GJ Holding Trustee Limited v Frith
[2023] NZHC 563
•23 March 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-002250
[2023] NZHC 563
UNDER the Companies Act 1993 IN THE MATTER OF
an application for relief by a prejudiced shareholder
IN THE MATTER OF
a breach of fiduciary duties
BETWEEN
GJ HOLDING TRUSTEE LIMITED as
trustee of the GJ HOLDING TRUST PlaintiffAND
KERRY FRITH
Defendant
Hearing: 14 - 18 November 2022 and 2 March 2023 Counsel:
DW Grove and SP Maloney for Plaintiff J Long and JM Alexander for Defendant
Judgment:
23 March 2023
JUDGMENT OF DOWNS J
This judgment was delivered by me on Thursday, 23 March 2023 at 12 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors/Counsel:
Foy & Halse, Auckland. DK Law Ltd, Auckland. DW Grove, Auckland.
J Long, Auckland.
JM Alexander, Auckland.
GJ HOLDING TRUSTEE LTD v FRITH [2023] NZHC 563 [23 March 2023]
Table of Contents
The case [1]
Background [2]
The claim and issues [25]
Did Ms Frith breach her obligations as a trustee under the trust
agreement by failing to appoint Mr Jorna as a director of Sealord? [28]
Did Ms Frith conduct Sealord’s affairs in an oppressive, unfairly
discriminatory, or unfairly prejudicial manner, by failing to consult
Mr Jorna in relation to the sale of the properties? [47]Did Ms Frith conduct Sealord’s affairs in an oppressive, unfairly discriminatory, or unfairly prejudicial manner by selling the
properties at an undervalue? [57]
Difficulties in relation to Mr Wigmore’s evidence [64]
Difficulties in relation to Mr Beasley’s evidence [69]
Value? [71]
May Mr Jorna rely on the deeming provisions of the Companies Act in relation to oppressive, unfairly discriminatory, or unfairly
prejudicial conduct? [76]
Did Ms Frith breach her obligations as a trustee by selling the properties
at an undervalue? [84]
Allegations beyond the pleadings [92]
Another pleading point [110]
Relief [112]
Standing back [132]
Result [134]
Costs [136]
The case
[1] Section 174 of the Companies Act 1993 confers a broad discretion for the provision of “just and equitable” relief to a prejudiced shareholder of a company. This case involves an application for such relief in the context of a regrettably familiar tale: the breakdown of a relationship between hitherto amicable business partners. As in other cases under the section, the facts are important.
Background
[2] Between 2015 and 2019, Kerry Frith and Gerard Jorna developed nine Auckland properties. Their first involved a property in Bundena Place, Clendon Park, hence the moniker, the Bundena model.
[3] The Bundena model involved Ms Frith buying the properties through her company, Nuincum Ltd,1 and being responsible for associated funding; Mr Jorna renovating the properties and meeting associated costs; and net profits being divided equally between Ms Frith and Mr Jorna. Each individual development was just that; no overarching, joint venture existed. The parties were free to do business with others, and without the other.
[4] On 17 October 2016, Ms Frith and Mr Jorna bought 15 Sealord Place, Manurewa, through Nuincum.2 Their original idea was to again employ the Bundena model, which would have meant 15 Sealord Place was renovated and sold within months. However, the property’s high-density zoning prompted a new idea in which adjacent properties would be purchased, existing homes demolished, and townhouses constructed and sold.
[5] Ms Frith and Mr Jorna agreed to incorporate Sealord Properties Ltd,3 for it to complete the purchase of 15 Sealord Place—which it did—and for it to acquire adjacent properties if possible. Between November 2016 and May 2017, Sealord did just that; it bought both 13 Sealord Place and 468 Roscommon Road.
[6]Sealord borrowed $540,000 from Nuincum to purchase 15 Sealord Place, and
$1,190,450 from a finance company to purchase 13 Sealord Place and 468 Roscommon Road. Ms Frith and her partner personally guaranteed that loan.
[7] Mr Jorna made no financial contribution to the purchase of the properties and did not guarantee related borrowings.
[8] Ms Frith and Mr Jorna recognised they had no experience in completing a development of the type envisaged, the Bundena model afforded none. So, they approached Finesse Residential Ltd,4 a residential construction company. Ms Frith knew one of Finesse’s directors, Geoffrey Philson.
