Burton v Thompson
[2012] NZHC 1330
•13 June 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-1465 [2012] NZHC 1330
BETWEEN REBECCA JESSIE BURTON, JAMES RICHARD BURTON AND ANNE MARJORIE BURTON AS TRUSTEES OF THE REBECCA BURTON FAMILY TRUST
Applicants
ANDBRENDAL MAREE THOMPSON First Respondent
ANDGRAEME ROBERT LITTLE Second Respondent
ANDBEBE CORPORATION LIMITED Third Respondent
ANDDOLLY BOUTIQUE LIMITED Fourth Respondent
ANDFIRST CHOICE COLLECTIONS (NZ) LIMITED
Fifth Respondent
Hearing: 14 May 2012
Counsel: JK Goodall for applicants
JG Miles QC and AJ Wedekind for first to fourth respondents
No appearance by or on behalf of fifth respondent
Judgment: 13 June 2012
JUDGMENT OF HEATH J
This judgment was delivered by me on 13 June 2012 at 2.00pm pursuant to Rule 11.5 of the High
Court Rules
Registrar/Deputy Registrar
BURTON V THOMPSON HC AK CIV-2012-404-1465 [13 June 2012]
Contents
Introduction [1] Background to the dispute [5] The Trust’s case in outline [10] The Trust’s applications [13] The events of November 2011 to March 2012
(a) The Trust’s version [18]
(b) The Thompson interests’ version [35] (c) Reliability issues [39] (d) Provisional findings of fact [41] Analysis
(a) Leave to bring derivative proceeding [45]
(b) Legal principles
(i) Interim injunction [53]
(ii) Preservation orders [55] (c) The preservation order and interim injunctions sought [58] (d) The corporate opportunity claim [61] (e) Conversion [70] (f) Inadequate disclosure [74] Result [76]
Introduction
[1] On 20 March 2012, the trustees of the Rebecca Burton Family Trust (the Trust) sought, on a without notice basis, wide-ranging injunctive relief against Ms Thompson, Mr Little, Bebe Corporation Limited and Dolly Boutique Limited (the Thompson interests) designed to prevent them from dealing, contrary to the Trust’s interests, with various fashion items imported into New Zealand for sale.
[2] The interim relief applications were made in a proceeding in which this Court was asked to grant the Trust leave to commence a derivative action against the Thompson interests, in the name of First Choice Collections (NZ) Limited (First Choice). That is a company in which the Trust and the Thompson interests each have a 50 per cent stake. First Choice was put into receivership on 13 January 2012. An Auckland barrister, Mr Sills, is the receiver.
[3] Although injunctive relief had been sought, Woodhouse J elected to make a preservation order, restraining the Thompson interests from “selling, transferring, moving or otherwise dealing with any products or stock that has been taken from, or acquired by, [the Thompson interests] from [First Choice], including but not limited
to products and stock of the brand’s Tyler Rodan Tignanello, Bruce Makowsky, Lily Bloom, Kathy Van Zeeland, Treviso Chaps and/or Rocco Originals”. The Judge declined to grant any other interim relief.1
[4] There are cross-applications before the Court. The Thompson interests apply to set aside the preservation order. The Trust prosecutes its applications for leave to bring a derivative action and seeks further interim relief.
Background to the dispute
[5] First Choice was incorporated on 30 March 2009. Ms Thompson was its sole director and shareholder. By 30 March 2009, it was becoming clear that two companies associated with Ms Thompson’s partner, Mr Little, could not continue in business. Part of the business of one of them (Sole Limited) was sold to First Choice.
[6] Sole had a distribution agreement with an American Corporation, Van Zeeland Inc (VZI). It was transferred into First Choice’s name, in May 2009. That gave First Choice an exclusive license to import and distribute Kathy Van Zeeland and other “hi-end shoes and fashion products” from VZI in New Zealand, Australia, South Africa, the Pacific Islands, Seychelles and Mauritius.
[7] The trustees of the Trust are Ms Rebecca Burton and her parents. After Ms
Burton and Ms Thompson had become acquainted, the Trust2 obtained, on 31 July
2009, a 50 per cent interest in First Choice, paying $250,000 for the shares. The shares were acquired as a result of discussions among Ms Burton, Ms Thompson and Mr Little, around the time that companies operated by Mr Little were in financial difficulties.
[8] In or about July/August 2010, First Choice began to encounter choppy financial waters. It had committed to an order from VZI of $200,000. This meant
1 Burton v Thompson HC Auckland, CIV 2012-404-1465, 20 March 2012 at para [2]. The orders sought and made are set out at para [14], [15] and [16] below.
2 The shares were acquired in the name of Hauraki Investment Trust Limited, as the Trust’s
nominee.
that it was required to purchase two seasons worth of stock in one order. To find working capital, Ms Burton approached her father, Mr John Burton, for a financing facility. A facility of $1 million was granted by the Burton family’s finance and investment company, Mainstay Equities Limited (“Mainstay”). In return, Mainstay took a general security interest over First Choice’s undertaking.
[9] Between November 2011 and March 2012, a number of events unfolded. They are the source of the disputes that have led to this litigation. I deal with those events separately.3 First, I outline the general nature of the Trust’s case against the Thompson interests.
The Trust’s case in outline
[10] Ms Thompson travelled to New York to meet with representatives of VZI, on
8 November 2011. At this time, First Choice owed Mainstay just over $450,000. While the Trust alleges that Ms Thompson went to New York without the trustees’ knowledge or authority, the evidence suggests that this was one of a number of regular visits made by Ms Burton to meet with VZI personnel.
