Catley v Waipa Corporation Limited and others HC Ak CIV 2008-404-007975
[2010] NZHC 128
•22 February 2010
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV-2008-404-007975
IN THE MATTER OF of Section 165 of the Companies Act 1993
BETWEEN GARY HASWELL CATLEY Applicant
ANDWAIPA CORPORATION LIMITED First Respondent/Intended Plaintiff
RED STAG TIMBER LIMITED Second Respondent/Intended Plaintiff
RED STAG WOOD PRODUCTS LIMITED
Third Respondent/Intended Plaintiff
MARTIN PHILLIP VERRY Intended First Defendant
PHILLIP ARTHUR VERRY Intended Second Defendant
EROS CAPITAL LIMITED Intended Third Defendant
WAIPA BUSINESS PARK LIMITED Intended Fourth Defendant
NEW ZEALAND MOUNTAIN BIKING CENTRE LIMITED
Intended Fifth Defendant
Hearing: 21 May 2009
Appearances: N R Campbell for the Applicant
C R Carruthers QC and B H Dickie for the Respondents
Judgment: 22 February 2010
JUDGMENT OF DUFFY J
CATLEY V WAIPA CORPORATION LTD AND ORS HC AK CIV-2008-404-007975 22 February 2010
This judgment was delivered by Justice Duffy
on 22 February 2010 at 3.00 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Counsel: N R Campbell P O Box 4338 Shortland Street Auckland 1140 for the Applicant
C R Carruthers QC P O Box 305 Wellington 6140 for the Respondents
Copy To: Meredith Connell P O Box 2213 Shortland Street Auckland 1140
[1] The applicant, Mr Catley, is a director of and holds 50 per cent of the shares
in Waipa Corporation Limited (Waipa). He applies for leave to bring proceedings in the name of Waipa, under s 165 of the Companies Act 1993, against a number of persons, including the other director of Waipa, Martin Verry. An application under
s 165 enables an individual shareholder or director of a company to bring a proceeding in the name of and on behalf of a company to remedy an injury the company is alleged to have suffered. Leave of the Court is required. The alleged injury Mr Catley relies on arises from the actions of the intended defendants, Martin and Phillip Verry.
[2] Phillip and Martin Verry were directors of Waipa at the time the alleged injury occurred. Phillip Verry has since died. Martin Verry and Mr Catley are now the only directors of Waipa. Phillip Verry held the other 50 per cent of the shares in Waipa; these are now held by his estate.
[3] Mr Catley alleges that Phillip and Martin Verry breached their fiduciary duties as directors, as well as various other directors’ duties under the Companies Act. They are alleged to have engaged in self-dealing, which has benefited themselves and companies in which they held either directorships, shares or both. Those companies, which are the other intended defendants, are alleged to have knowingly received some of the benefits of the Verrys’ self-dealing. Martin Verry is now their sole director.
[4] The intended defendants oppose the application upon the grounds that they have demonstrated, on unanswered evidence, that there has been no breach of their fiduciary duties to Waipa and, even if there were a prima facie case of breach (which they do not accept), leave should not be granted because:
a) the grant of leave will have a highly detrimental effect on Waipa and
its subsidiaries;
b)the issues raised can be better determined in other existing proceedings between the parties; and
c) Mr Catley is not a fit and proper person to control proceedings on behalf of Waipa.
[5] Given his shareholding in and directorship of Waipa, and given that Red Stag Timber and Red Stag Wood are related companies to Waipa in terms of s 2(3) of the Companies Act, Mr Catley qualifies as someone who has standing to bring this application.
Facts
[6] Waipa was incorporated in November 2003 for the purpose of acquiring the
Waipa Mill (the Mill). This was achieved in December 2003 by purchasing shares
of companies which owned and operated the Mill from the receiver who was then in control of them. In return for payment of $1, through ownership of shares in Red Stag Timber, Waipa obtained control of the business and assets associated with the Mill. This was on the basis that the existing liabilities associated with the Mill, including potential redundancy payments to staff, trading creditors and the ongoing chemical site contamination problems associated with the Mill, went with the purchase. It was not clear to me from the evidence whether those liabilities were assumed by Waipa or by Red Stag Timber, but for the purpose of the s 165 aplication this seems to be of little relevance.
[7] Following the acquisition of the Mill, Mr Catley and Phillip and Martin Verry were appointed as directors of both Red Stag Timber and Red Stag Wood. However, later in July 2004, Mr Catley was removed as a director of Red Stag Timber and Red Stag Wood. He remains a director of Waipa.
[8] Some time in February/March 2004, Red Stag Timber advanced $620,000 to Phillip Verry. In August/September 2005, Red Stag Timber paid $1.4m to Phillip Verry for pre-purchase contributions. On 8 August 2005, Phillip and Martin Verry incorporated Eros Capital Limited (Eros). Eros borrowed $4m from the ANZ Bank, and this money then formed part of a $5m loan from Eros to Red Stag Timber.
