Clyma v Kaminski
[2024] NZHC 1576
•14 June 2024
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE ROTORUA-NUI-A-KAHUMATAMOMOE ROHE
CIV-2019-463-000035
[2024] NZHC 1576
UNDER the Companies Act 1993 and the Fair Trading Act 1986 IN THE MATTER
of prejudiced shareholders and misleading and deceptive conduct
BETWEEN
THOMAS JAMES CLYMA, QIAN WANG, JU LI, CHRISTINA KALESITA CLYMA, JIA ZHAO, XIANMEI MENG, MARCO DUMAS and STEPHEN MICHAEL
REILLY as shareholders of KIWI RIDER LIMITED
Plaintiffs
AND
THOMAS KAMINSKI
Defendant
Hearing: On the papers Appearances:
E St John and S Maloney for the Plaintiffs T Kaminski in Person
Judgment:
14 June 2024
JUDGMENT OF WALKER J [QUANTUM]
This judgment was delivered by me on 14 June 2024 at 4 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
CLYMA & ORS v KAMINSKI [2024] NZHC 1576 [14 June 2024]
[1] This judgment concerns the question of the quantum of damages payable by the defendant following an earlier interim judgment as to liability under the Fair Trading Act 1986 (FTA) (the liability judgment).1
[2] The liability judgment found that the defendant had engaged in misleading and deceptive conduct which had induced some of the plaintiffs to invest in a start-up tourism adventure business operated by Kiwi Rider Limited (Kiwi Rider).
[3] The full background is set out in the liability judgment and will not be repeated here. The ailing venture failed after the fixed helium balloon taking passengers for panoramic views over Rotorua was destroyed in a storm. Prior to the accident, Kiwi Rider was operating at a significant loss. It ceased to trade. The shareholders, other than the defendant, resolved to wind up the business rather than use any insurance payout to replace the balloon. Their intention is to liquidate Kiwi Rider. The investor shareholders will recover some of their investment once any remaining assets of the company are distributed after liquidation in accordance with the shareholding of all investors.
[4] The defendant is also a shareholder, although did not provide any initial start- up capital. He is therefore entitled to a pro-rated distribution by the company on liquidation.
How did the parties get here?
[5] The liability judgment held that only the plaintiffs Thomas Clyma, Christina Clyma, Marco Dumas, Ju Li and Qian Wang are entitled to damages, calculated by reference to their initial investment less any sum they recover on liquidation of the company.2 A damages figure could not be determined due to the lack of evidence of the projected recovery on liquidation.
[6] It is trite that the less the successful plaintiffs receive on liquidation, the greater their loss and therefore quantum.
1 Clyma & Ors v Kaminski [2023] NZHC 3026.
2 At [148]. These plaintiffs are a subset of the joint plaintiffs.
[7] The plaintiffs were directed to file further evidence to support their calculation of damages quantum. The defendant had an opportunity to respond. The Court directed a telephone conference once that material was filed to determine how to proceed. In the light of the knowledge of the defendant’s straitened circumstances, the Court anticipated that a commercial compromise based on the defendant’s pro-rated shareholder entitlement of the projected liquidation distribution amount, would be sensibly explored. Even now, the plaintiffs candidly accept that this proceeding is essentially about the defendant’s 27.5 per cent share of the projected distribution post liquidation (approximately $102,000) which will not even cover the 2B costs of the successful plaintiffs, let alone their projected losses.
[8] The plaintiffs filed two affidavits of Marco Dumas. The first annexes draft accounts prepared by Kiwi Rider’s external accountants along with a cover note from the same accountants.3 The second purports to provide further explanation.4 The defendant filed responsive memoranda.5 The plaintiffs’ counsel filed a reply memorandum.6
[9] The material filed identifies an impasse. The defendant seeks a further hearing to challenge the quantum claimed by the plaintiffs on the basis that the accounts filed lack transparency and ought not be accepted at face value. He argues that any damages should largely be calculated by reference to sums received from insurance monies and the legitimate business expenses required to wind down the business. The plaintiffs seek damages based on the financial accounts prepared by Kiwi Rider’s accountants.
[10] Two telephone case management conferences convened in February 2024 and March 2024 were vacated for non-attendance. The first, counsel for the plaintiffs did not attend by oversight, for which they apologised. The second, the defendant did not answer the cell phone number provided to the Court despite multiple efforts to reach him. The Court made inquiries to ascertain the reason for non-attendance. Following
3 Affidavit of Marco Dumas sworn 4 December 2023.
4 Affidavit of Marco Dumas sworn 16 February 2024.
5 Memorandum of Thomas Kaminski dated 15 January 2024; Memorandum of Thomas Kaminski dated 16 February 2024; Memorandum of Thomas Kaminski dated 19 February 2024.
