Curtis v Gibson
[2013] NZHC 2884
•31 October 2013
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2008-485-2735 [2013] NZHC 2884
BETWEEN RICHARD JOHN CURTIS First Plaintiff
CURTIS HOLDINGS LIMITED Second Plaintiff
ANDRODNEY MARK GIBSON First Defendant
HABODE IP LIMITED Second Defendant
Hearing: 9-11 September 2013
Counsel: P B Churchman QC and S C McIver for Plaintiffs
D D Vincent and A J Watt for Defendants
Judgment: 31 October 2013
RESERVED JUDGMENT OF MACKENZIE J
I direct that the delivery time of this judgment is
4.45 pm on the 31st day of October 2013.
Solicitors: Gault Mitchell, Wellington, for Plaintiffs
Thomas Dewar Sziranyi Letts, Lower Hutt, for Defendants
CURTIS v GIBSON [2013] NZHC 2884 [31 October 2013]
Introduction
[1] In a judgment delivered on 5 August 2011, the Court of Appeal entered judgment in favour of Mr Curtis and his company Curtis Holdings Limited on the issue of liability and remitted their claim to this Court for an accounting of profit in accordance with that judgment.1
The arrangements to market the Habode in Australia
[2] The joint venture which the Court of Appeal held to exist was a joint venture between Mr Curtis and Mr Gibson to explore and develop the business opportunities available for the sale and distribution of the Habode in Australia. The business structures established in Australia would be based on the model already established for the sale and distribution of the Habode in New Zealand. A corporate vehicle would be utilised in Australia to market and distribute the Habode in that country. Habode IP Limited would license the Australian joint venture vehicle along similar lines to the model already developed for the sale and distribution of the Habode in
New Zealand.2
[3] As the Court of Appeal described, the Australian distribution arrangements proceeded in association with a West Australian construction and property development company, referred to as Pindan.3 The corporate vehicle which was used, and which was licensed by Habode IP Limited, was International Housing Solutions Limited (IHSL).4 IHSL was the corporate vehicle for the marketing and distribution of not only the Habode, but also the Ihouz, which was not part of the joint venture.5
[4] The original shareholding of the 9,000 ordinary shares in IHSL was as follows:
(a) UGI1 Limited: 5,100 ordinary shares;
1 Curtis v Gibson [2011] NZCA 373.
2 At [108].
3 At [51]-[57].
4 At [106].
5 At [113](c).
(b) UGI2 Limited: 900 ordinary shares; (c) UGI3 Limited: 1,000 ordinary shares;
(d) Kiwisfly International Limited: 1,000 ordinary shares; (e) Habode Finance Pty Limited: 1,000 ordinary shares;
[5] Kiwisfly International Limited (KIL) was a company owned or controlled by Mr Gibson’s then brother in-law, Mr McMillan. The other four companies were owned or controlled by Mr Gibson or interests associated with him.
[6] The arrangements under which the Pindan interests obtained an interest were documented in a series of agreements dated 20 July 2007. The timing of various payments indicates that the arrangements had been at least partly agreed and implemented before that date.
[7] The trustees of the Ivy Mariner Trust (a Gibson entity, and the holder of all the shares in UGI3, which held 1,000 shares in IHSL) sold the Trust’s shareholding in UGI3 to Habode Nominees Pty Limited (HNPL), a company owned and controlled by Pindan. Mr Gibson’s evidence is that the full sum of USD 1 million was paid to the Ivy Mariner Trust. It converted to NZD 1,434,094. It was paid in two tranches of USD 500,000 each, in December 2006 and January 2007, into a United States currency bank account held by Global Mariner Limited, a Gibson entity. That account was used because the Ivy Mariner Trust did not have a US currency account.
[8] A shareholder’s agreement dated 20 July 2007 between IHSL and its shareholders governed the relationship of the shareholders to the company, and to each other. Under the shareholder’s agreement, Habode Investments Pty Limited, a company wholly owned and controlled by Pindan interests, agreed to subscribe for a further 1,000 ordinary shares in IHSL. Those shares had a subscription price of USD 2 million, payable by instalments between July and December 2007. That increased the total shares on issue in IHSL to 10,000.
[9] The shareholdings in IHSL after these arrangements, were:
(a) 7,000 shares owned by companies owned or controlled by Gibson interests (UGI1, UGI2, and HFL);
(b) 1,000 shares owned by a company controlled by Mr McMillan (KIL);
and
(c) 2,000 shares owned by companies controlled by Pindan interests
(UGI3 and Habode Finance Pty Limited).