1 Nuincum.
2 The property settled 1 December 2016.
3 Sealord.
4 Finesse.
[9] Sealord and Finesse agreed, orally, Sealord would engage Finesse to build townhouses on the properties; Finesse would also be responsible for obtaining planning permissions, including resource consent; and net profits would be divided equally between Sealord and Finesse. Under this arrangement, Sealord provided the properties; Finesse developed them; and as observed, net profits divided equally. This model was one Finesse routinely employed.
[10] In the second half of 2017, another adjoining property, 466 Roscommon Road, became available, and Mr Jorna was successful in negotiating its purchase. Sealord, however, was not in a position to buy 466 Roscommon Road. So, Finesse did. This meant Sealord owned three properties underlying the proposed development; Finesse one.
[11] The next event is contentious. Ms Frith says Finesse informed Sealord it required Sealord to contribute to development costs as Finesse now owned one of the properties, a departure from its model. Failing this, Sealord’s share of the profits would be reduced accordingly. What is not contentious is that no agreement was concluded between Sealord and Finesse in relation to this aspect, or indeed, the project more generally once Finesse owned one of the properties.
[12] On 19 July 2018, Finesse applied for resource consent to build 19 townhouses on the four properties. That consent was granted 30 October 2018.
[13] Ms Frith told Mr Jorna she believed arrangements were inequitable in that the financial burden was falling upon her exclusively by dint of Nuincum’s loan to Sealord to acquire the first property, and her personal guarantee of Sealord’s borrowings in relation to its acquisition of the second and third properties. An example of the correspondence suffices: on 25 September 2018, Ms Frith suggested to Mr Jorna the position be redressed by revisiting Sealord’s ownership. Ms Frith owned half of the shares in Sealord and was its director. Ms Frith suggested Mr Jorna’s shareholding in Sealord be reduced from fifty to twenty percent.
[14] This introduces another aspect to the case. At his request, Mr Jorna’s interest in Sealord was not on the companies register. Mr Jorna and a former business partner
had separated on less than happy terms. For this reason, Mr Jorna wanted his interest in Sealord to be “invisible”. As a result of an agreement dated 23 November 2016,5 Ms Frith held half of the shares in Sealord for herself and the other half on trust for GJ Holding Trustee Ltd, the trustee for Mr Jorna’s trust, the GJ Holding Trust. The trust agreement required Ms Frith to appoint Mr Jorna a director of Sealord at the beneficiary’s request.
[15] From about May 2019 onwards, the relationship between Ms Frith and Mr Jorna deteriorated further. At a meeting on 7 May 2019, Mr Jorna told Ms Frith he wanted to be made a director of Sealord. Ms Frith said that should entail Mr Jorna assuming equal liabilities. On 22 May 2019, Finesse sent an email to Mr Jorna recording Ms Frith’s advice her partnership with him was “no longer on foot”. Mr Jorna remonstrated with Ms Frith this had caused “a huge problem”.
[16] On 21 August 2019, Mr Jorna served a notice on Ms Frith requiring her to appoint him a director of Sealord.
[17] On 3 September 2019, Ms Frith and Mr Jorna met as Sealord’s “directors”. The inverted commas reflect Mr Jorna had not yet been appointed a director despite his August notice.
[18]The 3 September meeting addressed an apparently difficult situation:
(a)Though resource consent had been granted 30 October 2018, Finesse had not begun work on the properties. They, therefore, remained as they were when Sealord acquired them.
(b)Sealord was operating at a loss of approximately $160,000.
(c)13 Sealord Place was untenanted, pending commencement of works by Finesse, and required approximately $5,000 of expenditure before it would be tenantable.
5 The trust agreement.
(d)Nuincum was under financial pressure. So too Ms Frith.
(e)Mr Jorna was not able to contribute any money to the project.
[19]Ms Frith and Mr Jorna agreed to explore these options:
Actions – to [be] done in 5 days
·Mediator options – investigate costs and parties to conduct mediator
– Gerard
·Contact Finesse in regards to Kiwibuild, buying the project, selling the project to another party. – Kerry
·Investigate valuers and quantity surveyor to price the project – Gerard
For reasons that need not be recounted, none resolved matters.