[11] At the meeting, Ms Thompson is alleged to have terminated the distribution agreement and to have negotiated a new one between VZI and one of her companies, Bebe Corporation Limited (Bebe). The Trust alleges that Bebe is now trading in competition with First Choice. The Trust asks that it be permitted to commence a proceeding in First Choice’s name to obtain damages for what is alleged to have
been the loss of a corporate opportunity.4
[12] Further claims are made in conversion:
(a) Ms Thompson and Mr Little are alleged to have redirected stock being shipped to First Choice from Hong Kong, in December 2012. The value of this stock is said to be $US15,657. The redirection is alleged
to have been carried out by Ms Thompson and Mr Little creating an
3 See paras [18]–[44] below.
4 For example, see Canadian Aero Services Ltd v O’Malley (1973) 40 DLR (3d) 371 (SCC) and
GE Smith Ltd v Smith [1952] NZLR 470 (SC).
invoice from First Choice to Bebe for an apparent purchase of stock in the sum of $US15,657; contacting First Choice’s freight agent and using that invoice to redirect the stock to Bebe; shipping and delivering the stock to Bebe; and deleting the invoice from First Choice’s accounting system, to conceal the transaction.
(b)Ms Thompson and Mr Little are alleged, on 13 January 2012, to have removed stock belonging to First Choice from a warehouse in Henderson, in order to prevent it being secured by the receiver of First Choice. The receiver had been appointed earlier that day.
The Trust’s applications
[13] As the original order was obtained on a without notice basis, the onus remains on the Trust to persuade the Court that the preservation order should be made. The onus also lies on the Trust to establish an entitlement to the other orders sought.
[14] The Trust’s application to Woodhouse J, on 20 March 2012, was in the following terms:
1. The applicants, Rebecca Jessie Burton, James Richard Burton, and
Anne Marjorie Burton, apply to the Court for the following orders:
(a) An order granting the applicants leave under s165 of the Companies Act 1993 to commence a derivative action in the name of the fifth respondent (First Choice Collections (NZ) Limited) against the first to fourth respondents (Brendal Maree Thompson, Graeme Robert Little, Bebe Corporation Limited, Dolly Boutique Limited);
(b) An order granting the applicants control of the derivative proceedings;
(c) An order restraining the first respondent (Brendal Maree Thompson) from acting as a director of the fifth respondent (First Choice Collections (NZ) Limited) until further order of the Court;
(d) An order restraining the first to fourth respondents (Brendal Maree Thompson, Graeme Robert Little, Bebe Corporation Limited, Dolly Boutique Limited) until further order of the Court, from:
(i) purchasing, acquiring or importing any stock from, through or via Van Zeeland Inc, VZI Corporation Limited, VZI Investment Corporation or any other company in the VZI group of companies;
(ii) purchasing, acquiring or importing any stock bearing the brand names or logos of Tyler Rodan, Tignanello, Bruce Makowsky, Lily Bloom, Kathy Van Zeeland, Treviso, Chaps and/or Rocco Originals (“Brands”); or
(iii) selling, transferring, or in any way dealing with, any stock in their possession or control bearing brand names or logos of the Brands;
(e) The further ancillary orders identified in the draft orders enclosed with this application.
[15] The application did not seek any form of preservation order. It is clear enough that Woodhouse J took the view that a preservation order was more appropriate than the injunctive relief sought. In his Minute of 20 March 2012, the Judge said:
[2] A range of restraining orders are sought. I am not persuaded that this is a matter where orders should be made without notice, save in respect of the stock owned by the fifth respondent and said to have been wrongly taken by one or more of the first to fourth respondents. In respect of that stock I make an interim preservation order pursuant to r 7.55 of the High Court Rules. The first to fourth respondents have leave to apply to set this order aside.
[16] The preservation order was made in the following terms:
(a) There shall be a preservation order restraining the first to fourth respondents from selling, transferring, moving or otherwise dealing with any products or stock that has been taken from or acquired by the first to fourth respondents from the fifth responding, including but not limited to products and stock of the brands: Tyler Rodan, Tignanello, Bruce Makowsky, Lily Bloom, Kathy Van Zeeland, Treviso, Chaps and/or Rocco Originals.
[17] In addition to seeking an order that the preservation order be set aside, the Thompson interests have also applied for an order that any further proceedings not be heard by Woodhouse J. No oral argument was directed to that application. There is no basis to make an order of that type. The Judge dealt with the application at short notice, on the evidence before him. It cannot be suggested that he acted other
than impartially. This part of the application ought not to have been made. It is dismissed.
The events of November 2011 to March 2012
(a) The Trust’s version
[18] Mr Schollum is a chartered accountant who acted for the Trust over the period in issue. He gives evidence of the operation of First Choice in New Zealand and a joint venture company in Australia owned in conjunction with Mr Fancourt, First Choice Fashion Group Ltd (First Choice Australia). First Choice Australia carried on a similar business to that of First Choice in New Zealand, obtaining most of its stock from VZI.
[19] Mr Schollum deposes that First Choice’s financial performance began to deteriorate in the second half of 2011. This resulted from both a decline in income and a growing number of creditors. Mr Schollum considers that the deterioration was caused, in part, “by a number of poor financial decisions made by” Ms Thompson and her attempts to put blame on Mr Fancourt, at First Choice Australia, for the New Zealand company’s poor performance.
[20] On 4 November 2011, Mainstay demanded immediate payment of the money owing to it by First Choice; then $111,851.75 plus costs and expenses. Payment was required by 5pm on 11 November 2011. The demand, authored by Mr Schollum, pointed out Mainstay’s ability to appoint a receiver if the debt was not paid.