[10] Certain intellectual property rights in the Habode (and the Ihouz) were owned by Mr Gibson and Habode IP Limited, a company controlled by him. The Court of Appeal has held that those rights were not part of the joint venture with Mr Curtis.6
As part of the 20 July 2007 arrangements, a licence agreement was entered into between Habode IP Limited and Mr Gibson as licensor and IHSL as licensee. IHSL was granted as from 1 July 2007 an exclusive licence to use the licensed intellectual property related to both the Habode and the Ihouz anywhere in the world for the purposes of promoting and selling portable buildings. IHSL had the ability to grant sub-licences. The licence fee was an annual fee of USD 240,000 plus USD 2,400 per Abode building and USD 1,200 per Ihouz building.
[11] IHSL also entered into an Australian distribution agreement with Habode (Australia) Pty Limited (HAPL). HAPL was wholly owned and controlled by Pindan interests. Under that agreement, IHSL appointed HAPL the sole and exclusive distributor of the Habode and Ihouz products in Australia. HAPL was to purchase Habode and Ihouz units from IHSL. It was required to purchase, or pay for, a minimum volume requirement. The purchase price payable by HAPL was fixed so as to provide a specified margin to IHSL over its manufacturing cost.
[12] IHSL also entered into two consultancy agreements. One was with U Group Holdings Limited, a company owned and controlled by Gibson interests, to obtain the consultancy services of Mr Gibson for an annual fee of NZD 280,000. The other
was with KIL to obtain the consultancy services of Mr McMillan, for an annual fee of NZD 225,000.
[13] As the Court of Appeal recorded, by July 2006 a distribution agreement had been entered into between the Gibson controlled Habode International Ltd (HIL) and the Pindan company HAPL.7 HIL had also entered into a distribution agreement with Habode Homes New Zealand Limited dated 3 August 2006 relating to distribution in New Zealand and the Pacific Islands. As part of the July 2007 arrangements IHSL was substituted for HIL in both of those agreements. By a Deed of Novation, HIL’s rights and obligations under the New Zealand/Pacific distribution agreement, were transferred to IHSL. For Australia, a letter from Habode IP Limited
and Mr Gibson to IHSL recorded the grant of the licence to IHSL and consent to the terms of the Australian distribution agreement between IHSL and HAPL. No Deed of Novation similar to that for the New Zealand distribution agreement was included in the documentation produced before me. The absence of a Deed of Novation for Australia might suggest that the distribution agreement which the Court of Appeal found was in place in July 2006 had not been formally documented. Whatever the position may be, it is clear that when the Pindan arrangements were put in place, IHSL was substituted for HIL in the Australian distribution arrangements described by the Court of Appeal.
[14] In 2008, there were further transfers of shares in IHSL, increasing the Pindan stake in IHSL. Mr Gibson said, in his evidence in chief at the trial before Simon France J to which he referred in his evidence before me, that in early 2008
Pindan decided that it wanted a greater share of IHSL because it was concerned at production issues and wanted more control. It proposed increasing its shareholding to 50 per cent by buying both Mr McMillan’s interest (the 1,000 IHSL shares held by KIL), and also 2,000 of the IHSL shares owned by Mr Gibson’s companies: 1,100 from UGI1 and 900 from UGI2. His evidence was that it was agreed that the purchase would proceed in two stages.
[15] The first stage was carried out in August 2008. Pindan interests purchased
900 IHSL shares from UGI2 and 100 IHSL shares IHSL from UGI1 for a total price
of USD 2 million. Pindan interests also purchased 1,000 IHSL shares from KIL for
NZD 500,000. That gave Pindan interests a total holding of 4,000 shares, or
40 per cent, in IHSL.
[16] There was evidence about the flow of funds in respect of the August 2008 purchase price of USD 2 million for the 900 shares held by UGI2 and the 100 shares held by UGI1. The Ivy Mariner Trust, which was the shareholder in both UGI1 and UGI2, received USD 841,236 (converting to NZD 1,201,422). The balance, of about USD 1.16 million, was not received in cash and there is no documentary evidence as to the payment of that money. Mr Gibson’s evidence, in cross-examination before me, is that at that stage Pindan had made shareholder advances to IHSL of about USD 2.4 million. Pindan was concerned to ensure that the shareholders’ advances were equalised. It appears therefore that the balance of the purchase price was not paid, but was credited as a shareholder advance by the Gibson interests to IHSL. The amount of that advance was apparently not paid by Pindan, but retained by Pindan as a partial repayment of its shareholder advance. Following those transactions, the shareholder advances by the Gibson interests and the Pindan interests, would have been approximately equal. The detail of these arrangements is not in evidence, but I infer that something of this description occurred.
[17] The details of the purchase by Pindan of the shares are also not before me. It appears that the purchase of those shares was part of an agreement with Mr McMillan whereby he was exited from the company, and the purchase price of NZD 500,000 was agreed in that context.
