would have involved Freddy and Michael as
shareholders in a company, or companies, incorporated with fresh and substantial acquisitions, either in mind or in place. Only at that point would Michael have been making available any or all of the $20 million previously discussed.
[128] Freddy’s claim for relief in relation to these (particular) Companies has therefore proceeded on the incorrect factual foundation that Michael was committed to injecting into these Companies (by way of equity) $20 million or thereabouts.
Freddy’s claim for relief under s 174 Companies Act
The pleaded claim
[129] Freddy, by the 3ASOC, pleads that he has been prejudiced and caused loss through seven, matters identified in the 3ASOC in this way:
[10][Michael] failed to contribute $20 million of equity within a reasonable time (or at all).
[11]On or about 30 September 2018:
(a)[Jimmy] at the direction of [Michael] ordered the defendant companies’ mining and exploration operations, and those of their subsidiary companies, to cease with immediate effect.
(b)[Freddy’s] employment agreement with the companies was terminated with immediate effect.
(c)[Freddy] was excluded from the operations of the companies and from access to the companies’ records.
[12]On 25 October and 9 November 2018 (as the case may be) [Freddy] was removed as a director of the defendant companies and their subsidiaries by shareholder resolution of [Jimmy] at the direction of [Michael], as holder of 80% of the shares of the companies. [Freddy] did not agree to his removal as a director of the companies.
[13]On 21 January 2019 [Jimmy] at the direction of [Michael] caused the two defendant companies to each offer for subscription 999,990 further shares at a proposed price of $1.00 per share. This offer did not proceed.
[14]On 11 June 2019 [Jimmy] at the direction of [Michael] caused the defendant companies to offer 500,000 further shares in each of the two defendant companies which were offered for subscription and subsequently issued at the price of $1.00 per share.
[15]The defendant companies and their subsidiaries have continued their operations to the exclusion of [Freddy].
[16][Michael] has failed to contribute any equity to the defendant companies or their subsidiaries.
[130]Earlier in the 3ASOC Freddy pleaded this:
8. [Michael]subsequently nominated [Jimmy] to hold [Michael’s] shares and to fulfil his role as director of the defendant companies and their subsidiaries.
“$20 million in equity”
[131] I have already found the cooperation discussions between Freddy and Michael were as to arrangements which would proceed in two stages, with Freddy and Jimmy to be the shareholders and directors of the defendant companies at stage one. Michael’s precise financial and equity involvement would have been negotiated and agreed at stage two, in the event the stage one venture proved successful.
[132] In these circumstances, Freddy can have no claim against Michael (or the defendant companies) for a failure or refusal by Michael to contribute $20 million or any other sum to the equity of the Companies or their subsidiaries.
[133] Freddy’s pleadings as to Michael’s failure to inject equity with the Companies (at paragraphs [10] and [16] of the 3ASOC, above at [29], therefore do not identify a relevant prejudice — contrary to Freddy’s pleading, Michael at no point agreed to contribute such equity to the Companies.
Termination of employment
[134] A further aspect of Freddy’s pleading also requires no further factual examination, this relating to the termination of Freddy’s employment, as pleaded at paragraph [11](b), of the 3ASOC (above at [129]). Freddy pleads he suffered financial loss (at the rate of $100,000 per annum from 1 October 2018) through the termination of his employment. His prayer for relief seeks compensation under s 174 Companies Act for that alleged loss.
[135] This aspect of Freddy’s claim for compensation falls within the exclusive jurisdiction of the Employment Relations Authority under s 161(1) Employment Relations Act 2000. In particular, under s 161(1)(r) of that Act, the Authority has
exclusive jurisdiction to make determinations about employment relationship problems generally, including:
…
(b) matters related to a breach of employment agreement:
…
(e) personal grievances;
…
(r)any other action (being an action that is not directly in the jurisdiction of the court arising from or related to the employment relationship or related to the interpretation of this Act (other than an action founded on tort);
[136] The claim Freddy brings here for financial loss of $100,000 per annum is expressly related to his employment agreement with the Companies. In other words, he seeks to sue in this Court as an employee whose employment was terminated in breach of his employment agreement. As identified by the Supreme Court in FMV v TZB, there can arise, in relation to company situations, “dual capacity cases” which produce a form of split proceeding based on multiple allegations, such as where an employee is also a director of the employer company.1 In such cases, which capacity applies is a question of fact.2
[137] Here, this aspect of Freddy’s claims expressly arises from his capacity as an employee pursuant to an employment agreement. As such this aspect of Freddy’s claims falls within the exclusive jurisdiction of the authority and cannot be considered further here.
[138] These findings leave for consideration, in relation to Freddy’s claims for relief under s 174 Companies Act 1993, only the pleadings in the 3ASOC at [11](a) and (c), [12], [13], [14] and [15], relating to actions taken by the defendants from late- September 2018.
