Gillette v Green
[2019] NZHC 946
•17 May 2019
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2017-442-042
[2019] NZHC 946
BETWEEN NATHAN DANIEL GILLETTE
Plaintiff
AND
THOMAS PATTON GREEN
Defendant
ROOFPOWER INSTALLATIONS LIMITED
Second Defendant
Hearing: 8–10 April 2019 Appearances:
Plaintiff in person
S S Zindel and S M Day for defendant
Judgment:
17 May 2019
JUDGMENT OF COOKE J
Table of Contents
First claims: Misrepresentations inducing contract/breach of Fair Trading Act[16] Second claim: Misleading or deceptive conduct in relation to employment[30] Third claim: Minority oppression under s 174 of the Companies Act 1993[38] Relevant factors[40]
Sale of the business[50]
Mr Green’s explanations[55]
Conclusion[63]
Remedy[64]
Costs[71]
Review of Associate Judge’s costs order[75]
Conclusion[79]
GILLETTE v GREEN [2019] NZHC 946 [17 May 2019]
[1] The plaintiff, Mr Nathan Gillette, and the first defendant, Mr Thomas Green, are both originally from the United States. Mr Green is now a New Zealand citizen, and Mr Gillette has been in New Zealand with his family since 2016. They both live in Nelson.
[2] Mr Green owned and operated the second defendant, then called SunPower Ltd (SunPower) which sold and installed domestic solar power systems. SunPower was formed, and the business established by Mr Green in 2014.
[3] In December 2015 Mr Gillette was travelling through New Zealand and saw an advertisement for a position as a sales manager at SunPower. Mr Gillette then made contact with Mr Green. Following detailed negotiations in December, the parties entered into two agreements under which Mr Gillette would join Mr Green in business.
[4] The first was a Shareholders Agreement between Mr Gillette and Mr Green dated 18 January 2016. The second was an Individual Employment Agreement between Mr Gillette and SunPower dated 21 January 2016. Under the Shareholders Agreement Mr Gillette obtained the rights to acquire up to 49 per cent of the shares of SunPower for a total of $98,000. The acquisition of the shares would take place in tranches between the execution of the agreement and 60 days following the establishment of a sales department for SunPower. There is no dispute that this time period was accelerated, with Mr Gillette paying Mr Green $98,000 for 49 per cent of the shares in SunPower by February 2016.
[5] The Employment Agreement had a 90-day trial period, and involved an annual salary to Mr Gillette of $60,000 with prospective bonuses if certain sales targets were met. The Employment Agreement assisted Mr Gillette to obtain a work visa in New Zealand, which in turn would assist him becoming a New Zealand resident. Mr Green/SunPower assisted in the process of obtaining such a visa. By late February 2016 Mr Gillette and his wife and three children had moved to Nelson from Singapore.
[6] It did not take long before the relationship between Mr Gillette and Mr Green started to deteriorate, however. By the end of March, Mr Green had advised
Mr Gillette that SunPower did not have sufficient money to pay his salary, and no such payments were made to him thereafter. Arguments between them developed during the course of the year. By July 2016 Mr Gillette ceased working for SunPower. Ultimately each took legal advice, but the attempts between them to resolve their differences were unsuccessful.
[7] Mr Gillette then brought proceedings in the Employment Relations Authority (the ERA). Following an investigation meeting by the ERA in December 2016 the Authority released a determination on 4 January 2017 finding that Mr Gillette had wrongly been deprived of his salary, and that he had been unjustifiably dismissed in July 2016. The Authority awarded Mr Gillette $26,043.96 for arrears of salary between 22 February 2016 and 28 July 2016 together with a penalty of $10,000 and various other costs. That judgment was against SunPower.
[8] In the meantime, on 18 August 2016 Mr Green incorporated a new company, Sunpower Solar Ltd (Sunpower Solar). Sunpower Solar then acquired the assets of SunPower on or about 6 September. The business formerly operated by SunPower was then undertaken by Sunpower Solar. Mr Gillette was not aware of, and did not participate in these transactions.
[9] Mr Green then took steps to put the business on the market for sale, and in or about April 2017 the business was sold to BSC Shipping for $120,000. By agreement dated 25 May 2017 Mr Green also entered an employment agreement with BSC Solar (New Zealand) Ltd BBA under which he was to be paid a salary of $80,000 together with potential bonuses. Again, Mr Gillette had no involvement or knowledge of any of these transactions.
[10] Mr Gillette took further enforcement action in relation to the ERA determination in his favour, however. SunPower had not paid the judgment sum awarded against it. By determination dated 15 November 2017 the ERA ordered that Mr Green was personally liable for the amount of $20,670.20 for aiding and abetting the breach of the employment contract by SunPower. On 12 February 2018 it also awarded costs against Mr Green of $2,565. Mr Green duly paid those amounts.