[18] As to stage two, Mr Gibson’s evidence is that the purchase by Pindan of a further 1,000 shares in IHSL from UG11, for a further USD 2 million, was scheduled for early 2009. No documentary evidence of that proposed purchase was produced before me. That proposed purchase did not take place. Instead, the arrangements between the Gibson interests and the Pindan interests were unwound in 2009. This was documented in a Settlement and Rearrangement Deed. The copy produced in evidence before me was undated and unsigned. Mr Gibson’s evidence is that it was signed on 3 June 2009.
[19] The Settlement and Rearrangement Deed recorded that Pindan interests held a total of 4,000 shares in the capital of IHSL. It recorded that Habode IP Limited and Mr Gibson, the licensors of the intellectual property rights, had given notice of termination of the licence agreement to IHSL. The Deed recorded that the parties had agreed to settle all disputes and to rearrange and replace the various contractual relationships between them, on the terms of the Deed. The main terms of the new arrangement were:
(a) Habode IP Limited and Mr Gibson, as owners of the intellectual property, agreed to grant to HAPL an exclusive licence to use the Habode and Ihouz intellectual property owned by the licensors to market, manufacture and distribute buildings for the Australian market.
(b)IHSL agreed to provide to HAPL plans and specifications for the Habode and Ihouz buildings, and related information about those products, for HAPL’s use for the purposes of its Australian licence rights as granted by Habode IP Limited and Mr Gibson.
(c) HAPL was to pay a licence fee to the licensor (Habode IP Limited and Mr Gibson) of AUD 3,000 for each Habode and AUD 1,500 for each Ihouz. No licence fees were to be payable in relation to buildings assembled up to 31 December 2014, unless the licence fees in that period exceeded AUD 1.5 million. In addition, a fee of USD 6,000 per six months was payable to Habode IP Limited for the use of aluminium extrusion dies.
(d)In consideration of the settlement, in particular the waiver of a number of claims which had been made by the Gibson interests, Pindan interests agreed to transfer all of the shares in IHSL to the Gibson interests for a total consideration of AUD 1, and the Pindan appointed director of IHSL resigned.
(e) Pindan interests agreed to write-off about USD 1.2 million in shareholder advances to IHSL and to pay to IHSL a further sum of AUD 1.5 million in two instalments: AUD 1 million immediately and AUD 500,000 12 months after the agreement.
The approach to the accounting for profits – general principles
[20] The general principles which apply to an accounting for profits have been quite recently enunciated by the Supreme Court in Chirnside v Fay.8 The basic principle is that the appropriate measure of redress is the fiduciary’s gain, whether or not that gain has been realised in monetary terms.9
[21] Elias CJ said:10
The breach of fiduciary duties “attracts legal consequences differing from those consequent upon the breach of other duties”. The “pre-eminent” remedies for breach of duties of loyalty are recission and profit-stripping through account. It is not necessary for a profit to have been realised; a monetary award can be ordered to reflect the profit obtained.
While compensatory damages are measured by what the plaintiff has lost, an account of profits is measured by what the defendant has gained. Whether the plaintiff has suffered loss is irrelevant, as Keech v Sandford and Boardman v Phipps illustrate. The liability of defaulting fiduciaries to account for all benefits arises from the requirements of equity that fiduciaries must not place themselves in positions where their duties conflict with their own interests and must not obtain unauthorised profits from their position.
…
[22] Tipping J (delivering the judgment of Blanchard J and himself) said:11
The key difference between the way in which the High Court approached the question of monetary relief and the method adopted by the Court of Appeal can be stated quite simply. It is the difference between damages based on a notional disgorgement of profits made, but not realised, on the one hand, and compensation for being deprived of the chance of participating in a profitable venture, on the other. …
The Court of Appeal gave no convincing explanation why it thought it necessary or appropriate to depart from the approach taken by the trial Judge. His was undoubtedly the conventional basis for awarding monetary relief in a case of the present kind. …
8 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433.
9 At [17].
10 At [16]-[17] (footnotes omitted).
11 At [95] and [99].
[23] The way in which an accounting for profit gained as a result of breach of fiduciary duty is to be undertaken is necessarily a case specific exercise. It is a cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts.12 The appropriate method of calculation of profits will depend upon the facts of the particular case. The term “profit” in this context may include both income gains and capital gains.