[9] In October 2006, Phillip and Martin Verry incorporated Waipa Business Park Limited (Waipa Business Park) and New Zealand Mountain Biking Limited (NZ Mountain Biking). The shares of each company were held by Eros.
[10] On 6 November 2006, Red Stag Wood transferred Lot 1 DP SA64610 (Lot 1)
to Waipa Business Park for $450,000, and transferred Lot 2 DP SA64610 (Lot 2) to
NZ Mountain Biking for $250,000.
[11] Mr Catley alleges that Phillip and Martin Verry caused Waipa, Red Stag Timber and Red Stag Wood to enter into transactions in which Phillip and Martin Verry had an interest, and in which they both profited, either personally or through their interest in Eros and its subsidiary companies. The transactions on which these allegations are based are:
i) The 6 November 2006 sale by Red Stag Wood of lots 1 and 2
to the Eros subsidiary companies;
ii) The $5m loan from Eros to Red Stag Timber; and
iii)The payment by Red Stag Timber of at least $2.02m to Phillip Verry, and $50,000 to Martin Verry, as alleged compensation for pre-purchase contributions.
[12] Mr Catley has already commenced other Court proceedings, under s 174 of the Companies Act, against some of the intended defendants. He contends that those proceedings and the present intended proceeding should be heard together. The intended defendants argue that the existence of the s 174 proceedings is one of the reasons why the Court should refuse leave to Mr Catley to bring the s 165 proceeding.
[13] There are also proceedings which Waipa and some of the intended defendants (Phillip and Martin Verry) are bringing against Mr Catley. These proceedings allege that Mr Catley has achieved his position as a shareholder and director of Waipa by
his own deceit and breaches of his duties. The intended defendants submit that in
such circumstances, it is not just that Mr Catley be permitted to bring a proceeding under s 165 when the basis on which his standing to do so is currently in issue in separate proceedings.
The law
[14] Section 165(1) provides the Court with a broad discretion to grant leave to a shareholder or director to bring proceedings in the name and on behalf of a company,
or any related company. Section 165(2) sets out considerations to which the Court must have regard, though they do not in any way limit the scope of the discretion in subs (1). Section 165(2) provides:
Without limiting subsection (1), in determining whether to grant leave under that subsection, the Court shall have regard to –
(a) the likelihood of the proceedings succeeding:
(b) the costs of the proceedings in relation to the relief likely to be obtained:
(c)any action already taken by the company or related company to obtain relief:
(d)the interests of the company or related company in the proceedings being commenced, continued, defended or discontinued as the case may be.
[15] Section 165(3) provides that leave to bring proceedings or intervene in proceedings may be granted under s 165(1) 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.
The evidence before me makes it clear that neither Waipa nor its subsidiary companies intend to bring proceedings against the intended defendants. If I am satisified in terms of s 165(1) and (2) that it would be appropriate to grant leave, this
is an application that would qualify under s 165(3)(a). The key issues, therefore, are whether the application satisfies the considerations set out in s 165(2), and whether I
am otherwise satisfied, in terms of s 165(1), that this is a proper case for leave to be granted.
[16] The appropriate test is that which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether or not to bring
a claim: see Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765 and Presley v CallPlus Ltd
[2008] NZCCLR 37 (HC). A prima facie case of breach of fiduciary duty by a director is a powerful factor influencing the decision whether a prudent business person would consider that the claim was worth pursuing: see Bridge v MB Cook & Co Ltd HC Christchurch CP53/99, 16 September 2009 at [27] and Needham v EBT Worldwide Ltd [2006] 3 NZCCLR 57 (HC) at [64]. I will deal with each transaction separately: first, by applying the s 165(2) considerations to them; and secondly, by making an overall assessment in terms of the broad discretion in s 165(1).
Sale of lots 1 and 2
[17] Mr Catley’s complaint here is that the Verrys were conflicted fiduciaries because they hold interests in the purchasers of these lots.
[18] Mr Catley submits that the general rule is that conflicted fiduciaries are liable
to account for any profits they make from self-dealing, regardless of whether a fair value was paid for the properties. But Mr Catley accepts that in Sojourner v Robb
[2008] 1 NZLR 751 (CA), the Court of Appeal proceeded on the basis that a self- dealing company director’s liability to account depends on whether fair value was paid. For the purposes of this application, Mr Catley has said he is content to proceed on the basis of the rule suggested in Sojourner v Robb. Under that rule, the onus lies on conflicted fiduciaries to prove that fair value was provided. Mr Catley contends that it is unlikely that the Verrys will be able to prove that fair value was provided. This is first because the combined sale price of the lots came to $700,000.
A valuer (Mr Attewell) engaged by Mr Catley has provided a preliminary view that the two properties could have had a market value of about $6m in November 2006. Secondly, there is no evidence that the Verrys obtained an independent valuation at the time of sale, and thirdly, Eros obtained a valuation report that assessed a market
value for the two properties of $3.6m as at 24 May 2007. Mr Catley is confident that against this background of evidence, the Verrys will not be able to prove that fair value was provided. If they cannot prove that fair value was provided, Mr Catley contends that they will be obliged to account to Waipa for the gains that they have made from the transaction. These are said to include:
a) Any inadequacy in consideration paid for the properties, which appears to be $7m alone; and
b)Other profits derived from the transaction. These are said to include profits that the Eros companies may make from the development of the properties.