[21] The date of 4 November 2011 is significant. It was the date on which Ms Thompson left New Zealand to travel to New York to meet representatives of VZI. The Trust has filed affidavit evidence from Mr Anstruther-Burson. He went to New York with Ms Thompson. Mr Anstruther-Burson deposes that the trip was one made each quarter and involved “looking over the next season’s products and preparing orders”. In November 2011, the distributorship licence was also up for renewal and required discussion.
[22] Mr Anstruther-Burson states that he was present at the VZI meeting about the licence. That meeting was held in New York on Tuesday 8 November 2011. Two representatives of VZI attended, its new Chief Executive Officer, (a person known only to Mr Anstruther-Burson as “Robin”) and his Personal Assistant, Ms Serra.
[23] Mr Anstruther-Burson’s evidence is that, in the course of this meeting, Mr Thompson was critical of her “business partners” and took the opportunity to negotiate a new distributorship arrangement directly with her own company Bebe. He deposed:
16.In the meeting, [Ms Thompson] told Robin and [Ms Serra] that she had been having a great deal of trouble with her “business partners” and that they had not turned out as she had expected. She said the business was very stressful, her “business partners” were “crooks” and there were problems in both Australia and New Zealand. [Ms Thompson] then said that First Choice would not be renewing its licence and that her intention was to operate under a new arrangement with VZI through her own company, Bebe Corporation Limited. She specifically mentioned Bebe by name, but said nothing about the demand that had been issued on First Choice by the Burtons or the financial difficulties that First Choice had encountered. [Ms Thompson] also said that it would be better not to have a formal agreement with Bebe and that a letter of intention and a non-exclusive arrangement would be preferable.
17. Robin and [Ms Serra] appeared relaxed throughout the meeting.
There was no indication that they had been unhappy with First
Choice or were looking to end the relationship. However, they were comfortable with [Ms Thompson’s] proposal to operate through
Bebe and indicated that this would be fine with them. If I were to
consider what would have happened had [Ms Thompson] tried to renew the licence through First Choice, then I would say from everything I saw at the meeting that this would not have been a problem. Under First Choice’s licence, there were annual minimum purchasing requirements that I understand had not been met. However, there was no discussion of those at the meeting and I had never understood those purchasing requirements to be an issue in the past.
18.The meeting ended with the understanding that the relationship would continue, but would be through Bebe. We then moved on to view the new season’s products and prepare orders for Bebe. These orders would be reviewed and finalised back in New Zealand.
[24] On 10 November 2011 Ms Thompson, on First Choice letterhead, wrote to
VZI saying:
To Whom it May Concern
Due to the fact that First Choice Collections Ltd is unable to meet the minimum order requirements as per the license agreement with VZI Corporation, this letter is official notification that First Choice Collections Ltd wish to rescind the license. First Choice Australia will honor the last payment being January 2012 shipment from August 2011 market and thereafter Bebe Corporation will take effect.
Ms Thompson and Mr Anstruther-Burson arrived back in New Zealand on 12
November 2011.
[25] On 15 November 2011, a meeting was held involving representatives of the Trust and the Thompson interests. Mr Schollum prepared a memorandum setting out what occurred at that meeting. Its content has not been challenged by Ms Thompson or Mr Little, both of whom attended the meeting.
[26] The meeting was held at the offices of Ms Thompson’s solicitors, Morgan Coakle, in Auckland, and was attended by Ms Thompson, Mr Little, Mr Peters (Ms Burton’s partner) and Mr Schollum. The meeting was about First Choice and Mainstay’s demand for payment. Mr Schollum’s contemporaneous note records:
The meeting in general discussed the demand notices issued by [First Choice] by Mainstay Equities Limited (secured creditor) and [the Trust] (secured creditor). [Ms Thompson] and [Mr Little] advised that [First Choice] did not have sufficient funds to repay these loans as per the demands. [Ms Thompson] went on further to advise that she had recently returned from a trip to New York to go through the latest range of product and to also discuss the review of the distribution license as a 5 year period had elapsed which therefore triggered a review. [Ms Thompson] advised that she during these discussions advised VZI (license holder) that [First Choice] had received demands from its secured creditors. [Ms Thompson] further mentioned that during this discussion the VZI representatives advised her it would be unwise to seek an extension of the license which includes minimum orders if the company had any solvency issues. [Ms Thompson] went on to say it was decided that at this time she would come back to NZ and sort out the demand issues at which point she would contact VZI to arrange for the license review to be completed. In short [Ms Thompson] basically said that the license was effectively at an end as a result of the demands being issued.
At this time as [Mr Little] was heading up the conversation some direct questions were asked of him/[Ms Thompson] in relation to VZI and the license. These questions included whether [Ms Thompson/[Mr Little] had endeavoured to conclude any business with VZI outside of [First Choice] to which the reply was no. They were further questioned about their intention
to operate future business within the industry and they refused to answer that question.
The conversation then moved on to trying to deal with the demands placed on the business. It was decided that the Secured Creditors would propose a deal to [Ms Thompson]/[Mr Little] during the coming week.
[27] On 3 December 2011 a “Heads of Agreement” was signed, to which there were five parties: the Trust, Mainstay, Ms Thompson, First Choice and First Choice Australia. The purpose of the agreement was to record a mechanism for repayment of the debt owed by First Choice to Mainstay. The agreement states that Ms Thompson “no longer wishes to continue a business relationship between” First Choice and First Choice Australia. The essence of the agreement was to allow the Trust (or its nominee) to assume exclusive rights to Australia with First Choice, to remain under the control of Ms Thompson, having an exclusive arrangement with the distributor in New Zealand and the South Pacific.