The approach to the accounting for profits in this case
[24] The findings which led the Court of Appeal to remit the case to this Court for an accounting for profits were summarised by that Court in these terms:13
In summary, there was sufficient evidence to establish the existence of a joint venture between Mr Curtis and Mr Gibson to explore and develop the business opportunities available for the sale and distribution of the Habode in Australia. The two men had common objectives and had taken sufficient steps to implement them prior to the end of their business relationship. It was intended that the two men would share any profits gained equally between them or their respective interests. It was contemplated that the business structures established in Australia would be based on the model already established for the sale and distribution of the Habode in New Zealand. It was intended that a corporate vehicle would be utilised in Australia to market and distribute the Habode in that country and that the ownership of the corporate vehicle would be owned equally by Mr Curtis and Mr Gibson or their respective interests. It was also intended that Habode IP would license the Australian joint venture vehicle along similar lines to the model already developed for the sale and distribution of the Habode in New Zealand.
The steps taken to implement the common objective included establishing the corporate vehicles in Australia (Habode Holdings Ltd; Habode (Australia) Pty Ltd; and Habode International Ltd); the steps taken by Mr Thompson in 2004 to further the common plan for international sales expansion; the arrangements between Habode Holdings and the Chinese manufacturers; the negotiations with Mr Muir in relation to distribution licences in Western Australia; the provision by Mr Curtis of substantial funding in late 2005 which benefited both Habode NZ and the joint venture; and the ongoing efforts by Mr Gibson to develop and bring the Habode units into production (which were similarly referable to the joint venture as well as to Habode NZ). Effectively, the development of the Habode for the New Zealand business was to be the springboard for the expansion into Australia. As matters turned out, that is exactly what happened soon after the end of the business relationship between the two men in March 2006.
The information gained with regard to the business opportunity represented by Mr Muir in Australia was gained during the currency of the joint venture
12 Warman International Limited v Dwyer (1995) 182 CLR 544 at 560.
and constituted confidential information belonging to the joint venture. As such, neither Mr Curtis nor Mr Gibson could exploit that information for their own gain and to the exclusion of the other. The joint venturers each owed fiduciary duties to the other. Mr Gibson breached that duty by exploiting the Muir business opportunity to the exclusion of Mr Curtis and without his agreement upon the termination of their business relationship in March 2006. In consequence, Mr Gibson or interests controlled by him gained substantial sums through the introduction of Pindan by Mr Muir and the acquisition by Pindan of its interest in the corporate vehicle or vehicles established in Australia for the sale and distribution of the Habode in that country.
[25] I heard evidence for the plaintiffs from Mr Curtis and from Mr Taylor, an independent accounting expert. Mr Gibson and Mr Frow, a former director of IHSL, gave evidence for the defendants. Reliance was placed on some evidence called at the original trial. A bundle of agreed documents was also produced for the hearing before me. That is the evidence on which I must determine the quantum of the accounting for profits which the Court of Appeal has directed.
[26] The first task is to determine the nature of the gain by Mr Gibson, and the mechanism by which that gain has been achieved, from his breach of duty in exploiting the business opportunity for the sale and distribution of the Habode in Australia.14
[27] As the description of the arrangements in the previous section of this judgment shows, that exploitation of the business opportunity had two elements:
(a) the sale to Pindan of an interest in IHSL, the corporate vehicle established to license the sale and distribution of the Habode in Australia; and
(b)the participation, as a shareholder in IHSL, in the business of that company.
[28] The positions taken by the parties on the approach to calculating profits reflects those two broad elements.
[29] The plaintiff focuses on the first element, and contends in essence for an accounting for profits gained on the sale of an interest to Pindan. Mr Churchman QC submits that Mr Gibson must account for the amount which he received for the disposal of a share in what the Court of Appeal has held was the subject of the joint venture. He submits that the best evidence of the value of the business opportunity is the evidence of what Pindan was prepared to pay for a share in IHSL, the company formed for the purpose of exploiting the business opportunity. Mr Taylor in his evidence identified three payments as relevant. First, the USD 1 million paid for the initial purchase of a 20 per cent interest (which I have described at [7]). Second, the payment of USD 2 million to purchase a further 10 per cent interest (which I have described at [15]-[16]). Third, royalty payments of USD 6,000 for each six months payable under the Settlement and Rearrangement Deed entered into in 2009 (as described at [19](c)).
[30] The defendant focuses on the second element, and contends in essence for an accounting based on the fortunes of the business of IHSL. Mr Gibson asserts that aside from a small amount which came to him personally, all of the Pindan money has gone into the Habode product. He contends that Mr Curtis was fortunate to get out of the Habode project when he did and that he would have lost more money had he invested in the distribution of Habode in Australia. Mr Vincent submits that the money received by the Gibson interests from the sales of the shares in IHSL were payments for a right to share in the gains that IHSL may make from the intellectual property that had been licensed to it by Habode IP Limited and that those payments are excluded from the analysis under [113](b) of the judgment of the Court of Appeal. Alternatively, the defendant submits that the share sales were for the purpose of introducing funds into IHSL, that all of the share proceeds were reinvested in the project, and that the losses attributable to the Habode project must be off-set against the funds received.