6 Memorandum of counsel for plaintiffs dated 19 February 2024.
an initial explanation confirming the accuracy of the number contacted, the defendant has apparently not engaged further with the Court.7
The way forward
[11] The plaintiffs are entitled to have the question of quantum determined without further delay. In the circumstances, and for reasons which will emerge, the Court is required to do its best to arrive at a figure even where the evidence is thin, recognising that the onus lies with the plaintiffs to establish their quantum claim on the balance of probabilities.8
What do the parties contend?
[12]Mr Dumas deposes:9
(a)Kiwi Rider received a total of $968,750, inclusive of GST from the insurer, QBE under a Material Damage and Business Interruption Insurance Policy.
(b)The policy was held by Orbserver Limited, of which he is sole director and shareholder, but for the benefit of Kiwi Rider.10
(c)Since the payout, KRL and Orbserver Ltd have incurred major expenses comprising:
(i)director’s salaries of $139,662;
(ii)solicitor’s fees of $48,366;
(iii)site shutdown cost of $308,947; and
7 Clyma & Ors v Kaminski HC Auckland CIV-2019-463-35 28 February 2024 (Minute of Walker J).
8 Zheng Lu Holdings Ltd v Lyndon [2023] NZHC 2679 at [127]; Walsh v Kerr [1989] 1 NZLR 490 (CA) at [494].
9 Above n 3 at [4]–[10].
10 This accords with Kiwi Rider’s ownership of the insured asset and the “business”.
(iv)GST on insurance payout of $126,358.70.
(d)Kiwi Rider’s total assets are $23,804 and Orbserver Ltd currently holds approximately $365,606 for the benefit of Kiwi Rider.
(e)The cost of winding down Kiwi Rider and Orbserver is estimated to be
$15,000 plus GST.
(f)The total expected payout to shareholders is therefore expected to be
$372,160.03.
(g)On that basis, Mr Dumas asserts that the total loss for the successful plaintiffs amounts to approximately $534,000.11
[13] A signed cover-note from Jerry Wang of GA Consulting, Chartered Accountants confirms the major expenses incurred since the destruction of the Kiwi Rider tethered balloon in 2017. This note is hearsay but, in any event, does not take the matter any further than calculating total expenditure based on information provided by Kiwi Rider’s directors.
[14] Mr Dumas also exhibits unsigned financial statements of Kiwi Rider for the year ended 31 March 2023.
[15] The defendant challenges the adequacy of Mr Dumas’ affidavit. He argues that it falls well short of any transparency and accountability regarding the appropriate disbursement of company funds. He complains that the summary of expenses lacks rationale, supporting evidence or adequate break-down considering the business was non-operational once the tethered balloon was destroyed. He submits:
11 Mr Dumas records this sum as $533,713.13 in the last column of his table (paragraph 10 of his affidavit sworn on 4 December 2023). There appears to be an arithmetical error as the sums in this column total $534,147.18.
(a)There is no explanation about why the business was not effectively shut down immediately once the shareholders determined they would not replace the balloon.
(b)The bank statements show unexplained payments to some shareholders recorded as “loan return” or “salary” or “tax on salary”.
(c)There are various unexplained payments to lawyers after the insurance case had been resolved, some of which are labelled “Lawyer for Thomas” or “Thomas case”.
[16] The defendant’s position in essence is that the only costs appropriately incurred after the balloon’s destruction are those essential to cover final salaries and wages, any outstanding business liabilities, and legal costs to determine the extent of the insurer’s liability. Further that the Kiwi Rider accounts are not a reliable basis on which to make a fair determination as they result in an inflated damages claim. He appears to be advancing the position that any award should start with the insurance proceeds and make only small deductions for approved expenses over a limited period.
[17] The defendant also criticises the deposit of insurance funds into the Orbserver bank account and queries the GST treatment of the insurance funds. I am satisfied that this criticism is not relevant to the issues before the Court given the undertaking by Mr Dumas that these funds are held for the benefit of Kiwi Rider.
[18]Mr Dumas’ second affidavit relevantly deposes:12
(a)The site shutdown cost related to the dismantling of the site and reinstatement of the leased premises.
(b)He was entitled to a salary of $120,000 per annum over the last six years but has charged a small fraction of that as compensation for the time and effort in managing the wind-down.
12 Above n 4.
(c)The solicitors’ fees over six years should be uncontroversial. Since the destruction of the balloon, the company has had to negotiate insurance payouts.
(d)No other shareholder has complained about the costs charged or treatment of company funds.
[19] The plaintiffs’ counsel submit that Mr Dumas does not have free rein over company finances. There is oversight in the form of the Inland Revenue Department, the chartered accountants, and other shareholders.