[19] The intended defendants accept there was a conflict of interest. However, they contend that the sales were forced upon them by Mr Catley’s actions. They also say that the purchasers paid fair value for the lots. Hence the sale of lots 1 and 2 are acceptable, and do not give rise to the usual consequences following a sale tainted by a fiduciary’s conflict of interest.
[20] Section 141 of the Companies Act deals with avoidance of transactions. Subsection (5)(a) provides that a person seeking to uphold a transaction and who knew or ought to have known of the director’s interest at the time the transaction was entered into has the onus of establishing fair value. This is a case where Mr Catley seeks an account of profits rather than avoidance of the transaction. However, as was recognised in Sojourner v Robb at [30]-[31], if the satisfaction of s 141(2)’s requirements precludes avoidance of a contract, it would be anomalous to allow a related claim for an account of profits. For that reason, the Court of Appeal proceeded on the basis that the liability of the allegedly self-dealing directors depended on whether the sale was for fair value. I think it would be equally anomalous if the burden of proof applicable to one claim was not applied to the other. The imposition of a burden on an allegedly conflicted fiduciary to prove payment of fair value is consistent with equitable principle: see Thomson v Eastwood (1877) 2 App Cas 215 at 236 and Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218 at 1230. It follows that I accept Mr Catley’s submission that
because s 141 underlies the modified equitable rule which was applied in Sojourner
v Robb to a claim like the present one, the burden of proof should likewise accord with that in s 141(5). The intended defendants are seeking to uphold the sale of lots
1 and 2. Consequently, since all intended defendants would have known of the conflict of interest arising from Phillip and Martin Verry being directors of the company selling the lots and the companies buying the lots, I consider that the burden of proving fair value was paid for the lots lies on the intended defendants.
[21] The intended defendants argue that the Court should hesitate before grafting additional common law or equitable duties on to the existing duties the Companies Act imposes on directors. I consider, however, that the adoption of the burden of proof in s 141(5) does no more than to apply logical and consistent thinking to this area of law. The view I have arrived at is a necessary consequence of the modified equitable rule applied in Sojourner v Robb.
[22] Lot 1 contains 11.5 hectares, and lot 2 contains 6.6 hectares of rural A zoned land. These lots neighbour the 76 hectare block on which the Mill is situated.
[23] At the time the sales occurred, no independent valuation was obtained. The intended defendants did not draw my attention to expert valuation evidence which has attempted to provide a market valuation of the lots at the time of their sale. The evidence the intended defendants rely on to establish a fair market value was paid is as follows:
a) The total value of the two properties on the balance sheet of Red Stag
Wood was $542,000;
b)Mr Catley agreed before the properties were sold that their approximate value was $553,034;
c) The properties were valued by their previous owner in 2002 at
$350,000; and
d) A valuation from 2003 values the land at $533,608.
[24] The intended defendants rely on this evidence to establish that the lots were,
in fact, sold above market value. They argue that the valuation of Mr Attewell, which Mr Catley now relies on, is hopelessly unrealistic, as it has valued the lots’ potential based on assumed zoning changes without taking into account infrastructure costs and other costs which would need to be incurred if the lots were to be sold on that basis.
[25] The intended defendants further contend that the sale of lots 1 and 2 was brought about as a direct result of Mr Catley’s activities. They say that he had initially been charged with developing the lots, but had failed to make any progress. The local authority had made it clear to everyone concerned that it would not co- operate with any developments of the lots by an entity associated with Mr Catley. The intended defendants assert it was therefore necessary for the lots to be transferred to Eros, so that development could be considered. They contend that it is not in the interests of justice for the results of Mr Catley’s own poor performance to now be relied upon and to found an action under s 165.
[26] As additional evidence of their good faith, the intended defendants point to their willingness to transfer the lots back, should the Court find this an appropriate course. They say this willingness is the best possible demonstration that the transfer was not an undervalue, and was instead carried out in the best interests of the company.
[27] I do not find the values recorded in the balance sheet of Red Stag Wood to be
of any assistance in determining whether fair value was paid for the lots. Nor do I consider Mr Catley’s agreement on the approximate value of the lots to be a helpful indicator of their actual value in November 2006. It was recognised by Richardson P
in Z v Z (No 2) [1997] 2 NZLR 258 (CA) at 289-291 that the values persons may attribute to assets in balance sheets is not determinative of actual value. In that case, partners in a firm had agreed their interest in the goodwill of the firm should have a
nil value. Richardson P determined that this agreement was not determinative of the actual value of the goodwill. He said:
... the fact that as between themselves the partners have agreed that their interests in the goodwill of the firm should have a nil value is not
determinative of actual value. It may mean that there will be great difficulty
in arriving at a value but that does not mean that there is none. In the end the assessment must be approached as a jury question with the assistance of the
best evidence available.
