Clark v Libra Developments Ltd CA26/05
[2006] NZCA 472
•31 October 2006
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IN THE COURT OF APPEAL OF NEW ZEALAND
CA26/05
BETWEEN LINDSAY ALLAN CLARK Appellant
ANDLIBRA DEVELOPMENTS LIMITED First Respondent
ANDRUSSELL ERNEST HYSLOP AS TRUSTEE OF THE HYSLOP FAMILY TRUST
Second Respondent
Hearing: 20 February 2006
Court: Chambers, Williams and Gendall JJ
Counsel: L A Andersen and W H Henderson for Appellant
P B Churchman and T J Hall for Respondents
Judgment: 31 October 2006 at 4 pm
JUDGMENT OF THE COURT
A The appeal is dismissed.
BThe appellant must pay the first respondent’s costs in the sum of $6,000 plus usual disbursements. We certify for second counsel.
REASONS
Chambers J (dissenting in part) [1] Williams and Gendall JJ [124]
CLARK V LIBRA DEVELOPMENTS LTD AND ANOR CA CA26/05 31 October 2006
CHAMBERS J
Table of Contents
Para No
Introduction [1] Issues on the appeal [10] Issues 1 and 2: What did Mr Clark and Mr Hyslop agree? [18] February 1997 [20] September 1997 [30]
July 1998 [35] March 1999 [40] June 2002 [43] October 2002 [48] November 2004 [49]
What were the legal consequences of what was “agreed”? [51]
Issue 3: Was the judge correct to find that Mr Clark and Libra
had entered into a partnership in February 1997? [85]
Issue 4: Was the partnership dissolved when Libra was removed
from the register of companies on 16 March 1999? [90]
Issue 5: What was the legal effect on Libra
of Mr Hyslop’s bankruptcy? [93]
Issue 6: Was the Cargill House project a Clark-Hyslop project? [95]
Issue 7: Was the Haggart Alexander Drive project
a Clark-Hyslop project? [112]
What relief would I have granted? [119]
Introduction
[1] The story begins in 1996. At that time, Lindsay Clark was a prominent property developer and building product supplier in Otago. Russell Hyslop had been for decades a self-employed building contractor in Otago and Southland. Messrs Clark and Hyslop were good friends.
[2] During 1996, Mr Hyslop got into severe financial difficulties. One of his creditors was Mr Clark. Mr Clark was keen to help his old friend, if he could. One of the projects Mr Hyslop had underway was a property development in St Albans Street, Dunedin. In February 1997, Mr Clark suggested that he might take over that development. He said that he would pay Mr Hyslop to complete the development for him. If the venture proved profitable, he would share some of the profit with Mr Hyslop. Mr Hyslop considered this a most attractive proposition.
[3] Unfortunately, Mr Hyslop proved unable to stave off his creditors. In July 1997 he was adjudicated bankrupt. But, notwithstanding that, he and Mr Clark continued their relationship.
[4] Over the next four or five years, Mr Clark and Mr Hyslop did a number of property developments. The nature of the men’s business relationship evolved over time, although its exact details were never pinned down. To a large extent this stemmed from the fact that Mr Hyslop was reluctant to have the relationship formalised, as for most of the time the men were in business together, Mr Hyslop was an undischarged bankrupt and accordingly subject to restrictions on his business activities.
[5] The men’s relationship continued, it seems amicably, until 2001. At that time, tensions developed with respect to one of the projects, known as the Cargill House project. Eventually, differences over that project led to Mr Clark’s bringing the relationship to an end on 30 October 2002.
[6] Since that time, Messrs Clark and Hyslop have been attempting to work out who owes what to whom in relation to the business projects they undertook. The difficulties have stemmed from the lack of precision as to the parties’ legal relationship.
[7] Shortly after the relationship ended, Mr Hyslop, in his capacity as trustee of his family trust, sued Mr Clark. Shortly before that proceeding was due to come on for hearing, Mr Hyslop applied to join a company of his, Libra Developments Limited, as co-plaintiff. The joinder of Libra came about because of confusion as to who, if anyone, had contracted with Mr Clark.
[8] The proceeding came on for trial in the High Court in Dunedin in November and December 2004. On 4 February 2005, Chisholm J delivered a reserved decision: Libra Developments Ltd v Clark HC DUN CIV 2002-412-39. His Honour found that there had been a partnership between Libra and Mr Clark. That partnership encompassed, he found, not only the St Albans Street project but also four other projects Messrs Clark and Hyslop had done together. His Honour adjourned the
question of whether the assets of a company called Mobile Batching Systems Limited were partnership property: at [117]. He found against Libra with respect to other ventures which Libra had said were partnership ventures.
[9] Mr Clark now appeals against certain findings in Chisholm J’s judgment. Neither Libra nor Mr Hyslop cross-appealed.
Issues on the appeal
[10] The first issue on this appeal is to determine whether Chisholm J was right in finding that the parties to the venture were Mr Clark and Libra. In order to answer that question, I intend to look at what Mr Clark and Mr Hyslop said to one another and then, having established that, what the legal consequences of those discussions were. For reasons I shall give, I conclude that the venture was always one between the men themselves. Mr Hyslop never contracted on Libra’s behalf. To that extent, I would not uphold Chisholm J’s conclusion.
[11] The next point is whether Chisholm J was correct to find that the relationship amounted to a partnership. Mr Clark has always been adamant that the relationship was not a partnership. Mr Hyslop has always been equivocal, at least in his formal court pleadings. For example, his last statement of claim had four causes of action, all mutually exclusive. He pleaded that the arrangement was either between Libra and Mr Clark or between him (as trustee for his family trust) and Mr Clark. (I shall explain later where the family trust fits into the story.) In either case, he asserts that the arrangement was either a partnership or effectively a joint venture agreement, under which Mr Clark was required to account to either Libra or the Hyslop Family Trust for half the profits of the venture. Chisholm J found it was a partnership. Was he right so to find? This is issue 2.
[12] Mr Clark’s next three arguments rather fall by the wayside in view of my findings on the major issue on the appeal. These arguments were really run to show the legal difficulties which arose if Chisholm J were right in finding that Mr Hyslop had always been acting as Libra’s director or agent. I can deal with these three issues briefly.
[13] The first (issue 3) was that Libra could not have entered into a partnership in February 1997 (as Chisholm J found) because at that date Libra was not in existence. Mr Andersen, Mr Clark’s counsel, submitted that it had not been claimed by Mr Hyslop “that there was a pre-incorporation agreement in February 1997 that was subsequently ratified by Libra”. Further, even if the February 1997 agreement had been entered into on Mr Hyslop’s part on behalf of a company to be formed, there was no evidence that Libra had ratified the agreement within a reasonable time of its incorporation. Accordingly, Mr Andersen submitted, Libra’s claim based on the February 1997 agreement should have failed.
[14] The second argument (issue 4) was that the partnership was dissolved when Libra was removed from the register of companies on 16 March 1999. Although Libra was restored to the register on 13 November 2003, Mr Andersen submitted that its restoration could not “revive” the previous partnership.
[15] The third argument (issue 5) was that, even if there had been a partnership, Libra could not act as a partner after 30 July 1997. That was the date on which Mr Hyslop went bankrupt. By virtue of ss 151 and 157 of the Companies Act 1993, Mr Hyslop vacated the office of director of Libra upon his bankruptcy. There were no other directors. Libra’s shareholder did not appoint any other directors. Accordingly, Libra was without a board, at the very least for the period of Mr Hyslop’s bankruptcy (30 July 1997 - 30 July 2000).
[16] Mr Andersen raised two further arguments. Both related to whether particular projects which Chisholm J found were partnership projects, namely the Cargill House project and the Haggart Alexander Drive project, were indeed partnership projects. Mr Andersen submitted that, even if there were a partnership or a joint venture agreement, these two projects did not form part of the venture. These are issues 6 and 7.
[17] I shall look at these issues in turn. I shall, however, consider issues 1 and 2 together as the same factual analysis is relevant to both.
Issues 1 and 2: What did Mr Clark and Mr Hyslop agree?
[18] In this section of these reasons, where I use the terms “agreed” and “agreement”, I speak only of a meeting of minds, the minds in question being Mr Clark’s and Mr Hyslop’s. I am not referring to the legal consequences (if any) of the understandings reached. I shall undertake that analysis in the next section of these reasons.
[19] In looking at what was agreed, it is vital to approach the matter chronologically. The dates that follow as subheadings seem to me the main dates of the evolving understanding between Mr Clark and Mr Hyslop. One thing is absolutely clear in this case: the relationship did evolve, as circumstances changed. What is particularly important is to establish what Messrs Clark and Hyslop said to each other and, perhaps, to their confidential advisors. A very important feature of this case is that for most of the period of the relationship Mr Hyslop was having to tread gingerly. He had unpaid creditors and the Official Assignee watching him.
February 1997
[20] The background to the understanding reached in February 1997 was this. Mr Clark and Mr Hyslop were old friends. Mr Clark had a high regard for Mr Hyslop’s skills as a building contractor and property developer. Mr Clark knew that Mr Hyslop was in very difficult financial circumstances. Indeed, Mr Clark was one of Mr Hyslop’s creditors and had been part of a creditor’s group which, Chisholm J found, had been formed with the primary objective of assisting Mr Hyslop out of his financial difficulties: at [8]. There was a real prospect that Mr Hyslop would shortly be put into bankruptcy.
[21] Mr Hyslop’s development company was called Queens Park Mews Limited. That company owned a property at St Albans Street, Dunedin. Mr Hyslop’s intention was to undertake a residential development on that property. When it became clear that Mr Hyslop’s interests were not going to be able to undertake that development, Mr Clark and Mr Hyslop agreed that Mr Clark would purchase the
St Albans Street property from Queens Park Mews. He would undertake the development, but on terms that were intended to be of advantage not only to himself but also to Mr Hyslop. Mr Clark would employ Mr Hyslop as an independent contractor. Mr Hyslop gave Mr Clark a quote for the work he was to perform, in the sum of roughly $80,000. Mr Clark accepted that quote. For that sum, Mr Hyslop was essentially to provide all services to the twelve lots on the proposed subdivision, plus seal the road into the subdivision.
[22] It is clear that at this stage Mr Clark and Mr Hyslop did not form any definite view as to how any profit on the development would be shared (if at all). Mr Clark’s intention was to keep Mr Hyslop out of bankruptcy if he could. My conclusion is that the understanding as to profit share must at that stage have been very loose – no more than a rather imprecise promise on Mr Clark’s part to see Mr Hyslop right, if the development made a profit. This suited both men. After all, Mr Clark was putting up all the money. He was paying a fair figure for Mr Hyslop’s services. His interest in sharing profits would clearly be contingent upon Mr Hyslop benefiting from those profits; Mr Clark had no particular wish simply to give money which, if Mr Hyslop went bankrupt, would not benefit Mr Hyslop at all but would benefit only his creditors. Indeed, the evidence reveals that there was talk that any “benefit” from the project intended for Mr Hyslop might be held over until he was discharged from bankruptcy, so that Mr Hyslop would personally get the benefit. It also suited Mr Hyslop for the arrangement to be left vague. He wanted, if at all possible, any benefits from this venture with Mr Clark to flow to him, not to his creditors following a bankruptcy. He no doubt recognised that he was in a very weak bargaining position; presumably he was grateful to his friend for the help he was providing.
[23] Mr Hyslop was acutely aware of his precarious financial position and the likelihood of bankruptcy in the near future. Shortly after reaching his understanding with Mr Clark, Mr Hyslop went to see his lawyer. Mr Hyslop suggested at trial that the purpose of seeing Mark Kirkland was to incorporate a company to be Mr Clark’s partner. I cannot accept that evidence. Mr Hyslop did not call Mr Kirkland as a witness. He did, however, produce a memorandum which Mr Kirkland had prepared for him. That memorandum made no reference to Mr Clark or to any partnership
with him. Rather, the memorandum gave advice as to how Mr Hyslop could protect himself “from creditors and bankruptcy”. Mr Kirkland recommended the establishment of “a discretionary family trust with a charitable component” and the setting up of “a company to operate a building business of which you [Mr Hyslop] will be an employee”. He advised Mr Hyslop that a bankrupt could not manage a business or be a director.