[28] The operative part of the Heads of Agreement provided:
Agreement
1.The debts owed by [First Choice] to Mainstay and [The Trust] are to be offset against stock to be level of the debt based on stock at FOB cost. Until such time as the stock has been received the lenders security and amount owing will remain in place.
2.The net assets/equity (for the avoidance of doubt after the above repayment) encompassing [First Choice] and [First Choice Australia] are to be split 50:50 between [the Trust] (or its nominee) and [Ms Thompson]. The split is to occur and formal transfer of shares to occur once points 1, 3, 6, 7, 10, 11 have been satisfied.
3.The net assets/equity as mentioned above is subject to final confirmation/audit by both parties.
4.[The Trust] (or its nominee) is to take on, on an exclusive basis the Australian territory. [Ms Thompson] and [the Trust] agree to work together using its best endeavours to achieve a direct license between [VZI] and [the Trust].
5.[First Choice] is to take on, on an exclusive basis the New Zealand and South African territory. [The Trust] is to assist where possible [Ms Thompson] is renewing its license between [First Choice] and [VZI].
6.All parties to work together to reduce current creditors involving the payment of available cash towards this and realisation of cash from stock sales to also assist.
7.[The Trust] and its representatives to assist [Ms Thompson] in reaching a suitable solution for drawings received personally from the business.
8. [The Trust] (or its nominee) and [First Choice] to receive a 10%
commission for any sales initiated in each other’s territory.
9.In the event [the Trust] (or its nominee) requests [Ms Thompson] to attend a market in the US on its behalf reasonable travel costs will be reimbursed to [First Choice] based on ratio of stock purchased by [the Trust] (or its nominee) and [First Choice] during that trip. [Ms Thompson] is to confirm travel and hotel arrangements with [the Trust] (or its nominee) prior to departure to ensure such costs are reasonable.
10.[First Choice Australia] and [First Choice] are to work together urgently work towards clearing the outstanding BR International Logistics Pty Limited invoices. Once this has occurred a portion of the stock available in Australia is to be sold through the most effective channel to release cash back to [First choice] for payment of creditors invoices.
11. The residual stock in Australia other than what is released above is to be transferred immediately to [the Trust] and Mainstay (or their nominee) in repayment of its outstanding loan.
12.Until such time as a direct license is granted to [the Trust] (or its nominees) all stock orders are to be placed through [First Choice] but in the name and of [the Trust] (or its nominee). Upon placing an order [the Trust] (or its nominee) will provide confirmation of sufficient funds being held within its solicitors trust account or provide a suitable letter of credit from a registered bank to [First Choice].
[29] Mr Schollum’s evidence is that it “became apparent” that Ms Thompson did not intend to implement the Heads of Agreement. He relies on two aspects of her conduct. First, he refers to her failure to transfer stock to Mainstay to satisfy the debt. Second, he identifies a failure to engage with First Choice Australia to clear the debt owed to BR International Logistics Pty Ltd, the lessor of a warehouse used to store First Choice Australian stock. In these circumstances, Mr Schollum considered that Mainstay had no option but to appoint a receiver. Mr Sills was appointed on 13 January 2012.
[30] Mr Sills sent an email to Ms Thompson at 10.43am on Friday 13 January, confirming his appointment at 9.20am that morning. He made it clear that his appointment gave effective control of the company to him and that Ms Thompson’s powers and obligations as a director had been superseded.
[31] A meeting had been arranged for later that day. One of the issues for discussion was “control of and protection of stock” including “stock in Australia, Hong Kong and ... New Zealand”. Mr Sills requested a print-out of stock on hand as at 13 January 2012, together with details of stock movements and storage over the previous two weeks.
[32] Mr Anstruther-Burson deposes that on 13 January 2012 he was summoned to premises at Central Park Drive in Henderson. Ms Harris, who now is Bebe’s account manager, is alleged to have told Mr Anstruther-Burson that he was needed because the “receiver is coming”. Mr Anstruther-Burson says that when he went to Central Park Drive, Ms Thompson, Mr Little and Ms Harris were loading quantities of First Choice’s stock into cars. They said they were taking the stock to “Dolly Boutique” so that the receiver could not take it. Mr Anstruther-Burson says that he reluctantly agreed to help, but now regrets it. He states that the stock taken covered products across the brand ranges sold by First Choice.
[33] Mr Schollum asserts that the Thompson interests had also misappropriated stock in China and Hong Kong awaiting shipment to New Zealand. An invoice from First Choice to Bebe dated 1 December 2011 had been located. It purported to evidence a sale of stock from First Choice to Bebe, in the sum of $US15,657. Mr Schollum alleged that Ms Thompson acted in the interests of her own company, to the detriment of First Choice, in misapplying First Choice’s property; as evidenced by her failure to advise the receiver of the transaction.
[34] Mr Schollum had expressed some concern about the accuracy of a stock-take at the end of February 2012. He deposed that First Choice’s accounting records demonstrated that approximately $237,500 of stock (at cost) ought to have been present, whereas the result of the physical exercise revealed stock worth $134,000 (at cost). Mr Schollum infers that stock valued at approximately $100,000 had been diverted by Ms Thompson to Bebe. That “inference” is no longer sustainable; after considering evidence adduced on behalf of the Thompson interests, Mr Schollum now accepts that about $50,000 of the alleged discrepancy has been explained.