[28] I also do not find the valuations of the previous owner in 2002 to be helpful
in arriving at a view of the fair value of the lots at November 2006. Without knowing more about relevant conditions affecting sales between 2002 and November 2006, the value as at 2002 is merely something of interest. The same can be said for the valuation from 2003.
[29] Looked at overall, the intended defendants have failed to provide evidence to establish the sales were for fair value. I consider the concept of a fair value is analogous to that of a fair market value which is assessed by reference to a hypothetical sale between a willing, informed buyer and a willing, reasonable and bona fide seller: see Valuer-General v Manning [1952] NZLR 700 (LVT) at 705. For a careful, thorough and detailed discussion of the relevant legal principles relating to valuation of rural zoned land with an arguable potential for development see: Hall v Chief Executive of Land Information New Zealand HC Auckland CIV 2005-404-007222, 9 December 2009. Since the sales were done without reliance on an independent valuation, I would have expected to see valuation evidence from the intended defendants that provided an opinion on the market value of the lots at the time of their sale.
[30] This is not to say that the lots have or had the values for which Mr Catley contends. The expert opinion of Mr Attewell is that the lots were sold at a substantial undervalue. However, I have trouble accepting this valuation. I find the valuation overly general, based on assumptions of zoning changes without any evidence to suggest such changes were probable, and heavily qualified (based on a stated need for further investigation). At one point he describes his valuation as a “preliminary indication of value”, which he discounts by 25 per cent as a further adjustment for any contingencies that may need to be made. The basis for adopting a 25 per cent discount is undisclosed.
[31] The valuation of lots 1 and 2 as at November 2006 assumes that the lots could be used for large scale service industrial/commercial development.
Mr Attewell says his preliminary view is that lots 1 and 2 could have been sold, and would have been sought after for use in this way. However, he qualifies these views
by saying they require further investigation, which he describes as being “a substantial exercise, including a lot of cost”. He says he has amassed a considerable value of sales data from throughout New Zealand for sales of land containing between six and 22 hectares. He does not identify any of the sales. He says the sales range in price from $20 a square metre to $50 a square metre, with the lowest being $10 a square metre. He says these sales contrast starkly with the sale price for lots 1 and 2 of $3.90 a square metre, and $3.78 a square metre. But significantly, Mr Attewell does not describe the characteristics of the blocks of land that sold at the higher prices. It is unknown whether he is describing blocks currently zoned industrial/commercial, or blocks seen as having the potential for being re-zoned industrial/commercial.
[32] In principle, valuations follow one of a number of methods. Market valuations attempt to determine the price a property would sell for on the open market, under the normal conditions applicable in the market, for the type and location of the property being valued: see Hall at [31]. Such valuations are usually arrived at and supported by assessments of comparable sales of comparable properties at a comparable time to the property being valued. Part of this valuation method includes the concept of the purchaser purchasing the land for the most advantageous purpose for which it is adapted: see Hall at [34]. The valuation of land at its highest and best use requires due weight to be given to its potential use, and the probability of consent being given for such potential use: see Hall at [35]. Potential use refers to uses to which the subject land is reasonably capable of being put in the future, which entails there being a realistic possibility of its occurrence in the foreseeable future of the potential use: see Hall at [38] citing Valuer-General v Tepene Tablelands Ltd [1993] 2 NZLR 336 (HC) at 345:
Potential use refers to uses to which the land is reasonably capable of being put in the future. In Tepene Tablelands Ltd, it was noted at 345 as follows:
Potential use means a use which is a realistic possibility in the foreseeable future. Moreover, foreseeable future itself does not have a very extended life. Without trying to being definite about it we think that it is unrealistic to anticipate that a purchaser of land will, except in the most extraordinary
circumstances, be thinking ahead much more than the next decade. That is, therefore, the timeframe of the foreseeable future in this context. Furthermore, potential which will be realised, if at all, towards the end of the period of the foreseeable future is much less likely to be reflected in the value of land than something which has a realistic possibility of occurring within the next few years. There is no rule of thumb for this kind of assessment and it is unlikely to be helpful if we were to explore it further.
[33] Valuations based on hypothetical gains resulting from changes in the character of land such as the hypothetical subdivision approach, or a discounted cashflow approach are different from market valuations. The strength of these hypothetical valuations depends in part on the soundness of the inputs and assumptions on which they are based. Unless their basis is clear from the valuation, it is difficult to assess how reliable they are.
[34] To have a reasonable idea of the current market value of lots 1 and 2 at the time when they were sold, I need to have a valution which conforms with accepted definitions of current market value. To be able to rely with confidence on a market valuation, I need to have details of comparable sales data to support the valuation, and an analysis of the probabilities of any potential uses actually coming to fruition. To be able to rely on a hypotheical subdivision valuation, or a discounted cashflow valuation, I need to have the inputs identified, as well as the basis for choosing those particular inputs. Mr Attewell’s valuation is nothing like this.