[24] Mr Hyslop took that advice. He set up a family trust, with Mr Kirkland as trustee. He also incorporated Libra, although Libra itself never did anything. For instance, following its incorporation in March 1997, it filed no documents with the New Zealand Companies Office until late 2003, by which time the relationship with Mr Clark was well and truly over and the present proceeding underway. Further, Mr Hyslop never became an employee of Libra.
[25] It was really too late for these entities – the trust and the company – to be of any value in protecting Mr Hyslop from bankruptcy. But it is clear that later, after Mr Hyslop went bankrupt, he saw that Libra might potentially be useful to him.
[26] Shortly after Libra was incorporated, there was a meeting of the R Hyslop Creditors Group, a group of Mr Hyslop’s creditors which was attempting to work out whether there was a better alternative to bankruptcy. Mr Clark, who was a member of the R Hyslop Creditors Group, attended the meeting. According to the minutes of the meeting (which were produced in evidence), Mr Clark told the group he had bought the St Albans Street property and was proceeding to complete the development. He said that Mr Hyslop was now working on the property “as a sub-contractor”. He said Mr Hyslop had offered “to pay either [the] creditors group or the total creditors a percentage of their debt from the profit he [was to make] from the sale of the land and from the work being done for L Clark as a sub-contractor”.
[27] That record accords exactly with Mr Clark’s evidence in the High Court. It does not accord with the evidence Mr Hyslop gave in court. Mr Hyslop says now that the report was wrong. He says that the land had not been sold to Mr Clark but only to Mr Clark as “agent”. He says that he “was not making a profit from the sale of the land, Libra was” and that his work “as a subcontractor was not being done for
L Clark but for L Clark as “agent””. I consider that this is a reconstruction of the position to suit the legal claim now being advanced. Mr Hyslop received a copy of the report. There is no evidence that he in any way questioned what Mr Clark was reported to have told the R Hyslop Creditors Group.
[28] The evidence Mr Hyslop gave is also inconsistent with what he said at the general meeting of his creditors on 15 July 1997, a meeting called so that his creditors could consider a proposal he was making under s 140 of the Insolvency Act
1967. At that meeting, Mr Hyslop explained that he was currently employed by Mr Clark and received wages. According to the minutes of that meeting, he told his creditors that he was working on the St Albans Street property, which was owned by Mr Clark. That is consistent with the understanding he had reached with Mr Clark, save that he was working for Mr Clark pursuant to the quote he had provided rather than as an employee.
[29] The proposal did not succeed. Mr Hyslop was adjudicated bankrupt later that month.
September 1997
[30] Having become a bankrupt, Mr Hyslop could not continue in business on his own account. So in early September 1997, Mr Hyslop became Mr Clark’s employee, and started to receive wages. At that stage, no other change from the earlier arrangement seems to have been made. Rhys Cain, the Official Assignee and Regional Manager (South Island) for the Insolvency and Trustee Service, gave evidence. He had been responsible for administering Mr Hyslop’s bankruptcy. He said that in the course of administering the bankruptcy he had talked to both Mr Hyslop and Mr Clark “in some detail” about Mr Hyslop’s working relationship with Mr Clark. Mr Hyslop told Mr Cain:
(a) He was a paid employee of Mr Clark and he was not a partner or in business with him;
(b)His employment with Mr Clark was on the basis of a friendship between the two men and that Mr Clark would “see him right” at the end of the bankruptcy period.
[31] Mr Cain said that Mr Clark had confirmed to him that Mr Hyslop was not a partner in his business, but was only an employee. Mr Cain said that Mr Clark had told him that he was just helping Mr Hyslop out with some employment because he considered him a friend.
[32] Mr Cain said that he told Mr Hyslop what his responsibilities were as a bankrupt and told him the restrictions the Insolvency Act placed on him. Mr Cain said that, based on what he was told, he concluded that Mr Hyslop was not acting in breach of the Insolvency Act.
[33] Mr Cain was not challenged on that account. It seems to accord with the situation as it stood from September 1997.
[34] Later that month, Mr Clark bought the Eastbourne Street development in Dunedin from the National Bank of New Zealand, as mortgagee. This development had been another of Mr Hyslop’s developments which was incomplete at the date of his adjudication of bankruptcy.
July 1998
[35] The next crucial development in the parties’ relationship occurred on
8 July 1998, when Mr Clark and Mr Hyslop met with Gavin Craw, Mr Clark’s accountant. Mr Craw, whom Chisholm J found “an impressive witness” (at [52]), questioned the two men about the nature of their relationship. It is not easy to work out from the evidence exactly what each said at the meeting. What is apparent, however, is that the parties were unclear about the nature of their relationship and that Mr Craw thought he should try “to establish exactly what [he] was dealing with”. He ascertained that they had no partnership agreement, but he concluded that the nature of their relationship was a partnership. In the accounts, Mr Craw used the name Southern Developments. That had been the name Mr Clark had chosen for his
ventures with Mr Hyslop. The previous August, he had opened in his name a bank account with the Bank of New Zealand and had asked for cheque and deposit books to read “FOR: SOUTHERN DEVELOPMENTS”. Obviously it was important that separate accounts be kept for Clark-Hyslop ventures, as Mr Clark ran other businesses in which Mr Hyslop had no interest.
[36] Mr Craw was probably puzzled as to how Mr Hyslop, whom he knew to be a bankrupt, could be a partner in a business. The answer he was given was that the partners were Mr Clark and “a company”. It does not appear that he was told at that stage the name of the company; presumably Mr Hyslop intended Libra. Mr Craw said that he suggested that “they should visit the solicitor and have [the partnership] documented”. According to Mr Craw, they decided not to do that; he recollected Mr Hyslop saying that “he didn’t trust suits”. I suspect there was quite a different reason as to why Mr Hyslop did not want to record the nature of the relationship in a proper documented form: he had, after all, told the Official Assignee he was not a partner of Mr Clark’s, but merely an employee. He had also been told by both Mr Kirkland and Mr Cain that he was not allowed to act as director of a company.
[37] What I take from this meeting is that Mr Clark was prepared to have accounts prepared for his venture with Mr Hyslop on the basis that, at least for accounting purposes, the arrangement would be treated as a partnership (whatever that meant). He also had no objection to Mr Hyslop’s nominating Libra as the entity which would receive Mr Hyslop’s share of any profits flowing from their joint venture.
[38] But nothing was apparently said at this stage to suggest any change to the fundamental arrangement agreed in February 1997 and then modified in September 1997. For instance, while at this point Mr Clark appears to have agreed that Libra would take Mr Hyslop’s share of profits, it was still Mr Hyslop personally he was employing. Nothing was said at that meeting to suggest that the business relationship was other than a Clark-Hyslop personal relationship. All that had changed was that the parties had agreed that Mr Hyslop’s share of profits would go in due course to “a company”, no doubt in a bid to defeat the interests of Mr Hyslop’s creditors.
[39] It is perhaps also significant that Mr Hyslop at no stage asked Mr Craw, or any other accountant for that matter, to prepare financial statements for Libra. Indeed, so far as the evidence reveals, no financial statements were ever prepared for Libra.
March 1999
[40] The next significant development was a meeting Mr Craw had with Messrs Clark and Hyslop in March 1999. Mr Craw was still very uncertain about the exact nature of his clients’ partnership. It was, after all, a very unusual “partnership” in that all the assets of the partnership remained vested in the name of just one of the partners, one of the partners was putting up all the money, and that partner was employing and paying wages to the other. It seems that Mr Craw was successful in getting Messrs Clark and Hyslop to think further about the nature of their relationship and as to how profits were to be calculated. An agreement was reached at this meeting, which Mr Craw then recorded in a memorandum. Both sides accept it accurately records the position they then reached. Mr Craw’s memorandum, which was addressed to Messrs Clark and Hyslop, recorded the agreement in the following terms:
It is agreed that the final profit be apportioned in the following manner:
1. RH wages drawn to be “added back” and taken from his ½ share.
2.Interest on LAC funds is to be adjusted so that LAC first receives as part of his share the amount of interest before any profit apportionment.
3.Losses will be utilised by LAC but taken into account in the final calculation.
[41] The reference to “RH” is a reference to Mr Hyslop; similarly, “LAC” means Mr Clark. It appears from the evidence that none of these points had previously been discussed or agreed between the parties. That is because, until this point, it had never been precisely agreed how Mr Hyslop’s “fair share” was to be calculated. This meeting and the agreement it produced demonstrate how the parties’ relationship was evolving, the details of it becoming clearer over time. It is perhaps significant that there was no reference to Libra. That appears to reflect the fact that
Mr Clark did not care who received Mr Hyslop’s share; he appears to have regarded that as entirely a matter for Mr Hyslop. All he was concerned about was that Mr Hyslop should continue applying his expertise to the benefit of their joint business ventures.
[42] As it happens, Libra was removed from the register of companies in March 1999. The fact that Mr Hyslop allowed that to happen speaks volumes: had he truly thought that Libra was the partner, there is no way he would have allowed the company to disappear. Mr Clark’s lack of concern is entirely consistent with his stance throughout that his relationship was with Mr Hyslop, not Libra.
June 2002
[43] By June 2002, the relationship between Messrs Clark and Hyslop had soured, largely, it seems, as a consequence of a disagreement with respect to the Cargill House development, to which I shall return.
[44] On 1 June 2002, Mr Hyslop wrote to Howard Alloo, Mr Clark’s solicitor, complaining about a settlement proposal Mr Alloo had sent to him. Mr Hyslop found that settlement proposal unacceptable. He wrote a long letter back, in which he referred to the “five years” he and Lindsay (Clark) had been through of what, he said, “I always saw as a partnership”. He went on:
“I NEVER ONCE saw him as my employer. Until a month ago he involved me in every decision that was made regarding anything I was doing with him. This sadly to say HAS NOT been the case of recent weeks and is without doubt putting a strain on what was an excellent working relationship.
Southern Developments was always a 50/50 profit share after documented and mutually accepted expenses were deducted. It was discussed upon the purchase of Cargill House (diaried 20-06-00 after discussion with Lindsay) that the rules for the development of Cargill House would be the same as St Albans.
[45] The significant feature of that long letter is that there is no mention whatever of the partnership being between Mr Clark and Libra; Mr Hyslop saw himself as
Mr Clark’s partner. By this stage, of course, Mr Hyslop had been discharged from bankruptcy for almost two years. Libra was non-existent; still off the register.
[46] While the parties continued to negotiate about Cargill House, they were unable to resolve their differences. Eventually, in August, Mr Hyslop caused to be lodged against the Cargill House title a caveat. The caveat was in his name. Mr Hyslop alleged that he had “a beneficial interest in the land”.
[47] The following month, Mr Hyslop commenced proceedings against Mr Clark. Once again, I find it significant that he alleged that the partnership was between Mr Clark and him, not Mr Clark and Libra.
October 2002
[48] It is common ground between the parties that, whatever the relationship was between Mr Clark and the Hyslop interests, it came to an end on 30 October 2002, when Mr Clark served a notice of dissolution.
November 2004
[49] The last crucial date in this analysis of what Mr Clark and Mr Hyslop said and did is 3 November 2004. On that date, Mr Clark signed his statement of evidence in the present case. That statement contained the following passage:
II Concessions as to legal existence of partnership
2.1 I acknowledge the following:
(a) The partnership accounts that were prepared for Southern
Developments showed Libra Investments Limited as a partner;
(b) The partnership accounts for Southern Developments show the Eastbourne and Law Street properties as being purchased by the enterprise.
2.2 I have been advised and accept the following:
(a) There is no difference between what I understood the St. Albans Street development arrangement [to] be and a partnership if the venture had been profitable;
(b) Because the Eastbourne and Law Street properties were included in the Southern Developments accounts then I am prepared to have them included in the profit sharing arrangement.