[20] Things did not improve into 2020. The COVID-19 pandemic reached New Zealand; Finesse had still not begun work; and Sealord, Nuincum, and Ms Frith remained under financial pressure. By May 2020, Sealord’s losses were approximately $220,000. To compound matters, its loans in relation to the second and third properties were repayable in June and August 2020, and Ms Frith’s partner lost his job in May.6
[21] On 6 May 2020, Ms Frith sent Mr Jorna a $13,061 tax bill in relation to the project, asking if he could pay it. Mr Jorna replied he was “about to start a legal claim” and said Ms Frith was “defrauding” the Inland Revenue Department.
[22] Ms Frith concluded she needed to act. On 17 July 2020, Sealord, at Ms Frith’s behest, entered an agreement to sell its three properties to Finesse for $1.7 million (zero rated for GST). Settlement occurred 25 August 2020.
[23] Ms Frith did not inform Mr Jorna what she was doing. Only after the sale, on 27 August 2020, did she tell him Sealord had sold the properties to Finesse. Mr Jorna had appointed himself a director seven days earlier.
6 He was out of work until February 2021.
[24]Acrimonious correspondence followed.
The claim and issues
[25]The statement of claim is brief. Its two causes of action read:
FIRST CAUSE OF ACTION – APPLICATION FOR RELIEF UNDER SECTION 174 OF THE COMPANIES ACT 1993 (“THE ACT”)
25.The sale of the Properties to Finesse was a major transaction (as defined in section 129 of the Act).
26.The defendant did not obtain a special resolution of the shareholders approving the sale as required by section 129 of the Act.
27.The sale of the Properties in breach of section 129 is deemed to be unfairly prejudicial conduct pursuant to section 175 of the Act.
28.By selling the properties to Finesse at an undervalue, the defendant has conducted the affairs of Sealord in a way which is oppressive, unfairly discriminatory, and/or unfairly prejudicial to the plaintiff.
29.By refusing to account for the profits of sale, the defendant is acting in a way which is oppressive, unfairly discriminatory, and/or unfairly prejudicial to the plaintiff.
30.The extent of the plaintiff’s loss due to the defendant’s actions cannot be particularised until after discovery is complete.
…
SECOND CAUSE OF ACTION – BREACH OF TRUST
31.By selling the Properties at an undervalue, the defendant breached her fiduciary duties as trustee under the Declaration of Trust.
32.The defendant has misused her position as trustee to obtain a personal profit and/or advantage at the expense of the plaintiff.
33.The defendant has failed to protect and preserve trust property (the value of the shares) for the benefit of the plaintiff.
34.The defendant has breached her obligations as trustee by refusing to provide information regarding administration of the trust upon request by the plaintiff, as a beneficiary.
35.The extent of the plaintiff’s loss due to the defendant’s breaches of her fiduciary duties cannot be particularised until after discovery is complete.
[26]Six issues of fact and law arise on the pleadings:
(a)Did Ms Frith breach her obligations as a trustee under the trust agreement by failing to appoint Mr Jorna a director of Sealord?
(b)Did Ms Frith conduct Sealord’s affairs in an oppressive, unfairly discriminatory, or unfairly prejudicial manner, by failing to consult Mr Jorna in relation to the sale of the properties?
(c)Did Ms Frith do likewise by selling the properties at an undervalue?
(d)May Mr Jorna rely on the deeming provisions of the Companies Act in relation to oppressive, unfairly discriminatory, or unfairly prejudicial conduct?
(e)Did Ms Frith breach her obligations as a trustee by selling the properties at an undervalue?
(f)If the answer to any of these questions is yes, what relief is appropriate?
[27] I address each accordingly. As I discuss later, Mr Grove’s presentation of the claim expanded at trial, and well beyond the pleadings.
Did Ms Frith breach her obligations as a trustee under the trust agreement by failing to appoint Mr Jorna a director of Sealord?
[28] It is common ground clause 2.2 of the trust agreement required Ms Frith to “forthwith” appoint Mr Jorna as a director if the beneficiary requested it.