[31] I consider that the starting point, in assessing the profit to be accounted for, is to determine the amount which Mr Gibson or his interests derived from the introduction of Pindan as a shareholder into IHSL. That involves a consideration principally of the first of the two elements discussed at [27]. There are a number of reasons for adopting that starting point.
[32] First, the Court of Appeal has held that the primary focus of the accounting will be on the gain attributable to the breach of fiduciary duty by Mr Gibson or his interests made as a consequence of his dealings with Pindan in establishing the corporate vehicle or vehicles in Australia for the sale and distribution of the Habode in that country.15 The corporate vehicle which was established for the purpose described by the Court of Appeal was IHSL.
[33] Second, applying the general principle, described at [23], that the remedy must be fashioned to fit the nature of the case, I consider that it is appropriate to adopt that starting point, rather than to consider the business fortunes of IHSL as the principal means of determining the gains. Mr Gibson did not exploit the joint venture business opportunity alone. He sold an interest in that opportunity to Pindan. The gain which he derived from the sale of that interest is a profit from the joint venture opportunity, for which he must account.
[34] Third, there is insufficient evidence to undertake any assessment of the fortunes of IHSL in the relevant period. The Pindan arrangements were formalised from 1 July 2007. They ended in mid 2009. The only accounting information for IHSL for that period that was produced in evidence before me was a set of financial statements ended 31 December 2008 and an income statement for the year ending
31 December 2009.
[35] The 2008 accounts were prepared by a firm of certified public accountants in Hong Kong. They were apparently audited by the same firm. They were not prepared until May 2010, well after Pindan had ceased to have an interest in the company. They show a gross loss of HKD 2 million and an overall loss of HKD 19 million for the year. The gross loss is made up of a turnover of HKD 29 million, and a cost of sales of HKD 31 million. There is no detail to support either of those figures. They are simply stated as one line items in the financial statements. The balance of the overall loss is substantially made up of what are described as “administrative expenses” of HKD 17 million. That too is a single line item with no explanation. I do not have sufficient confidence in those accounts to base any factual findings upon the information contained in them.
[36] The income statement for the 12 months ended 31 December 2009 contains more information as to sales and cost of sales than the 2008 annual statements. That statement is however expressed to be for management purposes only. It is not verified in any way. Again, I cannot make any factual findings upon those accounts. Mr Frow said in evidence that there were monthly management accounts, which all directors would have received. None were produced before me. The paucity of financial information about IHSL is such that I can make no factual findings about its finances.
[37] Fourth, the way in which the Pindan arrangements were structured makes any attempt to calculate the trading result of business which should be attributable to the joint venture extremely complex. The factual situation is different from that in Chirnside v Fay.16 There, one of the joint venture parties developed for himself the joint venture opportunity. That did not happen here. Mr Gibson did not himself explore and develop the business opportunity which was an asset of the joint
venture. He did so in conjunction with Pindan. Therefore, it is not simply a matter of assessing the trading performance of IHSL and attributing that to the joint venture. There were arrangements with Pindan, at two levels. Pindan purchased an interest in IHSL. It also carried on, alone, the distribution under a sub-licence from IHSL. That structure renders very difficult any calculation of an operating profit (or loss) which should be attributable to what the Court of Appeal has held to be the joint venture opportunity.
[38] Fifth, the limited evidence which is available on which to make an estimation of the trading fortunes of IHSL suggests that it made no profits. The only available accounts are unreliable, as I have said. The best evidence on which to assess IHSL’s performance is the actions of Pindan. Having made a substantial investment in the company in 2007 and 2008, Pindan relinquished that investment, at a substantial cost, in 2009. That strongly indicates that it regarded its investment as unsatisfactory, and that it was unprofitable.
[39] If the conduct of the joint venture opportunity led to a loss, then that loss does not form part of the accounting for profits which is required. Breach of a
fiduciary obligation leads to a liability to account for profits made from the breach. If there is no evidence that profits have been made, there is no gain to account for. The fiduciary is not able to require the wronged party to share in losses.
[40] I must also consider whether any deduction from the gain which the Gibson interests derived from the introduction of Pindan into IHSL is required, to reflect matters for which Mr Gibson should be compensated, in assessing the profits to be attributed to the joint venture opportunity.
[41] In determining the value which Mr Gibson derived from the sale of an interest in the joint venture opportunity to Pindan, an adjustment is required to reflect that the venture in which Pindan purchased an interest was not confined to the joint venture opportunity described by the Court of Appeal. It included other business opportunities. The activities of IHSL went beyond the scope of the joint venture, in two broad respects. First, it had distribution rights worldwide, not just for Australia. Second, it had rights to the Ihouz product as well as to the Habode product.
