Coffey v Walker
[2019] NZHC 2795
•31 October 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-0857
[2019] NZHC 2795
BETWEEN PAUL CORNEL COFFEY and WILLIS
STREET TRUSTEE SERVICES LIMITED
as trustees of the PC Coffey Trust Plaintiffs
AND
MARK ALAN WALKER as trustee of the Wynsfield Family Trust
Defendant
Hearing: 3 September 2019 Appearances:
G E Slevin for the Plaintiffs
D J Clark and J Collett for the Defendant
Judgment:
31 October 2019
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 31 October 2019 at 4.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Maude & Miller, Wellington G Slevin, Barrister, Auckland Wilson McKay, Auckland
COFFEY v WALKER [2019] NZHC 2795 [31 October 2019]
[1] The plaintiffs are the trustees of a trust called the PC Coffey Trust (Coffey). The defendant is, and was at all material times, a trustee of a trust known as the Wynsfield Family Trust (Wynsfield).
[2] In May 2008 Coffey entered into a written agreement with Wynsfield for the sale and purchase of 30 per cent of the shares owned by Coffey in the companies Alligator Ltd (Alligator) and Independent Monitoring Services Ltd (IMS) (the sale agreement).
[3]The purchase price for the shares was $700,000, and Wynsfield was to pay
$200,000 of that sum on the completion date. The balance of the purchase price was to be satisfied by a loan from Coffey, due for repayment on 1 June 2013.
[4] Wynsfield paid the $200,000 and the shares in Alligator and IMS were transferred to it.
[5] No repayment of principal or interest has been made on the $500,000 loan, and on 8 May 2019 Coffey issued this proceeding, claiming recovery of the loan and interest. Coffey says that there is no defence to its claim, and it has applied for summary judgment. That application is opposed by Wynsfield.
[6]I now give judgment on the application for summary judgment.
The evidence
Coffey
[7] Alligator was originally formed to supply and install CCTV, alarm and access control systems for customers. IMS mainly provided monitoring services for such systems, independently of the suppliers. Both companies were successful from the outset as they had taken over established businesses Mr Coffey had run with a previous business partner.
[8] Mr Coffey had known the defendant, Mr Walker, since the late 1980s. Mr Walker was then an owner of a private investigation company, and he later
established a security company that operated in the same field as Alligator. Later again, Mr Walker became the National Investigations Manager for the ASB Bank, which was then a significant client of IMS.
[9] Mr Coffey and Mr Walker discussed business matters frequently, and eventually Mr Coffey told Mr Walker he wanted to step back from the day-to-day operations of his companies. Mr Walker expressed an interest in taking up a 30 per cent stake in Alligator and IMS, and Mr Coffey regarded him as an ideal candidate. He instructed Coffey's solicitors to draw up the sale agreement.
[10] Mr Coffey was unable to provide a complete, signed copy of the sale agreement subsequently entered into between Coffey and Wynsfield. The copy he produced was missing one schedule, containing a shareholders' agreement which was said to form part of the agreement. However, Mr Coffey produced a draft copy of the shareholders' agreement, which he believed was not significantly different from the one attached to the sale agreement, and there was no dispute by Wynsfield that a shareholders' agreement was entered into substantially in this form.
[11] The sale agreement provided for the transfer of 30 shares in each of Alligator and IMS to the trustees of Wynsfield on payment of the $200,000. The $200,000 was paid on the date of the agreement, and the shares were duly transferred. The remainder of the $700,000 purchase price was lent to Wynsfield on terms set out in the sale agreement. The term of the loan was five years, and pending repayment interest was payable at the rate of nine per cent per annum, at six monthly intervals. The first payment of interest was due in early December 2008, but that instalment was not paid. No interest has subsequently been paid by Wynsfield.
[12] By cl 3.3.1 of the sale agreement, Wynsfield was obliged to apply at least 80 per cent of all dividends and distributions due to it from Alligator and/or IMS in repayment of the loan. Payment of dividends was dealt with in the shareholders' agreement. Clause 7.1 of the shareholders' agreement provided that dividends, including interim dividends, could be declared and paid each financial year, at the discretion of the board. The clause recorded the shareholders' intention that the companies would pay substantially all of their net profits as dividends, subject only to
requirements for meeting cashflow and capital requirements (at the determination of the board), and to the terms of the loan (which required Wynsfield to direct the companies to pay 80 per cent of their dividends to the companies).
[13] The copy of the sale agreement produced by Mr Coffey provided, at cl 2.1, for the purchase price of $700,000. The following words were then crossed out: "… plus an amount calculated to take account of the value of each company's stock on hand and fixed assets at 31 May 2008". There is some doubt as to why the words were crossed out, but it is common ground that Wynsfield agreed to pay a further sum, additional to the $200,000, which would cover stock and fixed assets, and that a further sum of $63,333 (30 per cent of $211,110) was paid by Wynsfield.1
[14] The $200,000 paid by Wynsfield was put into Alligator by Coffey, as part of its ongoing commitments to Alligator and IMS.
[15] Mr Walker's role in the businesses was to attract new customers for IMS, and to provide hands-on management in respect of finances, human resources, and compliance matters. But a number of problems arose during the first year of his employment. Although he was drawing a substantial salary, he was not successful in attracting significant new business. By June 2009, the companies were suffering from a lack of effective administration, and were experiencing cashflow issues. At that point, Mr Walker decided to return to his position with ASB.
[16] There was some discussion at that stage about Wynsfield selling its shares back to Coffey, but nothing came of those discussions. Mr Walker resigned as a director and ceased working for the companies.
[17] Alligator and IMS both struggled after that. IMS lost its contract with ASB, which was its biggest client, and it had to move its monitoring facilities from ASB's premises where they had been located. There were cashflow difficulties. By mid-2011, the companies had both accrued significant tax arrears, and the
1 There remains a dispute as to whether the sum was intended to cover Wynsfield's 30 per cent share of net tangible assets, which would have included some provision for liabilities (Wynsfield's position), or whether the payment was only in respect of the companies' fixed assets and stock (Coffey's position).
Commissioner of Inland Revenue commenced liquidation proceedings. Although Mr Coffey applied some of his own money towards the companies' tax arrears, it was not enough. The companies were both put into liquidation on 18 July 2011.
[18] In 2013 the Commissioner charged Mr Coffey with numerous tax offences. He was convicted and sentenced to 10 months' home detention, and a fine of $20,000. Mr Coffey said that Mr Walker gave evidence at the trial of the tax charges, and was cross-examined about the share transaction. Mr Walker acknowledged in cross-examination that he had signed the sale agreement, that the purchase price for the shares was $700,000, and that $200,000 of that sum was paid on completion date. Mr Walker further acknowledged in his evidence that the balance of $500,000 was to be satisfied by way of loan as set out in cl 3 of the sale agreement, and that neither that sum nor any interest thereon had been paid.
[19] Mr Coffey said that he instructed a debt collection agency to recover the unpaid loan and interest in 2015, and there was correspondence at that time with the lawyers acting for Wynsfield. Wynsfield's lawyers said that Mr Walker had a counterclaim, and they also indicated that if a proceeding was issued against Wynsfield they would apply for security for costs. Mr Coffey said this was about the time he was being tried over the tax matters, and he was not then in a position to put up any security for costs. He did not take the matter any further at that stage.