(b) The Thompson interests’ version
[35] Ms Thompson does not accept the version of events proffered by Mr Anstruther-Burson about their visit to New York. She denies that either she or Mr Little told Mr Anstruther-Burson that they did not intend to renew the VZI licence. She also denies saying that the licence would be taken up by Bebe. She deposes:
16.... I did not refer to my business partners as “crooks” nor did I say that [First Choice] “would not be renewing its licence” or that “my intention was to operate under a new arrangement with VZI through [my] own company”. Instead we discussed the [First Choice] sales figures and VZI made it clear to me that there could be no renewal of the agreement given that there was no prospect of [First Choice] meeting the minimum sales volume.
17.As I said in my first affidavit I was asked by VZI to write a letter formally “rescinding” the [First Choice] agreement. I agreed to this for the following reasons:
(a) The minimum purchases required by VZI could not be met; (b) I felt it would be morally wrong to sign an agreement for
5 years with conditions I knew were not going to be met;
(c) The intention was in the future to have separate agreements between the parties in NZ and Australia;
(d) We were under threat of receivership by Mainstay and the Trust which could be activated the day after I left New York. This would automatically terminate any existing agreement.
18.While I did tell VZI that as a consequence of a settlement with my shareholders, I would be taking over the New Zealand business of [First Choice], and that I intended to operate that business via a new company, I did not say that I would be “taking over” any existing agreements with VZI. I was aware that I could not obtain an exclusive distribution agreement from VZI for the New Zealand market and that VZI was free to sell to anyone else in that market, including [First Choice]. I advised that I intended to continue sourcing products from VZI in the future.
19.VZI also understood that the settlement with my shareholder meant that she would continue to distribute goods into the Australia market, and that she was likely to continue sourcing stock from VZI either via [First Choice] or through a new entity. VZI advised that there was no prospect of a distribution agreement being offered to Rebecca Burton, for the same reason that the [First Choice] agreement would not be renewed.
[36] Ms Thompson’s evidence that there was an intention “in the future to have separate agreements between the parties in New Zealand and Australia” is based on the proposition that such an intention had been formed before she and Mr Anstruther-Burson went to New York. In contrast, the Trust’s position is that those arrangements occurred after she returned and in an endeavour to find a way to
satisfy Mainstay’s demand for repayment.5
[37] Ms Thompson’s reference to VZI asking her to write a letter to rescind the First Choice agreement is fleshed out in her first affidavit, necessarily prepared under time constraints. She said:
24. As Mr Schollum concedes in his first affidavit, there was no automatic right of renewal of the agreement. During my discussions with VZI it was made quite clear to me that VZI was not prepared to offer a renewal of the licence. I was advised by VZI to “rescind” the license by VZI, for the reasons below:
(a) The budget for the year ending 30 November 2011 had not been met by [First Choice] and the budget required to 30
November 2012, US$1.1 million first cost (FOB), would
have been impossible for [First Choice] to meet.
(b) On 4 November 2011, 2 hours prior to leaving for New York, I received a demand from lender Mainstay, advising that if payment was not received by 11 November 2011, the day I was due to leave New York to travel back to New Zealand, a receiver may be appointed.
25.I went to VZI as it was an ongoing obligation for the first Monday in November (I made four visits to [New York] at the same time each year).
26.On this occasion I was also intended to raise the possibility of acquiring a license for the new entity to be operated by Rebecca Burton, yet not named, but now known as BPFD Ltd. We had the Heads of Agreement in place and it was agreed that I would enquire to see if this was possible. I deny that I told Mr Anstruther-Burson before the trip that I wasn’t going to renew the licence and that I wanted to transfer it to a new company to be operated by me.
27.During our meeting the representatives of VZI asked about our business and how we were going. I felt that I did not have any option but to disclose the Mainstay demand as this was clearly a relevant factor to any consideration of the granting of a licence or other exclusive arrangement. I did mention that I had concerns about irregularities involving the Australian subsidiary but I did not express any concerns about the applicants.
5 See the Heads of Agreement, set out at para [28] above.
28.At the conclusion of our discussions VZI’s representatives confirmed that they were not prepared to offer a licence to VZI, or to the new entity that Rebecca Burton intended to operate. The allegation that I negotiated my own distribution agreement with VZI is untrue. For the same reasons as [First Choice], I was unable to meet VZI’s requirements.
29.I confirm that none of the four respondents have any formal distribution agreements or licences with any of the companies that are mentioned in the proceedings.
30.I also confirm that the fifth respondent is in no better or worse position that anyone else, the other respondents included, to source goods from the companies concerned. The respondents have no exclusivity in that respect.
[38] Ms Thompson denies, supported by Ms Harris, taking any steps to convert any of First Choice’s stock for Bebe’s use. She says that, with one exception, “furniture, files and other property” owned by Mr Little and her were removed from storage after receivership but that, apart from some samples used by Mr Anstruther- Burson, no other stock was in her possession. The exception relates to the sum of
$US15,620.6 Ms Thompson deposed:
22.The exception I referred to above relates to goods that were paid for by my mother. At my request she arranged to pay the sum of US15,620.00 to VZI in January 2012. This sum was the overdue balance owed in respect of a large order totalling in excess of US$100,000, and the fulfilment of that order was in jeopardy due to the lack of payment. I was very concerned that a default would mean that VZI would refuse to have any further dealings with [First Choice] or anyone connected with the company.
23.In order to ensure supply my mother made the payment and this is the transaction referred to in Mr Schollum’s affidavit (para 47, annexure JS-18). Because the payment was made on my behalf I considered that the part of the shipment that was represented by the value of the payment, was my property, and I confirm that I am holding those goods which I arranged to have delivered to me and not to [First Choice]. I still have the goods in my possession. (my emphasis)
(c) Reliability issues
[39] I have not referred to evidence by which Ms Thompson casts aspersions on the conduct and character of Mr Anstruther-Burson and the reliability of evidence he
has given. Nor have I referred to allegations of the same ilk that Mr Anstruther- Burson has made against Ms Thompson.