[35] The one part of Mr Attewell’s valuation that I did find interesting was his comment that the prices adopted for the sales of lots 1 and 2 were based upon sales of rural zoned blocks of land around the periphery of Rotorua. This would tend to suggest that the prices paid for the lots were in line with prices paid for comparable land in the district. However, this passing reference is not enough for me to rely on to find fair value was paid.
[36] Mr Attewell says little regard was paid to the potential for a zoning change,
or the wider regional and national real estate markets. Regarding zoning changes, I have seen nothing in Mr Attewell’s valuation to show that the potential for change he envisages meets the realistic possibility test in Tepene Tablelands Ltd. Regarding Mr Attewell’s view that wider regional and national real estate markets are relevant
to establishing an appropriate value for lots 1 and 2, I have difficulty in seeing how prices achieved for land in other parts of the country can provide a reliable indication
of value for land in Rotorua. Nor does Mr Attewell provide an explanation for how this might be. Apart from all land being subject to the effects of inflation and deflation, regional variations of demand and economic wellbeing can have a significant influence on land prices in other regions. Thus there is nothing in Mr Attewell’s valuation of the lots as at November 2006 that I find helpful, or am prepared to rely upon.
[37] The same criticisms can be said of Mr Attewell’s valuation of the lots as at January 2009. This valuation is also based on the lots being re-zoned, and seen as a good investment for industrial/commercial development. I consider the “preliminary indications of value” which Mr Attewell offers to be too speculative to rely on to reach a view of the actual value of lots 1 and 2 as at January 2009. The various qualifications he has made, including the discount of 25 per cent, appear to be based on arbitrary decisions. No information is provided to enable a reader of his valuation to test the various qualifications he has made in order to see if they properly accommodate the risk of the assumptions being actualised.
[38] When it comes to seeking leave under s 165 to bring a claim for an account
of profits and other similar remedies (here Mr Catley is also wanting an inquiry into profits and disgorgement of profits), in circumstances where there is evidence the character of the lots remains the same as when they were sold, I consider the applicant bears an evidential burden of satisfying the Court that some profits actually exist, or that an inquiry into their existence has some prospect of success. This is because in terms of the prudent business person test, no such person would embark on seeking an account of profits without first having some reliable evidence to show that the litigation was worthwhile. Here the evidence before me shows that there is no reliable evidence capable of proving the intended defendants have profited from the sale of the lots.
[39] The evidence my attention was drawn to shows that the lots remain zoned rural A. There has been little if anything actually done to alter and improve the character of the lots. Any increase in value since 2006 is likely to be the result of
general increases in value that may be attributed to rural A zoned land in Rotorua. Whatever the increase in value might be, it has not been realised. Any potential value remains in the lots, and is available to whoever is their owner.
[40] Mr Catley has also introduced expert evidence from Gary McLoughlin, a chartered accountant with experience in providing assessments of value in commercial and civil disputes. Mr McLoughlin’s evidence is also based on general assumptions that lots 1 and 2 are to be developed well beyond their present rural A zoning. His evidence is dependent on the valuation evidence of Mr Attewell, which I have already rejected. It follows that Mr McLoughlin’s evidence cannot assist Mr Catley.
[41] Mr Catley has said in his evidence that the lots have potential for residential development. However, he does not provide any information that would allow this potential to be assessed in terms of the realistic possibility test formulated in Tepene Tablelands. Furthermore, this view is at odds with that of Mr Attewell who saw the potential as being for an industrial/commercial development. On the strength of Mr Catley’s evidence alone, I am not prepard to treat the lots as presenting a realistic possibility of residential development.
[42] Mr Catley also argues that the claim for, “other profits derived from the transaction [including] the profits that the Eros companies may make from the development properties” can be classed as a loss of a business opportunity which the Verrys have directed to the Eros companies. In answer to the Verrys’ argument that the opportunity could never have been realised by Red Stag Wood, Mr Catley says that this is wrong, and that it is irrelevant. To support the latter proposition, he relies on Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260,976 (HC) and Kawhia Offshore Services Ltd v Rutherford HC Hamilton CP 61/99, 24 April 2002.
[43] There is no reliable evidence before me to establish that Red Stag Wood was
in a position to develop the lots. The evidence is that development to turn the lots into an industrial/commercial park (the type of development envisaged by Mr Attewell) would cost approximately $16m. The evidence shows that Red Stag Wood, like the other Waipa companies, had difficulty raising finance. The
development required consents from the Rotorua District Council and working with the Council. Mr Catley’s bad track record with the Council as a result of his failed multi complex in Rotorua City (which ultimately resulted in Mr Catley and his company walking off the site, abandonment of the project and the eventual demolition of the building due to it being a safety risk) could not provide a proper reason for refusing him the required consents. Nonetheless, the lack of trust his reputation had engendered would have meant that his ability to ensure compliance with council consents and other requirements, as well as the type of conditions imposed, would have subjected him to closer scrutiny than a developer who the Council trusted.