[29] The issue of Mr Jorna’s directorship was first raised 7 May 2019, at the meeting between Mr Jorna and Ms Frith. Mr Jorna’s evidence in chief was silent on this point but Ms Frith’s recorded Mr Jorna “made clear” he wanted to be made a director at the meeting.
[30]Ms Frith addressed the topic in an email a week later:
.... In regards to exercising your rights to directorship, this is definitely an option, and am keen for that to proceed on the following basis:
You would need to become a Director and Shareholder of Sealord so we both have equal rights and liabilities in the company. The shares could not be transferred to another company or entity owned by you which has liabilities. The Deed of Trust by which I hold your shares would be revoked. Any bank guarantees or other security Craig and I have given the bank on behalf of Sealord should be given by both of us. A shareholders’ agreement would be established setting out how the company and business ventures will be managed, the responsibilities of the directors and shareholders to each other and to the company and the financial contributions of and profit entitlements for each of you. This includes LTC benefits.
It would be good to get your thoughts on all the options that I’ve proposed, and we can discuss at the meeting with [the accountant].
[31] The issue was next raised 21 August 2019, when, as observed, Mr Jorna served a notice on Ms Frith requiring her to appoint him a director.
[32] On 28 August 2019, Mr Jorna emailed Ms Frith, seeking confirmation she had done so because “the five working days are up”. Ms Frith replied the same day:
In regards to your email on the 21st August 2019, I have informed the accountant to make the appropriate changes to the companies office to appoint you as a director of Sealord Properties Limited. I will be calling a directors meeting to discuss the current outstanding issues. Please note as a director of Sealord Properties every expectation will be required by you to hold your directorship with interests of the company and not for your own self interest. This change to the directors will have implication in regards to the lending and way forward for the company.
[33] As will be recalled, there was a directors’ meeting 3 September 2019, which Ms Frith had arranged. The minutes of that meeting contain this entry:
Recognise new director and discuss options of informing the appropriate parties of this change of directorship.
a.Basecorp
b.Finesse
It was discussed that but no confirmed way forward. Kerry will contact Finesse re actions below
[34] Mr Long cross-examined Mr Jorna about the entry, then posed a broader question:7
Q. And then obviously you’ve been talking about being recognised as director and telling people that. That’s item 5. And the minute records: “It was discussed but no confirmed way forward.”
A. Yeah… Obviously, it wasn’t…
Q. We know it wasn’t done, but I’m right, aren’t I, when it comes to the entitlement to be a director, Kerry was never saying you weren’t entitled. If you wanted to be on the register, she wasn’t saying no, you can’t have that.
A. Correct.
[35] Mr Jorna emailed Ms Frith in the wake of the meeting and twice raised whether she had appointed him a director.8 Ms Frith did not respond.
[36] On 18 November 2019, Mr Jorna again raised the topic by email. He contacted Sealord’s accountants later the same day:
Dear [accountant]
Further to our discussion today, are you able to asap as contained within the attached agreement see clause 2:2 appoint me as a director and 50% shareholder of Sealord Properties Ltd so that is updated with the Companies office.
[37] One of the accountants replied the next morning. His message and the associated email chain are below:
Hi Gerard,
As per the agreement you have with Kerry in relation to Sealord properties, we can do what you ask.
However, we are currently conflict due to you and Kerry being our clients.
Before doing anything, [accountant] suggested that you talk to your lawyer in regards to your bank obligations and shareholders current account. To understand what affect it can have on you and the company before proceeding with this.
7 Notes of evidence, p 61, lines 1–8.
8 On 10 and 16 September 2019. Mr Jorna also raised, in other correspondence about this time, whether Ms Frith had told Finesse he was a director of Sealord.
[Mr Jorna replied at 1:02 pm] Hi
I’m out and wish to forward the shareholders current account to my lawyer. Can you send me a copy as I’m not near my PC.
Is [the] concern in relation to “Bank obligations” that if there is a change in directorship and shareholding that the lender may call in the loan?
[Then came this reply to Mr Jorna] Hi Gerard,
The financial for Sealord Properties Ltd don’t show your contributions. You would have to review what you actually contributed to the company.
As for bank obligations, yes if bank considered you high risk or for any other reason. They can call up a loan or other requirements as well.