1 FMV v TZB [2021] NZSC 102; [2021] 1 NZLR 466 at [102].
2 At [102], citing Global Kiwi NZ Ltd v Fannin [2014] NZHC 656 at [12] and [15].
The Companies’ operations up to September 2018
Jimmy and Freddy as shareholders and directors
[139] The Companies were incorporated on 30 November 2016 with Jimmy and Freddy as the shareholders and directors.
The Greid/German Gully interests
[140] With the transfer of GMSL’s shareholding to Golden Coast in November 2016, the mining assets held by Greid in relation to German Gully (Greid being GMSL’s wholly owned subsidiary) passed into the effective ownership of the new holding company, Golden Coast. Michael and Jimmy, in their evidence, at least impliedly criticised Freddy for not making a fuller disclosure of the manner and timing of his acquisition of the German Gully interests, partly because of their recent acquisition and partly because it was not until April 2017 that GMSL took the formal transfer of the Greid shares.
[141] I do not find any criticism of Freddy in that regard justified. Michael and Jimmy had the opportunity for due diligence and could have asked such further questions around those issues as they wished. Freddy effected the transfer of the Greid shares as he had agreed to do. Golden Coast and Westcoast thereby obtained the assets and the ability to operate the German Gully mine as had been intended.
Freddy’s/GMSL’s other holdings
[142] By transferring his shares in GMSL to Golden Coast in November 2016, Freddy also transferred effective control of the other exploration and mining interests (that is, other than owned by Greid) (as referred to at [21] above).
The Duffer’s Creek permit
[143] Around 31 January 2017, Freddy sent a GMSL tax invoice (for $28,750 including GST) to Jimmy with a request for payment. Jimmy arranged for Golden Coast to reimburse GMSL in that sum.
[144] Jimmy was to subsequently claim that Freddy’s obtaining of the $28,750 payment was “one example of Freddy’s dishonesty and many losses that were caused to the company through his negligence and lack of care as a director”.
[145] As explained in his evidence, Freddy sought the $28,750 payment on account of the purchase of an exploration permit for Duffer’s Creek. In his affidavit, Freddy stated:
61.In early January 2017 Matt Dove and I discussed the purchase of one of his exploration permits at Duffers Creek (EP60338). At that point the permit was at the application stage. The application document had been completed and relevant fees had been paid, but the application had not been submitted. To do our own application would have taken a lot of time and money (in obtaining relevant reports, etc), and Matthew Dove would have been granted the permit by NZPAM before we could do that. However, if Matthew Dove allowed us to use his application and supporting documents (but made the application in our name) then we could obtain the permit, and quickly. This approach also saved having to pay transfer fees to NZPAM if we had instead waited and bought the permit from Matthew Dove once it had been granted to him.
62.I discussed this with Michael and he agreed that we should buy it. This would have been in one of my many discussions with Michael in January 2017 but I cannot recall a precise date. The Duffers Creek permit was a minor deal compared to our other deals at the time, such as King Solomon.
63.The price was $25,000 excluding GST. Matt Dove wanted my Toyota Prado because he had left his job at Southwest Energy and lost the use of his work vehicle. He needed a four-wheel drive to access one of his mining sites. We agreed that he could have my Prado, which was of equivalent value, in return for the permit. The agreement reflects this, and also records that if the permit was not granted, then he would pay us (GCHL) for the Prado.
64.This was discussed with Michael and agreed to by him. I am not sure why he and Jimmy now say this arrangement was some kind of scam. I gave up my Prado to Matt Dove, the company (GCHL) effectively paid me for it and obtained the permit (once granted) from Matt Dove in return. If for some reason the permit had been refused by NZPAM then Matt Dove was obliged to pay GCHL for the Prado.
65.Michael and Jimmy also say that the permit was hopeless because the land in question was DOC land with endangered birds present, and access would never be allowed. That is correct about a very small part of the land, but the gold-holding area is not within or near to the bird breeding area. There is no requirement to obtain DOC consent to access the mineable land. Almost of the permit area is covered by private land, not DOC land, and there is a mining permit 54079 just beside it.
[146] In his evidence, Jimmy (notwithstanding Freddy’s affidavit explanation) reasserted a belief that the Duffer’s Creek permit was worthless, based on his perception of what the relevant maps indicate. Jimmy also expressed a belief that the entire arrangement (between Mr Dove and Freddy) was a “sham orchestrated by Freddy”.
[147] For his part, Michael denied he had approved Freddy’s acquisition of the Duffer’s Creek permit in exchange for a Toyota Prado. Michael suggested such an allegation was contrary to Jimmy’s assertion that he was at the time “sole executive director” and that Jimmy could not oversee his authority.