[11] These proceedings were first commenced in the District Court in April 2017, but were then transferred to the High Court. Mr Gillette was initially represented by counsel, but presented the case at trial in person. Mr Green is represented on legal aid. Various procedural steps have been taken. Mr Gillette obtained a charging order on 19 February 2018 in relation to Mr Green’s interest in a property that he owned with his wife. Mr Gillette then made an application for a freezing order which was declined. By judgment dated 14 March 2018 the Court discharged the charging order, but required Mr Green to pay into Court an amount for an order for costs that had earlier been made in the proceeding. On 11 April the Court ordered costs in Mr Green’s favour in relation to the discharge of the charging order. On 18 May the Court declined to make a further costs award in Mr Green’s favour in relation to Mr Gillette’s unsuccessful application for a freezing order. This was partly because Mr Gillette’s application was not entirely groundless, but also because it was more appropriate for the case to proceed to a hearing. Then by judgment dated 2 August 2018 the Court declined to order Mr Gillette to provide security for costs.
[12] Mr Gillette then made an application to have the costs judgment of 11 April set aside. That has been timetabled to be dealt with at this trial.
[13] On 28 November 2018 the Court dealt with a further application by the defendants to stay the proceedings because of the Mr Gillette’s failure to meet timetable orders. The defendants also sought that the money that had been paid into Court in relation to the earlier costs award be paid out. Both of those applications were declined.
[14] These proceedings have now come on for trial before me. Apart from the issue concerning the 11 April costs award, Mr Gillette advances three claims, namely:
(a)that he was induced to enter the Shareholder Agreement as a consequence of misrepresentations which are actionable under the Contract and Commercial Law Act 2017 (the CC Act) (fourth cause of action) or the Fair Trading Act 1986 (the FT Act) (third cause of action);
(b)misleading or deceptive conduct under the FT Act in relation to the original entry of the Employment Agreement (second cause of action); and
(c)that Mr Green had engaged in oppression of Mr Gillette as a minority shareholder in the manner contemplated by s 174 of the Companies Act 1993 (first cause of action).
[15] I will deal with the facts in greater detail as they are relevant to the particular claims, and will address each of the main claims in turn.
First claims: Misrepresentations inducing contract and/or breach of Fair Trading Act
[16] Mr Gillette first claims that he was induced to enter the initial Shareholders Agreement by misrepresentations made by Mr Green. These misrepresentations, he says, are of the kind covered by Subpart three of Part two of the CC Act. This is the fourth cause of action. He relies on the same matters to establish misleading or deceptive conduct in trade in breach of s 9 of the FT Act, permitting a remedy under s 43. This is the third cause of action.
[17] A number of allegedly false representations are set out in Mr Gillette’s statement of claim. All relate, in some way or another, to the financial performance of SunPower. Some of them can fairly be described as statements of opinion — such as that SunPower “was the best solar company around” and that given that only one per cent of New Zealand was using solar power “the market was wide open with potential”. Misrepresentations can arise from such statements of opinion because they presume, or imply, matters of fact.1 But in addressing the misrepresentation claims, I concentrate on certain core allegations that Mr Gillette is making, namely that Mr Green represented:
(a)That SunPower had a turnover of $430,000 over the previous year.
1 See Karum Group LLC v Fisher & Paykel Financial Services [2014] NZCA 389, [2014] 3 NZLR 421 at [29]; Narayan v Arranmore Developments Ltd [2011] NZCA 681, (2011) 13 NZCPR 123 at [28](b); and Buxton v Birches Time Share Resort Ltd [1991] 2 NZLR 641 (CA).at 646.
(b)That Mr Green had paid himself $90,000 in income, and there was
$35,000 profit on top of that in the previous year.
(c)That there was more than enough potential in the company to support an annual income for both Mr Gillette and Mr Green.
[18] There are other pleaded representations that can form a basis for a misrepresentation claim under the FT Act, but addressing the above matters is sufficient to address the essence of Mr Gillette’s claims.
[19] There is a possible issue as to whether Mr Green was “in trade” for the purposes of the FT Act claim, although it was not the focus of evidence, or argument. Mr Green did not plead that he was not in trade, although there is no clear allegation in Mr Gillette’s statement of claim that he was. Whilst Mr Zindel for the defendants referred to this issue, he did not ultimately rely on it.
[20] Under the CC Act, if the contract itself makes provision for the matters provided for in the Act, the Act applies subject to the contractual provisions (s 34). So if the parties in their contract have dealt with pre-contractual representations, and the consequence of any representations that are false, the contractual provisions will be applied by the Court. In addition, under s 50, a provision purporting to prevent a Court from enquiring into whether misrepresentations were made or relied upon will not be given effect unless the Court considers it is fair and reasonable the provision should be conclusive. There provisions reflect the importance the CC Act places on the contractual bargain the parties have reached. The FT Act contains a general rule prohibiting contracting out,2 but provides a limited exception for parties in trade under s 5D.
[21] In the present case the parties recorded their agreement in reasonably full terms. Mr Gillette had a solicitor acting for him on the transaction, and his wife was a lawyer practicing in Singapore, and she assisted him. Mr Gillette’s solicitor took responsibility for preparing the original draft of the Agreement. It contains terms that are directed to the topic of representations. In particular:
2 Fair Trading Act 1986, s 5C.
(a)There is a particular term recording that Mr Green warranted that the company had no debts and liabilities save for what had been disclosed to Mr Gillette at their negotiation meeting on 21 December 2015 (clause 3.2).