[38]Ms Frith was asked about this chain in cross-examination:9
Q. … Mr Jorna writes to the accountants asking them to transfer the directorship and shareholding, they come back and say: “However we are currently conflict due to you and Kerry being our clients.” Do you have any idea what conflict they are talking about there, was it anything you had said to them?
A. No.
[39]She was also asked about Mr Jorna’s notice of 21 August 2019:10
Q............ That is confirming service of a notice by Mr Jorna for you to action
making him a director and (inaudible 13:47:46) a shareholders and, shareholding, sorry, just to make him a director. That’s dated 21 August 2019. Did you do that?
A. At that point, no.
Q. Did you do it ever?
A. No.
Q. Why not?
A. I think in response to that I had a email, which we’ll find in the bundle here, that I was happy to do that but needed to be clear that the responsibilities of a director needed to be put in place and also the
9 Notes of evidence, p 276, lines 5–10.
10 Notes of evidence, p 268, line 6 – p 269, line 2.
financial obligations, I’m not saying it verbatim at the moment, of what that would mean to the loans and the guarantors, et cetera.
Q. You signed a deed of trust where you were required to do that, no matter what, on demand?
A. Yes.
Q. So you’re changing the rules?
A.No, I’m just making sure that Gerard was aware of those risks within the business and the way the finances were set up.
Q. Did you, could you have actually done the transfer then if, you personally?
A. My understanding, I now know that that’s not quite accurate but my understanding at that time was that you needed a key to the company to be able to do that.
Q. So did you ask the accountants to do it?
A. Yes.
THE COURT:
Q. When you mean a “key”, do you mean some sort of digital key?
A.I believe so, yes. I think to access the company pocket for Sealord, yeah. I never set the company up. GRA did, yeah.
[40] The remaining evidence on this topic is from Mr Jorna under cross-examination. Its importance warrants reproduction in full:11
Q. So [bundle, page] 870, you ask [the accountant] – obviously, you’ve spoken to him: “Are you able ASAP as contained within the attached agreement, clause 2.2?” So, you’re sending him the declaration of trust document?
A. Correct.
Q. To appoint him as a director and 50% shareholder so it’s updated with the company’s office, right?
A. Yes.
Q. And then [bundle, page] 871, he comes back next day because your email was at 4 o’clock, and he emails at you at 10 in the morning: “Hi Gerard. As per the agreement you have, we can do what you ask. However, we’re currently conflicted due to you and Kerry being our clients.” Did you interpret this at the time of his saying although we can do what you ask, we can’t do what you asked?
11 Notes of evidence, p 63, line 9 – p 65, line 23.
A. That’s what I thought he meant, yes.
Q. This is rather odd, isn’t it, to say we can do what you ask and then observe we’re conflicted. The way I had read it was that he could do what you asked, there’s a conflict arising with them because both you and Kerry are their clients, and both you and Kerry are in dispute because that’s the only way the conflict can arise in my mind, anyway. And then the next paragraph, he says: “Before doing anything” – and the anything he refers to can be doing what you ask – “[the accountant] says talk to your lawyer in regard to bank obligations and shareholder current account to understand what effect it…” – it being doing what you ask, making a director and shareholder – “…can have you on and the company before proceeding with this.” So, my suggestion is that it isn’t a refusal to do it. It’s just a suggestion that you should talk to your lawyer of the consequences of it being done before doing it. Isn’t that a better way to read that document?
A.I know that when I talked to them before about doing that, something they raised was that when Kerry applied for the loan that the fact that I was a director and shareholder could’ve been material to their decision. So the thing that always concerned me was if I became a director and Basecorp became aware of it, they may have withdrawn the loan.
Q. So I understand that now.
A. So I was trying to be co – measured –
Q. So you are being cognisant of the consequences of me exercising my rights, right?
A. Yes.
Q.And I'm aware that it might mean things could alter in a way that you don't want to have happened right, because you don't want the bank to pull their funding all of a sudden?
A. No, I don't want (inaudible 15:51:00).
Q. So, in a sense then it’s a choice that you make at this point, isn’t it, because unless you can rule those matters off –
A. Yes, it definitely caused me a degree of concern at the time.
Q. Because at the same time as you desire to have recognition on the legal register as both directorship and shareholder, right?