2.3I have arranged for my accountant, Gavin Craw, to prepare final accounts for Southern Developments on the basis that it is a partnership dissolved on 30 October 2002 (the date notice of dissolution was given) but with current values attributed to the assets that have not been sold as this is [the] interpretation that most favours [Libra] as it limits the interest charge to the date of dissolution.
2.4If there was money payable by me as a consequence of the St. Albans Street, Law Street and Eastbourne Street accounting then I will pay that money as if I had agreed to a partnership for those three ventures. If money is payable to me on the basis of “partnership accounts” then I do not seek such payment as I did not ever agree that [Mr Hyslop] or his interests would be liable for losses.
[50] The trial proceeded on the basis of Mr Clark’s concession.
What were the legal consequences of what was “agreed”?
[51] So far, what I have set out are the relevant things Mr Clark and Mr Hyslop said and did. Most of it is in fact not in dispute. Where disputes in the evidence have arisen is in the main where Messrs Clark and Hyslop have tried to fashion their cases to fit the legal constructs devised by their lawyers. The statements of evidence and answers in cross-examination are replete with conclusory statements such as “I was clear we had a partnership” or the converse. Whether or not there was a partnership is not for a witness to assert; that is a legal question to be determined by the court on the basis of what the parties said and did.
[52] In this section of these reasons, I give my conclusions as to the legal consequences of what Messrs Clark and Hyslop “agreed”. It should be no surprise that their legal relationship changed over time. The principal error in the argument advanced on both sides before us stems from the fact that counsel adopted a legal analysis as if the relationship had been static. That was, with respect, clearly wrong: this was a relationship which evolved.
[53] I am satisfied that what Mr Clark and Mr Hyslop discussed in February 1997 did lead to an agreement between them. But it was a very limited agreement.
Mr Clark would buy the St Albans Street property from Queens Park Mews and would retain Mr Hyslop as an independent contractor, in accordance with Mr Hyslop’s quotation. But the agreement went no further than that. Mr Hyslop at that stage was relying on Mr Clark to “see him right” if the St Albans Street development proved profitable. But the details of any additional payment were deliberately left vague, as Mr Hyslop was well aware that bankruptcy was probably inevitable. It was the wish of both Mr Clark and Mr Hyslop to leave matters open, to see how things developed. The last thing Mr Hyslop wanted at that stage was a contractual entitlement to future profits. Those profits would flow to his creditors. He wanted to insulate himself from his creditors. It was in his interests to keep matters deliberately vague.
[54] This policy was not necessarily foolhardy at all: he had known Mr Clark for years and he trusted him. Mr Clark’s actions were in fact very generous towards Mr Hyslop. He had no particular need to promise Mr Hyslop a fair share of the profits, although it must be acknowledged that Mr Clark clearly saw Mr Hyslop as a man of considerable skill in property development and construction. Mr Clark clearly hoped that he too would benefit from the skill and expertise which Mr Hyslop could bring to completion of the St Albans Street development.
[55] It is inconceivable that Mr Clark at this time agreed to enter into a partnership with Mr Hyslop. Who would want to start a partnership with a man who was likely to be adjudicated bankrupt very shortly? That would have involved Mr Clark in messy dealings with the Official Assignee. In any event, Mr Clark had no conceivable interest in paying out profits from his new St Albans Street development to Mr Hyslop’s creditors. The suggestion makes no commercial sense whatever – and, if one thing is clear in this case, it is that Mr Clark is a very astute businessman. The submission that a partnership was formed in February 1997 is not supported by a shred of contemporaneous documentation. It is also contrary to what Mr Hyslop told his creditors at the time.
[56] It was obvious that the parties’ legal relationship would have to change after Mr Hyslop was adjudicated bankrupt. After all, both knew that Mr Hyslop could no longer continue in business as a sole trader. That explains why Mr Hyslop’s
relationship with Mr Clark changed in September 1997 from independent contractor to employee. Mr Hyslop might later say, as I have quoted above at [44], that never in his years of dealing with Mr Clark did he see himself as Mr Clark’s employee, but employee in law he clearly was. (Later Mr Hyslop was to be employed by one of Mr Clark’s companies, but that change of employer is not significant for the purposes of my analysis.)
[57] The relationship changed again in July 1998. That was the occasion on which Mr Craw forced Messrs Clark and Hyslop to think through the nature of their relationship, so that Mr Craw could draw up the financial statements for their venture. It is unclear on the evidence who first used the term “partnership”. It is clear that neither Mr Clark nor Mr Hyslop is an expert on legal matters; neither probably had a clue about the legal indicia of a partnership or the ramifications of a partnership under the Partnership Act 1908. I consider it likely on the evidence that it was Mr Craw who determined to treat the relationship as a partnership, at least for accounting purposes.
[58] But who was “the partnership” between? Mr Craw was aware of Mr Hyslop’s status as an undischarged bankrupt and was no doubt, as an accountant, aware that undischarged bankrupts could not trade in business, whether as sole traders or partners. It may well be that that is what prompted Mr Hyslop to say that he had “a company” which could take his share. It seems clear that Mr Craw was not told the name of the company, which signifies that, at least at that stage, none of them saw its status as important. I see it as very significant that Mr Hyslop did not want to have the relationship committed to writing, notwithstanding Mr Craw’s advice to that effect. The only available inference on the evidence is that Mr Hyslop did not want any profits flowing from his venture with Mr Clark to be available to the Official Assignee or his creditors. At the same time, he did not want to lose control of where his profits were to go.
[59] It is not possible to be certain about the nature of the parties’ legal relationship after the July 1998 meeting. While I consider that it is arguable that Messrs Clark and Hyslop firmed up their relationship at that time, I think the better view is that they did no more than confirm to Mr Craw that he should prepare the
accounts on a partnership basis. But the terms of the relationship remained uncertain
– and designedly so. Mr Hyslop, for his own reasons, still wanted the relationship to be flexible. He was trusting Mr Clark to do right by him when the time came; but how right should be done remained a matter for consideration when the profits came in. The methodology would depend on Mr Hyslop’s circumstances at that time.
[60] Chisholm J’s primary reasons for finding there was a partnership between Mr Clark and Libra were Mr Craw’s evidence relating to the July 1998 meeting and the fact that the accounts referred to the partners as being Libra and Mr Clark: at [52]-[56]. I do not find either matter to be decisive.
[61] The judge quoted (at [53]) the following evidence from Mr Craw’s cross-examination:
Q. So is your evidence that you made this document [the interview sheet]
during your meeting with Mr Hyslop and Mr Clark in July 1998?
A. Yes.
Q.At the top, very top of the document, there is some handwritten annotation. Can you tell me what it says?
A. “No partnership agreement.” Q. And underneath that?
A. “L A Clark and a company.”
Q. What did you take those words to mean, “L A Clark and a company”? A. I think I was trying to establish exactly what I was dealing with.
Q. You mean those were the partners? A. Yes.
Q.During that meeting in July 1998, you established there was a partnership?
A. Yes.
[62] The judge said this was “compelling support” for the contention that there was a partnership between Mr Clark and Libra. With respect, I do not agree. This was a conclusory statement: there is no evidence that Mr Clark and Mr Hyslop knew what the indicia of a partnership were. Indeed, there is no evidence that Mr Craw
knew the indicia of a partnership, as opposed, say, to a joint venture or the situation of a contract whereby an employee receives a share of the profits. As to that last possibility, see Higgins and Fletcher The Law of Partnership in Australia and New Zealand (8ed 2001) at 45-47. The difference between these legal constructs is very subtle and not one which one could sensibly expect accountants to work out. Indeed, as this case proves, it is not easy for lawyers and judges to work out the correct pigeon-hole in which to place a particular relationship either. There is no evidence that Mr Craw considered other possibilities when trying to work out the nature of the relationship.
[63] A partnership normally connotes joint ownership of partnership assets. It is absolutely clear that up to this stage Mr Clark had retained sole ownership of the St Albans Street property and the Eastbourne Street property. There is no evidence to suggest that Mr Clark and Mr Hyslop ever discussed at this meeting Mr Hyslop’s (or Libra’s) acquiring a proprietary interest in those two properties. It is inconceivable that Mr Clark would have agreed to that. Mr Hyslop was, after all, an undischarged bankrupt. The evidence the judge relied on is, with respect, just too flimsy to sustain a conclusion that at this meeting Mr Clark agreed to a legal relationship which was fundamentally different from the relationship which previously existed.
[64] And the accounts are not decisive either. Mr Clark said he never read them. Mr Hyslop may have done so, but, if he did, he never pointed out an obvious error in them. Clearly after March 1999, Libra could not have been the partner, as Mr Hyslop had allowed it to be removed from the register. It is clear, however, that he never asked Mr Craw to correct that. The obvious inference is that that is because he regarded the identity of the entity representing his interests as unimportant.
[65] Chisholm J asked the rhetorical question “why there would be an entirely separate set of accounts for Southern Developments if that entity was effectively Mr Clark”: at [55]. But there needed to be separate accounts, whether this was a partnership or a joint venture or an agreement with an employee involving the sharing of profits. It was vital to keep track of the income and expenditure of these Clark-Hyslop ventures as opposed to Mr Clark’s other business activities which did
not involve Mr Hyslop. So the keeping of separate accounts is not in itself a factor pointing to a partnership as opposed to the sort of profit-sharing arrangement which Mr Clark has always acknowledged.
[66] The next milestone in the evolution of the parties’ relationship came in March 1999. Three crucial terms of the relationship were agreed for the first time. They are the terms set out in Mr Craw’s memorandum, reproduced at [40] above.
[67] So far as identity of parties is concerned, I think it is significant that Mr Craw’s memorandum did not refer to Libra. Mr Hyslop’s half share is referred to as “his”. I am satisfied that that is exactly how Mr Clark and Mr Hyslop saw it: it was Mr Hyslop’s half share, even if in documents which would or might become public Libra was shown as the partner. Mr Hyslop would have been very aware of his status as an undischarged bankrupt.
[68] Mr Craw’s memorandum does not really assist on the other question, namely whether this was in truth a partnership or a joint venture or a profit-sharing arrangement with an employee. As it turns out, I do not find it necessary for the purposes of this case to decide definitively which of those three possibilities is correct. The reasons why that does not have to be determined definitively are:
(a) Both sides agree that the relationship has lawfully come to an end, with the consequence that all that is required is an accounting between the parties;
(b)Later concessions made by Mr Clark render the exact nature of the agreement unnecessary.
[69] I may indicate, however, that I think this probably was a profit-sharing arrangement with an employee. It seems to me clear that Mr Hyslop never had a proprietary interest in any of the properties which were the subject matter of the parties’ venturing. They were always acknowledged to be Mr Clark’s property, paid for exclusively by him. Mr Hyslop’s right was to a share of the profits generated by the projects on which the two men ventured. I believe that the “partnership” label
was applied by Mr Craw at an early stage, when clearly the parties had not thought through the full terms of their relationship, and that label simply stuck, at least for the purposes of the venture’s financial statements.
[70] My preferred analysis is, in fact, the equivalent of the alternative claims advanced by Libra and Mr Hyslop (as trustee of his family trust), save that I consider the contracting party was always Mr Hyslop in his personal capacity.
[71] My preferred analysis also accords with Mr Alloo’s understanding of the position. He was Mr Clark’s solicitor throughout. He gave evidence, on which he was not challenged, that his understanding throughout was that the relationship was not a partnership, but rather was an arrangement whereby Mr Hyslop was employed, first by Mr Clark and later by one of his companies, with Mr Hyslop to receive “some form of bonus…out of any profit, should there be one”. Mr Clark had no motive – at least prior to the dispute arising – to dissemble to his confidential advisor as to his understanding of what had been agreed. Mr Hyslop, on the other hand, did not call his lawyer to support his evidence, notwithstanding the fact that Mr Kirkland remained as trustee of the Hyslop Family Trust until September 2000.