(b)Both parties acknowledged and agreed that the company was the sole owner of its intellectual property, and would not claim personal ownership (clause 16).
(c)There was an entire agreement clause in the following terms:
19.3 This Agreement constitutes the full agreement between the Parties and supersedes all prior negotiations, proposals and agreements whether oral or written with respect to the subject matter of this Agreement.
[22] Mr Green did not plead that the clauses of the Agreement engage either ss 34 or 50 of the CC Act, or s 5D of the FT Act. Mr Zindel did, however, refer to the entire Agreement clause, and the fact that Mr Gillette had access to legal advice, in support of his argument that the misrepresentation allegations should be rejected. The entire Agreement clause by itself does not seem to me to meet the requirements of either s 34 or s 50 of the CC Act, or s 5D of the FT Act.3 But I agree with Mr Zindel that the terms of the Agreement, and the circumstances of its entry, are potentially relevant to both causes of action.
[23] There is a difficulty for Mr Gillette in advancing his claims. In essence he is complaining that Mr Green misrepresented the financial performance of the company. But there are no warranties in the Shareholders Agreement about the financial position of the company other than the warranty that Mr Green had revealed all of the debts. The parties agreed the Shareholders Agreement was their entire agreement. There is no dispute that the parties had a detailed negotiation on 21 December 2015. A copy of a print out of the whiteboard they used during those discussions was produced in evidence, and both parties gave oral evidence about the negotiation. In evidence Mr Gillette explained that he had not been provided with any accounts for the
3 Compare the clause in PAE (New Zealand) Ltd v Brosnahan (2009) 12 TCLR 626 (CA).
company, or other written documents of that kind. He explained that he had been shown some financial data displayed on a computer screen by Mr Green. There is no clarity as to what exactly that information was. Mr Gillette was not able to produce, or identify the information in question. Under cross examination from Mr Zindel, Mr Gillette said he wasn’t sure how long he had seen the documents on the screen, but said it was “maybe a few minutes”.
[24] The absence of anything in writing, either in the terms of the contract, or in the form of an actual written document provided by Mr Green, makes the forensic task much more difficult for Mr Gillette. There is much greater capacity for misunderstanding or confusion when the allegations relate to oral representations during such a negotiation. Mr Gillette could have insisted on something clearer in writing, but he did not do so.
[25] Mr Gillette first contends that Mr Green misrepresented that the company had achieved an annual turnover of $430,000. The annual accounts to 31 March 2016 later signed off by Crowe Horwath demonstrate that the company generated sales of
$244,066 to 31 March 2015, and then generated a further $255,984 in sales to 31 March 2016. As at December 2015 the total sales generated by the company since commencing trade may well have been in the order of $430,000. That figure could easily have been displayed on a computer screen. That would not have been an annual figure, but would have represented what revenue the company had earned since it started business in 2014. There is potential for confusion on whether turnover figures Mr Green referred to were annual amounts or not.
[26] Similarly Mr Gillette contends that Mr Green represented that he had taken income of $90,000 from the company, and that there was a $35,000 profit on top of that amount. The accounts to 31 March 2015 demonstrate that Mr Green took $94,480 in drawings from the company, and it had made a net operating surplus for that period of $30,294. The $94,480 was only shareholder drawings recorded as a shareholder’s advance (ie it was money owed by Mr Green to the company). The $30,294 was the profit only if Mr Green was paid nothing for his work. Scrutiny of these figures demonstrates that the financial performance of SunPower was only modestly successful. But there was considerable prospect for misunderstanding. Mr Green
could easily have said that he drew $90,000 from the company and also took the
$30,000 profit. Both statements would have been accurate as far as they go. Much greater scrutiny would be required to understand what this really meant in terms of the company’s financial success. This is a further illustration of how confusion could arise without clear obligations, and clear information.
[27] In those circumstances I do not uphold Mr Gillette’s claims. I am not persuaded that there were misrepresentations or misleading conduct of the kind alleged by Mr Gillette. I accept that Mr Gillette came out of the negotiations with the understanding of the financial position of SunPower he refers to, but I consider this likely arose from a reasonably superficial analysis of its financial performance, and from his misunderstanding the position. I am not prepared to find that Mr Green made misrepresentations in the absence of clearer evidence. The fact that the figures Mr Gillette alleges correspond to actual numbers in SunPower’s accounting material suggest to me that Mr Green was making accurate statements that were misunderstood by Mr Gillette. I can see there is the prospect of exaggeration by Mr Green. But in the absence of actually being provided with accounting material and more careful assessment, Mr Gillette must be held to bear the risk arising from failing to seek hard data.
[28] The other statements by Mr Green — that there was capacity to allow both of them to draw an income from the business — was based on how SunPower could perform with both of them working for it, rather than just Mr Green. There is no misrepresentation involved simply because Mr Green was optimistic.
[29]Accordingly I dismiss these two causes of action.