[44] Regarding the relevancy of Red Stag Wood’s ability to carry out the development, the line of authority Mr Catley relies on involves cases where the fiduciary’s breach of duty has actually resulted in profit. At [25] of Kawhia Offshore, Glazebrook J refers to the “profit rule” in the context of its applicability to recognition of a breach of fiduciary duty. She says:
The barrier goes further than including realistic business opportunities. A breach of fiduciary duty can occur even in situations where the prospects of the company itself succeeding in obtaining the contract or benefit sought are remote, or indeed nil.
[45] However, there is no authority to support the proposition that the profit rule extends to requiring fiduciaries in breach of their duties to pay compensation for the loss of opportunity their breach has caused. This is essentially what Mr Catley seeks. Indeed, he seeks compensation for a loss of the chance to take advantage of a theoretical opportunity. At [29] of Kawhia Offshore, Glazebrook J says that in order
to be liable under the profit rule, there must be a linkage between the office and the profit. Later at [61], Glazebrook J referred to the well-established rule that an account of profits is a restitutionary remedy so that the relevant inquiry is the profit derived from the breach of fiduciary duty, and not whether the principal has suffered injury or loss. Then at [63], Glazebrook J concluded, from her assessment of the relevant authorities, that even for an account of profits there needed to be some “causal link” with the breach of duty.
[46] Mr Catley’s case is quite different from Kawhia Offshore, and the other cases discussed in that decision. In the present case, Mr Catley has failed to establish that there are any profits to be accounted for. This brings to an end any application of the profit rule. Claims for an award of compensation for loss Red Stag Wood may have suffered (if any) as a result of the transfer of the lots to the Eros subsidiaries are separate from an account of profits. Furthermore, a claim for such compensation is not contained in the present proceeding.
[47] The intended defendants say the lots can be transferred back to Red Stag Wood. No one drew my attention to evidence that showed the lots could not be transferred back to Red Stag Wood. The clear impression I formed from the evidence available to me is that the lots are in much the same state as when they were sold. Since I am not aware of any impediment to the lots being transferred back, and since the lots remain in much the same state as they were in before their sale, the return of the lots seems to me to be the proper remedy for a claim of self- dealing.
[48] In Peter Blanchard (eds) Civil Remedies in New Zealand (Brookers, Wellington, 2003) at 371, the author states that “restitution, in the sense of restoration, is the presumptive remedial response to a cause of action in unjust enrichment”. Here, the essence of the allegations against the Verrys is that they have unjustly enriched themselves through their self-dealing and breach of fiduciary duty. The return of the lots is simple. This is to be contrasted with an account of profits, which provides evidential difficulties. In Civil Remedies in New Zealand at 402, the writer notes that an account of profits has been described as difficult and time consuming. In support of this proposition they cite Siddell v Vickers (1892) 9 RPC 152 at 162-163 where Lindley LJ said:
I do not know of any form of account which is more difficult to work out … than an account of profits … The litigation is enormous, the expense is great, and the time consumed is out of all proportion to the advantage ultimately attained … I believe in almost every case people get tired of it and get disgusted.
[49] In circumstances where the asset involved in a breach of fiduciary duty is available, it can be returned in much the same state as when it was wrongly
appropriated and there is nothing to suggest any profit has been made since its appropriation, an order requiring its return seems to me to be by far the better remedy.
[50] There was reference in the evidence to the lots being used by the public for mountain biking and car parking. There was no evidence to suggest the public were charged to use the lots. Even if there was some return, in comparison to the cost of litigation that return would be minimal. Its recovery could more sensibly be achieved through the existing s 174 proceedings by requiring the conflicted fiduciaries to compensate Red Stag Wood for any monies it may have earned from the present public use of the lots.
[51] Since there is no reliable evidence to establish there is any profit to account for, I consider the only sensible remedy would be for the return of the lots to Red Stag Wood. The intended defendants are prepared to do this. When an alternative remedy for the wrongful acquisition of property by a conflicted fiduciary is readily available without resort to litigation, no prudent business person would embark on litigation seeking an account of profits. To do so would be imprudent. The costs of the proceeding would outweigh the likely return. It follows that for the claim of self-dealing based on the sale of lots 1 and 2, I consider Mr Catley cannot meet some of the essential requirements for leave under s 165.
[52] During the hearing little was said about the third cause of action. Nor is there anything specifically in the written submissions on this issue. Mr Catley claims that there are losses Red Stag Wood has suffered from having the lots sold at an undervalue. However, he equates those losses with the values given in Mr Attewell’s valuation. For the reason I have given in [38], in relation to proof of profits to be accounted for, I consider Mr Catley bears an evidential burden of showing there has been some loss. Since I have rejected Mr Attewell’s valuation, I have no reliable evidence from Mr Catley to prove the loss resulting from any sale at undervalue.
[53] Another aspect of the third cause of action is a claim for loss of value in the shares of Red Stag Wood as a result of the sale of lots 1 and 2. No evidence was
advanced to show how the share value was affected by the sale. Since the question
of the lots’ actual value remains unclear, there is no basis for pursuing this cause of action.