[72] The next relevant date is 30 October 2002, when it is agreed the relationship came to an end. Mr Hyslop does not allege that Mr Clark was not entitled to end the relationship. That must mean he accepts that the relationship was terminable by either party on notice. That is so even if some of the venture’s projects were midstream. What the parties never discussed, so far as the evidence reveals, is how the accounting was to be done with respect to projects midstream at the termination of their relationship.
[73] The final step in the analysis is defining the consequences of Mr Clark’s “concessions”. I see those concessions as removing any doubt on the following points:
(a) The St Albans Street, Eastbourne Street, and Law Street projects were all to be considered part of the parties’ venture;
(b)No point was to be taken about Libra’s suing, even if in law the partner or joint venturer or other party had always been Mr Hyslop;
(c) The March 1999 variation was to be applied to all joint venture projects.
[74] Putting to one side Cargill House and Haggart Alexander Drive for the meantime, I consider that the position Mr Clark “conceded” was, in any event, the correct contractual analysis. I consider that the parties to the evolving relationship were always Messrs Clark and Hyslop. As from July 1998, however, Mr Clark made it clear that he did not mind to what Hyslop entity Mr Hyslop credited his profit share. Although Mr Hyslop appears not to have told Mr Craw the name of his company at that stage, Mr Clark did by then know that Mr Hyslop had incorporated Libra. Probably, had Mr Clark not accounted to Mr Hyslop or his interests for their share of the profits, both Mr Hyslop and Libra could have sued, in the latter case pursuant to s 4 of the Contracts (Privity) Act 1982.
[75] In summary, therefore, my view of the evidence, in light of Chisholm J’s findings, is that the relationship between Mr Clark and Mr Hyslop evolved so as to contain the following terms:
1.Mr Clark and Mr Hyslop shall undertake such projects as they should agree would fall within their overall relationship.
2. The venture shall be called Southern Developments.
3.Properties and assets purchased for the venture should be bought and retained in Mr Clark’s name.
4.Mr Clark shall be responsible for all the capital requirements of the projects.
5.Mr Clark or one of his companies shall employ Mr Hyslop and pay him a salary to be agreed between him and Mr Clark.
6.Mr Hyslop shall apply his expertise and time to the day-to-day running of the projects.
7.Mr Clark shall account to Mr Hyslop for a half share in the profit of the venture, subject to what was agreed on 24 March 1999.
8.The interest rate for the purposes of term 2 of the 24 March 1999 variation shall be 10%.
9. Either party may terminate the relationship by giving notice.
10.Mr Hyslop may require Mr Clark to credit his share of the project to any entity associated with him.
[76] I make a number of points about these terms. First, I do not attempt to paraphrase the terms agreed on 24 March 1999 (see term 7 above). Those agreed terms still give rise to potential difficulties. If the parties cannot agree on the calculation, presumably they will need assistance from either the High Court or an arbitrator to resolve their differences.
[77] Secondly, the above list of terms does not purport to be exhaustive. Unfortunately, the parties in formulating their pleadings and making their submissions have never attempted to assert all the terms (express and implied) which are necessary to resolve this dispute. I am aware that my list of terms would not be sufficient to resolve how the final accounting is to be done. After the hearing of this appeal, we issued a minute on a number of matters on which we required further assistance. We said in that minute that we wanted “our judgment to be as complete as possible, in the sense of leaving as few less loose ends as possible which require further negotiation or High Court assistance”. One of the questions we asked was:
Is there any dispute with Mr Craw’s methodology in preparing the
31 October 2002 accounts (other than the dispute as to whether the Haggart
Alexander Drive Project and Cargill House project should be brought into account)?
[78] The Hyslop interests’ response, as conveyed by their counsel, Mr Churchman, indicated that there are numerous disputes as to that methodology.
[79] Finally, the effect of Mr Clark’s concessions, is to remove any remaining doubt on two matters:
(a) The St Albans Street project, the Eastbourne Street project, and the Law Street project are all agreed to be projects in terms of term 1 above.
(b)There is no dispute about Libra’s entitlement to Mr Hyslop’s share of the profit (if any).
[80] It follows that, while I respect all Chisholm J’s findings of credibility and fact, I do not agree with all his findings of law.
[81] I think the venture agreement, to use a neutral term, was always between Mr Clark and Mr Hyslop. It is clear that, from 1998 on, Mr Clark was prepared to credit Mr Hyslop’s share to any entity Mr Hyslop cared to nominate. Mr Clark appreciated Mr Hyslop’s difficulties as an undischarged bankrupt. He appreciated that there might be difficulties for Mr Hyslop if Mr Hyslop took profits in his own name. But it is clear that Mr Hyslop always saw himself as the “partner”: whether and how the family trust and Libra were to be utilised was, as he saw it, a matter for him, depending on his status and circumstances at any relevant time. It is clear on the evidence that, from time to time, Mr Hyslop asserted different positions as to what he was up to, depending on to whom he was talking and the interests they represented. But as between him and Mr Clark, however, he never deviated from the view that he was Mr Clark’s “partner”, albeit with a right to nominate other entities, including Libra, as the recipient of his share of profits.
[82] It is very significant that Mr Hyslop took no steps on Libra’s removal from the register in March 1999. He clearly saw that as of no moment whatever in his relationship with Mr Clark – and indeed it was of no moment. It is significant that he did nothing about having Libra restored to the register until the end of 2003.
[83] Why did he bother to have Libra restored to the register at that late stage, more than four years after its removal? I infer that Mr Hyslop’s lawyers must have decided at that point that it was arguable that Mr Hyslop was not the partner or the contracting party, given that the Southern Developments accounts named Libra Developments Limited as the partner. Mr Hyslop’s lawyers would have been aware from Mr Clark’s statement of defence to Mr Hyslop’s statement of claim that Libra was no longer in existence, a fact which had been pleaded in that statement of defence. In other words, Libra’s restoration to the register was driven by Mr Hyslop’s lawyers’ concern that they might have the wrong plaintiff. As it happens, I do not think they did have the wrong plaintiff. Mr Hyslop’s initial reaction, namely to lodge a caveat in his own name and to start the proceeding in his own name, steps which no doubt accorded with his own understanding of the position at that stage, were in fact legally correct (at least so far as identity of parties was concerned).
[84] In summary, therefore, I find on issues 1 and 2 that the agreement was always between Messrs Clark and Hyslop. I also find, though not definitively, that the agreement was probably a profit-sharing arrangement with an employee. That accords with what Mr Clark has always said the relationship became (even though there remains a dispute as to which projects formed part of the overall venture). This conclusion is also reasonably consistent with one of the four causes of action advanced by the Hyslop interests, namely Mr Hyslop’s second cause of action based on an agreement akin to a partnership.
Issue 3: Was the judge correct to find that Mr Clark and Libra had entered into a partnership in February 1997?
[85] Chisholm J found at [81]:
In February 1997 an agreement was reached for a partnership to be formed between Mr Clark and Libra primarily for the purpose of property development. The basic terms of the partnership are accurately reflected in Mr Craw’s memorandum of 24 March 1999. It continued until
30 October 2002.
[86] Mr Andersen challenged that conclusion. His first ground of challenge was based on the fact that Libra could not have entered into a partnership in February 1997 because at that date Libra was not in existence. He submitted that it had not been claimed by Mr Hyslop “that there was a pre-incorporation agreement in February 1997 that was subsequently ratified by Libra”. Further, even if the February 1997 agreement had been entered into on Mr Hyslop’s part on behalf of a company to be formed, there was no evidence that Libra had ratified the agreement within a reasonable time of its incorporation. Accordingly, Mr Andersen submitted, Libra’s claim based on the February 1997 agreement should have failed.
[87] It will be apparent from the above discussion that I do not consider there was ever an agreement between Mr Clark and Libra. Further, I have avoided the question as to whether the agreement between Mr Clark and Mr Hyslop did actually create the relationship of partnership. That is in fact of no moment: what is important, given that both sides accept that the relationship, whatever it was, is at an end is not its “title” but rather its terms, so that the final accounting between the parties can be undertaken.
[88] In view of my findings, Mr Andersen’s first point disappears. I agree that Libra was not a party. It is accordingly not surprising that there is no evidence of its having ratified whatever Mr Hyslop agreed in February 1997. In any event, what was agreed in February 1997 was subsequently varied in a number of respects. What is important in this case is not what was agreed in February 1997 but rather the nature and terms of the relationship as it existed immediately prior to Mr Clark’s dissolution of it.
[89] This ground of appeal would not in my view, therefore, avail Mr Clark.
Issue 4: Was the partnership dissolved when Libra was removed from the register of companies on 16 March 1999?
[90] Mr Clark’s next ground of appeal was that, if there were a partnership between Mr Clark and Libra, that partnership was dissolved when Libra was removed from the register of companies on 16 March 1999.
[91] The answer to this submission will by now be clear. Since Libra was not the party to the venture agreement, its removal from the register had no effect on the parties’ relationship. Indeed, the complete lack of concern on the part of both Mr Clark and Mr Hyslop to Libra’s removal from the register speaks volumes. It was completely unimportant to both of them, as Libra’s only significance was as a possible home for Mr Hyslop’s share of the profits if, at the time they became available, it did not suit Mr Hyslop to show such profits coming into his own bank account.
[92] This ground of appeal too would not in my view avail Mr Clark.
Issue 5: What was the legal effect on Libra of Mr Hyslop’s bankruptcy?
[93] Mr Clark’s next ground of appeal was that, even if there had been a partnership, Libra could not act as a partner after 30 July 1997, the date on which Mr Hyslop was adjudicated bankrupt. By virtue of ss 151 and 157 of the Companies Act, Mr Hyslop vacated the office of director of Libra upon his bankruptcy. There were no other directors. Libra’s shareholder did not appoint any other directors. Accordingly, Libra was without a board, at the very least for the period of Mr Hyslop’s bankruptcy (30 July 1997-30 July 2000).
[94] This point too disappears, in light of the above analysis. Libra was not a partner.
Issue 6: Was the Cargill House project a Clark-Hyslop project?
[95] Initially, as I have said, the parties’ relationship was limited to the St Albans Street project. But it is clear that Messrs Clark and Hyslop later decided that they would do other projects on the same basis as they had agreed for St Albans Street. Hence, term 1 of their venture agreement: see above at [75]. The question is whether the Cargill House development was a term 1 project.
[96] Chisholm J found that the Cargill House project was a partnership venture: at [98]-[110]. I summarise his reasons for so deciding. First, the judge recorded that early in 2000, Mr Clark had become interested in Cargill House for development purposes and had told Mr Hyslop about his interest. The judge recorded Mr Hyslop’s evidence on this:
I remember very clearly Lindsay [Clark] telling me that if I did not want to be involved, then he was not interested in pursuing a purchase any further. He also told me that, if we proceeded with the purchase, then the entire project would be mine just like all the others we had done together.
[97] The judge recorded that Mr Andersen had not challenged that evidence in cross-examination. Nor did Mr Clark deny it. The judge expressly found that Mr Hyslop’s evidence in that regard was correct.
[98] On 22 June 2000, Cargill House was purchased for $1,065,000. The purchaser was Danube Holdings Limited, a shelf company, the shares in which were in due course transferred to Mr Clark. Mr Clark was Danube’s sole director.
[99] After the purchase, the judge found that Mr Clark and Mr Hyslop had discussed development options for the property. Mr Hyslop applied for a building consent to convert space on the seventh floor into temporary residential accommodation for himself and his family. His unchallenged evidence was that Southern Developments paid the consent fee.
[100] In September 2000, Mr Hyslop signed a general listing agreement with Knight Frank, real estate agents. By mid-2002, there were two potential tenants for Cargill House. But Mr Hyslop had another idea. I take up the story from the judge’s account:
[101] … However, Mr Hyslop suggested to Mr Clark that before they finalised anything he wanted to look at the possibility of a hotel development and suggested that they approach Mr Stuart McLachlan, a director of Scenic Circle Hotels, who was known to both of them. Negotiations with Scenic Circle ensued. Mr Hyslop took an active part in those negotiations. This evidence is not disputed.