A. Correct.
Q. You’re concerned that consequences will flow from that that will be negative because of the company’s lending commitments and things, yes?
A. Yes, yes.
Q. And so you make a decision to not do it, right, because we know certainly in November 2019, on page 871, there’s no come back to [the accountant] to say: “Please do it” is it?
A.Well, there was that and also the fact that he said about the conflict, so I took that to mean as they basically couldn't do it and I wasn't aware how we could do it.
Q. But you’re fully aware of your entitlements to have these things, yes?
A. To have the directorship and the –
Q. And the shareholding?
A. Yes.
Q. Kerry has not said you don’t have those entitlements, has she?
A. No, she hasn’t.
Q. It just seems to have got stuck in getting it done?
A. Yes, correct.
Q.And that’s because of the possible consequences that you realised might come from doing it that way, yes?
A.Yes, I mean I obviously asked Kerry to do it and serve that document on her, you know, obviously identifying clause 2.2 but then with that email I was like 50/50, what do I do.
Q. And so you did nothing?
A. I just thought I’d wait, I decided to wait, yes.
Q.And that sort of is how the situation remains, isn’t it, until later into 2020 when you decide: “I'm actually going to do something now”?
A. Correct.
Q.So all of that is a consequence of your choices and decisions, right, not a consequence of Ms Frith refusing you anything, is it?
A.No, she didn’t refuse to do, in fact I thought she was going to do, she had done it because of that email she sent me saying that she’d do it but obviously I became aware that it hadn’t happened because of what [the accountant] sent me.
[41] The evidence reveals Ms Frith referred Mr Jorna’s directorship to Sealord’s accountants within no more than seven days of his notice. It also reveals that when Mr Jorna later raised the issue directly with them, in November 2019, he chose to let the matter lie because of the possible ramifications of being made a director. Mr Jorna
did not, on the evidence, raise the point again with Ms Frith before making himself a director 20 August 2020. There is no evidence Ms Frith encouraged Sealord’s accountants to delay or frustrate Mr Jorna’s appointment. Mr Grove did not argue otherwise.
[42] Mr Grove did argue Ms Frith had sought to impose conditions on the appointment, as is reflected in the evidence at [30]. However, Mr Jorna’s own evidence makes clear he did not regard Ms Frith as unwilling, let alone obstructive. And, as observed, the same evidence makes clear Mr Jorna made an election not to pursue appointment until appointing himself.
[43] This leaves a more nuanced point. The trust agreement required Ms Frith to appoint Mr Jorna “forthwith” upon the beneficiary’s request. It is arguable Ms Frith failed to do so given the delay between 21 August 2019, when Mr Jorna gave notice, and on or about 19 November 2019, when Mr Jorna said he “decided to wait”. The argument—which was never articulated—would be that the trust agreement required Ms Frith to ensure Mr Jorna was made a director forthwith upon him making that request, in other words, without delay, or at least, without unreasonable delay.12 In support of this contention would be Mr Jorna’s email of 18 November 2019 to Ms Frith, in which he noted she had not responded for “two months” in relation to his directorship.
[44]As against this, Ms Frith:
(a)Had, by 28 August 2019 at the latest, asked Sealord’s accountants to appoint Mr Jorna a director.
(b)Arranged the directors’ meeting of 3 September 2019, at which Sealord’s affairs appear to have been comprehensively addressed.
[45] Furthermore, Mr Jorna’s concessions in cross-examination remain striking. Indeed, they are impossible to reconcile with this aspect of the claim, especially as Mr Jorna bears the burden of proof. This aspect thus fails as a matter of evidence.
12 I received no argument on the meaning of “forthwith” in this or any other context.
[46] The same would be true if the statement of claim were understood to allege Ms Frith engaged in oppressive, unfairly discriminatory, or unfairly prejudicial conduct by failing to appoint Mr Jorna a director, for the simple reason the animating factual proposition had not been established as more likely than not.
Did Ms Frith conduct Sealord’s affairs in an oppressive, unfairly discriminatory, or unfairly prejudicial manner, by failing to consult Mr Jorna in relation to the sale of the properties?
[47]Section 174 of the Companies Act 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.