Second claim: Misleading or deceptive conduct in relation to employment
[30] Mr Gillette’s second main head of claim involves alleged breach of s 12 of the FT Act on the basis that Mr Green engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, “as to the availability, nature, terms or conditions, or any other matter relating to that employment”. Again a number of particulars are identified in the statement of claim, but the key allegation is contained in the following paragraph:
21 The first defendant misled or deceived the plaintiff by inducing the plaintiff to enter the employment agreement on the basis that would assist with an application for residency in New Zealand but while intending:
a. That the plaintiff would work in excess of 40 hours per week without additional remuneration.
b. That no salary or bonus would be paid to the plaintiff.
c. That the plaintiff would not be reimbursed for employment related expenses.
d. To terminate the employment of the plaintiff without due notice or salary in lieu of notice.
[31] There is an initial jurisdiction issue. It is not referred to in Mr Green’s statement of defence, but Mr Zindel contends that pursuant to s 161 of the Employment Relations Act 2000 the Court cannot make further inquiry beyond that which has already been addressed by the ERA.
[32] In JP Morgan Chase Bank NA v Lewis the Court of Appeal held that the exclusive jurisdiction of the ERA contemplated by s 161 depends on whether the problem before the Court is one that directly and essentially concerns the employment relationship.4 If the gist of the dispute is not truly an employment relationship problem but something else, even though it has arisen in an employment context, then other courts can have jurisdiction.5 Here it seems to me that the gist of the dispute is not an employment relationship problem. Rather it is an allegation that Mr Green misled Mr Gillette to come to New Zealand with his family, and invest a significant amount in a joint business enterprise with Mr Green, a component of which was the offer of employment that Mr Green never truly intended to fulfil. The essence of that allegation is not an employment relationship problem. Accordingly I consider the claim on its merits.
[33] Having considered the evidence, I am satisfied that Mr Gillette’s claim under this cause of action should fail.
[34] In the negotiations that led up to the signing of the Shareholders Agreement and the Individual Employment Agreement, statements were likely made by Mr Green
4 JP Morgan Chase Bank NA v Lewis [2015] NZCA 255, (2015) 14 NZELR 263.
5 See Ecostore Co Ltd v Worth [2017] NZHC 1480 at [21]–[23].
about the proposed employment arrangements. The terms subsequently agreed were then recorded in the Individual Employment Agreement. I do not accept that prior to the entry of the Individual Employment Agreement Mr Green represented what the arrangements would be with no intention that such terms would be performed. That is what Mr Gillette effectively alleges — that is that all of the adverse events that subsequently transpired as particularised in paragraph 21(a)–(d) of the statement of claim reflected Mr Green’s plans from the outset. I do not accept this. If SunPower had operated more successfully, and generated profits of the kind that could have supported both Mr Green and Mr Gillette, then I do not think Mr Green would have taken the actions he did during 2016.
[35] It is true that once the Individual Employment Agreement had been signed and Mr Gillette had moved with his family to New Zealand, Mr Gillette and his family were effectively reliant on Mr Green and SunPower to perform the agreement and thereby maintain their immigration status. I also accept that Mr Green took advantage of this. He effectively threatened to withdraw that support with the effect that Mr Gillette and his family would lose their residency status, and have to leave New Zealand. The references Mr Green made to this were clearly threats to that end. That put Mr Gillette in a weak negotiating position. But I do not believe Mr Green had a plan from the outset to deceive Mr Gillette into entering an employment agreement that he never intended SunPower to perform.
[36] Finally, as Mr Zindel says, to the extent that SunPower breached the terms and conditions of employment it has already been held liable by the ERA. In addition, the ERA has held that Mr Green personally must meet some of the award made against the company. It has not included the penalty awarded against the company as part of the award against Mr Green as it had no jurisdiction to do that.
[37]Accordingly I dismiss this cause of action.
Third claim: Minority oppression under s 174 of the Companies Act 1993
[38] The final, and in my view primary cause of action, is that Mr Gillette is entitled to relief under s 174 of the Companies Act 1993. Section 174 provides:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a) requiring the company or any other person to acquire the shareholder’s shares; or
(b) requiring the company or any other person to pay compensation to a person; or
(c) regulating the future conduct of the company’s affairs; or
(d) altering or adding to the company’s constitution; or
(e) appointing a receiver of the company; or
(f) directing the rectification of the records of the company; or
(g) putting the company into liquidation; or
(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[39] The approach to s 174 is well established. The overall role and purpose of the section was fully articulated by Richardson J in Thomas v W H Thomas.6 Section 174 concerns oppressive, unfairly discriminatory, or unfairly prejudicial conduct towards a member of the company. What is involved is an assessment of the full circumstances giving rise to the issue before the Court in light of the overall scheme and purpose of the relevant provisions of the Act. In essence this section is directed to abuse of power, or a visible departure from the standards of fair dealing. Whether there has been an abuse is considered objectively. The fact that the conduct is within the powers of a defendant does not mean it is permitted if it involves such an abuse.
6 Thomas v W H Thomas [1984] 1 NZLR 686 (CA). See also Latimer Holdings Ltd v SEA Holdings Ltd [2005] 2 NZLR 328 (CA) and Sturgess v Dunphy [2014] NZCA 266 at [130]–[145].