[20] In more recent years, Mr Coffey has been the sole caregiver for his mother, who has been in bad health. He said that is why Coffey has not pursued the matter until now. As Mr Coffey's mother has recently moved to a rest home, he has become free to turn his attention to the present claim.
Wynsfield
[21] Mr Walker said that the original discussion he had with Mr Coffey contemplated a payment of $200,000 in cash for the shares, with the balance of the purchase price to be repaid from dividends spread over a period of five years. He said that it was important to him that his secure employment with ASB would be replaced by similar secured employment with Alligator or IMS. Purchase of a 30 per cent shareholding would provide him with employment as well as a long-term investment.
[22] Mr Walker's understanding was that his only risk would be the loss of the initial payment of $200,000. The balance of the purchase price would be paid from dividends, and that was to be recorded in a shareholders' agreement. Mr Walker produced a copy of an email he sent to Mr Coffey on 6 April 2008, setting out a basic proposal to purchase the shares. The email included the following:
3Agreement to pay off cost of remaining shares to you over next 3 years out of anticipated profits. To that end I would like to determine the minimum amount of drawings I am able to live on, and meet my financial commitments, ensuring that my repayment of the shares is completed as soon as possible.
[23] Mr Walker said that the financial position of Alligator and IMS was misrepresented to him before Wynsfield entered into the sale agreement. In an email received by Mr Walker around March 2008, Mr Coffey said that the monthly average revenue of IMS over the previous 12 months had been about $70,000, or $840,000 per annum. The revenue figure for Alligator over the same period was said to be similar, with an additional $225,000 of fixed contract maintenance work. Mr Coffey estimated revenue for IMS over the ensuing 12 months at $840,000, and for Alligator
$1,300,000. Based on those figures, the parties accepted the figure of $700,000 for the acquisition of the 30 per cent shareholding by Wynsfield. Important to Mr Walker's assessment, were what he understood to be genuine long-term contracts that could reliably be expected to continue. That expectation was confirmed in Mr Coffey's March 2008 email.
[24] Mr Coffey told Mr Walker that the future monthly income would be sufficient to fund all expenditure and provide a salary for Mr Coffey and Mr Walker of $5,000 each per fortnight. There would also be a motor vehicle lease allowance of $1,500 per fortnight, and petrol and operating expenses would be run through the companies. Mr Coffey would have any additional drawings debited to his current account with the companies, but on the basis that the level of drawings would not have a negative impact on the financial viability of the businesses. The expected surplus was to be allocated as dividends, which would be used by Wynsfield to repay the outstanding balance owing under the sale agreement.
[25] Mr Walker said that Mr Coffey gave him details of the net tangible assets of the companies. First, he told Mr Walker that the plant, fixtures, fittings and stock would have a value of approximately $134,190. Later, he told Mr Walker that plant, fixtures and fittings had a book value of $138,110, and stock of $73,000. Mr Walker said that he accepted the latter figures, even though they considerably exceeded the amounts previously advised to him by Mr Coffey.
[26] Mr Coffey also told Mr Walker that debtors and creditors had approximately equal value, and that there was no need to show Mr Walker full financial accounts or a print-out of debtors and creditors. He said that there were no other assets or liabilities of any significance, and therefore no capital accounts existed or were required. Mr Walker said that he accepted those assurances, but now believes that there were financial accounts that Mr Coffey did not then supply and has not since supplied to him. He contended that Mr Coffey lied to him about the companies' liabilities.
[27] Mr Walker asserted that Mr Coffey took no steps in his role as managing director of the companies to either complete the shareholders' agreement or submit an employment contract or financial accounts to Mr Walker. Nor was there ever any proper valuation of the net tangible assets. Mr Walker never knew the full extent of the companies' tax obligations, or details of when they arose.
[28] Mr Walker did not receive full financial statements for the companies until they were provided to him on 8 June 2009. The statements showed that for the period ending 31 March 2008, the companies had made a combined profit of approximately
$72,400, but that figure included expenses totalling $298,950 (Alligator) and $48,057 (IMS) that Mr Walker considered were personal expenses incurred by Mr Coffey.
[29] The statements of financial performance for both companies for the period April 2008 to March 2009 showed a net profit of $34,450.92 for IMS and a net loss of approximately $279,000 for Alligator. Mr Walker noted that while the revenues of both companies had increased markedly, Mr Coffey had not contained his spending within agreed parameters. Mr Walker listed expenses in this period totalling $513,805 for Alligator and $251,312 for IMS, saying that much of this expenditure was for
Mr Coffey's personal benefit, contrary to the parties' agreement. He asserted that many of the expenses were not genuine tax-deductible items.
[30] Mr Walker did not obtain independent legal advice before he signed the sale agreement. He said that he has now seen that the agreement omitted schedules, and was drafted to suit Coffey in material ways, including by not incorporating financial accounts, a warranty of the accuracy of the accounts, and a warranty relating to payment of liabilities such as income tax, GST, and PAYE. He said that he had no communication with the law firm that prepared the sale agreement, but relied on Mr Coffey's assurances about it. He referred to a "higher level of undisclosed debt" owed by the companies to the law firm that prepared the sale agreement, and significant amounts owed to the firm of chartered accountants acting for the companies.
[31] Mr Walker said that the second part of cl 2.1 of the sale agreement (the part that was crossed out, referring to the value of stock on hand and fixed assets at 31 May 2008) was meant to refer to net tangible assets, with the $700,000 representing the intangible, goodwill component of the purchase price. Mr Walker noted that, in his affirmation in support of the summary judgment application, Mr Coffey confirmed that the deleted words were intended to reflect "net tangible assets", and that Mr Walker had accepted that the alleged loan was based on that. Mr Walker said that the problem with Coffey's analysis was that if all existing debt had been deducted, including tax obligations, bank debt, credit cards, and other liabilities, the value of the net tangible assets would have been a substantial negative amount that should have been deducted from the balance of the purchase price, and/or paid to Wynsfield in cash. Mr Walker said that he never entered into a separate loan agreement or security over the shares in the companies (as the sale agreement required), and even though the claimed debt was expressed in the sale agreement to be "a loan", the sum was in reality the balance of the purchase price, subject to adjustment, and was to be paid from dividends.
[32] Mr Walker said that he did not know whether Mr Coffey had paid Wynsfield's cash contribution of $263,333 into Alligator as Mr Coffey claims he did.
[33] Mr Walker referred to what he regarded as the lavish lifestyle Mr Coffey enjoyed. He also referred to Mr Coffey's friendships with a number of individuals whose businesses provided Alligator and IMS with a large amount of the companies' revenue, questioning whether sales revenues based on such relationships (as opposed to the quality of the goods and services provided) could be relied upon. Mr Walker also contended that the entertainment, travel and accommodation expenses claimed by Mr Coffey in the companies' statements of financial performance were not only contrary to his agreement with Mr Coffey, but also demonstrated the high level of personal expenditure Mr Coffey was charging to the companies. Mr Coffey was using the companies to disguise personal spending, making it appear to be tax deductible. Mr Coffey also supplied his long-term partner with a vehicle and other benefits while she worked for the companies.