[48] The test for oppressive, unfairly discriminatory, or unfairly prejudicial conduct is well-established. It has been discussed in several Court of Appeal decisions,
including Thomas v HW Thomas Ltd,13 and Latimer Holdings Ltd v Sea Holdings New Zealand Ltd.14 The most recent is Vey Group Ltd v Vance:15
“Oppression”, standing alone under previous legislation, was said to imply a “visible departure from the standards of fair dealing, and a violation of the conditions of fair play”. Those words are apt in this case, but oppression was joined by unfair discrimination and unfair prejudice in a 1980 amendment. Together they expand the basis for intervention. As Richardson J observed in 1984, in Thomas v HW Thomas Ltd, the provisioning to an extent overlaps, but is directed at conduct “amounting to an unjust detriment to the interests of a member or members of the company”. In Sturgess v Dunphy this Court confirmed that the statutory standard should not be read restrictively. The conduct need not be undertaken in bad faith or be otherwise unlawful. Reflecting the original premise of oppression, “unfairness” requires a visible departure from the standards of fair dealing, assessed in light of the history and structure of the company and the expectations of its members. A broad view is taken in the authorities of the expression “the affairs of the company”. It may encompass anything generally concerning the company. The prejudice to the shareholder or entitled person applicant may be in a capacity other than purely shareholder, such as a director or creditor of the company. In short, s 174 offers a broad, flexible, remedial rather than punitive, jurisdiction.
[49] Extensive examination of the evidence is unnecessary because Ms Frith acknowledges she concealed Sealord’s sale of the properties to Finesse. A précis beginning in June 2020 captures the picture.
[50] On 8 June 2020, Mr Jorna emailed Ms Frith to record he had been discussing the sale of all four properties, hence including the property owned by Finesse, with a real estate agent. Ms Frith replied 13 June 2020, inviting Mr Jorna to “get something on paper”. On 19 June 2020, Mr Jorna pointed out an agent required a listing agreement “before introducing buyers”. More extensive correspondence 22 June 2020 included Ms Frith telling Mr Jorna she had “approached Finesse and they are reviewing the feasibility of the project”, and Mr Jorna exhorting Ms Frith to put her “big girl pants on”.
[51] In response to Ms Frith’s approach, Finesse said it did not want to sell its property or see Sealord’s three properties sold; it was then in a position to advance the project. Finesse also raised the recovery of its development costs if Sealord did not
13 Thomas v HW Thomas Ltd [1984] 1 NZLR 686 (CA).
14 Latimer Holdings Ltd v SEA Holdings New Zealand Ltd [2005] 2 NZLR 328 (CA).
15 Vey Group Ltd v Vance [2020] NZCA 232, [2021] 2 NZLR 541 at [12] (footnotes omitted).
sell its properties to Finesse. These discussions occurred between Ms Frith and Mr Philson; Mr Jorna was not privy to them.
[52] Mr Jorna asked Ms Frith for updates in June and July 2020. Ms Frith did not respond. Instead, she obtained an extension of the loans (underlying two of the properties) until the end of August 2020 and, on behalf of Sealord on 17 July 2020, entered a sale and purchase agreement with Finesse in relation to the three properties. The agreement was unconditional. Settlement took place 25 August 2020.
[53] Ms Frith did not inform Mr Jorna what she had done until 27 August 2020. Unsurprisingly, Mr Grove cross-examined Ms Frith about why she had not consulted Mr Jorna in relation to the sales. Ms Frith said she was tired of Mr Jorna’s “bullying” and “badgering” and worried he would attempt to “derail” the sales when the loans were due, in turn risking financial hardship to her and her partner.
[54] While I do not doubt Ms Frith felt under siege, the explanation affords no defence to conduct engaging s 174. Nor does the apparent inequity of arrangements between Ms Frith and Mr Jorna. By selling the properties without consulting Mr Jorna, Ms Frith conducted Sealord’s affairs in an oppressive, unfairly discriminatory, or unfairly prejudicial manner. Three points stand out. First, the properties were Sealord’s only assets of significance. Second, Ms Frith and Mr Jorna had incorporated Sealord to develop the properties. Sale precluded that. Third, Mr Jorna owned half of the shares in Sealord, and, as observed, was entitled to be appointed a director of the company (on request). In short, Ms Frith should have consulted Mr Jorna about the sales given their respective interests in Sealord and the properties’ importance to Sealord’s business. Mr Long did not argue otherwise.