Relevant factors
[40] A number of factors are relied on by Mr Gillette to establish such abuse. They include the following steps which were in breach of, or inconsistent with the terms of the agreements that had been entered:
(a)That he was not appointed a director as contemplated by the Shareholders Agreement.
(b)That Mr Green excluded Mr Gillette from any financial or operational involvement in the company, and effectively terminated or blocked all rights that Mr Gillette had in relation to shareholding in breach of the Shareholder Agreement.
(c)That Mr Green controlled all distribution of funds, and provided none to Mr Gillette while continuing to take funds himself when he wished. Mr Gillette was not paid under his Individual Employment Contract, and the company did not pay the debt when it was determined by the ERA.
(d)That Mr Green threatened to close the business down with the effect that Mr Gillette would lose his investment and his immigration status, and that Mr Green coerced him into signing further documents varying the agreements given this pressure.
(e)That Mr Green formed a new company with the intention of taking over the business of the company, and then made attempts to sell the business without the knowledge or consent of the plaintiff.
[41] It is clear that Mr Green had effective control of the SunPower at all stages. Mr Green had the signing authority over the bank accounts, and Mr Gillette never obtained any such authority. Control of the bank accounts of a company of this kind gave Mr Green effective control of the company itself. In addition Mr Green also had control of the supply arrangements that were necessary for its business. That arose primarily because the suppliers required a personal guarantee relating to payment for
the goods supplied, and Mr Green had provided such guarantees. Mr Green relies on the fact that he provided such guarantees to demonstrate that he was more at risk than Mr Gillette was, but irrespective of that point Mr Green had control of the actual performance of the company’s business as a consequence. I also accept Mr Gillette’s evidence that he was effectively excluded from any real input into the financial performance of the company, or access to recording and accounting systems. Mr Green’s suggestion that Mr Gillette was able to see things on Mr Green’s computer, and that all he needed to do was ask, in some ways demonstrates the effective control that Mr Green had.
[42] The reality was that Mr Gillette’s role was no more than that of an employee notwithstanding his investment. His ability to exercise any influence was also highly compromised. That was because he relied on his employment to have an immigration status that allowed him and his family to be in New Zealand. The references Mr Green made to him losing his residency status were a powerful pressure point. They explain why Mr Gillette had to accept that he would not be paid under his Employment Agreement, and why he had little choice but to accept what Mr Green decided.
[43] This is also confirmed by the contemporary documents. On 20 June 2016 Mr Green sent Mr Gillette the following email message:
As discussed yesterday afternoon in our telephone conversation I look forward to you presenting your view on your present and future employment position with Sunpower. In the meantime, as we discussed for the survival of our company as Director of Sunpower Ltd I will be taking over all operational tasks and sales related work over until such time that we can reach some sort of agreement. I would like to hear back from you with your proposal for a way forward by Friday 24th June.
[44] This confirms that Mr Green was indeed assuming all control. Five days later Mr Gillette counter-signed two documents presented to him by Mr Green. The first said:
It is great to have you on board. Your arrival in February was certainly exciting and Sunpower Solar looked forward to getting you officially started. As with any immigration into another country by a family it takes some time to get settled and adjust to your new surroundings. Sunpower is happy to work with adjusting your start date to accommodate your transition.
We agree to adjust your official start date for the technical sales position as agreed by both Nathan and Patrick with your official start date will being 31/08/2016. The terms and conditions of the employment contract remain otherwise unchanged.
[45] This purported to say that Mr Gillette had not started his employment at the time he actually had, and as set out in the Individual Employment Agreement. The second read:
I hope your settling in nicely in New Zealand. As with any family immigration it does take time to settle in. Sunpower Solar understands and wishes to work with you on your request for time before being appointed Director of Sales of Sunpower Solar.
We agree to delay your appointment as Director as agreed by both Nathan and Patrick until August 1st 2016.
[46] This purported to put off Mr Gillette’s right to become a director under the Shareholders Agreement. I accept Mr Gillette’s evidence that he signed these documents because he had no real choice.
[47] There is a dispute between the parties as to the responsibility for the failure for Mr Gillette being registered as a director of the company at the Companies Office — both say the other is responsible for failing to take the administrative steps required. Mr Gillette was never formally registered. But even if he had been formally registered it would have made no effective difference as Mr Green had complete control regardless. I reject Mr Green’s argument that Mr Gillette was a director in substance.
[48] Given this background I find that the requirements of s 174 are satisfied, and that Mr Green engaged in oppressive, unfairly prejudicial or oppressive conduct in relation to Mr Gillette. They include the fact that Mr Green unilaterally stopped Mr Gillette being paid anything from SunPower for his involvement, whilst at the same time taking funds to meet his day to day needs as he had previously. I also accept that Mr Gillette was effectively excluded from any meaningful involvement in the management of the affairs of the company. There was no formality in its operation. There were no board meetings, or minutes from any such meetings. In terms of its financial control, Mr Green effectively moved money in and out of the bank accounts, including to and from his own personal bank accounts as he saw fit, and as best met
his overall desires. The company was effectively treated as an entity to do with as he wished. Mr Gillette had no involvement with any of these matters.