[148] These issues surrounding the Duffer’s Creek permit were raised by the defendants in part-explanation of the concerns they subsequently came to have with Freddy’s conduct and also (on the part of the Companies, as first and second defendants) in support of Golden Coast’s counterclaim for judgment in the sum of
$28,750 for what the defendants refer to as the “sham arrangement”.
[149] By the nature of those claims, the defendants bore the burden of proof in establishing either that the Duffer’s Creek arrangements were a sham or that Freddy otherwise acted in breach of fiduciary duty by causing Golden Coast to acquire a valueless interest.
[150] As the plaintiff, Freddy was the first witness to be cross-examined in relation to the Duffer’s Creek issues. I found his answers in cross-examination to be straightforward, logically supportive of the genuineness of the Duffer’s Creek transactions and cogently explaining (contrary to Jimmy’s assertions) why the Duffer’s Creek land held mining potential. When Mr Ormsby cross-examined Freddy by reference to maps of the area, it became apparent that (contrary to Jimmy’s view) not all the area covered by the Duffer’s Creek permit was subject to conservation restrictions.
[151] Jimmy’s evidence did not establish that the Duffer’s Creek permit was valueless — in particular it did not establish that the land did not contain areas capable of exploration mining (unaffected by conservation restrictions).
[152] Michael, in cross-examination, accepted Freddy had told him that “the deal of Duff Creek is done” but he reasserted that Freddy had not talked to him about Duffer’s Creek before the deal was done.
[153] In his evidence, Freddy reiterated he had discussed the acquisition of the Duffer’s Creek permit with Michael (by telephone), in January 2017 following his discussions with Mr Dove. Freddy referred to Vodafone records of texts and telephone calls indicating discussions with both Mr Dove and Michael at the time.
[154] I prefer the evidence of Freddy in relation to the nature of the Duffer’s Creek transaction and the discussions he had with Michael in relation to it. For Freddy, a major attraction of entering arrangements with Michael was to obtain Michael’s mentorship in relation to business dealings. In the initial discussions concerning the introduction of Freddy’s mining assets, Michael had already demonstrated his determination to understand the nature of assets being acquired and his interest in being involved in due diligence. It is implausible that Freddy would have unilaterally acquired the Duffer’s Creek permit and told Michael about the acquisition only after the event. It is clear from the Vodafone records that Freddy was in discussion with Michael at the same time as his discussions with Mr Dove. In this regard I find that Michael has either forgotten the relevant discussions with Freddy or, with memory of it, has chosen to deny it took place.
[155] I also positively find that the Duffer’s Creek permit had potential value and that the deal with Mr Dove was not a “sham transaction”. Freddy’s explanation of the genuineness of the transaction was logical and was not undermined in cross- examination. Jimmy’s belief that the transaction was a sham was based on nothing more than suspicion. Freddy for his part was embarking upon what he wanted to be a long-term venture with Michael in which Michael would invest up to $20 million in future purchases. The prospect that Freddy might have sought to fraudulently obtain
$28,750 out of Golden Coast at the earliest stage of the venture is highly improbable
— no one in this litigation has suggested that anyone involved embarked on their venture other than with the intention of a long, close and enduring commercial relationship.
[156] The defendants have not established their counterclaim in relation to the Duffer’s Creek permit. To the contrary I find that the Duffer’s Creek arrangement was not a sham. Freddy genuinely provided his vehicle to meet the cost of the asset. Golden Coast acquired the permit. This was discussed and agreed by Freddy and Michael before the transaction was completed.
Purchase of King Solomon Gold Limited
[157] King Solomon Gold Ltd (King Solomon), a company controlled by Mark Cotton, held an exploration permit for an old, disused mining area in Southland.
[158] There was significant historical information available about prior mining in the King Solomon area. Freddy obtained some historical reports about the area from Mr Cotton. Freddy took the view there was potential for very large amounts of gold still to be mined from the area, albeit with the need to remove up to 60 metres of overburden before accessing the gold.
[159] Freddy (on behalf of Golden Coast) around January 2017, sought advice from Philip McKinnel in relation to King Solomon. Mr McKinnel had expertise in large- scale mining operations particularly on the West Coast.
[160] Freddy explained to Mr McKinnel that Golden Coast was considering the purchase of King Solomon and that the vendor was asking $1 million for the shares.
[161]On 18 January 2017, Mr McKinnel reported to Freddy as follows:
Hi Freddy
A few notes on the proposed purchase of King Solomon Gold:
• Historic underground gold mine, operated in the mid 1930’s.
• Significant gold produced going on previous records, however there are questions around this due to company practices.
• Previous exploration drilling has been completed, with inconclusive results.
• There appears to be a significant volume of stripping required (up to 60 m).
