Coupe v Remmington

[2020] NZHC 2122

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-2425

[2020] NZHC 2122

BETWEEN

AARON PETER COUPE

Plaintiff

AND

BRIAN GREGORY REMMINGTON

Defendant

Virtual hearing:	19 August 2020
Appearances:	B D Gray QC and HMZ Lanham for the plaintiff S E Cameron for the defendant
Judgment:	21 August 2020

JUDGMENT OF JAGOSE J

This judgment was delivered by me on 21 August 2020 at 4.00pm.

Pursuant to Rule 11.5 of the High Court Rules.

………………………… Registrar/Deputy Registrar

Counsel/Solicitors:

B D Gray QC, Auckland

HMZ Lanham, Barrister, Auckland

Cook Morris Quinn – City Branch, Auckland

COUPE v REMMINGTON [2020] NZHC 2122 [21 August 2020]

[1]                  The plaintiff (“Mr Coupe”) seeks leave under s 165 of the Companies Act 1993 effectively to convert this proceeding against the defendant (“Mr Remmington”) into proceedings in the name and on behalf of Liberte Investments Limited (“Liberte”).

Background

[2]                  Mr Coupe is the sole shareholder of Greys Avenue Investment Partners Limited (“GAIL”), which owned a commercial property on Auckland’s Greys Avenue. Together with Greys Avenue Partners LLC (“GAP”), on 8 March 2019, the three agreed GAIL would sell the property for $24 million to Liberte, whose minority and majority shareholders respectively are Mr Coupe and GAP as joint venturers, for development as a hotel. This was their second run at the same objective, previously through another vehicle, Ascent Industries No 33 Limited (“Ascent”), along similar lines.

[3]                  The 8 March 2019 heads of agreement identified Liberte was incorporated to purchase the property, with a 40/60 shareholding split respectively between Mr Coupe and GAP, and for their appointment of one and two directors respectively, for majority decision-making (GAP’s directors voting together). The parties agreed Liberte “will continue development of the hotel”, and its board “will solely control and take responsibility for [Liberte’s] management, administration and communications …, including as to funding, tax, accounting and legal matters”.

[4]                  The heads of agreement also specified the purchase price was to be funded by a mix of commercial loans in the amount of approximately $19 million from identified financiers, and GAP’s initial shareholder advance of $5.3 million. After repayment of

$19 million to GAIL’s secured creditors, the balance of sale proceeds would be applied “to reduce GAP’s investment to $4 million” and in payment of Ascent’s expenses, and otherwise as capital contributions in accordance with Mr Coupe’s and GAP’s 40/60 shareholding. By a 6 March 2019 side-agreement – between GAIL, Liberte, and GAP

– GAIL directed Liberte to pay the whole of that balance directly to GAP “in satisfaction of [Liberte’s] obligation to pay that part of the purchase price under the Property Agreement”.

[5]                  In the event, only GAP appointed a director, Mr Remmington;1 on 12 March 2019, GAIL and Liberte entered an unconditional sale and purchase agreement for the Greys Avenue property at a purchase price of $24 million for settlement by 12 April 2019; available financing fell substantially short of requirements; the sale did not settle; and the property instead was sold on 25 July 2019 by mortgagee sale for $20.8 million.

[6]                  The derivative proceeding would allege Mr Remmington failed to act in good faith and in Liberte’s best interests by (a) acting on the instructions of GAP’s owner (“Mr Oda”); (b) failing to seek alternative funding after Mr Oda declined to provide a personal guarantee required by a lender; and (c) participating in transfer of funds from GAP to another company of which he and Mr Oda were directors. The proceeding would claim damages of between $4 million as the contended loss on settlement and

$13 million as the prospective loss on the value of the joint venture hotel.

The law

—derivative actions

[7]Section 165 of the Companies Act 1993 provides:

165 Derivative actions

(1)    Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—

(a)bring proceedings in the name and on behalf of the company or any related company; or

(b)intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.

(2)    Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—

(a)the likelihood of the proceedings succeeding:

(b)the costs of the proceedings in relation to the relief likely to be obtained:

1      It was proposed to Mr Remmington both he and GAP’s owner, Gary Oda, would be directors, Mr Remmington the only New Zealand resident director.

(c)any action already taken by the company or related company to obtain relief:

(d)the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.

(3)    Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—

(a)the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b)it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

(4)    Notice of the application must be served on the company or related company.

(5)    The company or related company—

(a)may appear and be heard; and

(b)must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.

(6)    Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.