[49] All of the above matters are sufficient in themselves to establish a claim under s 174 justifying some form of remedy. But there is a further more obvious reason why this section applies.
Sale of the business
[50] On 18 August 2016 Mr Green created Sunpower Solar. Sunpower Solar was solely owned by Mr Green and was established by him to take over the business of SunPower. This was Mr Green’s own evidence. It was incorporated only after he was in full dispute with Mr Gillette, and each party had obtained legal advice. Mr Green said in his evidence that he “received legal and accounting advice to the effect that I should set up a new company on my own and invest money in that through the shareholders account”. Using his control of SunPower, Mr Green then transferred the business of SunPower to Sunpower Solar.
[51] It is not entirely clear what Sunpower Solar paid SunPower for the business. This transaction was not documented. Bank statements were produced that some payments were made on 6 September in the amount of $6,600 for tangible assets. It is a little difficult to trace this in the accounts of SunPower and Sunpower Solar to 31 March 2017 signed off by Crowe Horwath (who were giving Mr Green advice), although Sunpower Solar does record that it has non-current assets involving property, plant and equipment valued at $5,754. But in any event the entire business was transferred at this time, and thereafter Sunpower Solar conducted the previous trade of SunPower. No payment was made for the goodwill notwithstanding that it was the principle asset of the business belonging to SunPower.
[52] Mr Green’s evidence was that he took these steps because SunPower was no longer making any money because Mr Gillette was failing to perform his duties, and that he wished to avoid SunPower trading whole insolvent, and at the same time preserve the business. Transferring the business to a new entity allowed him to ensure both things. I do not accept this characterisation of these events. I find that Mr Green took these steps to preserve his own financial position, and to preserve what he
regarded to be his assets. He did so by totally excluding Mr Gillette from the transactions notwithstanding that Mr Gillette had paid $98,000 to be an effective half owner of this business.
[53] In June 2017 Sunpower Solar then sold the business to BSC Shipping for a total amount of $120,000. This was made up of $10,000 in tangible assets, $5,000 for stock in trade, and $105,000 for intangible assets. The terms and conditions were set out in an agreement for sale and purchase of a business under the fourth edition of the REINZ and ADLS form, with Bayleys acting as the seller’s agent. In part because of a dispute with Bayleys, the written agreement was not executed, but the parties nevertheless concluded the transaction in those terms. Significantly the principal asset of the business recorded in this agreement was the intangible assets, or the goodwill the business had. The purchaser was presumably acquiring the prospect that this business could be turned into a more profitable enterprise. At the same time it was agreed that Mr Green would join as an employee of BSC Solar (New Zealand) Ltd. As it happens this employment was later terminated. Mr Green suggests that this was a consequence of Mr Gillette making adverse comment about him to his employer. Mr Green gave evidence that he brought his own ERA proceeding against his employer, and succeeded with that claim. Nevertheless these further ramifications are largely immaterial. The key point is that Mr Green acquired the business owned by SunPower for something in the order of $6,000, and then sold it the following year to a third party for $120,000. Again Mr Gillette had no knowledge of, or involvement in the sale.
[54] Such action involved breaches of the Shareholders Agreement. Under the Agreement the directors were obliged to act in the best interests of the company, and the shareholders could not dispose of their shares without first offering them to the other party, with terms regulating the fair price to be paid for the shares. The Shareholders Agreement would only terminate by agreement, or if the company became effectively insolvent. This seems to me to have locked in Mr Green to the arrangements with Mr Gillette to promote SunPower as the vehicle by which the business would be exploited to their mutual advantage. To take the business for himself is clearly a breach of the Shareholders Agreement.
Mr Green’s explanations
[55] A number of explanations were advanced by Mr Green for the difference between what he had paid SunPower for the business assets, and what they were sold for to BSC Shipping.
[56] First Mr Green contended that the goodwill in the business had been effectively destroyed as a consequence of Mr Gillette failing to perform his functions as an effective employee, such that there was no goodwill in the business as at June 2016, but that he had built up the business through the operation of Sunpower Solar to restore a meaningful value to that goodwill the following year. In support of that argument Mr Green referred to a valuation contained in an email to him from Mr Michael Musso of Crowe Horwath which had been provided to Mr Gillette in the course of the attempts to resolve the disputes in 2016. In it Mr Musso said that the company either had no value or limited value depending on the valuation methodology employed.
[57] I do not accept Mr Green’s argument. Mr Green did not call evidence from Mr Musso or another valuer. A consideration of SunPower’s trading results shows there was no meaningful difference in the performance of the business of the company after it was taken over by Sunpower Solar that would justify the difference in value. In the year to 31 March 2015 SunPower made a net operating profit of $30,294. In the year to 31 March 2016 it made a small operating loss of $2,176. The year to 31 March 2017 involved an operating loss of $28,907, although the figures in that year’s accounts are affected by a number of one-off items that appear to be attributable to the dispute with Mr Gillette — $4,000 higher accountancy fees, $10,239 in legal fees, and $5,356 being a loss on the sale of fixed assets (and potentially other items). There is no meaningful change in financial performance arising from trading activities that would explain the change in value. The company’s value existed in the form of its potential given its established reputation and supply lines.