[102] Agreement was reached that the entire Cargill House building would be converted into a Scenic Circle hotel and on 12 July 2002 Danube Holdings Limited entered into an agreement with various parties for the sale
of the premises to Cargill Hotel 2002 Limited and the operation and management of the new hotel under a hotel management agreement. In simple terms Cargill Hotel 2002 Limited, which was incorporated on
4 July 2002, was to be half owned by Scenic Circle and half owned by
Mr Clark’s interests.
[103] Mr Hyslop maintains that he was promised a shareholding in Cargill Hotel 2002 Limited and a seat on the board. He also maintains that he was actually appointed to the board. While Mr Clark does not dispute that he initially intended that Mr Hyslop should be on the board, it was his evidence that he changed his mind as a result of legal advice and Mr Hyslop was never appointed to the board. Mr Clark denies that he ever promised Mr Hyslop a shareholding in Cargill Hotel 2002 Limited.
[101] It was the Cargill House dispute that proved to be the undoing of the parties’
venture agreement.
[102] The judge’s ultimate finding concerning Cargill House was as follows:
[106] Against that background I now consider the plaintiffs’ request for a declaration in relation to Cargill House. When an overview is taken of the evidence concerning this project it can be seen that it fits into the pattern of developments undertaken by the partnership. At the outset Mr Clark acknowledged that Mr Hyslop’s involvement was crucial and assured Mr Hyslop that the Cargill House project would be like the other projects. By that he must have been referring to the St Albans Street, Eastbourne Street and Law Street projects. Like those projects Cargill House revolved around the development of a property. Mr Clark was to provide the funding and Mr Hyslop was clearly expected to utilise his skills to turn the property to best advantage. It is not disputed that Mr Hyslop played a key role at each stage of the development. In fact, but for his initiative the Scenic Circle group would not have become involved.
[107] In substance the only major difference between this project and the other partnership projects is that this time a company acquired the property rather than Mr Clark personally. I do not think that this factor is significant when determining whether Cargill House was a partnership project.
[103] Mr Andersen’s first attack on this finding was based on his issue 5 argument, namely that “Libra had no ability to agree to enter into the Cargill House development because it had no director”. That argument obviously cannot succeed, given the findings I have made. Libra was not the party.
[104] Mr Andersen’s alternative argument was that, on the evidence, this development was different from the others. Mr Andersen submitted that what the evidence disclosed was “a development by Mr Clark’s company with Mr Hyslop to
provide vital assistance for undetermined remuneration”. Mr Andersen relied on six pieces of evidence as supporting that submission.
[105] First, he referred to a transcript of a meeting between Mr Hyslop and Howard Alloo, Mr Clark’s lawyer, on 19 July 2001. Mr Hyslop had secretly recorded that meeting. In the course of that meeting, Mr Hyslop said to Mr Alloo, “Lindsay has said to me there is something in this for me if Cargill House works and the other things work.” From that, Mr Andersen submits, one can draw two inferences: first, that Mr Hyslop saw the benefit as coming to him, not Libra, and secondly, the undefined nature of that benefit is inconsistent with an assertion that this project was covered by the standard agreement, which provided for a 50/50 share of profit.
[106] I agree that the first inference can be drawn. This is but another piece of evidence supporting my principal thesis that both Mr Clark and Mr Hyslop always saw the parties as being themselves. I do not think, however, that the second inference can safely be drawn. Mr Andersen’s quote from the evidence stops too soon. Mr Hyslop went on to explain that his half share of the profits “was never, ever, ever, ever in doubt”. What he was referring to here was something different: on this occasion, he said, he and Mr Clark had been talking about Mr Hyslop’s not only getting his standard share of the profits but also getting a share of the “capital ownership”. That was undetermined; that was being negotiated. Those negotiations ultimately foundered. Although Chisholm J made no specific finding on this part of the evidence, I accept Mr Hyslop’s account that that is what he meant. That account ties in with the contemporary documentation, disclosing the offers and counteroffers concerning the ownership and development of Cargill House. The first piece of evidence, therefore, far from assisting Mr Andersen’s submission, is further evidence in support of my conclusion as to the general nature of the agreement and is supportive of the judge’s finding that Cargill House was a “partnership” project.
[107] Mr Andersen’s second and third pieces of evidence also led to the conclusion, he submitted, that, even on Mr Hyslop’s account, “the terms for his reward for Cargill House had not been determined”. I need not cite these pieces of evidence because the answer to Mr Andersen’s submission is the same as the answer I give to
the first piece. That is to say, they reveal that it was not certain what Mr Hyslop would get as “a capital benefit”. The point is that Mr Hyslop was trying to use the Cargill House development as a lever to ratchet the relationship up to a new level, whereby he would be entitled not only to a share of the profits but also to a capital share. Mr Hyslop said that Mr Clark had promised him such a benefit, but the two of them were never able to bring their negotiations to finality. Indeed, in the end, it was these negotiations and the dispute they engendered that led to Mr Clark’s pulling the plug on the entire venture agreement.
[108] Mr Andersen’s fourth piece of evidence was a letter which Mr Hyslop wrote on 26 January 2001, in which he acknowledged that Danube Holdings was “owned by Mr Lindsay Clark”. That, with respect, proves nothing. I accept that Mr Clark owned Danube. Mr Hyslop accepted that too. What Mr Hyslop was arguing for was a share in the capital of Cargill House. Presumably, he saw that being achieved by his acquiring a shareholding in Danube. It is clear that that was never achieved.
[109] The fifth and sixth pieces of evidence on which Mr Andersen relies are to the same effect as the fourth. I accept that they indicate that Mr Hyslop considered he did not have an interest in Danube. Nor did he. Indeed, that was his complaint. He thought that he should be given an interest, but that was a dream he never realised.
[110] While I do not see these pieces of evidence as assisting Mr Andersen on the question of whether the Cargill House project was a term 1 project, I do nonetheless see this evidence as supporting Mr Clark’s contention that the agreement he had with Mr Hyslop never amounted to a partnership. The fact that Mr Hyslop never asserted a proprietary interest in Danube Holdings (even though he thought in this case he should have one), just as he never asserted a proprietary interest in any of the other properties which they were developing, is a strong pointer to the conclusion that the relationship was not a partnership but rather was a profit-sharing agreement.
[111] I am satisfied that Chisholm J was correct to find that the Cargill House project was one which Mr Clark and Mr Hyslop agreed should fall within their overall relationship.
Issue 7: Was the Haggart Alexander Drive project a Clark-Hyslop project?
[112] Chisholm J dealt with this topic at [92]-[97] of his judgment. The judge recorded at [92]:
[92] In about March 2001 Mr Hyslop and Mr Clark decided that this property would be suitable for development and Mr Hyslop became involved in purchase negotiations. A contract for the purchase of the property was signed by Mr Clark on 1 September 2001. In terms of the contract it was necessary for the land being purchased to be sub-divided off and Mr Hyslop was appointed for the vendor’s attorney for the purpose of achieving the necessary sub-division.
[113] The judge concluded at [95]:
I have no difficulty in arriving at the conclusion that the purchase of Haggart Alexander Drive fits within the pattern of the partnership projects. Judging from Mr Hyslop’s affidavit in the caveat matter, the property was initially brought to Mr Hyslop’s attention by a real estate agent. Mr Hyslop then introduced Mr Clark to the venture. Both viewed it as a desirable development proposal. As with the other properties it was purchased in Mr Clark’s name. Southern Developments annual accounts indicate that the settlement proceeds came from that source.
[114] Mr Andersen challenged the judge’s finding on three grounds.
[115] First, he contended that Libra could not have agreed to make this a partnership project, Libra had been struck off the register and had no directors. This point is easily disposed of: Mr Hyslop was the co-venturer.
[116] Mr Andersen’s second point is that Haggart Alexander Drive did not appear in the Southern Developments accounts as a partnership asset and, although the balance of the purchase price of $93,872 was paid from Southern Developments’ bank account, the accounts treated that as a drawing to Mr Clark. I place no weight on these particular accounts, as they were the accounts for the year ended 31 March
2002, prepared by Mr Craw at a time when matters had completely blown up between Mr Clark and Mr Hyslop. By this stage, Mr Craw was taking instructions solely from Mr Clark. In any event, the accounts generally are not definitive of the true nature of the parties’ relationship. Mr Craw was doing his best, but his instructions – even at the end – were far from complete. The parties had simply not thought through the full implications of their relationship. At the start, that was
intentional, as Mr Hyslop in particular wanted to keep matters fluid as a protection against his creditors. By the time he was free of that risk, the dispute concerning Cargill House was impeding clarification. I do not regard this reason as in any way undermining Chisholm J’s conclusion.
[117] Mr Andersen’s third argument was that the evidence established “that Haggart Alexander Drive was regarded by Mr Hyslop as being the property of [Mr Clark] at the time of purchase”. So it was. But that was the case with all the venture projects. All the properties were bought in Mr Clark’s name, save for Cargill House, in respect of which he used a company which he controlled. The fact that the mode of purchase fitted the pattern is part of the evidence justifying Chisholm J’s conclusion that the Haggart Alexander Drive was a venture project.
[118] I am satisfied that Chisholm J was correct to find that the Haggart Alexander Drive project was one which Mr Clark and Mr Hyslop agreed should fall within their overall relationship.
What relief would I have granted?
[119] Chisholm J finished his judgment as follows:
[134] The first plaintiff is entitled to a declaration that the following properties and/or profits or proceeds from such properties are assets of the partnership:
- St Albans Street (paragraph [86])
- Eastbourne Street (paragraph [86])
- Law Street (paragraph [86])
- Haggart Alexander Drive (paragraph [97])
- Cargill House (paragraph [110]).
Leave is reserved to any party to apply further should any of these declarations require further refinement in relation to any of these properties.
[135] The application for a declaration in relation to Mobile Batching
Systems Limited is adjourned in accordance with paragraph [117].
[120] So far as I am aware, neither side has availed itself of the leave reserved in
[134]. No doubt that is because Mr Clark decided to pursue his appeal.
[121] Had my views commanded majority support, Chisholm J’s declaration would have required amendment. I consider the relationship was always between Mr Clark and Mr Hyslop, not Mr Clark and Libra. Libra’s “entitlement” was solely as a beneficiary of the contract. (Its “entitlement” springs from the Contracts (Privity) Act.) The properties listed in [134] of Chisholm J’s judgment were not “assets of the partnership”. They were Mr Clark’s assets, but Mr Hyslop had the right to share in the profits from those five projects.
[122] For myself, I would have quashed the declaration Chisholm J made and made a fresh one in its place. It would have been in these terms:
A declaration:
(a) that the appellant and Russell Ernest Hyslop were parties to an agreement, among the terms of which were the terms set out in [75] of the reasons for judgment herein;
(b) that the projects within the venture were the St Albans Street, Eastbourne Street, Law Street, Cargill House, and Haggart Alexander Drive projects;
(c) that whether the Mobile Batching Systems project was a project within the venture remains to be determined by the High Court;
(d) that if on the taking of accounts between the appellant and Mr Hyslop it is demonstrated that the appellant owes money to Mr Hyslop, that sum is by agreement between them to be paid to the first respondent.
[123] Although my reasoning is somewhat different from Chisholm J’s, the end result is not significantly different. I consider that r 48(4) and (5) of the Court of Appeal (Civil) Rules 2005 provides sufficient authority for the declaration I would have made.
(Given by Williams J)
Table of Contents
Para No
Introduction [124] Pleadings, facts and judgment under appeal [125] Submissions [143] Discussion: [154] (1) Partnership contract [154]
(2) Ratification [158] (3) Effect of Mr Hyslop’s bankruptcy [167] (4) Libra’s removal from register [182] (5) Haggart Alexander Drive [206] (6) Cargill House/Danube Holdings [211]
Result [215]
Introduction
[124] For reasons which will appear, we take a somewhat different view of this appeal than Chambers J and though we unhesitatingly agree that because the parties never really thought through the precise nature of their relationship in law or what properties and assets were a part of their enterprise and the financial consequences, they really have nobody but themselves to blame for the lengthy and complicated litigation which has ensued between them to date and which will require yet further negotiation or litigation. We also agree with Chambers J that the parties left few documentary blazes to mark the trail of the legal relationship, preferring obviously to get on with their business. The evidence is also open to the interpretation that Messrs Hyslop and Clark, particularly the former, may have been less than entirely open with Mr Hyslop’s creditors, the Official Assignee and even with their professional advisors as to the nature of their ongoing relationship and what each, particularly Mr Hyslop personally, wished to derive from it. But we give greater weight to the views reached by Chisholm J on the paucity of documentary evidence but with the additional significant assistance of seeing and hearing the witnesses to support the conclusions he reached.