[40] I am in no position to determine which of those deponents is telling the truth. It may be one of those rare occasions in which there is no middle ground, based on mistake. That being so, I proceed to identify facts that are not in dispute, or are consistent with contemporary documents, to determine whether First Choice has a serious question to be tried on the corporate opportunity and conversion causes of action.
(d) Provisional findings of fact
[41] On the evidence adduced, I consider that First Choice could, if Mr Anstruther-Burson’s evidence were accepted, establish that Ms Thompson went to New York with the intention of securing some form of distribution agreement for Bebe and with little enthusiasm to procure such an arrangement for First Choice. That view receives some support from an email that Ms Thompson sent to her solicitor, Mr Martin (at Morgan Coakle), a few days before she travelled to New York and the contemporaneous note made by Mr Schollum of the meeting held on 15
November 2012.7
[42] The email is dated 1 November 2011. It refers to another email, of the same date, that Ms Thompson had sent to Ms Burton’s partner, Mr Peters. Ms Thompson sought advice on whether she should consider appointing a receiver for First Choice, anticipating that the Mainstay loan would be called up and she would lose control of the New Zealand operation. She added:
I can apply to VZI New York to have the licence to be transferred to my registered company Bebe Corporation? I would like to get your advise prior to the next meeting, yet to be confirmed as you see in below email [to Mr Peters], if I can call you please advise.
[43] The email to Mr Peters aired concerns about Mr Fancourt, whom
Ms Thompson described as a “thief”. Stating that she would not falsify figures for
the Australian operation, Ms Thompson indicated she would not purchase stock for
First Choice Australia on her forthcoming visit to New York. She added:
The only way for Mainstay to receive their loan back, is for us to take total control of the Australian company. We can achieve immediate online sales throughout Australia, with no cost in commission and total payment within
48 hours, I would guarantee that Mainstay would receive payments upon
[First Choice] receiving payment.
I am told by you yesterday that I am incompetent and incapable of dealing with Cameron Fancourt, this is correct, as I don’t have the experience that others might, in dealing with such dishonesty in business, I do not intend to have such a partner.
If the GSA’s over the company are withdrawn immediately (Today) you can resume negotiations with [First Choice Australia], however I want to make it very clear, I won’t, as I will not be held responsible for disappearing funds and reckless trading.
For you to expect myself to negotiate with someone on the basis all Australians are crooks, therefore in my opinion approving of this behaviour, is not the lifestyle I wish nor the direction I want to lead [First Choice New Zealand]. Business is difficult, I have spent 5 years building up what equity we have in this business and I will not see it drained away by a fraudster. I do not understand why you want it to continue? I feel there is something you are not telling me? This is not an accusation but a nagging feeling with your general attitude towards [First Choice Australia] business behaviour, are the investors happy to be dealing with Cameron Fancourt in light of our findings and serious concerns with money handling inside [First Choice Australia]? I would like to call a meeting with the investors to ascertain their understanding and position, can they make the meeting tomorrow?
I would like to express my gratitude to you on your negotiations to date, I appreciate the time you have dedicated, it has only ever been my wish to succeed with the DA for Australia, so we can all move forward and honour our commitments.
A decision on the above needs to be resolved at the next meeting, which I have emailed you on being tomorrow morning @ 9am or 12pm, please advise what time and who will be attending. (original emphasis)
[44] There are two aspects to the claims based on conversion. In relation to the first, an allegation that stock was removed after receivership, the inferences drawn by Mr Schollum in his first affidavit have been undermined by subsequent explanations provided by the Thompson interests. The second concerns stock for which Ms Thompson’s mother paid. The amount involved is modest ($US15,657)
but there is clear evidence as to what happened from Ms Thompson, who also acknowledges that she retains possession of the relevant goods.8
Analysis
(a) Leave to bring derivative proceeding
[45] I deal first with the application for leave to bring a derivative proceeding. As a result of discussions between myself and Mr Goodall, for the Trust, at the commencement of the hearing, it became clear that an order was unnecessary.
[46] The Court’s jurisdiction to bring proceedings in the name of the company is conferred by s 165(1) of the Companies Act 1993 (the Act). The circumstances in which leave might be granted are set out in s 165(3):
165 Derivative actions
...
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1) of this section, only if the Court is satisfied that either—
(a) The company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) It is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
...
[47] Ordinarily, a derivative action is brought when a minority shareholder needs to bring a claim that the existing directors will not authorise. It is the absence of any independent person to bring the proceeding that forms the basis of the Court’s
jurisdiction to allow a claimant to bring an action in the company’s name.
8 See para [38] above.
[48] In terms of s 165(3)(a) of the Act, there is no evidence that the receiver of First Choice does not intend to bring proceedings on its behalf. For the purposes of s 165(3)(b), refusal to make an order will not leave the conduct of the proceeding to the directors. That is because they are functus officio during the stewardship of a receiver.9
[49] An alternative basis for declining leave relates to Ms Thompson’s indication that she will resign as a director on appointment of others by the Trust. The explanation given, that the trustees do not want to accept Ms Thompson’s resignation as a director because they do not wish to be seen as directors of a failed company, is unpersuasive.
[50] In this case, a receiver has been appointed. Appointment of a receiver suspends the directors’ powers.10 A cause of action of the type alleged would clearly fall within the scope of the general security agreement under which the receiver was appointed.
[51] If the receiver considers that a proceeding of the type alleged can be brought and Mainstay is prepared to advance funds, against its present security to bring it, there is no reason why a claim could not be launched.
[52] The application to bring a derivative proceeding fails.