[58] I also regard the email providing a valuation opinion as being affected by the purpose for which it was being sought, namely proposing what Mr Gillette would be paid in settlement. In my view the business was worth what a third party purchaser was prepared to pay for it in 2017, and it was also worth approximately the same
amount in 2016 when the business was transferred from SunPower to Sunpower Solar. Including its tangible assets the business was worth approximately $120,000. That is the best evidence of its value.
[59] Next it was argued that the goodwill of the business was personal to Mr Green. I accept that a purchaser would have regarded Mr Green’s continued involvement as important in preserving the goodwill of the business. That is why the buyer was prepared to offer employment with the additional $80,000 per annum in salary to have Mr Green continue. But that was over and above the amount paid for the company’s goodwill. It is also clear that the goodwill was an asset owned by SunPower, and effectively transferred to Sunpower Solar when the business was transferred. Under cl 16.2(a) of the Shareholders Agreement Mr Green warranted that the company was the sole owner of the intellectual property, and intellectual property was broadly defined, and included all intellectual property rights and confidential information used in the business. It clearly encompasses the goodwill of the business operated by SunPower.
[60]Finally Mr Green argued that he had only been able to secure the price of
$120,000 for the business assets because of the extent to which he had reinvested money into the business. In support of that argument he referred to amounts in bank statements showing what he had reinvested into the company.
[61] There are two answers to that suggestion. First it was not the company that was being sold, but its business assets. Any amounts invested into the company by Mr Green might have been to the benefit of the company, but they did not change the value of its business. Secondly, and in any event, the evidence does not support Mr Green’s contention as a matter of fact. The accounts to 31 March 2016 record that Mr Green owed SunPower Ltd $60,742 as a result of shareholder advances. To identify what Mr Green invested in the following financial year, it is necessary to consider the annual accounts of both SunPower and Sunpower Solar, as the business was transferred from one to the other during that financial year. The accounts of SunPower record that Mr Green reinvested $83,606 into the company eliminating Mr Green’s debt of $60,741 and leaving the shareholders account in credit to the amount of $22,865. That supports Mr Green’s contention. But the accounts for
Sunpower Solar for the same period shows Mr Green’s shareholders current account in deficit by $71,974. The net effect across both sets of accounts is that Mr Green repaid or reinvested only approximately $10,000 of the $60,000 he had extracted. Presumably he was able to use some of the $98,000 paid to him by Mr Gillette for 49 per cent ownership to do so.
Conclusion
[62] For these reasons I reject all of Mr Green’s arguments concerning the transfer and sale of the business of the company.
[63] The above events involve a straight forward case of unfair prejudice to the minority shareholder under s 174. The majority shareholder has utilised his control of the company to effectively take the whole business operation owned by the company, transferred it to his own company at under value, and then sold those assets for the true value to a third party. He has then kept all the proceeds of sale. No resolutions approving such a major transaction were passed, and these steps have taken place without any approval or involvement of the minority shareholder. I note that the events have apparently took place with professional advice, but that does not mean that s 174 has not been triggered.
Remedy
[64] In dealing with remedy I raised two potential approaches with the parties at the hearing. The first was an order requiring Mr Green to now purchase the shares of Mr Gillette under s 174(2)(a). The second was an order requiring compensation to be paid by Mr Green to Mr Gillette, coupled with an order placing the company in liquidation under s 174(2)(b) and (g). For the reasons outlined below I have decided upon the first option, albeit that the orders that I grant have a compensation element, such that they involve both s 174(2)(a) and (b).
[65] The shares in SunPower presently have little or no value. Its business has been sold. Requiring Mr Green to acquire the shares at their present value would not be an effective remedy. The authorities recognise, however, that in these circumstances, the share valuation date is determined in light of the intention to give an appropriate
remedy. In addition the approach that the Court takes to the value of the shares may also be influenced by providing an appropriate remedy. In Sturgess v Dunphy the Court of Appeal said:7
[148] Wrong and remedy are closely linked. As Richardson J put it in Thomas, it is the unfairly detrimental effect of the conduct on the complaining member that brings the remedy into play. The remedy responds to that detriment, and the court acts for remedial, not punitive, purposes. The most common remedy is a buyout order, presumably because the cases usually involve tightly held companies or quasi-partnerships in which the members can no longer do business together. When fixing the price the court will adopt a valuation methodology designed to achieve fair market value, which is normally defined as the price that an informed buyer would pay. It assumes no discount for minority status.
[66] There is no point in leaving Mr Gillette as a minority shareholder in SunPower. The relationship between the parties has irretrievably broken down. The company is effectively insolvent and is not operational. Accordingly the appropriate remedy will include Mr Gillette transferring his shares to Mr Green.
[67] In determining what Mr Green will be required to pay Mr Gillette I consider all the circumstances of the case. The valuation, or amount that the Court fixes for transferring those shares can include a compensatory element. In assessing a compensatory element, I need to take into account that the ERA has already provided remedies for the breach of the Individual Employment Agreement, and that Mr Green has been required to personally meet some of that sum.