[34] Mr Walker agreed that his role in the business was to attract new customers to IMS and to provide hands-on management in many areas in the Auckland region. But he denied Mr Coffey's allegation that he had any role (agreed or otherwise) in relation to finances. The finances were managed and tightly controlled by Mr Coffey, with no input from Mr Walker. Mr Coffey did not share with him any form of management accounts or financial accounts, and Mr Walker had no access to bank statements, or signing authority on the companies' bank accounts. He described Mr Coffey as secretive.
[35] Mr Walker said that the companies' sales increased substantially in the period he was an employee, but Mr Coffey's personal spending continued to be channelled through the companies.
[36] Mr Walker said that he would not have purchased the shares if he had known the extent of the companies' liabilities. He referred to the fact that interest expenses for both companies in the year ended 31 March 2009 totalled $72,914.51, exclusive of interest on hire purchase agreements. That annual figure suggested a total debt level for the two companies, at a hypothetical interest rate of seven per cent per annum, of well over $1 million.
[37] Soon after commencing employment, Mr Walker noticed that the companies' suppliers were not being paid. And he found out that there were tax debts owing for both companies (PAYE and GST). The tax obligations had existed for some time, and were at a late stage of enforcement, but Mr Walker had not been given any information about them. Mr Walker spoke to Mr Coffey about the tax obligations, and he was told to arrange regular payments. Repayments commenced at the rate of $3,000 per week, but the companies soon defaulted in meeting their ongoing tax liabilities.
[38] Mr Walker's salary from the companies was stopped by Mr Coffey in June 2009. Mr Coffey told him that the companies had other priorities, and was not able to pay his salary. Also, the first dividend was to have been paid no later than six months after settlement. The dividend was not paid, and there was no explanation for non-payment other than a lack of funds due to the payment of tax arrears and bank debt. Those were the urgent priorities.
[39] There was a meeting at the companies' Auckland office in June 2009, at which it was agreed that Mr Walker should find alternative employment and that something would need to be done about his shareholding in the companies.
[40] By this time Mr Walker had realised that the companies had been misrepresented to him by Mr Coffey. The large debts owed to Inland Revenue had not been disclosed, and the management accounts that had been shown to Mr Walker did not correctly reflect the trading activities of the companies.
[41] On 17 June 2009 Mr Walker wrote to Mr Coffey advising that he would return to a new role with ASB. He raised the issue of re-selling his shares in the companies to Coffey, balancing his unpaid salary and interest on the shares and generally concluding all aspects of the parties' relationship. He was looking for a "walk away" position under which he would lose the $263,333 invested, but would obtain a clean exit.
[42] Nothing came of the mid-2009 discussions for the sale back of the shares to Coffey. Mr Walker said that Mr Coffey was nevertheless fully aware of Mr Walker's view of Mr Coffey's responsibility, especially in relation to the tax obligations and the
bank debt, and he understood the reasons for Wynsfield's refusal and inability to pay the balance of the purchase price.
[43] Without informing Mr Walker or obtaining Wynsfield's approval as a shareholder, Mr Coffey executed a general security agreement (GSA) in relation to both companies, in favour of himself, on 6 May 2011. And on 17 July 2011 he appointed Iain Shephard and Christine Dunphy as receivers of the companies. This occurred approximately one hour before a High Court hearing of the liquidation claims filed by the Commissioner of Inland Revenue.
[44] Both companies had sold their businesses the day before the appointment of the receivers. Mr Walker contended that the sales were made at a large undervalue, to an entity associated with a Wellington employee of the companies who was a long-term girlfriend or partner of Mr Coffey. A receivers' report later showed that the business was sold for $240,063.19, leaving a debt owed to the Commissioner of Inland Revenue of $423,244 and an overall shortfall of $910,024. Mr Walker noted that the sale price appeared to be for the value of plant, fixtures, fittings and stock, with no provision for goodwill.
[45] Mr Walker regarded the sale of the companies as an attempt to defeat creditors and to destroy the value of his own 30 per cent shareholding in the companies (as well as his entitlement to unpaid salary).
[46] Mr Walker produced a copy of the liquidators' final report dated 21 August 2015 in the liquidations of the companies. The primary focus of the liquidators' investigations was the sale of the businesses, and whether valuable consideration had been received. As a result of the liquidators' investigation, a claim was brought against the purchaser under s 348 of the Property Law Act 2007 (the PLA). The liquidators also considered various other avenues of investigation, but they concluded that further action against Coffey could not be economically justified.
[47] Mr Walker contended that the present claim represents Mr Coffey's attempt to "resurrect old issues that he abandoned long ago". He said that he had misplaced or destroyed many of the documents going back to 2008, and that had prejudiced his
ability to properly respond to the summary judgment application. Most communications between himself and Mr Coffey were by email, and the emails were stored on the companies' computer, which Coffey has retained. Mr Walker's own personal computer records have long since ceased to exist.
Coffey evidence in reply
[48] In his reply affidavit, Mr Coffey affirmed that neither Alligator nor IMS had been trading for a full year when the deal was done with Wynsfield. Financial statements for the year from 1 June 2007 to 31 March 2008 would not have been prepared until sometime after the sale agreement was executed.
[49] Mr Coffey agreed that the intention was that Wynsfield would pay off the loan component of the share purchase from dividends. He said that he was assured by Mr Walker that he would be able to grow the businesses substantially through his connections, which would have made it possible to pay off the loan from dividends, but that did not happen.
[50] Mr Coffey denied telling Mr Walker that there was no need to show him full financial accounts or print-outs of creditors and debtors. Full financial statements for the two companies did not exist at the time of the negotiations for the sale agreement, but Mr Walker was given profit and loss accounts for the periods worked, a balance sheet, list of creditors and debtors, and schedules of fixed assets and stock. All of that information was presumably reviewed by Mr Walker's accountant Alan Bertelsen, who was also a trustee of Wynsfield.
[51] Mr Bertelsen later acknowledged receiving management accounts for the companies. In the course of an interview he had with investigators from the Department of Inland Revenue on 21 May 2012, at which Mr Walker was also present, Mr Walker and Mr Bertelsen were asked by the investigators if they had ever viewed or used financial or management reports, and whether any such reports were produced to them. Mr Walker is reported as having replied that, prior to buying into the business, Mr Coffey was asked for financial statements so that Mr Walker and Mr Bertelsen could make an assessment as to whether or not the share acquisition would be a viable venture. Mr Walker then said:
… The ah figures that were supplied weren't um from an accountant or anything were they, they were just …
[52] It appears from the transcript of the interview that Mr Bertelsen interrupted at that point, saying:
No they were management accounts and we asked for financials and um they, they weren't supplied and [Mr Walker] was counselled about that at the time but ah, rightly or wrongly chose to go ahead with it.
[53] Mr Coffey also produced a copy of the transcript of Mr Walker's evidence given in the tax prosecution against Mr Coffey, in the course of which counsel for the Commissioner asked Mr Walker if he had undertaken due diligence when he was considering buying the businesses. Mr Walker's reply was:
My accountant looked over things, um. Yes.
… The information that [Mr Coffey] gave us I passed to the accountant.
[54] Counsel then asked Mr Walker if he spent any time walking through the business with Mr Coffey, sitting in the business prior to actually paying the money. Mr Walker's response was "no".
[55] Mr Coffey said that the companies were then using Quickbooks accounting software, and it would have been no trouble to run reports for Mr Walker and Mr Bertelsen if they had asked for them. Mr Coffey said that nothing was hidden.