The $5m loan from Eros to Red Stag
[54] Mr Catley contends that Phillip and Martin Verry are self-dealing directors in relation to this loan as they have interests in Eros which mean they have benefited from the terms of the loan. Since Phillip and Martin Verry are directors of Waipa and its subsidiaries, as well as directors of Eros and its subsidiaries, I accept that there is a conflict of interest. I consider that, for the same reasons as I found with the sale of lots 1 and 2, the burden of proving the loan was provided at a fair value to Waipa lies on the intended defendants.
[55] In November 2005, Eros borrowed $4m from the ANZ Bank. Red Stag
Timber acted as guarantor and provided security to the ANZ Bank. Eros then lent
$5m to Red Stag Timber. Red Stag Wood and another company related to Waipa provided security to Eros. Mr Catley claims the Verrys and Eros must account to Red Stag Timber for any profits, unless they can prove that Eros provided fair value
for the transaction. He contends that they are unable to prove fair value was provided. He says there is no independent evidence from the intended defendants to confirm fair value has been provided, and they have not revealed the interest rate Eros has paid to the ANZ Bank, or to its other sources of capital.
[56] The intended defendants say that Red Stag Timber was forced to borrow capital through Eros. The funds were urgently and desperately needed by the company, following years of underinvestment by previous owners. The intended defendants argue that the involvement of Mr Catley with Waipa and its subsidiaries stymied the company’s attempts to raise funds directly from banks or other financial institutions. They say, for example, that Westpac Bank declined to support the company due to Mr Catley’s involvement. They also say that part of Mr Catley’s role in joining the company was to arrange finance for development purposes, but he had not done so. This meant that Waipa and its subsidiaries were left in a difficult position. Several million dollars was needed immediately, or the opportunity to
expand the production line would be lost and, along with it, the chance to secure a one-off extraordinary opportunity for a major ongoing supply contract. The loan transactions allowed these opportunities to be realised, which has proven critical to the company’s current success. Given the urgent need for funds, and the difficulties faced in obtaining funds due to Mr Catley’s poor business reputation, the intended defendants say that the only viable option was for Eros to raise funds and then to onlend them to Red Stag Timber. This allowed money to be lent on the strength of ANZ’s relationships with the Verrys, and without Mr Catley’s involvement in the Waipa group of companies becoming an issue. The intended defendants say that this proposal was the subject of a board meeting on 8 December 2005, and that Mr Catley attended the meeting with his solicitor. At the meeting, he is said to have put forward no alternative proposal, and to have made no objection to the proposed loan arrangements. The intended defendants argue that the interest rate Eros is charging Waipa is a fair one. The margin accruing to Eros is said to be small and less than the commercial norm. The intended defendants conclude their submission by saying that arrangements now criticised by Mr Catley only came about as a direct result of his own behaviour in the affairs of the company, and that it is not open to him to precipitate such extraordinary steps, and then to complain about them.
[57] There is clear evidence from a number of witnesses for the intended defendants that Mr Catley has earned a poor reputation, both as to his creditworthiness and his manner of operating in business. He has not countered that evidence with any evidence of his own. There is evidence that Waipa and its subsidiaries needed significant funds to continue operating and to expand in business but that there were difficulties obtaining funding. Phillip Verry outlines in his evidence the difficulties the Waipa group of companies had in obtaining finance from either the National Bank or Westpac Bank. The Bank of New Zealand was not a likely contender as it had provided finance to the Waipa Mill before it had gone into receivership. Mr Verry attributes the difficulties experienced in raising finance to Mr Catley’s unenviable lack of creditworthiness, which was due to his earlier failed projects. The difficulties in arranging finance were avoided once the borrower was Eros. Eros was able to borrow a significant sum of money from the ANZ Bank, which is a bank associated with the National Bank. Mr Catley has not filed any reply evidence to contradict the reasons Mr Verry gives for the need to interpose
Eros between the source of funds and the Waipa group. In such circumstances, the arrangements which were resorted to make sense. Mr Verry’s evidence on the need
for the financial arrangements stands unchallenged. I was told, in the course of hearing submissions from the intended defendants, that the interest rate Eros was charging was 2.4 per cent per annum above that which it paid to the ANZ. I consider that since Eros was assuming the role of Red Stag Timber’s banker, it was entitled to make some profit from the risk that entailed. Had Eros not been prepared to act, the evidence shows that Red Stag Timber and the other Waipa companies would have been unable to continue with their business operations.
[58] When I apply the prudent business person test to the circumstances of the Eros loan, I consider that no prudent business person, knowing all that has gone before, would subsequently embark on litigation against the very persons that had provided much needed finance. I am satisfied that Mr Catley has established no grounds for leave to bring this claim.