I don’t think the permit is worth what they are asking for it, for the following reasons:
• A significant investment in exploration is required. Drill holes will cost in the order of $300/m and at 60 m deep, this will be appropriately $18,000 per hole.
• Land access is not confirmed and additional costs may be incurred as part of this negotiation.
• There is no recent exploration work that provides any certainty around the gold resource.
• Resource consents are required for mining, and any large scale overburden removal will be required to be disposed of.
Should you want to proceed with a potential purchase, any contract should include the following conditions:
• The purchaser gains access to private land covered by the mining permit within 3 months of the signing of the sale and purchase agreement under conditions that are satisfactory to the purchaser and allows any resource to be mined economically.
• A review of the relevant regional and district plan provisions to ensure any future mining is possible under relevant legislation.
• There are no physical, geological or legal obstacles that will frustrate future exploration or mining activities.
Can discuss further if necessary.
Regards
[162] In a follow-up email to Freddy a week later, Mr McKinnel recorded in relation to the land owners (the Andersons):
I’ve spoken to the friend of mine who knows the Andersons and he can introduce me to them. This should give a good chance of getting a land access agreement in place.
Let me know if you want me to start work on this.
[163] Through this time, Freddy was discussing mining opportunities for the Companies with Michael and not with Jimmy.
[164] Unsatisfactorily, it was Jimmy who on behalf of the defendants gave the narrative affidavit evidence in relation to King Solomon, referring to correspondence and communications between Freddy and Michael and stating things of which he said
he was “aware”. However, Jimmy did not move down to the West Coast until April 2017. In his evidence at trial he clarified that anything about his understanding (of the King Solomon discussions) had come from what Michael had told him. I accordingly disregard those parts of Jimmy’s affidavit evidence in which he discusses what discussions took place (or did not take place) between Freddy and Michael.
[165] A draft agreement for the purchase of the King Solomon shares at $1 million was prepared — Freddy forwarded it to Michael by email on 26 January 2017 requesting Michael to view it. There then followed 34 minutes of telephone discussion between them. Freddy stated in his evidence that during those conversations they discussed the purchase of the King Solomon shares and that the two of them agreed to purchase the shares.
[166] In his affidavit evidence, Michael did not refute the reference to his agreement to purchase the shares but recorded:
I did not have discussions with Freddy agreeing to him purchasing King Solomon without land access. I was consulted generally about it for my advice.
[167] After the telephone discussions on 26 January 2017 between Freddy and Michael, Freddy later that evening forwarded the draft agreement to Jimmy with the request that he initial and sign the document.
[168] The agreement contained a land access condition which provided the purchaser with the opportunity to cover off land access issues before the contract became unconditional.
[169] Having regard to the evidence as to Michael receiving the draft agreement, perusing it and then having lengthy discussions with Freddy in relation to it, I do not accept Michael’s evidence that he was only “consulted generally” about the agreement “for [his] advice”. It is clear Freddy must have been discussing in detail the proposed purchase and seeking Michael’s approval to have Jimmy sign the agreement, as Freddy arranged promptly after his telephone discussions with Michael. Significantly, Michael in his evidence did not deny having discussions with Freddy in which he agreed to the purchase of the King Solomon shares — rather, his evidence was that he
did not agree to the purchase “without land access”. Of course, that was not what the draft January 2017 agreement would have committed Golden Coast to, as the contract would have remained conditional until land access was resolved to Golden Coast’s satisfaction.
[170] I find as a matter of probability that Michael, on 26 January, understood there was an access issue but that he equally understood the draft agreement would give Golden Coast the opportunity to work through that.
[171] Mr Cotton as vendor would not agree to a land access condition but was prepared to reduce his asking price to $500,000. Freddy immediately referred this development to Michael. Michael enquired:
If the landlord does not agree to the land access permission, will the exploration permit be lapsed to be worthless soon?
(translated from his Chinese message)
[172] In his affidavit evidence, Michael stated that, in discussions on 13 February 2017, Freddy assured him that land access could be obtained, and referred to an agreement that had been reached with another exploration company for land access.
[173] I do not accept Michael’s evidence that he received an assurance from Freddy in February 2017 that land access could be obtained. Michael’s own text to Freddy as to what would happen if the landlord did not agree to land access indicates that that refusal of access was a live possibility in his mind.
[174] I also find as a matter of probability that Michael’s text indicates that, at that point, he was contemplating the landowner’s agreement might well not be obtained, with the consequence the exploration permit might lapse and Golden Coast thereby put in a position of being able to obtain a fresh permit without having to purchase the King Solomon shares.