[56] Mr Coffey said that he was assured by Mr Walker that he could bring 1,000 new connections to IMS within the following 12 months. If he had done that, that would have increased IMS's profitability by up to $30,000 a month and would have increased its value significantly. He said that he would not have sold the shares at the price they were sold to Wynsfield if he had not thought that Mr Walker would relieve him of the management burden and at the same time grow the business.
[57] Mr Coffey attached full financial statements for Alligator and IMS for the year ending 31 March 2009. He had obtained them from the District Court file in the tax prosecution. The 2008 comparative figures in the financial statements showed that the average monthly revenue of IMS had been correctly stated for the year to 31 March
2008, and its revenue forecast for the March 2009 year was exceeded by a substantial margin, as it was for Alligator. The sales were supported by genuine long-term contracts that were expected to continue (and in most cases did continue).
[58] Mr Coffey rejected Mr Walker's claim that he had lied to him about the companies' liabilities. He acknowledged that he had an accounting background, but referred to Mr Bertelsen's involvement as both an accountant and as a trustee of Wynsfield.
[59] Mr Coffey noted that the figures in the accounts as at 31 March 2008 showed the values for plant, equipment and stock for the two companies at slightly less than
$250,000. He said that he had no reason to believe the figures were not accurate.
[60] In response to the allegations relating to his personal expenses allegedly paid for by the companies, Mr Coffey said that entertainment, travel and accommodation expenses reflected the need to pursue sales, and they were incurred both by himself and Mr Walker. The two of them agreed to try to get the best tax advantages they could from the company structure, with any adjustments that had to be made for personal use items to be made at the end of the financial year. He did not accept that many of the expenditure items referred to by Mr Walker were for his personal benefit, but to the extent they were, they would have been adjusted for in the 2009 accounts.
[61] Mr Coffey confirmed that no interest was charged on the $63,333 paid for by Wynsfield for 30 per cent of the companies' stock, plant and equipment. He said that the $63,333 had nothing to do with any debts the companies might have had at the time.
[62] Mr Coffey confirmed that the companies could not afford to pay any dividends once they had incurred the additional cost of employing Mr Walker. That was largely because Mr Walker did not introduce the "thousands of connections" he had said he would bring to the table for IMS. Mr Walker brought in only $75,000 of sales during the first year of his employment, contributing about $15,000 to profits. In addition, Mr Walker increased both of the salaries paid to him and Mr Coffey, by instructing the
payroll staff to add both of them to the PAYE schedule and to pay their agreed individual salaries net of tax.
[63] In response to Mr Walker's contention that he never received an employment agreement, Mr Coffey produced a signed copy of an employment agreement between Alligator and Mr Walker. The employment contract described Mr Walker's responsibilities as:
Day to day management and responsibility for business and the retention of existing business for us and for [IMS].
[64] Mr Coffey generally denied the allegations about his business associates and his former (relationship) partner. He said that his ex-partner was a key employee of the companies, and that there was nothing irregular about the terms and conditions of her employment, given her role.
[65] Mr Coffey denied being secretive, or deliberately withholding financial information from Mr Walker. Mr Walker did not raise any concerns about access to information at the time, and he worked in the Auckland office, where the accounting functions were handled. Both parties understood that Mr Walker was a director, with the same rights to information about the companies that any director would have.
[66] Mr Coffey said he was not aware of cash flow issues arising soon after Mr Walker commenced his employment, but agreed that cashflow issues arose eventually. He said that was inevitable given the additional cost burden Mr Walker represented, and his failure to bring in additional revenue.
[67] Mr Coffey said that he did not put pressure on Mr Walker to pay the interest payment that was missed in December 2008 — he was still hopeful that things would work out. In fact, Mr Coffey made no demand for interest or repayment until 2015, when he engaged Debtworks to take recovery action.
[68] In the meetings with Mr Walker in mid-2009, Mr Coffey said that he raised with Mr Walker the fact that Mr Walker had not made enough sales, and that he would have to turn that around so that the companies could afford to pay him. Mr Walker chose to leave instead. When Mr Walker left, Coffey was willing to either repurchase
Wynsfield's shares or arrange for that to occur at a later date, but Mr Walker did not pursue the matter. It was allowed to drift. Mr Coffey acknowledged that Mr Walker suggested that Wynsfield's obligations under the sale agreement should be forgiven, but Mr Coffey never agreed to do that. He did not take any action to enforce the sale agreement while Mr Walker was at ASB, simply because that would have created serious problems for the companies' relationships with ASB.
[69] Mr Walker did not raise any issues with Mr Coffey about alleged misrepresentations in 2009, and he never raised those allegations subsequently, at least until Mr Coffey sought repayment of the loan in 2015.
[70] Mr Coffey produced notes of meetings he held with Mr Walker on 27 June 2011 and 12 July 2011. The notes record that Mr Walker said he would support any decision Mr Coffey made about a sale of the companies, and that Mr Coffey should proceed as he saw fit (or words to that effect).
[71] Mr Coffey's notes recorded a further meeting on 3 August 2011, when the companies had just been put into receivership. Mr Walker asked Mr Coffey why he had not been consulted about the receivership. That aspect appears not to have been discussed further, but the notes do record that Mr Walker suggested that any future obligations in respect of the shares should be forgiven. Mr Walker explained that he left the company in the interests of both parties, and that Coffey should be amicable about it. Mr Coffey replied that there was a lot of money at stake, and that he would seek advice from legal counsel and financial advisers. The note recorded that the issue had been discussed before, and Mr Coffey did not see any movement from his original stance.
[72] At the time of the meeting, it appears that ASB was involved in a tender process, and Mr Coffey or an entity associated with him was or would be a tenderer. The note records that Mr Coffey said that if he forgave Wynsfield's future obligations relating to the shares it could be construed as a bribe, and he was not prepared to go down that track during the tender process. Mr Coffey decided not to contact Mr Walker after that, as it might have prejudiced the tender process.
Supplementary affidavits
[73] Both parties provided supplementary affidavits. Neither party objected to these affidavits.
[74] Mr Coffey provided a further affidavit on 13 August 2019. He attached a copy of a notice served on Wynsfield on September 2015, notifying a default under cl 3.7 of the sale agreement.
[75] Mr Walker swore a supplementary affidavit on 26 August 2019. Attached to the affidavit were certain profit and loss and budget documents for IMS and Alligator that Mr Walker had omitted from his first affidavit. The attachments comprised profit and loss accounts for IMS for the period June 2007 to January 2008, a profit and loss budget overview for IMS for April 2008 to March 2009, a profit and loss account for Alligator for the period August 2007 to January 2008, and a profit and loss statement for Alligator for the period April 2007 to March 2008.
Plaintiffs' summary judgment applications — legal principles
[76]Rule 12.2(1) of the High Court Rules 2016 provides:
12.2 Judgment when there is no defence or when no cause of action can succeed
(1)The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
…
[77] The principles applied on r 12.2(1) applications were summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd as follows:2
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not
2 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] – [27].
accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
[27] … [T]he defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.
(citations omitted) Counsel's submissions Wynsfield
[78]As the matter was argued, Mr Clark put the case for Wynsfield as follows:
(a)Coffey made misrepresentations as to the financial position of the companies, and Wynsfield was induced by those representations to enter into the sale agreement (including the shareholders' agreement).