Discussion
[20] It is both reasonable and expected that the directors and shareholders of Kiwi Rider would take time to decide whether to use the insurance funds to replace the destroyed balloon and reinstate the business to mitigate their losses. It is also apparent that negotiations with the insurers took time. During that period, ongoing fixed costs would have to be met, including for instance lease payments and legal costs associated with settling against insurers along with salary obligations.
[21] However, there comes a point in time when it was no longer reasonable to continue to deplete the insurance proceeds, particularly to pay salaries to any of the plaintiffs in respect of a non-trading business. Pragmatism is necessary to determine where that line should be drawn. I have relied on the contemporaneous documentation to ascertain a reasonable line in the sand to be circa mid-2018. This broadly corresponds with the second of three interim payments from the insurers on 15 May 2018 and the ‘Settlement and Discharge’ with insurers dated 2 April 2019. In addition, there is a Portacom return fee paid on 11 September 2018 and an entry coded “GDF Ltd Clean Site” paid on 4 September 2018. Clearly the events underpinning those payment obligations identified points of no return.
[22] After that date, there are unexplained payments from the Kiwi Rider bank account. This is not to say that those payments cannot be justified. The point is, they have not been. Given the burden rests with the plaintiffs, the defendant should not
have to bear the impact of these payments in the absence of full and transparent explanation. These are:
(a)Payments for lawyer fees which do not on their face relate to the issues against insurers but reference “Thomas” and therefore possibly relate to the litigation against the defendant.13
(b)Ongoing salary payments to Mr Dumas for 20 months between January 2018 to August 2019 at a rate of $4,500 per month.14 This equates to approximately $65,000 after tax. In the absence of explanation I consider that this period is too long in respect of a non-trading business and consequently should be treated as a return to Mr Dumas as shareholder rather than salary. A more reasonable transition period for ongoing salary payments is eight months rather than 20 months. Adjustment should be made accordingly.
(c)There is an unexplained payment of $30,000 on 13 August 2018 coded “repayment IREN”. In the absence of detail, the defendant should not have to bear this payment.
(d)Curiously, there are three income tax payments made after mid 2018 which total approximately $43,000. They do not on their face relate to Kiwi Rider since they are not coded to Kiwi Rider’s GST account number. While there may well be a perfectly legitimate explanation (and I do not in any way suggest these are not legitimate) there is no explanation before this Court. Payment has substantially reduced the Kiwi Rider bank balance and correspondingly, the sum available to shareholders on liquidation. Again, I find that the defendant should not be impacted by these payments in the assessment of quantum.
13 In cross-examination, Ms Li said the reference to “Thomas” was to Mr Thomas Clyma as he had engaged the lawyers in relation to the insurance dispute over helium. The final settlement with insurers was 2 April 2019. The legal expenses paid after this date are more likely to relate to this proceeding which commenced in May 2019. Although Ms Li denied this proposition I consider that she is mistaken.
14 There were two payments totaling $65,767.04 made to Mr Dumas on 5 September 2019 and 4 November 2019.
(e)There are a series of payments to a vehicle rental company coded as “flexi rent nz” payments. These total approximately $19,000 (rounded up) for the period after mid-2018. It is difficult to see any justification for continuing lease payments after a reasonable period of wind-down. I intend to make an adjustment for these payments.
[23] There are also a series of payments to Mr Dumas, Ms Li, and Ms Wang before mid-2018.15 In cross-examination, Ms Li suggested that the payments to her and Mr Dumas were coded as “loan payments” because they were deferred salary payments. Having been deferred, she treated the sums as loans to Kiwi Rider. She explained that Mr Dumas had not been paid between April 2017 to December 2017 because the obligation was first to pay staff. Once the first partial insurance payout was received, Kiwi Rider paid some of that deferred salary to Mr Dumas. Ms Li further explained that she had not been paid for the same period and was owed $33,000 but only took a payment of $15,000.
[24] I accept Ms Li’s explanation because no regular salary payments in the relevant period are seen in the bank accounts. That appears to corroborate her evidence. However, there was no explanation provided for the payment to Ms Wang. In those circumstances I am satisfied there should be an adjustment in respect of compensation to Ms Wang.
[25]These adjustments are captured in the attached schedule.16
[26] Accordingly, I award damages to the successful plaintiffs of $357,530.87, pro-rated amongst the successful plaintiffs based on their initial investment.
Costs
[27] I have previously determined that the plaintiffs are entitled to an award of 2B costs in respect of the liability judgment. I decline to make a further order for costs in
15 Payments to Mr Dumas on 17 December 2017 of $50,000; to Ms Li on 14 February 2018 of
$13,000; and a payment of $30,000 to Ms Wang on 24 April 2018.
16 Schedule 1 – Loss adjustment table.
respect of this quantum judgment. Costs on this aspect should lie where they fall in view of the mixed success of the parties.
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Walker J
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