[175] As it was, in the months that followed further attempts were made to negotiate an agreement with King Solomon. In Michael’s cross-examination, he again insisted that decisions during this period were “Freddy’s decision” and that he “only gave some
general advice”. Yet, on 25 May 2017, when Freddy forwarded a redrafted purchase agreement to Michael, there followed two telephone discussions (totalling 29 minutes between the two) in which (Michael accepted in evidence) he asked for a force majeure clause to be included in the agreement. I find, contrary to Michael’s evidence, that the decisions in question were not being made by Freddy alone and that Michael was not limiting his role to “general advice”. He was actively involved in all decision-making relating to King Solomon from January to May 2017 — the decisions were being made in light of the fact that access to the land was not assured.
[176] A contract was then entered into between King Solomon and Golden Coast, without a condition as to land access but with Michael’s requested force majeure clause, and the purchase price reduced to $500,000.
[177] It transpired that the agreement of the landowners to grant access for exploration purposes was not ultimately obtained, notwithstanding a meeting arranged by Mr McKinnel on 20 November 2017, at which Freddy advanced, with Michael’s approval, the possibility that Golden Coast might, instead of paying for access to the land, purchase the land outright.
[178] The breach of duty expressly pleaded by the defendants in relation to the King Solomon purchase was that Freddy entered into the King Solomon purchase and acted contrary to professional advice to secure land access. The contract in relation to King Solomon was in fact entered into by Golden Coast with the full knowledge and approval of Michael. Mr McKinnel’s advice had not been against the purchase of the King Solomon shares — rather it was that the permit was not worth the $1 million that the vendor was asking in January 2018. Mr McKinnel’s recorded view had been that there was a “good chance of getting a land access agreement in place”. The decision to ultimately enter a contract without a land access condition (but with the price halved to $500,000) was a decision reached jointly by Freddy and Michael with knowledge that land access was not assured.
[179] The defendants have not established their counterclaim in relation to King Solomon. They have not established that a reasonable and prudent director of Golden Coast would not have entered the contract to purchase the King Solomon shares —
that contract was entered into upon the agreement of both Michael and Freddy upon the basis of their collective commercial judgement, taking into account the uncertainty over land access and having regard to the ultimately negotiated price.
The surrendering of EP60133 and MP60242
[180] The defendants, in addition to their allegations that Freddy had breached his fiduciary duty and had been negligent in relation to the Duffer’s Creek permit and the King Solomon purchase, pleaded that Freddy had similarly breached duties by surrendering an exploration permit and a mining permit (EP60133 and MP60242) following Golden Coast’s acquisition of the shares in (Freddy’s) GMSL.
[181] Freddy arranged for the two permits to be surrendered in October 2017 at a time when the regulatory authority, New Zealand Petroleum and Minerals (NZPAM) was considering Golden Coast’s application relating to the transfer of the King Solomon exploration permit.
[182] As a result of the defendants’ pleading Freddy had breached his duties by surrendering the permits, Freddy provided a detailed explanation in his affidavit evidence:
Surrender of permits
Failing to hand over company records and information
[208] Westcoast, by its counterclaim, alleged Freddy had breached his duties to Westcoast by failing to hand over company records and information. Westcoast did not plead that any financial consequence had flowed from such failure. The only relief sought by Westcoast pursuant to its counterclaims is monetary. Accordingly, even should the allegation of alleged failure be made out it would not result in a judgment on the “company records” claim as pleaded.
[209] That said, I will briefly consider the evidence in relation to this allegation as background to the Court’s consideration of the relief sought by Freddy on his claim under s 174 of the Act.
[210] Jimmy provided the defendant’s evidence in relation to the alleged failure to hand over company records and information. In his affidavit, he recorded in a “list of grievances with Freddy” the following:
Freddy failed to maintain company files and had all documents sent to his personal email or home address, such as permits files from NZPAM, and company credit card statements… These were vital records and the companies are still missing most of them. I now believe Freddy deliberately blocked the company's documents in this way in order to prevent me from discovering his unauthorised company credit card expenditure as well as to take advantage of the company such as his secret surrender of permits, and recent application for an exploration permit covering the land area of King Solomon Limited.
[211] Jimmy, in addition to identifying in his “list of grievances” a failure to hand over company records, asserted in his affidavit evidence that Freddy regularly had “unexplained credit card expenditure and used the credit card for personal expenditure”. He gave five instances relating to the telephone bill of Freddy’s wife and “AA Insurance payment”; a “family vacation trip” in February 2017; credit card expenses said by Freddy to relate to a China mining conference in September 2017; and Air BnB charges in early 2018.
[212] In his affidavit in reply, Freddy responded on each of those five categories of grievance. His explanations were detailed and coherent. It is significant that in relation to none of Jimmy’s “grievances” did the defendants see fit to plead an actual loss to the Companies. The defendants did not establish that any of the “grievances” identified by Jimmy in relation to record keeping and expenditure involved Freddy obtaining company funds or credit for his personal benefit. I conclude that Jimmy’s preparedness to detail these matters as “grievances”, without any of the defendants pursuing counterclaims based on them, reflects the extent of the distrust and suspicion that had arisen between the parties by the time by the time Freddy was excluded from company operation.