(b)Coffey breached the sale agreement (including the shareholders' agreement) in the following respects:
(i)ceasing to issue dividends;
(ii)ceasing salary payments to Mr Walker;
(iii)using the companies' funds for Mr Coffey's personal expenditure;
(iv)entering into major transactions without obtaining Wynsfield's consent;
(v)selling the companies' businesses at an under-value; and
(vi)not acting in good faith.
(c)The misrepresentations and breaches of contract entitled Wynsfield to cancel the sale agreement (including the shareholders' agreement). Wynsfield effectively did that by Mr Walker leaving the companies in June 2009.
(d)Coffey's claim, or at least part of it, is barred by the Limitation Act 1950. The first default in paying interest instalments occurred in December 2008, well outside the six year limitation period prescribed by s 4 of that Act.
[79] Wynsfield contends that there was intentional concealment by Coffey, particularly as to the extent of the companies' indebtedness at the time the sale agreement was entered into.
[80] The effect of Coffey's misrepresentations or breaches of contract were to substantially reduce the benefit of the sale agreement (and shareholders' agreement) to Wynsfield.
[81] To the extent that the sale agreement contained provisions excluding reliance by Wynsfield on any misrepresentations made by Coffey before the sale agreement was entered into, s 50 of the Contract and Commercial Law Act 2017 provides the Court with a discretion to decline to give effect to such provisions. In this case, the factors favouring Wynsfield on the exercise of that discretion include the high value nature of the transaction, the substantial reduction in benefits to Wynsfield caused by Coffey's misrepresentations and breaches, the fact that Coffey had greater bargaining strength (particularly through Mr Coffey's knowledge and experience of the companies' businesses and financial positions), and the fact that Wynsfield was not represented by a lawyer.
Coffey
[82] For Coffey, Mr Slevin submitted that the companies' financial positions were not misrepresented before the parties entered into the sale agreement.
[83] Discontinuance of Mr Walker's salary might have justified an employment claim against Alligator, the company who employed him, but any such claim would not affect Coffey's rights under the sale agreement, and in any event would now be out of time.
[84] The companies' losses were not caused by mismanagement by Mr Coffey, but by Mr Walker's failure to achieve any significant additional sales. But even if they were, any mismanagement by Mr Coffey would not have affected Wynsfield's liability. At best, it might have had a minority shareholder's claim under s 174 of the Companies Act 1993, but any such claim would now be out of time.
[85] There was no agreement that the additional amount paid by Wynsfield for fixtures, plant and stock was a net amount, intended to include part or all of the companies' debts.
[86] Mr Coffey did not misappropriate company funds for his own benefit. But even if he had, any claim would belong to one or both of the companies, not Wynsfield. Also, any such claim would now be statute-barred.
[87] Even if Wynsfield did have some claim against Coffey (denied), the claim could not be set off against the claim for the amount of the loan and interest thereon. Clause 2.3 of the sale agreement provided that all payments to be made by any party under the sale agreement would be made:
…
2.3.2Free from any deduction, withholding, set-off, counterclaim, restriction or condition.
[88] Wynsfield has not produced any evidence that the companies' contracts were not reliable sources of income. Nor is there anything in the argument that the companies' businesses were sold at an undervalue. The sale of the businesses was only effected at about the same time the companies were put into receivership and liquidation, and by then any value in Wynsfield's shares had been irretrievably lost. The sales could not have caused any loss to Wynsfield. In any event, any claim relating to an alleged under-value sale would now be time-barred.
[89] Coffey's claims are not time-barred. The loan was not due for repayment until 1 June 2013,3 and the present proceeding was commenced on 8 May 2019, within the six year time limit. Nor is the claim for interest in respect of the period before 8 May 2013 statute-barred. Clause 3.5 of the sale agreement provided:
3.5[Wynsfield] will repay the Loan and any unpaid interest on the Loan in full at the end of the term set out in clause 3.2.
[90] Clause 3.5 created a separate payment obligation that was independent of Wynsfield's obligation in the sale agreement to pay interest at six monthly intervals, and no notice was given by Coffey under cl 3.10 of the sale agreement prior to 1 June 2013 calling up the loan and interest on the basis of default by Wynsfield.
[91] Wynsfield has signalled a possible counterclaim for the $263,333 paid by it under the sale agreement and the separate agreement relating to the plant fixtures and stock, but any such claim is not supported by the evidence, and would in any event be statute-barred.
Discussion and conclusions
[92] In the end, I think the result of the application must turn on whether it is reasonably arguable for Wynsfield that there was a valid cancellation of the sale agreement in or about June 2009 as Wynsfield alleges. I do not consider Wynsfield was entitled to set off any claimed damages against the loan repayments, and any damages claim would in any event now be statute-barred. I have considered whether there may have been an implied agreement to abandon the sale agreement, but in my view there is no sufficient foundation in the evidence for me to find that there might be an arguable abandonment defence.
[93] If there was a valid cancellation, the effect would have been that, to the extent the contract remained unperformed at the time of cancellation, no party was obliged or entitled to perform it any further. Also, no party would, by reason only of the cancellation, be divested of any property transferred or money paid under the
3 Wynsfield says that the completion date under the sale agreement was 1 June 2008, and Coffey accepts that date.
contract.4 For the reasons that follow, I consider that if there was a valid cancellation the case would not be suitable for determination on a summary judgment application.
The terms of the sale agreement
[94] There was initially some question over the content of the agreements between the parties, in particular over the missing schedule that should have contained the agreed form of shareholders' agreement. In the end, nothing turned on that. Wynsfield itself sought to invoke certain provisions of the form of shareholders' agreement produced by Mr Coffey (including a provision imposing an obligation on both parties to act in good faith and in the best interests of the relevant company).5 There was also initially some disagreement over the reason for the payment by Wynsfield of the additional $63,333, but Mr Walker himself said that the figure represented 30 per cent of a total sum of $211,110, made up of specified amounts for plant, fixtures and fittings for each company, and stock. Neither in the breakdown provided by Mr Walker nor in the relevant part of the sale agreement that was deleted was there any suggestion that liabilities should be deducted from the figures adopted for plant, fittings, and stock.
[95] There was an argument raised by Mr Walker, which I did not understand Mr Clark to push strongly at the hearing, that Wynsfield's obligations to make the loan repayments were dependent on the receipt of dividends from the companies. I agree with Mr Slevin that that is not what the sale agreement said. All it did was impose on Wynsfield an obligation to apply at least 80 per cent of any dividends and distributions it might receive from the companies, in reduction of the loan. The sale agreement did not guarantee that any dividends or distributions would be made; indeed, the form of shareholders' agreement made it perfectly clear that the declaration and payment of any dividends, including interim dividends, would be a matter for the discretion of the board. Clause 7 of the shareholders' agreement did record the shareholders' intention that the company would pay substantially all of its net profits as dividends to shareholders, but payment under that provision was obviously dependent on the companies making net profits. It was also expressly made dependent on the judgment
4 Contract and Commercial Law Act 2017, s 42(1).
5 Shareholders' draft agreement, cl 2.1.
of the board as to whether the dividends could be paid without prejudicing the companies' cashflow requirements and any capital demands, as determined by the board.6
[96] In the end, I do not think that any uncertainty over the terms of the agreements stands as a bar to the summary judgment application. It is common ground that a commercial agreement was entered into and acted upon by both parties for over a year, and any areas of uncertainty over the terms do not affect the outcome.