(b) Legal principles
(i) Interim injunction
[53] In Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd,11 Cooke J
identified the factors to be taken into account in determining whether an interim injunction should issue in any given case. Although, in the past, the factors had
9 Generally, see Paramount Acceptance Co Ltd v Souster [1981] 2 NZLR 38 (CA) at [42]–[43], citing Moss Steamship Co Ltd v Whinney [1912] AC 254 (HL) at 263 (Lord Atkinson).
10 Ibid.
11 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
sometimes been applied as if they were tests, Cooke J made the point that they were merely considerations to be taken into account as part of a framework for analysis.
[54] The first step is to identify whether a serious question exists for trial. The next is to consider where the balance of convenience lies, if an interim injunction were or were not granted. Having considered those aspects it is necessary to stand back and determine whether the overall interests of justice require an interim injunction to issue.
(ii) Preservation orders
[55] The jurisdiction to make a preservation order is conferred by r 7.55 of the High Court Rules. No criteria are identified. Rather, r 7.55(1) provides that a Judge “may at any stage in a proceeding make orders, subject to any conditions specified by the Judge, for the attention, custody, or preservation of any property”.
[56] It is important that the preservation order jurisdiction is not used as a means of providing security for payment of a debt, whether disputed or undisputed. Ordinarily, an order will only be made if there were a risk of dissipation or destruction of relevant property and a plaintiff has a proprietary right in it.12
[57] In addition, the jurisdiction ought not to be used as a means of supplementing the “carefully controlled jurisdiction of the Court” in relation to the issue of charging orders before judgment and to freezing orders. The purpose of the rule is not to provide a means for hopeful litigants to ensure proposed defendants are not rendered
judgment-proof.13
(c) The preservation order and interim injunctions sought
[58] It is arguable that, having held that leave to bring a derivative action should not be granted, it is unnecessary to consider whether interim relief should be ordered,
12 For example, Investors Protection Co Ltd v Ray Courtney Architects Ltd (1993) 7 PRNZ 1 (CA)
at 5–6.
13 For example, Rapid Metal Developments (NZ) Ltd v Rusher (1987) 2 PRNZ 85 (HC) at 92 (McGechan J).
in any form. That is because there is no live substantive proceeding to which it could relate.
[59] However, it is likely that the receiver will consider whether to issue proceedings in the name of the company. Leave is not required for him to do so. That being so, I consider whether it is appropriate for some form of limited interim relief to be granted for a short period while the receiver determines whether proceedings should be issued.
[60] As indicated earlier, there are two bases on which First Choice might wish to sue the Thompson interests:
(a) The first is for loss of a corporate opportunity. That relates to the termination of the exclusive VZI distribution agreement with First Choice and the subsequent acceptance by Bebe of a non-exclusive distribution agreement with VZI for the same or similar products.
(b)The second relates to the claim in conversion which, it now appears, is limited to the sum of $US15,620 and an indeterminate amount of stock, with a value of no more than about $50,000.
(d) The corporate opportunity claim
[61] The claim based on loss of corporate opportunity is founded on cases such as GE Smith Ltd v Smith14 and Canadian Aero Service Ltd v O’Malley.15 The purpose of the cause of action is to ensure that a director (as a fiduciary) does not misuse information or opportunities received in that capacity for his or her own benefit. Smith and O’Malley are useful illustrations of the principle at work.
[62] In Smith, a company in liquidation sued one of its directors who had obtained an import licence in his own name in respect of goods in which the company dealt.
Later, he sold his shares to a co-director without disclosing that he had obtained the
14 GE Smith Ltd v Smith [1952] NZLR 470 (SC).
15 Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3rd) 371 (SCC)
licence. The case was argued on the basis that the director had breached a fiduciary duty to the company not to profit personally from information obtained in his capacity as a director as a result of preferring his own interests to those of whom he was bound by law to protect. Gresson J held that the director was not free to obtain for his own benefit concessions which it was in the interests of the company to obtain. Further, the Judge took the view that the director’s liability did not depend on a breach of duty so much as upon the proposition that he must not make a profit out of property acquired by reason of his relationship to the company. Liability was unaffected by the fact that the director could not have obtained the property for the
company itself.16
[63] In O’Malley, the President and Executive Vice-President of a company were engaged in securing a contract for the company. Subsequently, they resigned and incorporated their own company. They then negotiated a contract on behalf of the new company. The question was whether they were in breach of obligations owed to the first company by taking a corporate opportunity for their own benefit. Laskin J, for the Supreme Court of Canada, held that they were disqualified from usurping (or diverting to a company with which they were associated) a maturing business opportunity that the first company was actively pursuing. They were precluded from doing so, even after they had resigned in anticipation of attempting to negotiate the
same benefit for themselves through the new company.17
[64] Inquiries into aspects of duty and breach, in such circumstances, are always fact-specific. In O’Malley, the Supreme Court of Canada gave a non-exhaustive list of relevant factors, including “the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was
special or, indeed, even private ...”.18
[65] As my discussion of the conflicting evidence indicates, it is not possible to determine which of the deponents is telling the truth on the issue of the potential
16 GE Smith Ltd v Smith [1952] NZLR 470 (SC) at 475–476, applying Regal (Hastings) Ltd v
Gulliver [1942] 1 All ER 378 (HL) at 395 per Lord Porter.
17 Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3rd) 371 (SCC), at 382–384.
18 Ibid, at 391.
usurpation of the distribution agreement by Ms Thompson, on behalf of Bebe. But, supported by the documentary evidence to which I have already referred,19 it might be possible to say that there is a seriously arguable case to that effect.