[213] Although Jimmy was suggesting that Freddy had engaged in “unauthorised company credit card expenditure”, the defendant in this proceeding did not plead that Freddy had taken any company money or used any company credit for his personal benefit. I further observe that both types of missing information referred to by Jimmy
— permit information held by NZPAM and credit card information — would have been readily obtainable by the Companies from the organisations in question. There was no need for any substantial delay by the Companies in obtaining such information (assuming it was not held in the records available to the Companies after Freddy was excluded).
[214] As it was, Freddy provided responses to the relevant paragraphs in Jimmy’s affidavit. He recorded in response to the paragraph I have quoted at [210] above:
… Judy Zhang came to the West Coast for a week and I gave her all the records I had and taught her what to do. I spent 3 hours with her in a cafe teaching her and handing over documents. She had copies of all bank statements and credit card statements and had authority on those accounts. She was in charge of them, and company paperwork generally. She changed the company contact details (including with NZPAM) to go to her.
Misrepresentations as to mining management experience
[215] In their defence, the defendants asserted Freddy had misrepresented his experience and qualifications to Michael and Jimmy. In particular they asserted Freddy had stated that he had “extensive working experience in mining operations”.
They pleaded that Freddy did not have the mining skill, expertise and experience that he represented to them.
[216] These allegations were not made as giving rise to monetary counterclaims by either Westcoast or Golden Coast. As explained in their Statement of Defence, the allegations of misrepresentation (and other allegations) are relied upon by the defendants as establishing that Freddy had disentitled himself to relief and that it would be contrary to justice and equity for him to be compensated in respect of any of the matters he was asserting in his claim.
[217] As I conclude, for separate reasons, that Freddy is not entitled to relief under s 174 of the Act, it is unnecessary that I examine in detail the evidence and competing arguments as to the accuracy of the way in which Freddy represented himself to Michael in particular.
[218] Had I found that Freddy had been unfairly prejudiced in terms of s 174 of the Act, I would have found that aspects of the way in which Freddy represented his experience and qualifications needed to be brought into account as potentially disentitling conduct on his part. For instance, his representation (through his CV) as to when he would obtain a relevant manager’s licence, and the impact of the extended time and effort thereafter taken by him to achieve the qualification, became significant factors in the subsequent deterioration of the relationships between Freddy on the one hand and Michael and Jimmy on the other. As a matter of equity, Freddy must bear substantial responsibility for the ensuing deterioration in the relationships.
[219] These observations stated, the correct outcome of Freddy’s claim turns not on any disentitling conduct on his part but on the primary conclusion that Freddy has not established unfair prejudice in terms of s 174 of the Act.
The relationship deteriorates and falls apart
[220] From January 2017 to September 2018 the parties worked together to have the German Gully mine operating and on other opportunities. Water supply was established at German Gully, mining equipment was purchased and operations commenced. Jimmy began transferring funds to Golden Coast for purchases and
operating costs, with $5,066,500 advanced by 31 March 2018 and net losses of
$1,008,485 accruing in the Companies. In the meantime, from mid-2017, Freddy replaced the initial mine manager (Mr Reid). The King Solomon shares purchase was pursued through 2017 but land access issues rendered the purchase unsuccessful. Issues arose in March 2018 when Mr Zhong sought compensation for his borrowed Xinxin equipment and made allegations of deception against Freddy. Jimmy became concerned in April 2018 when he discovered Freddy had surrendered the two GMSL permits and he was not prepared to accept Freddy’s explanation of the reason for those surrenders. The parties arranged from April 2018 to have the German Gully mine operate with two shifts per day to attempt to increase production. By mid-July 2018 it had become clear that the King Solomon landowners would not discuss access to that property any further.
[221] Beginning around April in 2018, Freddy and Michael attempted to draft a “cooperation agreement” to reflect the understanding they each believed they had reached in November 2016 relation to their working together. It became clear by May 2018, from the drafts they were discussing, that they had disagreements as to what precisely they had agreed at the time they set out to work together. Discussions continued during the following months as to how management responsibilities might be divided between Freddy and Jimmy, but without conclusion.
[222] This sequence of events (summarised at [220] (along with other aspects of the operations) caused Jimmy and Michael to become concerned about the increasing losses. The level of Jimmy’s financial contributions to the Companies’ operations, without returns resulting, was beyond anything contemplated during the November discussions. Michael convened a meeting including himself, Jimmy, Freddy and Judy on 15 September 2018, at which he queried whether Golden Coast should continue to mine and operate and discussed whether it was possible to drastically change the current loss situation. It was agreed at that meeting that the parties would reflect and discuss these matters at a further meeting.