[42] To address these aspects, I approach the task of calculating the profit gained by Mr Gibson from the sale of an interest in the joint venture opportunity in three steps:
(a) I assess the gross gain derived by Mr Gibson or his interests from the sale to Pindan of the shares in IHSL, the company which exploited the joint venture business opportunity.
(b)I consider whether any deduction from that gross gain is required to reflect money invested, or time and effort expended, in the conduct of the business of IHSL, to determine the net gain from the sale to Pindan of the interest in IHSL for which Mr Gibson should be held accountable.
(c) Finally, I apportion that net gain to exclude that part of the gain attributable to the wider business activities of IHSL which did not form part of the joint venture opportunity.
[43] These assessments must necessarily be made on a very broad and general basis. The evidence is not sufficient to achieve any level of accounting precision. When I use figures and percentages, I do so with a considerable degree of rounding. I consider that is appropriate, to avoid clothing the calculations with an apparent degree of precision which they do not have.
(a) Step one
[44] When Pindan was introduced as a shareholder, IHSL held, under a licence from Habode IP Limited and Mr Gibson, the right to market and distribute the Habode product in Australia. That was the essence of the joint venture which the Court of Appeal has held to exist between Mr Curtis and Mr Gibson. When Pindan bought into IHSL, IHSL was owned eight-ninths by Mr Gibson’s interests and one-ninth by Mr McMillan’s interests. Pindan paid USD 1 million for a one ninth interest (1,000 of a total of 9,000 shares). At first sight, it might be said that the payment of USD 1 million for a one ninth share valued the company at USD 9 million, and Mr Gibson’s share at USD 8 million.
[45] The next part of the arrangement was that Pindan subscribed for an additional
1,000 shares in IHSL, for a subscription price of USD 2 million. Again, at first sight, the subscription of D 2 million for the purchase of what was, after the introduction of that capital, a 10 per cent shareholding might suggest a value of USD 20 million for the company.
[46] I consider that it would be unrealistic to attribute a value of USD 20 million or USD 9 million to IHSL at the time Pindan purchased an interest, based upon the subscription price paid for the new shares, or the purchase price paid for the shares acquired from Mr Gibson’s interests. Those transactions were part of a wider arrangement. The prices at which these transactions took place should not be used to fix a notional value for IHSL which should constitute a component of the accounting for profit. Counsel for the plaintiffs did not contend for such an approach.
[47] The focus at this first stage of the accounting for profit exercise must be the realised money gains derived by Mr Gibson or his interests from the introduction of the Pindan interests under the July 2007 agreements. The USD 1 million purchase price of the shares is a realised monetary gain. As I have described at [7], Mr Gibson, through his interest in the Ivy Mariner Trust, derived a gain of NZD 1,434,094 from the sale of 1,000 shares in IHSL to Pindan interests in December 2006 and January 2007. The USD 2 million subscribed by Pindan is not a gain derived by Mr Gibson which should be brought into the reckoning in the accounting for profits. The capital subscribed benefitted IHSL, but it did not directly benefit, or accrue to, Mr Gibson’s interests.
[48] I consider that the total gain (before consideration of any deductions) which is to be attributed to Mr Gibson from the initial arrangements in July 2007 is the USD 1 million (NZD 1.4 million) received in December 2006 and January 2007 for the sale of the 1,000 shares in IHSL (made indirectly through the sale of the shares in UGI3).
[49] The next aspect to be considered is the further sale of 1,000 shares for USD 2 million in August 2008. I have described this at [16]. That needs to be considered in two parts: the USD 840,000 (NZD 1.2 million) paid to the Ivy Mariner Trust; and the USD 1.16 million credited as a shareholder’s advance to the Gibson interests in IHSL.
[50] The first part, the amount paid to the Ivy Mariner Trust, is a realised monetary gain. Mr Gibson’s evidence is that the balance of the purchase price, about USD 1.16 million was credited in IHSL as a shareholder advance by the Gibson interests, as noted above at [16]. Mr Pringle, a Pindan director, gave evidence at the earlier trial. His evidence confirmed that most of this purchase money was injected into the company. I find that this was the case.
[51] I hold that the USD 1.16 million credited as a shareholder advance is not to be included in the accounting for profit. I draw the inference that Pindan would not have agreed to purchase the shares unless that amount had been used to equalise the shareholders’ advance accounts. That means Mr Gibson could not have insisted on
payment in cash, with no condition as to its reinvestment in IHSL. The sum credited as a shareholder advance by Gibson interests therefore does not form part of a gain to be included in the accounting for profit.