[66] The injunction sought seeks to restrain Bebe (and others) from (in general terms) carrying on business through the use of products derived from brands associated with VZI.20 The order is sought in very wide terms. It would, because of lack of specificity, be difficult to enforce. Further as it relates to a non-exclusive arrangement, concerns arise about the inappropriate stifling of a competitor’s business.
[67] From the perspective of the Thompson interests, their ability to carry on business would be effectively stymied by the grant of such an order while, from the Trust’s viewpoint, it would be able to trade without such competition, if it wished to do so. While I acknowledge that Ms Burton does not appear to have any personal relationship (in the sense of rapport) with VZI personnel, there is nothing to prevent the Trust (or any entity it controls) from negotiating with VZI for a licence. Bebe does not hold an exclusive licence in New Zealand.
[68] For the purposes of analysis, I am prepared to assume (without deciding the point) that there is a seriously arguable question on the corporate opportunity issue. Nevertheless, the anti-competitive features of any injunctive relief, militate against its grant. Both the balance of convenience and the interests of justice favour competition rights, especially when a non-exclusive arrangement is in issue. If the Trust’s view about the likely profitability of the distribution agreement to Bebe, it should follow that the Thompson interests will be able to derive sufficient benefit from Bebe’s operations to meet any claim for damages that might ultimately succeed.
[69] I am not prepared to grant an interim injunction on the intended corporate opportunity claim.
19 See paras [26], [41], [42] and [43] above.
20 See para [14] above; para 1(d) of the application.
(e) Conversion
[70] There are two distinct elements involved in the conversion claim. The first relates to a sum of $US15,657 worth of stock that was allegedly intercepted by Ms Thompson and directed to Bebe. The second concerns various calculations carried out by Mr Schollum in relation to a stock discrepancy following receivership. On that issue, Mr Schollum initially deposed that there was a shortfall of approximately $100,000 but he now accepts that at least $50,000 of that has been
explained by the Thompson interests.21
[71] As to the $US15,657, I proceed on the basis of Ms Thompson’s evidence that her mother met this payment.22 It is difficult to see any logical basis for an argument that property in the relevant goods passed to either Ms Thompson or her mother on that payment. The correct analysis is more likely to be that Ms Thompson’s mother would be seen as a creditor of First Choice to the extent of the moneys advanced, with First Choice being entitled to receive the goods. Ms Thompson has deposed that the relevant goods are still in her possession.
[72] The preservation order made by Woodhouse J did not specifically address the goods in issue. His order was more generic and related more specifically to the ability for any of the Thompson interests to deal with stock sourced through First Choice.23 I am prepared to make a preservation order in respect of these goods, given the strength of the argument and Ms Thompson’s acknowledgement that she holds the goods. The preservation order will enure for a period of 20 working days,
to be extended for a further 20 working days if proceedings are filed and served by the receiver of First Choice before the expiry of the first 20 days period. That will enable the receiver to seek an extension of the interim relief in any new proceeding, should he think that appropriate. The order is made on the condition that if, during its currency, the Thompson interests either pay to the receiver of First Choice the sum of $US15,657 or return the relevant goods to him, the order will be discharged.
In the event of dispute about whether all goods have been returned, the order will
21 See para [33] above.
22 See para [38] above.
23 See para [16] above.
continue in force for its duration. I reserve leave to the Thompson interests’ to apply
on short notice to set it aside, if such dispute were to arise.
[73] I am not prepared to issue an injunction in respect of the other claims for conversion of stock. While it is seriously arguable that some stock (presently unquantifiable) has been removed, neither the balance of convenience nor the interests of justice favour the issue of an interim injunction. It remains open for the receiver to sue for damages. It is unclear how such stock could be more specifically identified. Thus, problems are likely to arise in enforcement, given the breadth of the proposed order. The evidence, with regard to removal of stock belonging to First Choice is too fluid to justify an order.
(f) Inadequate disclosure
[74] Counsel for the Thompson interests were critical of the Trust for failing to make adequate disclosure of material evidence adverse to its without notice application for interim relief. While I agree that some criticism may be made about the nature of the evidence adduced from Mr Schollum, this factor alone is not sufficient to justify setting aside the existing order or, otherwise, refusing interim relief.
[75] As it may be relevant to costs, I record my view that the nature of the evidence was not likely to have misled the Judge when he dealt with the interim relief application. The criticisms have been exaggerated.
Result
[76] For those reasons:
(a) The application to bring a derivative action in the name of First
Choice is dismissed.
(b)The preservation order made by Woodhouse J on 20 March 2012 is discharged and substituted by an order in terms of para [72] above.
(c) All other applications for interim relief are dismissed.
(d) The application for an order that further proceedings not be heard by
Woodhouse J is dismissed.24
(e) Leave to apply is reserved if there are any disputes about the form of the order that may be sealed.
[77] At the request of the parties, costs are reserved. The Registrar is directed to allocate a telephone conference before me on the first available date after 11 July
2012 for counsel to put forward a suggested timetable for the exchange of memoranda, if costs cannot otherwise be agreed.
[78] In my view, a settlement conference or mediation should be held promptly. This is a case that, given the amounts at stake, cries out for settlement. However, that is for the parties to consider and it is inappropriate for me to make any orders to encourage that approach.
[79] I thank counsel for their assistance.
P R Heath J
Delivered at 2.00pm on 13 June 2012
Solicitors:
Hornabrook MacDonald, PO Box 91845, Auckland
Morgan Coakle, PO Box 114, Auckland
Counsel:
J K Goodall, PO Box 1778, Shortland Street, AucklandJ G Miles QC, PO Box 4338, Shortland Street, Auckland
24 See para [17] above.
0
1