[223]A board meeting was then convened for 6 October 2018.
[224] At the board meeting on 6 October 2018, Freddy agreed with a proposal by Jimmy that the German Gully mining operation be immediately shut down. Two days later (8 October 2018), Freddy in a WeChat message to Michael referred to “a series of contradictions in our work that are difficult to reconcile”, acknowledged that the “cooperation agreement” had not been negotiated well, and suggested they consider “stopping cooperation”. In exchanges in the following days, Freddy appeared to acknowledge that “the work is over”, he thanked Michael for the valuable experiences that he had gained and looked forward to discussing cooperation matters.
[225] In his evidence, Freddy stated that he felt he had no choice but to agree to the closure of the mine but noted he was not happy with its closure.
[226] In the days that followed, Michael and Jimmy became concerned at Freddy’s indications that he still wished to pursue the “cooperation agreement” as they simply wanted to bring the cooperation to an end. Michael and Jimmy decided to convene special shareholders’ meetings for the purpose of removing Freddy as a director of the Companies and their subsidiaries.
[227] Notices for such meetings were issued and from 25 October 2018, Jimmy exercised his powers and removed Freddy as a director of the Companies and each of the subsidiaries.
[228] Subsequently, in January 2019, Jimmy notified shareholders of Westcoast (that is himself and Freddy) that Westcoast were seeking to raise funds through a subscription offer of 999,900 shares at $1 per share (involving a re-operation plan once funding was in place).
[229] In the course of January–February 2019, the Companies received a non- compliance notice from the Department of Conservation in relation to Greid and from the West Coast Regional Council abatement and infringement notices for historical mining.
[230] In the course of the next financial year (to 31 March 2020) Westcoast incurred a further loss of $573,833.
Oppressive or unfairly prejudicial conduct?
The pleadings
[231] Freddy, by the 3ASOC, alleged he had been unfairly prejudiced in the conduct of the Companies because:
(a)The plaintiff’s removal as director was in breach of:
(i)The Agreement.
(ii)The common law duty on the fourth defendant as beneficial owner of 80% of the shares in each of the defendant companies to exercise his powers for a proper purpose.
(b)He has been excluded from the operations of the company in breach of the Agreement.
(c)The issue of the additional share capital in each of the defendant companies was prejudicial in that:
(i)The relevant resolutions by the third defendant were made for improper purposes, being to put financial pressure on the plaintiff and/or dilute his shareholding, and is accordingly in breach of section 133 of the Companies Act 1993 and the director’s common law duty to exercise powers for proper purposes, and is accordingly void.
(ii)The issue grossly undervalues the existing shares in the defendant companies.
(iii)The issue dilutes the plaintiff's shareholding in the companies.
(iv)The company had no need for additional capital.
(v)The fourth defendant has unpaid share capital of $20 million.
(d)The plaintiff’s exclusion from the companies, and the improper dilution of his shareholding, and the fourth defendant’s failure to contribute agreed capital, have resulted in the value of the plaintiff’s shareholding being diminished in value by an amount to be quantified prior to trial.
(e)The termination of the plaintiff’s employment caused him financial loss at the rate of $100,000 per annum from 1 October 2018.
[232] By their statements of defence, the defendants denied that their actions in relation to the removal of the defendant as a director and from the operations of the Companies and the issue of additional share capital were unfairly prejudicial or oppressive. They recorded the willingness of Jimmy to acquire Freddy’s shares at a
fair value. They pleaded that Freddy was disentitled to relief by reason of those aspects of his contact which they asserted to have been in breach of his duties.
The law
[233]Section 174 of the Act relevantly provides:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
…
[234] On the basis of Freddy’s case as pleaded, the three sequential questions for the Court are:
(a)were the affairs of the Companies operated in a manner that was oppressive or unfairly prejudicial to Freddy?
(b)if so, is it just and equitable to order relief?
(c)if so, what is the value of Freddy’s shareholding (if any)?
Unfairly prejudicial or oppressive?
[235] The focus of s 174(1) of the Act is on conduct that is unjustly detrimental to any member of the company whatever form it takes (and whether it adversely affects all members alike or discriminates against some only).3
[236] A lack of probity or the presence of bad faith are not necessary conditions to the granting of relief under s 174.4
[237] In determining whether conduct falls within the categories identified in s 174 of the Act, the court will take account of matters other than the strict terms of the formal constitutional or contractual documents, such as special circumstances that reasonably lead a shareholder to believe the powers would not be exercised in a particular way.5
[238] In determining whether a defendant’s conduct has been unfairly prejudicial, the Court will have regard to whether there has been an offer to buy the complainant’s shares or make some other fair arrangement whether that offer to purchase cures any unfairness is a question of fact for the Court to determine in the circumstances.6
The conduct in this case
[239] The predicament facing the Companies during 2018 was impossible to ignore. With Golden Coast, as the operating company, continuing to trade unprofitably, and no willingness on the part of Jimmy (or Freddy) to extend (beyond the already substantial advances) further credit to the Companies, the Companies could not prudently be allowed to continue to operate. The closure of operations, at least for the time being, was required. Freddy himself agreed with that at the time.