[125] Following the 8-day hearing in the High Court Chisholm J, on
4 February 2005, delivered a reserved judgment dealing primarily with the following issues:
(a) Whether there was a partnership/profit sharing arrangement from February 1997 until 30 October 2002 between either or both Mr Hyslop and his company, Libra Developments Ltd (until 13 November 2003 Libra Investments Ltd) and Mr Clark or companies controlled by him.
(b)If so, what assets were included in the partnership/profit sharing arrangement.
[126] It is to be noted that the claim at trial pleaded that Messrs Hyslop and Clark agreed in about February 1997 to “form a partnership for the purposes of acquiring and developing” some land belonging to a company called Queen’s Park Mews Ltd and “entering into other business ventures” and the Hyslop Family Trust was created on 6 March 1997 and incorporated Libra Investments on 12 March 1997 for the purposes of that partnership. The respondents pleaded that the partnership, to be called Southern Developments, was an oral one between Mr Clark and Libra with the partners having equal shares, Mr Clark providing capital and Mr Hyslop his experience as developer and builder. The partnership was to buy most of its building materials from Mr Clark’s building supply business. Mr Hyslop would be employed by the partnership with his salary being an advance against Libra’s share of profits.
[127] However, by consent, elsewhere in the claim it was asserted the partnership was between Mr Hyslop as trustee of his family trust and Mr Clark.
[128] The beneficiaries of the Hyslop Family Trust are Mr Hyslop and his immediate family. From its constitution to 14 September 2000, its sole trustee was a Mr Kirkland, the solicitor who acted for Mr Hyslop. Mr Hyslop replaced him on that date and presumably remains in office.
[129] Libra’s only shareholder at incorporation was Mr Kirkland as trustee of the Hyslop Family Trust. Mr Hyslop was appointed Libra’s sole director on incorporation. On a date which does not clearly appear in evidence but was between
6 February 2003 and 23 November 2004, probably about 22 October 2004, he became Libra’s sole shareholder, almost certainly as a result of his becoming trustee of the Hyslop Family Trust.
[130] However, on 30 July 1997, Mr Hyslop was adjudicated bankrupt and remained bankrupt until his automatic discharge on 30 July 2000. The consequences in law of his adjudication and its effect on this appeal will require later discussion but, for the present, it is sufficient to note that Mr Hyslop’s adjudication in bankruptcy disqualified him from continuing to be the director of Libra and meant he vacated that office: Companies Act 1993 ss 151(2)(b), 157(1)(c)1. The claim acknowledged Mr Hyslop’s vacation of the office of director and said no other director was appointed.
[131] On 16 March 1999 Libra was removed from the register of companies under s 317. Libra was restored to the companies register on 13 November 2003. The evidence did not disclose the grounds for removal or restoration nor who instigated either. Again the legal consequences of those matters and their impact on this appeal will require later consideration, particularly in light of s 330(2) which provides that a company restored to the register “shall be deemed to have continued in existence as if it had not been removed”.
[132] It is, however, material to note that the respondents’ claim contradictorily pleaded :
The Partnership continued to trade after Libra was struck off the register of companies, either as a continuation of the original partnership with the Trust as partner in place of Libra or, alternatively, pursuant to a new partnership subject to an identical partnership agreement and with the same assets of the original Partnership.
[133] The parties agree that in 1996 Queen’s Park Mews, which the development company associated with Mr Hyslop, was in financial difficulties including owing
1 All statutory references in this judgment are to the Companies Act 1993 unless otherwise noted.
money to Mr Clark. It owned land in St Albans Street Dunedin which it intended to develop. The creditors’ group, including Mr Clark, discussed a proposal for the development to proceed under Mr Clark’s ownership but with Mr Hyslop actually carrying out the work. What then occurred was recorded by Chisholm J :
[9]On 20 February 1997 Queens Park Mews agreed to sell St Albans Street to Mr Clark and following settlement the property was transferred into Mr Clark’s name. Mr Clark acknowledges that he told Mr Hyslop that he would not buy St Albans Street unless Mr Hyslop was involved. But he disagrees with Mr Hyslop’s assertion that in February 1997 they agreed that a partnership subsequently called Southern Developments would be formed between Mr Clark and Libra for the purpose of developing St Albans Street and other properties, with Mr Clark providing the cash and Mr Hyslop the labour. Mr Clark maintains that in September 1997, following Mr Hyslop’s bankruptcy, he agreed to employ Mr Hyslop to develop St Albans Street on a profit sharing basis and that Southern Developments was established as a convenient vehicle for the implementation of that arrangement. He denies that there was a partnership.
[134] The Judge continued with his examination of the evidence on the first question posed, ultimately concluding a partnership had been proved: at [65]. The partners were Mr Clark and Libra, Libra having been “formed for that purpose, Mr Hyslop having acted as its promoter”: at [66]. The company, he held, was formed because of Mr Hyslop’s poor financial position. A number of factors were weighed by the Judge in reaching that view. They included payment of Mr Hyslop’s wages during his bankruptcy, Mr Hyslop’s day-to-day involvement in the completion of a development at Eastbourne Street, Dunedin which was incomplete at his bankruptcy and the fact that Southern Development’s accounts for the year ended
31 March 1998 included both St Albans Street and Eastbourne Street. Mr Craw, the accountant who prepared the accounts - a witness described by the Judge as “impressive” - said that at a meeting with Messrs Clark and Hyslop in July 1998 he established from them that there was a partnership between Mr Clark and Libra and accordingly annotated the accounts for that and all subsequent years that “Southern Developments is a partnership governed by the Partnership Act 1908”. The Judge went on to cite Mr Craw’s memorandum quoted by Chambers J at [40] and continued by turning to the date of the partnership’s commencement:
[161] However, to ensure it was Libra rather than he who became liable for the debts, it was necessary for the pre-incorporation partnership contract to be ratified by Libra, in the circumstances in this case within a reasonable time after incorporation: ss 182(2), 183(1)(b).
[162] There having been no formal ratification by Libra of the pre-incorporation contract in the manner required by s 180, the question is whether Libra ratified the pre-incorporation contract by other means recognised at law.
[163] Pre-incorporation contracts must be ratified within the period specified in the contract or a reasonable time after incorporation and must be ratified “in the same manner as a contract entered into on behalf of the company”, that is to say, “in writing or orally by a person acting under the company’s express or implied authority”: ss 180(1)(c), 182(2) (4). As the law does not require partnership agreements to be written, the requirements for Libra to ratify the partnership agreement are as put by Panckhurst J in Taylor v Todd [2004] 3 NZLR 76 at [54]-[56] :
[54] At common law the essentials of ratification are tolerably clear.
Ratification requires a clear adoptive act on the part of the principal, but such act may be express or implied from conduct. The act of
adoption must be accompanied by full knowledge of all the essential facts and must relate to a transaction to which effect can be given:
McEwan v Johnstone [1918] NZLR 49 (SC).
[55] In relation to ratification under the Act Quilliam J in Development
Finance Corporation v McSherry Export Kilns Ltd (In Liq) (1987)
3 NZCLC 99,998 (HC) concluded at p 100,005 that:
“It is, I think, fundamental that there can be no ratification unless there is a conscious intention to ratify. It is implicit in s
42A that some deliberate act shall be done for the purpose of
confirming something which would be imperfect without that confirmation.”
[56]To my mind the conscious act test is an appropriate one. In form ratification may consist of a formal decision of the company to that effect, or of other conduct which plainly indicates that the newly formed company intends to adopt and perform the pre-incorporation contract.
[164] Or, as it is expressed in Art. 17 in Bowstead & Reynolds on Agency (17th ed
2001) para 2-070 :
Ratification may be express or by conduct.
Anexpress ratification is a clear manifestation by one on whose behalf an unauthorised act has been done that he treats the act as authorised and becomes a party to the transaction in question.
Ratification will be implied whenever the conduct of the person in whose name or on whose behalf the act or transaction is done or entered into is such as to amount to clear evidence that he adopts or recognises such act or transaction in whole or in part: and may be implied from the mere acquiescence or inactivity of the principal.
The adoption of part of a transaction operates as a ratification of the whole.
The requirements for ratification under the Companies Act 1955, s 42A, the equivalent of s 182, appear in Development Finance Corporation of New Zealand v McSherry Export Kilns Ltd (In Liquidation) (1987) 3 NZCLC 99,998, 100,005 :
There is no guide in sec 42A, or elsewhere in the Companies Act, as to what will amount to ratification and it is necessary to determine that upon general principle and having regard to the purpose of the Statute. Ratification is a concept which arises perhaps most commonly in respect of agency and it is in that context that a general statement appears in 1 Halsbury, 4th ed para 765 p 457:
“Ratification must be evidenced either by clear adoptive acts, or by acquiescence equivalent thereto. The act or acts of adoption or acquiescence must be accompanied by full knowledge of all the essential facts, and must relate to a transaction to which effect can be given unless the principal shows an intention to take all risks, but it is not necessary that he should know the legal effect of the act ratified.”
…
I accept that as a general statement of the principle to be applied.
It is, I think, fundamental that there can be no ratification unless there is a conscious intention to ratify. It is implicit in sec 42A that some deliberate act shall have been done for the purpose of confirming something which would be imperfect without that confirmation.
[165] In discussing inactivity or acquiescence, the learned author of Bowstead notes that “if inactivity of the principal can be taken as manifesting assent, it may constitute ratification” (para 2-074) citing in support the view expressed in Yona International Ltd v La R union Française Société Anonyme d’Assurances et de Réassurances [1996] 2 Lloyds Rep 84 at 106 that :
Ratification can no doubt be inferred without difficulty from silence or inactivity in cases where the principal, by failing to disown the transaction, allows a state of affairs to come about which is inconsistent with treating the transaction as unauthorised …
[166] In this case, it was common ground that Mr Hyslop did most of the day to day work involved in Southern Developments’ activities. Chisholm J found he undertook that work on Libra’s behalf, not as an employee of Southern Developments or Mr Clark. On 11 July 1997 Libra invoiced Mr Clark for Mr Hyslop’s wages and material it bought for the partnership. We are therefore of the view that the Judge was right to hold that Libra made Mr Hyslop’s services available to Southern Developments pursuant to the partnership agreement entered into in February 1997. It did so for several months after its incorporation. That in our view is both Libra treating as authorized what might otherwise have been unauthorized acts on its behalf by Mr Hyslop and its adoption of those actions. Mr Clark’s acquiescence or inactivity and his failure to disown the transactions implies he was accepting that Libra was ratifying the transactions entered into for it. In our view, Libra’s actions in that regard amounted to its valid ratification of the partnership contract entered into on its behalf by Mr Hyslop, that ratification either being by Libra’s adoption of the contract and its acting in pursuance of it through the provision of Mr Hyslop’s services, or implied ratification by its committing itself to a state of affairs inconsistent with Mr Hyslop’s services being unauthorized, all coupled with Mr Clark’s lack of objection. We accept Chisholm J’s finding that after Libra had been incorporated, it was in a relationship with Mr Clark to carry on
business with a view to profit and that situation continued after Mr Hyslop’s bankruptcy.
(3) Effect of Mr Hyslop’s bankruptcy
[167] Mr Hyslop’s bankruptcy on 30 July 1997 automatically disqualified him from continuing as director of Libra: ss 151(2)(b) and 157(1)(c). At least until Libra was removed from the register it had no directors despite s 150 requiring companies to have at least one. After Mr Hyslop’s bankruptcy Libra had no board and accordingly, absent any other qualifying provision, Libra’s business was unable to be managed as a matter of law: s 128(1)(2).