[52] The next aspect is the 2009 settlement. I have briefly described, at [19], how Mr Gibson and his interests reacquired all of the shares previously held by Pindan interests, so that IHSL became wholly owned by Mr Gibson. I need to consider whether the reacquisition of the Pindan shares resulted in a gain which should be taken into account in the accounting for profit exercise.
[53] The terms of the settlement suggest that Pindan did not regard the IHSL shares as having any value at that time. Pindan retained distribution rights to the Habode and Ihouz buildings. It secured a licence to use the intellectual property owned by Habode IP Limited and Mr Gibson. Those intellectual property rights did not form part of the joint venture. The licence fees payable by Pindan, and the fees for the use of the dies, described at [19](c), do not fall to be included in the accounting for profit exercise.
[54] Pindan agreed to write-off about USD 1.2 million shareholders’ advances to IHSL and to pay IHSL a further sum of AUD 1.5 million. Those are on the face of it benefits to IHSL, which might be expected to contribute to a residual value for the shares in IHSL. However, there is no evidence to establish that the write-off and payment produced a benefit to the shareholders by creating a positive value for IHSL which should be attributed to Mr Gibson as sole shareholder as part of the accounting for profit exercise. The payment of AUD 1.5 million was part of an overall settlement between the Pindan interests and the Gibson interests which included settlement of claims or disputes between the parties. In those circumstances, and in the absence of any evidence of a material benefit to the Gibson interests as a result of that settlement, it would not be appropriate to attribute to the Gibson interests any residual value in the shares of IHSL as a profit derived from the joint venture. Mr Taylor did not in his evidence attribute a value to the reacquisition of the IHSL shares previously owned by Pindan.
[55] For these reasons, at step one of the calculations referred to at [42], I assess the gross gains derived by Mr Gibson or his interests from the sale to Pindan of the shares in IHSL as NZD 1.4 million (referred to at [48]) and NZD 1.2 million (referred to at [50]), a total of NZD 2.6 million.
(b) Step two
[56] There are two matters to consider in determining whether any deduction from the gross gain assessed at step one is required to reflect money invested, or time and effort expended, in the conduct of the business of IHSL. The first is the effect of reinvestment of the money received at step one in the business of IHSL and related businesses. The second is whether there should be some allowance for the efforts which Mr Gibson put into IHSL and the Habode product during the period of Pindan’s involvement.
[57] Mr Gibson contended that substantially all the money he or his interests received was reinvested in IHSL or the venture, and has been lost. He produced schedules showing a quite complex distribution of funds from the Ivy Mariner Trust to other Gibson entities. I need not discuss the detail of that distribution. There is insufficient evidence on which to make factual findings about Mr Gibson’s assertion to the effect that the funds have been lost in the business venture. But, even if that were so, it would not provide a basis for deduction from the gross gains calculated at step one. The liability of a fiduciary to account for profits does not include an ability to require the party to whom the fiduciary obligation is owed to contribute to losses, in a case such as this. The money which I have identified at step one was received in cash by Mr Gibson or interests under his control and must therefore be brought into the calculation. They were gains derived from the sale of the interest in the joint venture opportunity. Even if they were later lost in carrying on the joint venture opportunity, that is not a basis for deduction.
[58] I have, at step one, excluded those parts of the consideration payable to Gibson interests for the purchase of IHSL shares which were compulsorily reinvested in IHSL so that they were never received in cash by Gibson interests. That exclusion is arguably favourable to Mr Gibson. However, I regard it as
appropriate in the circumstances of this case to exclude from the gains money reinvested in the business which were never at the disposal of Mr Gibson. By contrast, the funds over which Mr Gibson had control, through having received them in cash, are to be treated as a gain at the time they were received, for which Mr Gibson is accountable.
[59] In some cases, such as Chirnside v Fay,17 it is appropriate to make an allowance for skill and effort on the part of the fiduciary in earning the profits for which the fiduciary is bound to account. I am satisfied that this is not a case in which such an allowance is required. The time and effort expended by Mr Gibson in the affairs of IHSL for which recompense is sought related to the conduct of the business after the sale to Pindan. It has therefore not contributed to the gain to be accounted for, which is the gain derived from that sale. Because there is no profit for which Mr Gibson is accountable derived from IHSL’s business, there can be no allowance for time and effort expended in IHSL’s business. Further, Mr Gibson was entitled to be remunerated for his efforts, under the consultancy agreement to which I have referred at [12]. Accordingly I make no deduction at step two.
(c) Step three
[60] It is necessary to apportion the total gain of NZD 2.6 million obtained from the sales of the shares in IHSL to Pindan interests, to exclude that part of the gain attributable to the wider business activities of IHSL which did not form part of the joint venture opportunity. Two aspects require consideration. The first is that the joint venture opportunity extended only to the Australian distribution rights, whereas IHSL held a licence from Habode IP Limited and Mr Gibson to use the intellectual property relating to both buildings not just in Australia, but anywhere in the world. The second is that the joint venture extended only to the Habode product, whereas IHSL’s business included both the Habode and the Ihouz products.