3 Thomas v HW Thomas Ltd [1984] 1 NZLR 686, (1984) 2 NZCLC 99,148 at 693 (referring to s 174’s precursor s 209 Companies Amendment Act 1980).
4 Sturgess v Dunphy [2014] NZCA 266 at [137].
5 Re Waitikiri Links Ltd (1989) 4 NZCLC 64,922 (HC) at 5.
6 Birchfield v Birchfield Holdings Ltd [2021] NZCA 428, [2022] 2 NZLR 123 at [33]–[36].
[240] It would have been self-evident to all the parties that, were there to be a restructuring of the Companies so as to give them a sound, future trading potential, the necessary funds required would need to come from either Jimmy or Michael.
[241] Any restructuring, so depending on the goodwill of Jimmy and/or Michael, would require the Companies to have a governance structure that was functional and united.
[242] The relationship between the parties (Freddy on the one hand and Jimmy and Michael on the other) had deteriorated to the point of dysfunction by September 2018. The interests of the Companies required functioning governance. It mattered not whether the matters that had led to the dysfunctional relationship were due to misconduct on the part of Freddy or not. The correct outcome of Freddy’s claim does not turn on whether he had misconducted himself. It turns on the fact that, for a wide range of reasons that had developed through a period of some 18 months, there was, by September 2018, no prospect of continuing functional operation of the two companies, if Jimmy and Freddy remained as co-directors.
[243] The impracticability of the existing situation is highlighted by Freddy’s insistence at the time, and subsequently through this proceeding, that Michael was required to provide $20 million as equity to these two Companies. His insistence on that position (which I have found to be legally and factually incorrect) would have put the Board of each company in an impossible position while he continued to be one of the two directors.
[244] I conclude the steps taken (on the basis of Jimmy’s rights as shareholder) to remove Freddy as director were justified and indeed required in the best interests of each Company.
[245] I am further satisfied that the defendants’ responsibilities towards Freddy as a minority shareholder, who no longer held the position of director, were appropriately met by Jimmy’s offer to purchase Freddy’s shares at fair value. It then became a matter for Freddy whether he wished to sell his shares or not. In the event he wished to sell, there were obvious difficulties in determining in late-2018 what was fair value. The
potential complexity of the valuation exercise was reflected in the conflicting evidence which this Court heard at trial from two experienced valuers. While, by reason of the conclusions I have reached, it has not been necessary to examine here that valuation evidence, the gulf of opinion between the two valuers indicated the unreliability of any estimate Jimmy might have been prepared to put on the value of the shares at the time Freddy was excluded from company operations. Furthermore, the ultimate value of the shares could not be ascertained until there was resolution of Freddy’s assertion that Michael was obliged to provide $20 million by way of equity for the Companies.
[246] I do not find the offering of additional share capital in each of the Companies to have been unfairly prejudicial. The Companies were substantially indebted to Jimmy, were grossly undercapitalised (on the basis Michael was not obliged to inject
$20 million as equity) and there was clearly a need for additional capital. Both shareholders had the right to take up their proportion of the offered shares.
[247] Nothing in these collective considerations indicates oppression or unfair prejudice. To the contrary, the Board of each company was obliged to take appropriate steps of the nature taken in order to preserve such asset value as remained in the Companies.
Outcome
[248] Freddy’s claim for relief under s 174 of the Act fails at the point of the first question (above at [234](a)) — the affairs of the Companies were not conducted in a manner that was oppressive or unfairly prejudicial to Freddy.
[249]Freddy’s claim for relief under s 174 of the Act will be dismissed.
Costs
[250] I will reserve issues as to costs and disbursements. In the event the parties are unable to resolve those themselves, costs and disbursements will be determined on the papers (five page limit) with the defendants to file and serve first within 20 working days from today and the plaintiff to file and serve within 10 working days thereafter. In the event no memoranda are filed within those periods, the order of the Court
(without further order issuing) will be that there is no order as to costs and disbursements.
Orders
[251]I order:
(a)the plaintiff’s claim is dismissed;
(b)the counterclaims of the first and second defendants are dismissed;
(c)the costs and disbursements of the proceeding are reserved.
Osborne J
Solicitors:
Corcoran French, Christchurch for Plaintiff R V G Law, Christchurch for Defendants
3
0