Did Coffey misrepresent the companies' financial positions?
[97] In my view, Wynsfield's strongest argument is its argument that there were pre-contractual misrepresentation as to the extent of the companies' liabilities. Mr Walker said in his evidence that Mr Coffey verbally informed him in or about March 2008 that the companies' debtors and creditors were approximately equal, and that there was no need to show him full financial accounts for the companies, or to print out a list of debtors and creditors. Mr Coffey is alleged to have said that there were no other assets or liabilities of any significance, and that no capital accounts existed or were required. Mr Walker said that he accepted Mr Coffey's assurances in that regard, but now believes that there were full financial accounts that Coffey did not disclose.
[98] Mr Coffey was not able to provide a definite rebuttal of that evidence given by Mr Walker. In his reply affidavit he said:
6.I do not recall ever saying to Mr Walker that there was no need to show him full financial accounts or a print-out of creditors and debtors and I doubt that I would have said that. I couldn't give him full financial statements for the companies when we were negotiating the sale because none existed at that time. I recall that we supplied him with profit and loss accounts, a balance sheet, lists of creditors, and debtors, fixed assets and stock schedules. All of this information was presumably reviewed by [Wynsfield's] accountant Alan Bertelsen, who was also a purchaser as the other trustee of [Wynsfield]. I understand he was then a senior partner with the chartered accountancy practice Smith Chilcott Bertelsen Harry Limited.
6 Shareholders' agreement, cl 7.
[99] The March 2009 statements of financial position for the two companies, showing comparative figures for the March 2008 year, were produced by Mr Coffey with his reply affidavit. The statement of financial position for IMS as at 31 March 2008 shows that it then had accounts receivable of $54,892. Accounts Payable were listed at $100,614, and in addition there were "Sundry Payables" of $22,648, a tax liability of $55,138, and shareholders' current accounts totalling $441,840. Total current liabilities were $628,535, and the corresponding "current assets" figure was
$140,934. There were non-current assets (property, plant and equipment) shown at
$86,990, but a non-current liability (a term loan from the bank) of $300,000. On any view of it, IMS's debtors and creditors were not "approximately equal" as at 31 March 2008, and the statement that there were no other significant liabilities, if it was made, would have been incorrect. It seems unlikely that the position in those respects would have been materially different roughly six weeks later when the sale agreement was signed.
[100] IMS's net assets were shown in the March 2008 statement of financial position at $79,363, but that figure was largely dependent on an amount of $779,974 included for goodwill. If the real figure for goodwill was less than that by any significant amount, IMS's liabilities could have exceeded its assets by a substantial margin.7
[101] Alligator's statement of financial position as at 31 March 2008 did not provide any better picture, although the figures for accounts receivable ($301,724) and accounts payable ($309,332) were roughly equal. But total current liabilities ($523,393) still substantially exceeded total current assets ($394,859). The difference appears to have been made up largely by debts of approximately $144,000 owing to Westpac Bank on overdraft and Mastercard accounts, and an intercompany debt of
$65,764 owing to IMS. The statement of financial position for Alligator showed negative shareholders' funds of $58,744 as at 31 March 2008.
7 The financial statements for IMS themselves raise at least a question over whether the $779,974 goodwill figure was a "real" figure. The statements of financial performance for IMS for each of the years ended 31 March 2008 and 31 March 2009 contained "amortisation of goodwill" figures of $33,912 and $40,694 respectively. In circumstances where Wynsfield agreed to pay $700,000 for 30 per cent of the total goodwill of the two companies (suggesting a figure of roughly
$2,333,300 for 100 per cent of the goodwill), one might have expected to see some explanation for the amortisation figures. None was provided.
[102] The positions disclosed by the statements of financial position as at 31 March 2008 do not look any better when one considers the statements of financial performance for the two companies to that date. Alligator posted a small loss ($4,672) after depreciation, and there were further deductions (total approximately $54,000) for entertainment expenses and legal fees that were treated as non-deductible for tax purposes. IMS posted a profit of $135,185 before tax, but with its substantial debts and a relatively short trading history it is difficult to see how performance at that level, coupled with Alligator's roughly "break-even" result, could have justified a goodwill valuation for the two companies of over $2.3 million.
[103] Mr Walker was provided with a copy of what appears to be a "management" profit and loss statement for Alligator for the full year to 31 March 2008, printed on 21 April 2008. It showed total sales of $1,276,230, but the expenses were high; the statement showed a net loss of $83,602. He was also provided with a "management" profit and loss statement for IMS printed on 25 February 2008, showing IMS's performance in the eight month "start-up" period from June 2007 to January 2008. This statement showed a total net income for the period of $141,328 (on average, approximately $17,600 per month), suggesting that a net profit somewhere in the order of $176,500 could have been expected for the 10 months to 31 March 2008. The actual net profit report in the completed financial statements for that period showed a net profit before tax of $135,185, roughly 24 per cent lower than the projected year-end figure.
[104] Mr Coffey said in his evidence that he provided Mr Walker with a balance sheet or balance sheets for the companies, but that is disputed. Whether or not he did cannot be determined on a summary judgment application.
[105] In the circumstances just described, I do not think it can be said that Wynsfield has no reasonably arguable case that the financial positions of the companies were or may have been misrepresented to it prior to the sale agreement. It is true that the figures as at March 2008 were not current when the sale agreement was entered into, but it seems unlikely that there would have been any significant change in the picture between 31 March 2008 and 14 May 2008. If balance sheets were not provided to Mr Walker, and if Mr Coffey told Mr Walker that debtors and creditors were
approximately equal, that there were no other significant assets or liabilities, and/or that there was no need for Mr Walker to see full financial statements for the companies, I think it is clearly arguable for Wynsfield that there were material misrepresentations. Alligator's position might not have seemed much better or worse if full accounts had been provided, but I do not think that can be said about IMS. If Mr Walker and Mr Bertelsen had had a full statement of financial position for IMS as at 31 March 2008 they would have immediately seen that current liabilities significantly exceeded current assets, and that Wynsfield was being asked to pay for its stake in the companies on the basis of a combined goodwill figure that would have seemed difficult to justify.
If there were misrepresentations, is it arguable for Wynsfield that the misrepresentations justified cancellation of the sale agreement?
[106] There could be difficult issues of causation for Wynsfield to address given that Mr Walker was assisted at the time by a senior chartered accountant who was also a trustee of Wynsfield. Mr Bertelsen would have been well aware of the importance of getting accurate figures for existing assets and liabilities, and the impression given by the notes of the interview conducted by Inland Revenue investigators is that Mr Bertelsen probably did sound some warning bells with Mr Walker, but Mr Walker decided to proceed anyway. But those are ultimately trial questions. In the context of a summary judgment application, I have evidence supporting the allegation that certain verbal statements were made by Mr Coffey which, if made, would appear to have been materially incorrect, and it is impossible to safely conclude that, if made, they did not induce Wynsfield to enter into the sale agreement. Given the actual position of the two companies as shown by the March 2008 financial statements, it must also be reasonably arguable for Wynsfield that the effect of any such misrepresentations would have been to substantially reduce the benefit of the sale agreement to Wynsfield. I conclude that Wynsfield has raised a sufficient argument that circumstances existed that would have entitled it to cancel the sale agreement for misrepresentation.