[8]                  It generally is accepted applications for leave should not conduct any interim trial of the proposed proceeding on its merits, but rather determine with regard to s165(2)’s considerations if the proposed proceeding was one a prudent business person would have brought in the conduct of their own affairs.2

—directors’ duties

[9]                  A director’s predominant duty is “to act in good faith and in what the director believes to be the best interests of the company”.3 It is a fiduciary duty, distinct from other duties requiring exercise of due care and skill.4 It is a duty “owed to the company

2      Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765; He v Chen [2014] NZCA 153 at [30].

3      Companies Act 1993, s 131.

4      P L Davies Gower’s Principles of Modern Company Law (10th ed, Sweet & Maxwell, London, 2016) at 598–599.

and not to shareholders”.5 That is acknowledged a difficult distinction in closely-held companies,6 but still no reason to blur the distinction.7

Discussion

[10]              There is no dispute, and I am satisfied, Liberte does not intend to bring the proceeding against Mr Remmington. I therefore turn to s 165(2)’s mandatory considerations.

—the likelihood of the proceeding succeeding

[11]              Notably, the proposed proceeding is not intended to allege Mr Remmington’s breach of his s 136 duty:

… [to] not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

When I queried that with Mr Coupe’s counsel, Bruce Gray QC, Mr Gray explained the proceeding was to allege Mr Remmington’s specific failures in Liberte’s governance.

[12]              Thus it is not contested, at the time Liberte entered into the transaction,      Mr Remmington had reasonable foundation to believe it would be able to acquire the property. Mr Remmington says:

My understanding was that while I would be a director of Liberte I would not be involved in any of its day to day operations. I understood Mr Coupe was responsible for arranging finance for the purchase of the Property and would be responsible for the continued development of the Property into a hotel. I understood GAP was providing the initial development funding for the conversion of the Property into a hotel. …

I agreed to become a director on this basis.

He says, from that perspective, he entered the sale and purchase agreement and the side-agreement for Liberte.

5      Companies Act 1993, s 169(3).

6      Glavanics v Brunninghausen (1996) 14 ACLC 345 (NSW SC).

7      Stacey v Watson [2017] NZCA 542 at [37], citing Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [75].

[13]              Mr Remmington also said he had no knowledge of the terms of the joint venturers’ agreement on Liberte’s responsibilities. But that is key to Mr Coupe’s intended derivative action: with direct reference to that agreement, he says “I do not know how a director’s role can be limited. You have legal obligations as a director”. Mr Gray takes that one step further to submit “the company had an obligation to settle” and, even leaving aside the joint venturers’ agreement, “it is uncontentious” directors should “use their best endeavours to ensure the company they govern could fulfil its contractual obligations, avoiding risking loss”.

[14]              A director is bound to act not objectively in the best interests of the company, but subjectively in what s/he “believes to be” in those best interests.8 The standard is:9

… an amalgam of objective standards as to how people of business might be expected to act, coupled with a subjective criteria as to whether the directors have done what they honestly believe to be right.

It is a difficult assessment to make here, in the context of a corporate shell, established to acquire the foundation joint venture property effectively from one joint venturer with partial funding from another, when there is a substantial shortfall in the balance of intended funding, and the director is not one of the joint venturers. The circumstances do not permit a director’s expected assessment of options, to compare their present and prospective value, advantages, and disadvantages.10

[15]              The joint venturers’ agreement was “Liberte will continue development of the hotel at the Property”, to which end its board was to control and take responsibility for, among other things, “funding”. But that follows their agreement the property’s acquisition “will be completed [in] the terms set out in the sale and purchase agreement attached”, for payment of its $2.4 million purchase price by a 10 per cent deposit and the balance “in cleared funds on 12 April 2019”. The heads of agreement’s reference to “funding” assumes prior acquisition of the property for Liberte’s continued

8      Companies Act 1993, s 131(1). I am not aware if Liberte’s constitution permitted directors of that joint venture company to “act in a manner which he or she believes is in the best interests of a shareholder or shareholders, even  though it  may not be in  the best  interests of the company”  (s 131(4)), and therefore disregard the prospect.

9      Sojourner v Robb [2006] 3 NZLR 808 (HC) at [102], upheld on appeal Robb v Sojourner [2007] NZCA 493, [2008] 1 NZLR 751.

10     Hedley v Albany Power Centre Ltd (in liquidation) [2005] 2 NZLR 196 (HC) at [64].

development of its hotel. Even if known to Mr Remmington, the heads of agreement was not a directive Liberte bore responsibility for funding the property’s acquisition.