[61] I do not consider that any apportionment is required to reflect the fact that the joint venture extended only to rights to the Habode product in Australia rather than
worldwide. There is no evidence on which I could attribute any value placed by
17 Chirnside v Fay, above n 8.
Pindan on any rights beyond the Australian rights. IHSL granted only the Australian distribution rights to HAPL, the Pindan company with distributor rights in Australia. There is no evidence that Pindan attached any value to the ability of IHSL to grant distribution rights to distributors in other parts of the world. I therefore consider that the purchase price paid by Pindan for the shares in IHSL reflected the value of the Australian distribution rights only.
[62] An apportionment is required, to reflect the value of the rights to distribute the Ihouz product in Australia. I find that the inclusion of the Ihouz product in IHSL did add value which needs to be recognised in the accounting for profit. There is a paucity of evidence upon which to make the apportionment. Mr Gibson in his brief said “I have always seen the Ihouz/Habode split as being 80/20 in favour of Ihouz, based on volumes of product manufactured”. Mr Pringle of Pindan was asked about this issue in his evidence at trial before Simon France J, which was referred to before me. He was asked how many units had been purchased from IHSL and said that in total Pindan purchased about 100 units, about 60 Ihouzes and 35 to 40 Habodes. He was asked “and what proportion would be the larger unit Habode and what proportion would be Ihouz?”. He answered “I think it’s about 40 per cent Habode,
60 per cent Ihouz”. That evidence was put to Mr Gibson in cross-examination and he asserted that “Mr Pringle got it wrong”. I prefer Mr Pringle’s evidence.
[63] The management accounts for the year ending 31 December 2009, to which I have referred earlier, gave revenues for sales of the Habode in Australia of HKD 2.7 million and for sales of Ihouz in New Zealand and Australia of HKD 600,000. Those figures were put to Mr Gibson. He said that Pindan made no orders for buildings in 2009, they were all made in 2008 and the payments listed were residual payments. Mr Gibson referred to the schedule to the 2009 Settlement and Rearrangement Deed with Pindan, which listed the Habode and Ihouz units under manufacture at that date. Those figures showed 12 Ihouz units, and 17
Habode units.
[64] Another figure which is of some assistance in attempting the apportionment is the licence fee payable for respective units. Under the Settlement and
Rearrangement Deed, the licence fee payable for a Habode was double that payable for an Ihouz.
[65] There is no other evidence which I find to be of assistance in making the apportionment. The evidence is insufficient to enable me to do more than make a very rough assessment of the extent to which the payment by Pindan for the shares in IHSL reflected the value of the business opportunity represented by the Habode and the Ihouz respectively. Doing the best I can, I accept Mr Pringle’s evidence that the split was about 60 per cent Ihouz, 40 per cent Habode, by number of units. As to their respective values, I adopt Mr Gibson’s acceptance that an Ihouz was about half the value of a Habode. The licence fees suggest that the profitability to IHSL of the
units would be in about that same ratio.18 The figures of 40 per cent for Habode by
volume, at twice the value of the Ihouz, gives approximate percentages (rounded) of
60 per cent by value to Habode and 40 per cent by value to Ihouz. I adopt those figures in apportioning the gain.
[66] Using that percentage, 60 per cent of the gains derived from the sale of the shares in IHSL to Pindan is to be attributed to the joint venture. The total amount to be apportioned is the sum of NZD 2.6 million, referred to at [60]. Sixty per cent of that figure is just over NZD 1.5 million. Allowing for rounding, and to reflect the inherently broad basis of the calculation, I adopt a figure of NZD 1.5 million as the gain to be accounted for to the joint venture from the sale of the joint venture opportunity. Of that, Mr Curtis and Mr Gibson are each entitled to one half, or NZD 750,000.
[67] The plaintiffs claim interest. I consider that it is appropriate to award interest from the date on which the sale proceeds were received by Mr Gibson’s interests. The full amount had been received by August 2008. I consider it appropriate to award interest from 1 September 2008.
Result
[68] There will be judgment for the plaintiffs in the sum of $750,000 (NZD).
18 The licence fee payable for the Ihouz is half that for the Habode: see [19](c).
[69] That sum is to bear interest at the prescribed rate from 1 September 2008.
[70] Costs are reserved. Counsel agreed that it would be appropriate for me to fix costs for all of the proceedings in this Court. Counsel may submit memoranda if they are unable to agree on costs.
“A D MacKenzie J”
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