[107] It is true that the sale agreement did contain "entire agreement" provisions, intended to preclude Wynsfield from relying on any pre-contractual misrepresentations. But s 50(2) of the Contract and Commercial Law Act provides that the Court is not prevented by such provisions from inquiring into the question of whether pre-contractual statements were made and/or relied upon, unless the Court
considers that it is fair and reasonable that the provision should be treated as conclusive between the parties, having regard to the matters set out in s 50(3). The matters set out in s 50(3) include the parties' respective bargain strengths, the nature and value of the transaction, and whether or not any party was advised by a lawyer at the time of the negotiations. In this case, Wynsfield did not have legal advice before it entered into the sale agreement, and the bargaining strength arguably lay with Coffey, because of its greater knowledge of the companies. Wynsfield was taking on very substantial obligations. In those circumstances it is not possible to conclude on a summary judgment application that, on account of the "entire agreement" provisions, the Court would decline to inquire into the questions of whether Coffey made material misrepresentations, and if so, whether they induced Wynsfield to enter into the sale agreement.
Did Wynsfield cancel?
[108] The rules about cancellation are clear enough, at least for most situations. First, a cancellation by a party does not take effect before it is made known to the other party.8 The cancellation may be made known by words or by conduct showing an intention to cancel, or both, and it is not necessary to use any particular form of words, so long as the intention to cancel is made known.9 Secondly, a party with a right to cancel may lose that right if that party, with full knowledge of the repudiation, misrepresentation, or breach that would entitle it to cancel, affirms the contract.10
[109] Turning to the facts of this case, Mr Walker described a meeting with Mr Coffey in Auckland in June 2009, in the course of which they agreed that it would be necessary for Mr Walker to find alternative employment, and that something would need to be done about Wynsfield's shareholding in the companies.
[110] On 17 June 2009 ,Mr Walker sent an email to Mr Coffey in which he confirmed that he was "seeking to conclude" his involvement with Alligator and IMS, as soon as practicable. He said that he was looking to take up a newly created security position with ASB, and that would preclude him from having any financial investment in either
8 Contract and Commercial Law Act 2017, s 41(1)(a).
9 Section 41(2).
10 Section 38.
Alligator or IMS given the contractual relationships between the parties. Mr Walker said that he was "totally committed to the future success of both Alligator and IMS", and that he was acutely aware of "our current cashflow difficulties we are experiencing". He said that, in the interests of lessening the financial outgoings and burden, he was willing to discuss the option of lowering or ceasing his drawings, with a view to relying on his investigative and consultancy endeavours as his main source of income. He said that he would be happy to discuss that further with Mr Coffey. Mr Walker went on to propose that he would sell his 30 per cent of the shares, assets and stock to Coffey at a fair value, with the "financial position with regards current account and interest owed to you for unpaid shares" to be determined. He would resign his directorships of Alligator and IMS, and "housekeeping" issues would be amicably concluded.
[111] Mr Walker wrote again to Mr Coffey on 15 July 2019. It appears that the email had been preceded by earlier emails, but they were not produced in evidence. Mr Walker set out in the 15 July 2009 email his "thoughts on how we might conclude my involvement in Alligator and IMS in a fair and reasonable manner". He said that he was open minded on how the partnership might be resolved. He then set out a further proposal for Mr Coffey's consideration.
[112] The proposal involved Mr Walker resigning as a director with effect from 30 June 2009, and receiving no further salary payments after that date. The value of Alligator and IMS, and Wynsfield's shareholding therein, would be determined as at 30 June 2009, after which the parties would explore the options for settlement in a fair and workable manner. Mr Walker went on to refer to "reaching a mutually acceptable agreement". In the interim, he would assign his shareholding in IMS and Alligator to Mr Coffey's trust or other nominated entity. He said that it was important that he be able to illustrate to ASB that he had totally severed his relationship with Alligator and IMS, "even though the financial settlement may not have been settled". Mr Walker concluded by seeking interim agreement for Alligator or IMS to meet his monthly vehicle repayment fees, "until we have been able to reach an agreement on my departure".
[113] Mr Walker produced an undated reply email from Mr Coffey. Mr Coffey agreed that the business should be valued at 30 June 2009, noting that Mr Walker had been conducting investigative work in a personal capacity, and had had meetings with ASB which had resulted in an offer of employment with an almost immediate start. He described as understandable the urgency of addressing the conflict of interest issue raised by the bank.
[114] Mr Coffey then listed his own options, which he said were (i) purchasing Wynsfield's shareholding, (ii) declining the offer to purchase, or (iii) selling Wynsfield's shareholding to some other party. He said that he did not wish to incur costly professional advice, given the financial constraints Coffey was under. Mr Coffey suggested that management accounts be made available at the earliest opportunity, with Mr Walker to put forward a price thereafter for the sale of Wynsfield's shares, with supporting documentation as to the formulae/methodology used to arrive at his sale figure. Mr Coffey suggested that if the proposal for sale by Wynsfield could not be achieved in the short term, a heads of agreement should be formulated under which the parties would agree a valuation process for Wynsfield's interest. In the meantime, Wynsfield would assign the shares to Coffey and Mr Walker could start his new job with ASB.
[115] Those were the only emails produced from the June/July 2009 period, and Mr Walker said in his evidence that it had been clear to him by June 2009 that the companies had been misrepresented to him by Coffey. Mr Walker said that he had some regret that his email dated 17 June 2009 to Mr Coffey had expressed gratitude for Mr Coffey's support. At the time, Mr Walker was looking for a clean exit and he hoped that his email would appeal to Mr Coffey's better nature. His goal at that stage was to be restored to his original position, minus the payments of $263,333. At that time, he was prepared to let the $263,333 go.
[116] After Mr Walker's 15 July 2009 email and Mr Coffey's reply there were some discussions, but it is common ground that nothing came of them. Mr Walker said in his evidence that Mr Coffey was fully aware of the issues that had developed and Mr Walker's view of Mr Coffey's responsibility, especially in relation to the tax
obligations and the bank debt, and any refusal and inability to repay the balance of the share purchase price.
[117] In his evidence, Mr Coffey agreed that Mr Walker's return to ASB in a senior management role involving bank security did create serious problems, because ASB was a major client, and Wynsfield's ongoing shareholding would create a conflict of interest that affected both Mr Walker and Coffey. Mr Coffey said that he was not comfortable with that situation, and he wanted to avoid any conflict issues arising in the future. For that reason, he was willing to either repurchase the shares or arrange for that to occur at a later date by an agreed process. However, Mr Walker did not pursue the matter, and it was allowed to drift. Mr Coffey said that Mr Walker did suggest that the obligations under the loan agreement be forgiven, but Mr Coffey never agreed to that.