[68] The best evidence of the value of the shares is reflected on what relevant parties have been prepared to pay for them. On the evidence, two amounts are relevant. First Mr Gillette was prepared to pay $98,000 for a 49 per cent share in the company at the beginning of 2016. Secondly Mr Green sold the business in 2017 for $120,000, half of which would be $60,000. Those present two potential amounts that could be used to set the amount that Mr Green needs to pay Mr Gillette for his shares.
[69] I do not think it appropriate to utilise the $98,000 figure as argued by Mr Gillette. I am not setting the share price to provide Mr Gillette with a remedy for
7 Sturgess v Dunphy, above n 6, at [148] (footnotes omitted). See also Bi v Westcoast Mining Ltd
[2019] NZHC 860 at [23].
making a bad bargain. As indicated, that acquisition was not accompanied by any careful assessment of the value of the company, and may well have been influenced by Mr Gillette’s desire to obtain a path towards New Zealand residency, as well as Mr Green’s ability to present a rosy picture. The amount paid by the third party in 2017 is much more likely to reflect the true value of the business owned by the company at that time. For that reason I conclude that this is the appropriate amount to use to assess the amount that should be paid to Mr Gillette for his 49 per cent shareholding in SunPower.
[70] It seems to me that I should make orders under s 174 with a degree of precision given the position of the parties. In the circumstances I make the following orders:
(a)Mr Green is to pay Mr Gillette $60,000.
(b)On the payment of that amount, together with any accruing interest on a judgment debt that might arise from any delay in making that payment, Mr Gillette is to execute share transfers for the shares in SunPower to transfer them to Mr Green.
Costs
[71] The position concerning costs is somewhat complicated as Mr Gillette acts for himself, and Mr Green is on legal aid. Mr Gillette was legally represented at the outset of the proceeding, and would normally be entitled to a costs award for that period of time. He is not entitled to costs after that point as he has incurred no out of pocket legal expenditure.8 As far as I am aware he has not incurred any amounts in disbursements. I asked the parties to provide memoranda following the hearing to provide some precision about the position.
[72] Mr Gillette commenced these proceedings in the District Court in April 2017. They were transferred from the District Court to the High Court in July 2017. At that stage the plaintiff was legally represented and was so until February 2018.
8 McGuire v Secretary for Justice [2018] NZSC 116, (2018) 24 PRNZ 350.
[73] Under s 45(2) of the Legal Services Act 2011 no costs award may be made against an aided person in a civil proceeding unless the Court is satisfied there are exceptional circumstances. Mr Gillette did not argue that there were exceptional circumstances in the present case. Under s 45(5) the Court can specify what the costs order would have been but for the fact that the person is on legal aid. In that case the person can apply to the Legal Services Commissioner under s 46. Under s 46 the Commissioner considers a number of factors in dealing with such an application under s 46(3).
[74] I conclude that Mr Gillette would have been entitled to costs on a 2B basis in the District Court proceedings until transfer, and then thereafter in the High Court until the date he was no longer represented but for legal aid. I presently have no memorandum from Mr Gillette claiming such amounts. If Mr Gillette wants the Court to make that determination under s 45(5) he needs to set out an itemised claim under the Schedules to the District Court and High Court Rules setting out what would have been his claim. If he wishes to do that he will first need to provide that itemised claim to counsel for Mr Green for comment. I reserve leave for him to do so.
Review of Associate Judge’s costs order
[75] The final matter before me is Mr Gillette’s application to have the Associate Judge’s costs award dated 11 April 2018 reviewed under r 2.3 of the High Court Rules 2016. That was a costs award made in Mr Green’s favour against Mr Gillette in the amount of $5,936.50.9 For a series of related reasons I do not do so.
[76] First, r 2.3 was revoked as from 1 March 2017 by s 183(a) of the Senior Courts Act 2016. Under cl 11 of Schedule 5 of that Act the ability to review a decision of an Associate Judge remains in effect if the proceeding was pending as at 1 March 2017. These proceedings were commenced in April 2017 (the date on the cover page of the statement of claim is in error) and are not saved by the transitional provision. The effect is there is no longer an ability for a High Court Judge to review a decision of an Associate Judge.
9 Gillette v Green [2018] NZHC 645.
[77] Secondly, it is difficult to see why the decision of the Associate Judge should be reviewed — Mr Green was entitled to costs on his successful application. I note that Mr Gillette did not present submissions in opposition, but it is difficult to know what other award the Associate Judge could have made.
[78] Finally the question of costs is now largely moot given that Mr Gillette is self- represented, and Mr Green is on legal aid. Whilst Mr Gillette is liable on the costs award, the Associate Judge records that Mr Green has had costs awards made against him in Mr Gillette’s favour totalling $7,800. So the sums cancel each other out to some degree such that there is no injustice arising from the protection Mr Green has arising from his legal aid status.
Conclusion
[79] For the reasons outlined above judgment is entered for the plaintiff against the first defendant on the terms set out in [70] above. Leave is reserved to the plaintiff in accordance with paragraph [74] above.
Cooke J
Solicitors:
Zindels, Nelson for Defendant
Copy to:
The Plaintiff
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