[16]              Similarly, then, Mr Remmington had no opportunity to consider if acquisition of the property was in Liberte’s best interests. Without the property, it had no interests at all. It cannot be said, the joint venturers having established Liberte to acquire the property, it necessarily was in Liberte’s best interests to secure the acquisition, irrespective of its “contractual obligation” to one of the joint venturers. As the vehicle for Mr Coupe’s and GAP’s “joint undertaking or activity”, “some contractual association … with a view to mutual profit”,11 it may as easily have been in Liberte’s best interests only to provide mechanical support to achieve the initial acquisition, and to allow the transaction to fail if the joint venturers’ intentions for that funding were not achieved.12 The derivative proceeding is not one which effectively permits any dispute between the joint venturers to be resolved.13

[17]              From that perspective, Mr Remmington’s contended closeness to and complicity with Mr Oda’s interests, or any free-floating obligation to act in good faith, are unlikely to found Mr Remmington’s independent liability to Liberte.

—the costs of the proceedings in relation to the relief likely to be obtained

[18]              Given the lack of a clear foundation for liability, the likely relief is in a range from nothing to something more. The upper ends claimed by Mr Coupe – of the net loss of value in the acquired property at $4.4 million, or in the successful hotel development at $13 million – are undermined by the shortfalls in the joint venturers’ anticipated financing. The property’s purchase price is established by reference to clearing GAIL’s $19 million debts (the side-agreement essentially repaying the balance of the purchase price to GAP), yet a first mortgage could only be raised in the amount of $13.5 million, and any subsequent funding required to be supported by personal guarantee (which was not forthcoming). It seems unlikely the property’s true

11     Commerce Commission v Fletcher Challenge [1989] 2 NZLR 554 (HC) at 615, citing United Dominions Corporation Ltd v Brian Pty Ltd (1985) 60 ALR 741 at 746.

12     See Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd CA70/05, 3 August 2005 at [69]–[73].

13     Cf, “the company will have an essentially neutral role as the shell within which the shareholders will resolve their differences inter se”: Vrij v Boyle, above n 2, at 767.

value then is more than twice the available secured funding. The $20.8 million mortgagee sale price, while likely at a discount, suggests a 20 per cent or more premium in acquired value to better Liberte’s $24 million contract price is improbable.

[19]              The cost of achieving whatever relief may be available thus may well be a very close-run thing. The cost would be for what is likely to be at least a multi-day commercial trial, incurring expenses into high five-figure, if not low six-figure, sums. I acknowledge Mr Coupe’s agreement to fund the derivative proceeding, but that is inevitable in circumstances of this shell of a non-trading, assetless company, and not of itself a material factor in considering the position from that of a prudent business person in conduct of their own affairs.

—    any action already taken by the company or related company to obtain relief

[20]              No action has been taken by Liberte to obtain relief against Mr Remmington. There has been other litigation which may involve related companies,14 but also not against Mr Remmington.

—     the interests of the company or related company in the proceedings being commenced

[21] For the reasons I have explained at [16] above, Liberte may have no interest in the proceeding being commenced. Mr Gray was forthright the only point of the proceeding was to put Liberte in  funds  to  meet  Mr  Coupe’s  subsequent  claim. No related company is contended to have any interest.

—what would the prudent business person do?

[22]              The suggestion Mr Remmington may have a duty to attempt to secure acquisition of the very property Liberte was established as a joint venture vehicle to own, develop, and operate is not particularly coherent. Leaving aside any diversion of opportunity (of which none is claimed here), Liberte’s own interests arguably only commenced on acquisition, meaning Mr Remmington’s applicable duty was in

14 Companies Act 1993, s 2(3). GAIL or GAP may be related companies to Liberte, carrying on business in the acquisition of the property such that their separate businesses or substantial parts of it are not readily identifiable, but that was not argued and is unlikely to afford any more constructive path to determination of Mr Coupe’s application for leave.

relation to agreeing to Liberte incurring that obligation. The losses claimed are aspirational, and do not sit well with the claim’s dubious foundation.

[23]              Standing back, for the reasons I have outlined, a prudent business person in conduct of their own  affairs  is  likely  to  consider  the  prospect  of  establishing  Mr Remmington was in breach of his s 131 duty to Liberte in the ways alleged was slim, and any prospective recovery unlikely to justify the cost of its pursuit.

Result

[24]              I refuse Mr Coupe leave to bring the proceeding in Liberte’s name or on its behalf.

Costs

[25]              Mr Coupe’s application is brought in response to Mr Remmington’s application to strike out the present proceeding. The parties agree determination of the former  resolves  the  latter.  In  my  preliminary  view,  as  the  successful  party, Mr Remmington is entitled to 2B costs and disbursements on his steps taken in both applications. That is because, so far as I can tell, no step on these averagely complex applications required other than a normal amount of time.

[26]              If that is not accepted by the parties, or they cannot otherwise agree, I reserve costs for determination on short memoranda of no more than five pages – annexing a single-page table setting out any contended allowable steps, time allocation, and daily recovery rate – to be filed and served by Mr Remmington within ten working days of the date of this judgment, with any response and reply to be filed within five working day intervals after service.

—Jagose J