[118] I think it would be dangerous to conclude on a summary application, where the parties have not had the benefit of discovery and there has been no cross-examination of witnesses, that Mr Walker's communications to Mr Coffey in mid-2009 did not convey Wynsfield's intention to bring the sale agreement to an end. Both parties were aware that Mr Walker would be moving to a new role where he could no longer have financial ties with Coffey, and Mr Walker said in his evidence that Mr Coffey was aware of Mr Walker's views on the issues between the parties, including his views on Mr Coffey's alleged responsibility for the debts, and any "refusal and inability" by Wynsfield to pay the balance of the share purchase price. In circumstances where the events in question took place over 10 years ago, and it seems clear that not all of the emails have been produced, I do not consider that Coffey has sufficiently shown that the communication of (i) Mr Walker's departure from the companies and (ii) Wynsfield's inability and refusal to pay the balance of the share purchase price, did not together constitute a cancellation of the sale agreement.
[119] The correspondence that followed the initial communications in mid-2009 is not in my view inconsistent with the sale agreement having been cancelled. The exchanges between Mr Walker and Mr Coffey followed Mr Walker's advice that he was seeking to quit his financial investments in Alligator and IMS and Mr Coffey's apparent acceptance of the need for a split. Mr Coffey proposed steps that appear to
have been designed to bring about an "unwinding" of the parties' relationships, including a valuation and assignment of Wynsfield's shareholding.
[120] The fact that negotiations on the orderly winding up of the parties' relationship appear to have been allowed to drift after mid-2009 is not necessarily inconsistent with both parties treating the sale agreement as being at an end from that point. Mr Walker said in his evidence that he was prepared to let Wynsfield's investment in IMS and Alligator go, and Coffey made no demand for, or apparently even asked about, the interest payments falling due at six-monthly intervals from 1 December 2009. And in 2011 Mr Coffey executed the GSA over both companies, without any prior reference to Mr Walker. He then entered into a sale agreement, and put the companies into receivership, again without reference to Mr Walker.
[121] Mr Coffey gave evidence in reply about certain meetings between him and Mr Walker in 2011, but I think it would be unfair to put any significant weight on them given that the evidence was not given in Mr Coffey's first affidavit and Mr Walker did not have the opportunity to respond to it. And in any event I do not think the evidence could affect the "cancellation or no cancellation" issue. Either the sale agreement had been cancelled two years earlier or it had not, and discussions in 2011 could not affect the answer to that question. And if there was a cancellation in 2009, there still needed to be an "unwinding" of the links between the parties — Wynsfield remained the registered owner of the shares, Coffey still had a claim for the loan, and Wynsfield would still have had an arguable claim that it had been misled in entering into the sale agreement.
[122] I conclude on this issue that Coffey has failed to show that Wynsfield has no arguable defence that it validly cancelled the sale agreement in mid-2009. That being the case, the question of relief under the Contract and Commercial Law Act will need to be determined, and that is not in my view an exercise that can properly be carried out on a summary judgment application. All of the evidence should be before the Court.
No need to consider the breach of contract allegations
[123] Having regard to my finding that Wynsfield has a reasonably arguable case that it was entitled to cancel and that it did cancel on the basis of misrepresentations by Coffey, there is no need to consider the various breaches of contract alleged by Wynsfield — if there was a right to cancel on one ground, Wynsfield's position on the cancellation issue will not be improved if other grounds also existed.
Was the sale agreement abandoned?
[124] In view of my conclusion that Coffey has failed to show that Wynsfield has no defence on the basis of cancellation of the sale agreement, it is not strictly necessary to address this issue. However, I will make some observations on the possibility of such a defence, in case the matter should go further.
[125] The authors of Burrows, Finn and Todd on the Law of Contract in New Zealand acknowledge a category of difficult cases that may arise where it is argued that the contract has been implicitly abandoned by conduct.11 The issue in such cases is whether the parties have tacitly abandoned the agreement. The possibility of mutual abandonment of contractual obligations was recognised by the House of Lords in Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal where Lord Brandon identified two ways in which implicit abandonment might be shown:12
The first way is by showing that the conduct of each party, as evinced to the other party and acted on by him, leads necessarily to the inference of an implied agreement between them to abandon the contract. The second method is by showing that the conduct of B, as evinced towards A, has been such as to lead A reasonably to believe that B has abandoned the contract even though it has not in fact been B's intention to do so, and that A has significantly altered his position in reliance on that belief.
[126] The authors of Burrows, Finn and Todd note that it is usually not easy to prove an agreement to abandon a contract in the absence of express words. However, the Court found that the contract had been abandoned in one New Zealand case, Christchurch City Council v Link Co Ltd.13 In that case, Chisholm J found that the
11 Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, Lexis Nexis, Wellington, 2018) at [19.2.1].
12 Paal Wilson & Co A/S v Partenreederei Hannah Blumenthal [1983] 1 AC 854 (HL) at 914.
13 Christchurch City Council v Link Co Ltd, HC Christchurch CIV-2005-409-966, 13 February 2008.
second method of agreement to abandon referred to by Lord Brandon in Partenreederei Hannah Blumenthal had been established: the Council had encouraged a belief that certain swap agreements were at an end, by entering into negotiations for a new deal which would be totally incompatible with the swap agreements remaining in force. The Court found that there was an implied abandonment.
[127] The issue of abandonment was not pleaded by Wynsfield in its notice of opposition, but it was raised by Mr Walker in his affidavit. Mr Walker did not point to anything communicated to him by Coffey evidencing Coffey's intention to treat the parties' contractual obligations as having been discharged, and no evidence has been put forward to suggest that Wynsfield may have altered its position to its detriment in reliance on any assurance by Coffey that it would not enforce its rights.
[128] In my understanding of the concept, abandonment of a contract involves express or tacit agreement between the parties that all obligations, rights and liabilities of the parties will be at an end. There is no evidence of that in this case. If it had been necessary, I would have held that Wynsfield has not raised an arguable case that there was an agreement to abandon.
Does Wynsfield have a damages claim to set off against the amount due under the loan, or a counterclaim?
[129]In case the matter should go further, I will state briefly my view on this topic.
[130] If there had been no cancellation, Wynsfield would still, subject to the terms of the sale agreement, have had a right to claim damages for misrepresentation or breach. But the problem for Wynsfield is that the sale agreement provided (at cl 2.3.2) that any damages claim could not be set off against the payments due on the loan. Furthermore, Wynsfield had sufficient knowledge of the various matters on which it might have claimed damages well before 8 May 2013 (the date six years before the present proceeding was filed), and under s 4 of the Limitation Act 1950 any damages claim had to be brought within six years after the cause of action had accrued. Section 30 of the Limitation Act 1950, relating to counterclaims, could not have assisted Wynsfield. It provided that any counterclaim filed by a defendant was deemed to have
been filed on the same day the plaintiff filed its proceeding. It would not have availed Wynsfield on the limitation issue if any counterclaim it might have wished to file were deemed to have been filed on 8 May 2019 — the counterclaim would still be outside the six year time limit.
Result
[131] Coffey has failed to prove, to the standard required to justify the entry of summary judgment, that Wynsfield has no defence to its claims. The application for summary judgment is refused accordingly.
[132] In accordance with usual practice where a plaintiff's application for summary judgment is refused, costs are reserved.
[133] Wynsfield is to file and serve its statement of defence within 15 working days of the date of this judgment. Any reply is to be filed and served within 15 working days of service of Wynsfield's statement of defence. The registrar is to allocate a case management conference for the first practicable date after 21 February 2020.
Associate Judge Smith
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