[168] However, notwithstanding s 150, Mr Hyslop, at least until Libra’s removal from the register (and probably afterwards), as a matter of fact continued on the evidence to act as Libra’s director.
[169] At first sight, when s 151(2)(b) disqualifies a bankrupt from holding office as company director and s 157(1)(c) provides that the “office of director of a company is vacated” on bankruptcy, it may be difficult to see that Mr Hyslop’s action in managing Libra after his bankruptcy could be legally valid.
[170] That is particularly the case when the Insolvency Act 1967, s 62 (in the form current until 2 May 2001) relevantly read:
(1)Except with the leave of the Assignee or the Court, no person who is adjudged bankrupt after the commencement of this Act shall before his or her discharge -
(a) Enter into or carry on any business either alone or in partnership with any person, or become a director of or directly or indirectly take part in the management of any company:
[171] However, the Judge considered that ss 158(b) and 126 validated Mr Hyslop’s actions on behalf of Libra following his bankruptcy. Has that now been shown by the appellant to be in error?
[172] The former provides that the “acts of a person as a director” are valid despite defective or disqualified appointment. Chisholm J took the view that the case on which Mr Anderson relied, Hudgell Yeates & Co v Watson [1978] 2 All ER 363, was unhelpful in that regard. That was an action for costs by a firm of solicitors, one partner of which had inadvertently failed to renew his practising certificate for part of the period covered by the account thus automatically dissolving the firm. The English Court of Appeal held the partnership had been reconstituted by the conduct of the remaining partners during the relevant period. We agree with the Judge that the case is of no assistance as far as Southern Developments is concerned during the period after Mr Hyslop’s bankruptcy because it was not he, but Libra, which was the partner.
[173] The only relevant authority on s 158(b) appears to be Harlow Finance & Leasing Ltd v Sterling Nominees Ltd (2001) 15 PRNZ 633. In that case, Harlow was Sterling’s tenant. Following re-entry for breach of the lease, Harlow obtained relief against forfeiture on conditions but again fell into breach. Sterling sought rescission of the order for relief – which was not opposed – and for indemnity costs on grounds which included an assertion that, at the time Harlow applied for relief, its director was an undischarged bankrupt and accordingly the original application was a nullity. Rodney Hansen J dealt with that point in an oral judgment in the following way: at [19]:
I am unable to see any reason why this proceedings should be treated as a nullity. The fact that a director is prohibited from holding office or participating in the management of the company does not invalidate actions taken on behalf of the company: s 158 Companies Act 1993. Mr Johnson was the company’s director and responsible for its management in fact, even if it was an offence for him to do so. The proceedings were properly constituted.
[174] The second basis on which the Judge held Mr Hyslop’s position was saved was under s 126(1 where the definition of “director” includes a “person occupying the position of director of the company by whatever name called”, so the next question is whether Mr Hyslop remained director of Libra under s 126(1) despite his bankruptcy and the various statutory provisions already discussed.
[175] There appears to be no New Zealand authority directly on point but in England a “shadow director” was defined by the Insolvency Act 1986, s 251 (UK) as a “person in accordance with whose directions or instructions the directors of the company are accustomed to act”.
[176] In Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180 the directors of Hydrodam before incorporation were two offshore companies. The case was concerned with whether directors of the company which, through a chain of wholly owned subsidiaries ultimately owned Hydrodam, were shadow directors of Hydrodam. Millett J first held: at 182 :
Directors may be of three kinds: de jure directors, that is to say, those who have been validly appointed to the office; de facto directors, that is to say, directors who assume to act as directors without having been appointed validly or at all; and shadow directors …
[177] He then went on to take the view: at 183 :
A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and prove that he undertook functions in relation to the company which could properly be discharged only by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level.
[178] Further, in Re Lo-Line Electric Motors Ltd [1988] BCLC 698, the issue was whether an admitted de facto director of various companies in liquidation should be disqualified from further appointment. The case concerned the English equivalents of both s 126(1)(a) and s 126(b)(i). As to the former, Browne-Wilkinson VC held (at
706) that the “words ‘by whatever named called’ show that this subsection is dealing with nomenclature” and continued:
Since the definition of director is inclusive and not exhaustive its meaning has to be derived from the words of the Act as a whole. In my judgment it is not possible to treat a de facto director as a ‘director’ for all the purposes of the [Companies Act] 1985. …
It follows that the word ‘director’ is capable of including de facto directors but may not do so. The meaning of ‘director’ varies according to the context in which it is to be found.
[179] In our view, the combined effect of ss 158 and 126(1)(a) is that Mr Hyslop remained a de facto director of Libra during the period of his bankruptcy notwithstanding disqualification as a director by his adjudication and the fact that under the Insolvency Act 1967, s 62, he was forbidden from so acting and was open to prosecution for continuing so to act: Insolvency Act 1967, s 128(1)(a). Despite his disqualification and the prohibitions statutorily imposed on him, he was still “occupying” the position as Libra’s director. In the management of its affairs and the operation of its business he was held out by Libra as its director. Even if such may not apply generally, in our view it clearly applies to a company with only one director who is disqualified after appointment because s 128(1) requires a company’s business and affairs to be managed under the direction of its board and s 127(b) expressly defines a sole director as the company’s board. It was therefore plainly Parliament’s intention that no company could operate without a board. Accordingly, Libra was required to act through Mr Hyslop and he, as the sole occupant of the position of director, remained such despite his disqualification and the other impediments to his continuing in that role.
[180] We therefore conclude the Judge was right to find Mr Hyslop’s acts as
Libra’s director after his bankruptcy were valid.
[181] It may be apposite to note that, in our view, once Mr Hyslop was bankrupt, if the share of the enterprise was payable to him rather than to Libra that share may have been an asset in his bankrupt estate and therefore not one he could assign to Libra without the approval of the Official Assignee or his creditors, something not likely to have been given. This is also a significant pointer, in our view, confirming that the result of Mr Hyslop’s discussion with Mr Clark in February 1997 was, in Mr Hyslop’s parlous financial position, an agreement that whatever might turn out to be a share of the profits in the joint enterprise passed to Libra and thence to his family trust, not to his creditors.
(4) Libra’s removal from register
[182] To recapitulate, Libra was removed from the register on 16 March 1999 and not restored to it until 30 November 2003. During the first 14 months of that period, Mr Hyslop was bankrupt.
[183] The next question is therefore what effect Libra’s removal from the register may have had on Southern Developments.
[184] Although, as the Judge noted, the parties did not raise s 330(2) he regarded it as fundamental, together with the other sections he mentioned, to the question of Libra’s capacity to continue to participate in the partnership. He held that, because of what he regarded as the plain words of s 330(2), the Southern Developments partnership continued until the relationship terminated on 30 October 2002.
[185] It is convenient to restate s 330(2). It reads:
A company that is restored to the New Zealand register shall be deemed to have continued in existence as if it had not been removed from the register.
[186] This Court considered the Australian equivalent of s 330(2) in Natural Selection Clothing Ltd v Commissioner of Trade Marks [1996] 2 NZLR 148 which dealt with the validity of an application by a company to the Commissioner to extend time for filing a notice of opposition to an advertised trademark. The opponent was not on the register of companies at the date of the application but was reinstated some months after its extension application was granted. The Corporations Act 1989 (C’th), s 574(2) provided that on reinstatement “the company shall be deemed to have continued in existence as if its registration had not been cancelled”. The applicant for the mark sought judicial review of the Commissioner’s decision extending time.
[187] This Court commented on the somewhat unconventional manner in which the issue came forward – a New Zealand Court in judicial review proceedings construing an Australian statute without expert evidence as to Australian law – but preferred the judgment of the majority of the English Court of Appeal in Tymans Ltd v Craven
[1952] 2 QB 100 to the decision in Morris v Harris [1927] AC 252. Morris was concerned with an application roughly comparable to our present s 329 to declare void an order for a company’s dissolution, broadly following the procedure in our present s 322 when an objection is received to a notice of intention to remove from the register, whereas Tymans was directly concerned with the proper construction of s 353(6) of the UK Act which is materially identical to s 330(2).
[188] In Morris v Harris [1927] AC 252 Lord Blanesburgh held the corresponding English provision had the effect of restoring corporate existence but not corporate activity. In Natural Selection this Court continued: at 154
The distinction between corporate existence and corporate activity was however taken up by Mr Hodder in the course of his argument and he contended that it should provide an appropriate basis upon which to approach the interpretation of s 574(2). He drew support in that argument from the dissenting judgment of Jenkins LJ in Tyman’s Ltd v Craven [1952]
2 QB 100. That case was concerned directly with the English section corresponding to the one we have before us (to the extent of providing for application to the Court for reinstatement) and provided that a company on reinstatement to the register "should be deemed to have continued in existence as if its name had not been struck off". Jenkins LJ said (at p 116):
"The retrospective import of the provision that the company shall be deemed to have continued in existence as if its name had not been struck off is, to my mind, amply satisfied by the necessity of restoring the company to its original corporate status and preserving its identity as the same company and the same legal person as was previously dissolved."
The majority (Evershed MR and Hodson LJ) however took a different view and determined that the re-animation of the company has retroactive effect and that the express power for the Court to give directions as to the position of third parties was by way of further particularity and did not limit the breadth of the general deeming provision. We were not referred to any subsequent decisions at appellate level where that view has been questioned. We have however located the decision of the Court of Appeal of British Columbia in Natural Nectar Products Canada Ltd v Theodor [1990]
5 WWR 590. There the Court expressed a preference for the views of Jenkins LJ in the Tyman’s Ltd case and interpreted a deeming provision in the light of the power of the Court to give directions as in s 574(5) in the Australian Act. But we are concerned with the deeming provision on reinstatement by the commission unaccompanied by the further provision for directions so the reasoning is less easily applied. We consider the view of the majority in the Tyman’s Ltd case is to be preferred for the words we must interpret.
and then considered whether s 574(2) covered the acts of third parties such as the
Commissioner. It held: at 154-155
We have no doubt that it should extend to all matters the only defect in which stems from the non-existence of the company. To take the more restrictive view would be to create difficulties in such areas as company contracts and dealings by the company and its officers in the course of business. There is also an illogicality in treating the application as valid but the decisions as invalid when the only basis for their invalidity is the invalidity of the application.
[189] In Tymans, the company applied for a new tenancy despite its being previously struck off the register. The hearing of the application occurred after it had been restored to the register. The Court dealing with the tenancy application, held, first, that the tenancy application was a nullity having been made when the company was no longer in existence, and secondly, that restoration to the register was not retroactive.
[190] On appeal, Evershed MR, after citing the equivalent of s 330(2), observed: at
105-106:
If the words which I have quoted stood alone, the question, as a matter of plain English, would appear at first sight to be simple. A limited liability company cannot act, save through agents. At the time of the making of the application the company's agents—its directors—had no authority so to act because (but only because) the company had been struck off the register and did not, therefore, exist. But the words I have quoted provide clearly, on the face of them and without qualification, that “the company shall be deemed to have continued in existence as if its name had not been struck off.”
On the hypothesis, therefore, which the statute requires, it would appear to follow that on the hearing of the application on 31 October 1951, Mr Craven's objection could no longer be taken, for the ground of that objection—viz, that on 23 July 1951, the company's name had been struck off the register—had, by the terms of the statute and the order made thereunder, been taken away. But the sub-section does not end with the quoted phrase. After a semi-colon it continues “… and the court may by the order give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off.” The argument of Mr Craven is that the addition of this further and (as it is said) expository sentence substantially qualifies the effect of the phrase that precedes it, so that the latter does no more than preserve the continuance of the company's corporate existence without validating ex post facto any acts done in the company's name during the period of its temporary dissolution.