Payments for pre-purchase contributions
[59] The complaints regarding the pre-purchase contributions are that Red Stag
Timber paid $1.5m to Phillip Verry as remuneration for pre-purchase contributions
in August or September 2005, and Phillip and Martin Verry have treated advances made to them by Red Stag Timber of $620,000 and $50,000 respectively as remuneration for pre-purchase contributions. Mr Catley contends that there is no dispute that the payments have been made, and that Phillip and Martin Verry have now treated the advances as being remuneration. He says that it is clear from affidavits of Phillip and Martin Verry that a total of $6.048m has been paid out, which when interest compounding monthly is also taken into account is said to come to a total of $9.442m. Mr Catley contends that this is the clearest possible case of self-dealing. To counter the intended defendants’ argument that the transactions were agreed to by all shareholders, Mr Catley says there was never such an agreement, but even on the intended defendants’ case, such an agreement was to be subject to an independent remuneration review, which has never happened.
[60] The intended defendants contend that there is no breach of any fiduciary duty
by payment of compensation by a company to its directors and shareholders. They say the amounts in question were approved by the board of the company at a properly constituted meeting, and the fact that such a meeting was valid has already been confirmed by the High Court. They say Mr Catley took no objection to the course of action at the time. The amounts in question were calculated following independent professional advice from Sheffield Accord, Macquarie Bank, and Ernst and Young. The minutes of Waipa dated 10 March 2004, record that Mr Catley withdrew his previous opposition to the appointment of Sheffield Accord. In such circumstances, the intended defendants submit that there can be no criticism of what was done. As an additional argument, they say that the remuneration payments have not been drawn down and have remained in the company as working capital to fund its expansion.
[61] The Verrys contend that they are entitled to the payments attributed to them
by dint of the hard work they carried out. This is particularly so for Phillip Verry, who was able to achieve the acquisition of the entire assets and business operation of the Waipa Mill for consideration of $1. In principle, there is nothing wrong with directors determining that remuneration for pre-purchase contributions be paid to themselves. What is important is that the correct process is followed in reaching such a decision and that it is properly recorded. Phillip Verry has said in his evidence that at a meeting of Waipa directors on 8 December 2005, papers concerning the methodology for the pre-purchase contributions were tabled, and, although Mr Catley had the basis for the remuneration fully disclosed to him, he did not object then, nor subsequently. Mr Catley has not filed reply evidence disputing this. In such circumstances, I accept the reasons given at paragraph 684 of Phillip Verry’s affidavit in support of the pre-purchase remuneration. Furthermore, the methodolgy for calculating the payments was based on the recommendations of Sheffield Accord whose appointment as an independent remuneration authority was accepted by Mr Catley. Regarding the payment of $620,000 to Phillip Verry, a court has already determined that this was agreed to by Mr Catley: see Catley v Waipa Corporation Ltd & Ors [2004] 2 NZCCLR 50 (HC).
[62] Mr Catley has filed no reply evidence disputing the Verrys’ account of the events surrounding the pre-purchase remuneration. The Verrys’ evidence shows that the pre-purchase remuneration was based on the recommended methodology of an independent review team whose apointment was accepted by Mr Catley. He had initially accepted that there should be something paid in the nature of pre-purchase remuneration. At this time, it seems the monies have remained in the company; there appears to be no risk of them being drawn down in a way which would endanger the company’s financial viability. I fail to see any reason why it is in the interests of the company at this point and on the strength of the evidence available, for it to pursue a claim against the intended defendants related to the pre-purchase contributions. Having agreed in principle to the concept of pre-purchase remuneration, and having agreed on the independent qualified team of persons to provide the methodology for arriving at appropriate payments, Mr Catley’s present rejection of the validity of those payments appears unreasonable and unfounded. For Mr Catley to propose that the proper course of action is for the company to now take action against the Verrys is contrary to what any prudent business person acting in good faith would do. Since Mr Catley’s acquiesence is partly the reason for the payments progressing as they have done, any concerns he now has regarding their legitmacy should be pursued by him in the context of his s 174 application. I can see no reason why Waipa or its subsidiaries should have to pay for litigation over events for which Mr Catley has some responsibility, and to which he may now wish to adopt a different stance. It follows that Mr Catley’s s 165 application under this head fails.
General comment
[63] When I stand back and look at the matter overall, I am struck by the fact that the evidence before me demonstrates a bitter dispute between shareholders who once started out as joint venturers in a project to obtain for their benefit a financially distressed sawmill. Relations between them have now reached a stage where they are unable to work together. Each group accuses the other of unlawful, prejudicial and oppressive conduct. There is presently a s 174 application before the Court. That application is far further advanced towards a hearing than is the present application. Furthermore, I consider that the s 174 application will provide a proper
forum for the venting of the controversies that exist between the parties. I see no reason whatsoever for Waipa or its subsidiaries to be drawn into this controversy, and especially into having a part in funding it. I have already satisfied myself that there is no basis on the recognised tests for allowing Mr Catley leave to bring a derivative action. Since the discretion in s 165 is a broad discretion, I have considered if there is any residual basis on which I should consider granting Mr Catley the leave he seeks. However, when looked at in this way I am satisfied that this is a case in which the s 165 application is entirely without foundation. Accordingly, the application under s 165 is refused.
Result
[64] Application for leave under s 165 fails on all grounds.
[65] Leave is reserved to the parties to file memoranda on costs, should they be unable to reach agreement on this issue.
Duffy J
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