[191] However, after citing from Morris, the Master of the Rolls said (at 616) that the two sections relevant in that case and in Tymans dealt with different circumstances, and continued: at 107:
Section 353(6) is, no doubt, primarily directed to the case where a formal end has been put to a company which has in practice become defunct or lapsed into inanition. But the earlier provisions of the section provide an effective sanction for failure to comply with the statutory obligations on a limited liability company as to making returns, etc. The section is, therefore, specifically directed (and the sub-section in its original form in the Act of
1880 was exclusively applicable) to cases, like the present, where a company which has failed in the performance of its statutory duties had, nevertheless, continued to trade and to transact business and, necessarily as a consequence, entered into numerous engagements with third parties.
[192] The Judge then rejected an argument that “s 353(6) was retroactive to the extent of validating only what [counsel] called ‘internal’ acts done in the company’s name but not ‘external’ acts, that is, acts done, or purporting to be done in relation to third parties”: at 110.
[193] Both the Master of the Rolls, and Hodson LJ, concurring, were troubled by additional provisions in s 353(6) which are, in essence, an amalgam of our present ss 328, 329, especially the phrase in the English statute that “on the making of an order for restoration, such proceedings may be taken as might have been taken if the company had not been dissolved”. They were particularly concerned with the provisions roughly comparable with those now appearing in our ss 328(6) and
329(4) empowering the Court on restoration to give directions or make orders “necessary or desirable for the purpose of placing a company … and any other persons as nearly as possible in the same position as if the company had not been removed from the register”. In that regard, the Master of the Rolls held: at 111:
In my judgment, the final words of the sub-section can properly and usefully be regarded as intended to give to the court, where justice requires and the general words would or might not themselves suffice, the power to put both company and third parties in the same position as they would have occupied in such cases if the dissolution of the company had not intervened. More generally the final words of the sub-section seem to me designed not, by way of exposition, to qualify the generality of that which precedes them, but rather as a complement to the general words so as to enable the court (consistently with justice) to achieve to the fullest extent the “as-you-were position”, which, according to the ordinary sense of those general words, is prima facie their consequence.
[194] As this Court noted in Natural Selection, that view has been accepted in
Britain since.
[195] Tymans and Natural Selection have also been followed in the High Court, principally by Venning J in both his judicial iterations. Valley Nurseries (1991) Ltd v Yates NZ Ltd (HC CHCH CP 128/97 2 April 1998 Master Venning, p 6) was a striking-out application brought on the basis the claim must fail as Valley Nurseries had been removed from the register. It was adjourned in reliance on Tymans and Natural Selection until determination of a pending restoration application. In Best Wholesale Ltd, an application to set aside a statutory demand, Venning J again followed Tymans and Natural Selection holding that s 330(2) “has the effect of validating actions of the company taken during the period it is off the register so that the issue of the statutory demand and the subsequent issue of the proceedings based on the defendant’s failure to comply with the statutory demand are valid”: at [30].
[196] In Spencer v Commissioner of Inland Revenue (2004) 21 NZTC 18,818 the time for filing an objection to a tax assessment concluded while the company in question was removed from the register. As a result, the Commissioner asserted the company’s directors were personally liable for its tax. A judicial review set aside the Commissioner’s decision. Amongst the issues raised was the effect of the company being off the register during the relevant period. Paterson J reviewed the authorities discussed in this judgment but distinguished Natural Selection on the ground that s 330(2) extends only to ‘matters the only defect in which stems from the non- existence of the company”. The defects in Spencer went beyond that: there was no service on the company because it did not exist, there was no legal entity able to issue an objection within the required period and the rights of third parties as the company’s agents were adversely affected: at [62].
[197] That review of authorities shows that this appears to be the first occasion on which the effect of s 330(2) has been directly in issue in this Court.
[198] On its face, the subsection is a straightforward piece of English which should therefore be accorded a literal interpretation unless there are statutory indications that such was not intended by Parliament. It also requires to be interpreted conformably with the code comprising Part 17 dealing with removals from, and reinstatements to, the register. Although s 330(2) lacks some of the additions which
troubled the English Court of Appeal in Tymans, the inclusion of comparable words in ss 328(6), 329(4) means that case remains of assistance.
[199] Removal of a company from the register places it in what Evershed MR described as “suspended inanation” until such time as it is restored to the register, in which event, on the plain words of s 330(2), it is “deemed to have continued in existence as if it had not been removed”. There are, however, obvious conceptual and practical difficulties which may arise from that literal interpretation, particularly where, as here, the company and those involved with its management and business, both internally and externally, continued to conduct themselves as if the company remained registered. During the period the company was off the register, it and those trading with it, incurred liabilities and obligations, it may have earned profits or incurred losses and no doubt it continue to operate a bank account, all despite the fact that, in law, it no longer existed. Further, its removal from the register may have amounted to an incident of default under its financial arrangements, thus triggering liabilities for itself and, if any, its guarantors, but with those factors all being set at nought on restoration if s 330(2) is given its literal meaning.
[200] No doubt it was in recognition of the legal and practical difficulties caused by trading during a period of removal from the register that Parliament gave the Court power in ss 328(6) and 329(4) to make orders on restoration designed to place the company and others as nearly as possible in the same position as would have been the case had removal not occurred.
[201] There are other provisions in the Companies Act 1993 which are of assistance in the interpretation of s 330(2). A “company” can only exist in accordance with s 2 if it is registered under Part 2 of the Act (or re-registered under the Companies Re-Registration Act 1993). Section 10 in Part 2 sets out the essential requirements of a company, including that it must have one or more shares, shareholders and directors. The fact that a company is no longer a company when removed from the register is confirmed by s 15 providing for a company to be a legal entity in its own right separate from its shareholders and it “continues in existence until it is removed from the New Zealand register”. However, s 17(1) provides that the company’s acts and property transfers are not deemed invalid “merely because
the company did not have the capacity, the right or the power” to enter into those actions and s 18(1) provides that companies or guarantors cannot assert against a person dealing with a company or one who has acquired property, rights or interests from the company that the Act has not been complied with, directors have not been duly appointed or do not have the authority to “exercise a power which a director of a company carrying on business of the kind carried on by the company customarily has authority to exercise” and persons held out as directors are not duly appointed or without authority.
[202] Taken in combination, those provisions support the view that it is appropriate to give s 330(2) its literal meaning. Removal from the register places the company and those operating it or dealing with it in legally a state of “suspended inanition”. As it is no longer registered and does not comply with the requirements of the Act, it is no longer a “company” as defined by s 2.
[203] But Parliament recognised that because the grounds for removal in s 318 are wide and removal may follow the company’s failure – sometimes minor failure - to comply with its statutory obligations, the Court or the Registrar should have the power of restoration to the register in appropriate cases and, should that occur, it is also appropriate that the company and all those dealing with it during the period of removal should not be disadvantaged by its and their actions during the period it was off the register. Accordingly neither it nor they can challenge the validity of actions taken, including during the period of its removal, and the Court is given power on restoration so to adjust the rights and obligations of the company and those involved with it as to place them as nearly as possible in the same position as if it had not been removed. As mentioned in Morris and Tymans, the Court or the Registrar has power by restoration to the register to ensure the company and all those who have dealt with it during the removal period are placed as far as is possible in an “as-you-were” position. Holding that s 330(2) is to be accorded a literal interpretation also accords with the decision of this Court in Natural Selection even though the point did not directly arise in that case, and also accords with the High Court decisions earlier reviewed. Spencer should, in our view, be seen as a decision on its own facts or confined to the operation of the Tax Acts. Further, as Mr Churchman submitted, had Mr Clark wished to dissolve Southern Developments during the period Libra was off
the register, he could have issued dissolution proceedings in this Court under the
Partnership Act 1908, s 38, and sought directions as to service.
[204] With specific reference to the present appeal, on Libra’s removal from the register all its assets, including its interest in Southern Developments, were, by force of statute, vested in the Crown: s 324(1). However, in our view, that vesting did not terminate the Southern Developments partnership since the Partnership Act 1908 contains no provision to the effect that removal of a corporate partner from the register of companies dissolves the firm. Removal is not the equivalent of death or bankruptcy under the Partnership Act 1908 s 36(1) (Tairawhiti District Health Board v Perks HC Gis CP2/01 26 September 2001 at [42], [43] and citing Boka Enterprises (Pty) Ltd v Manatse (1990) (3) SA 626, 631) and since the business of Southern Developments in property development was not unlawful during the period Libra was removed from the register, s 37 of that Act does not apply.
[205] In view of all that, we take the view the Judge was right in his interpretation of s 330(2) and the conclusion he reached on that aspect of the case.
(5) Haggart Alexander Drive
[206] As we agree with Chambers J that Haggart Alexander Drive was part of the enterprise between Messrs Clark and Hyslop, we need only add a few observations of our own.
[207] Chisholm J found that Messrs Hyslop and Clark decided the property at Haggart Alexander Drive would be suitable for development and a contract to buy it was signed by Mr Clark on 1 September 2001 and settled on 24 November 2001. The South Developments’ capital account for the year ending 31 March 2002 showed the payment but, as with other properties, the title was transferred into Mr Clark’s name alone.
[208] As the Judge recorded, Mr Clark’s opposition to the declarations sought by Libra arose out of an affidavit sworn by Mr Hyslop on 17 August 2001 seeking removal of a caveat from the title which Mr Clark interpreted as an admission by
Mr Hyslop that Haggart Alexander Drive was Mr Clark’s asset, not that of the partnership.
[209] The Judge had “no difficulty in arriving at the conclusion that the purchase of Haggart Alexander Drive fits within the pattern of the partnership projects”: at [95]. He itemised the ways in which the property fell within the pattern of Southern Developments’ operations and noted that any other conclusion would run counter to the acceptance of St Albans, Eastbourne and Law Streets as partnership developments, a “wholly untenable proposition”: at [96]. With Chambers J, we would emphasise that the fact that the realty remained in Mr Clark’s name was immaterial to the resolution of the issues in this case: the enterprise was concerned with development of the property and the sharing of the profits that arose from it, not with title.
[210] No basis has been made out to disturb Chisholm J’s factual finding in relation to Haggart Alexander Drive. We would dismiss that aspect of the appeal.
(6) Cargill House/Danube Holdings
[211] Again we agree with Chambers J’s conclusions concerning this aspect and confine ourselves to the following observations.
[212] The Judge dealt extensively with the facts supporting his ultimate conclusion that Cargill House/Danube Holdings were a partnership asset. Important facets of that evidence were Mr Hyslop’s uncontested evidence of Mr Clark telling him that if he did not want to be involved in Cargill House then he, Mr Clark, would not buy it. The Judge also considered but rejected Mr Hyslops’s assertions that he was promised a shareholding in Cargill Hotel (2002) Ltd and a seat on the board. He noted that the Cargill House/Danube Holdings project fell somewhat outside the modus operandi for Southern Developments because a company not Mr Clark bought the land, but we agree with the Judge’s conclusions (at [106]) cited by Chambers J: at [102].
[213] He accordingly made a declaration in relation to Cargill House noting that “it will be necessary to set aside the Danube Holdings Ltd corporate veil and treat Mr Clark’s shares as a partnership asset”: at [110].
[214] Again, we have carefully considered the submissions that the Judge erred in his conclusion concerning Cargill House/Danube Holdings, but again are unpersuaded. This, too, was largely a factual matter on which the Judge balanced the contrasting evidence of the various witnesses and reached his factual conclusions. It has not been demonstrated that the conclusions were unsound, erroneous or lacked evidential foundation. We therefore consider there is no basis made out to interfere with the Judge’s findings.
Result
[215] Though, as earlier mentioned, we are conscious a significant number of issues between these parties still remain for agreement or determination, this judgment has set out our view on all points properly raised on appeal. The appellant, in our view, having failed on all the grounds advanced, we would dismiss the appeal.
[216] As mentioned at the outset, the difference of view between Chambers J and ourselves appears most unlikely to affect the dollar value result of the further determination of the parties’ positions, though, on our view of the matter, whatever may be payable to the “Hyslop camp” will be paid to Libra not to Mr Hyslop personally.
Solicitors:
Albert Alloo & Sons, Dunedin, for Appellant
Kensington Swan, Wellington, for Respondents
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