[55] This leaves one aspect. During Sealord’s pre-sale discussions with Finesse, Ms Frith provided them a table in relation to the properties containing financial information, including the price(s) required for a “break even” sale. Mr Grove was particularly critical of this, as he argued it deprived Sealord of the ability to negotiate with Finesse at arms-length. Ms Frith said she did so as part of an “open book” conversation with Finesse, in which Mr Philson said Finesse had already incurred
$250,000 of development costs in relation to the project. Mr Philson acknowledged
he was “surprised” Ms Frith was quite so forthcoming, but also said Ms Frith told him she felt “not good about withdrawing from the project” and disclosure of this nature was arguably consistent with Sealord being Finesse’s “JV partner”.
[56] It is unnecessary to say more about this chapter except that its occurrence highlights two elements: Ms Frith’s lack of consultation of Mr Jorna and her associated financial anxiety.
Did Ms Frith conduct Sealord’s affairs in an oppressive, unfairly discriminatory, or unfairly prejudicial manner by selling the properties at an undervalue?
[57] This question turns on the properties’ value. Sealord sold the properties to Finesse for $1.7 million. Mr Jorna contends they were worth $2.04 million if sold on the open market at the time of their sale to Finesse.
[58] I heard competing evidence from two experienced registered valuers: David Wigmore on behalf of Mr Jorna, and Patrick Beasley on behalf of Ms Frith.
[59] Mr Wigmore valued the properties globally, that is, as one economic unit, using the residual land valuation approach.16 This approach entails a series of discrete steps, each with an accompanying assumption. First, it presupposes the properties have been developed into townhouses and sold for particular sums. Next, it assumes the development has cost an identified amount. The approach then assumes the development has taken a certain amount of time. Finally, it asks what a reasonable and prudent developer would pay for the land armed with this foresight. In other words, the residual land value approach imagines a reasonable and prudent developer assessing the value of the land according to the anticipated time and cost of successfully developing it, including selling the resulting townhouses at a specified level of profit.
[60] Mr Wigmore concluded the properties were worth $2.04 million in July 2020 using this approach.
16 Mr Wigmore used the direct comparison approach as a crosscheck, albeit see [68].
[61] Mr Beasley assessed the value of each of the properties individually, using the direct comparison approach, then added the values together to reach a global figure. The direct comparison approach assesses the value of a property by identifying sales of analogous properties: sales in the same or similar suburbs, of properties of the same or similar size, with the same or similar characteristics. So, whereas the residual land valuation approach is informed by assumption, the direct comparison approach is informed by analogy.
[62] Mr Beasley concluded the properties were worth $1.665 million in July 2020 using the direct comparison approach.
[63] This is not a case in which one valuer triumphantly prevails; there are difficulties with the evidence of each.
Difficulties in relation to Mr Wigmore’s evidence
[64] Mr Wigmore acknowledged the sensitivity of the residual land valuation approach; small variations in inputs can produce “a disproportionate and resultant residual land value”. Therein lies the danger. To describe the residual land valuation approach as a tower of turtles would be unfair, but the imagery usefully conveys the fragility of the exercise.
[65] Cross-examination revealed errors in Mr Wigmore’s calculations. He originally said the properties were worth $2.2 million. Errors stripped $160,000 of value.
[66] The sale occurred in July 2020. Uncertainty then attached to the property market, indeed, to many aspects of life, because of the advent of COVID-19. Markets prefer certainty to uncertainty, and uncertainty affects price. The property market around this time was “not easy”.17
17 A real estate agent called by Ms Frith said she did not sell a property for 11 weeks. Her colleagues had a similar experience.
[67] The properties are next to “a very busy arterial road”, in an area known for “low-cost housing”.18 In the middle of 2020, unlike six months later, there was no evidence developers were buying blocks of land in the area. Mr Jorna called evidence from a real estate agent who said the properties “would be very attractive to a developer”. This evidence, however, does not address the critical, italicised term.
[68] Mr Wigmore used the direct comparison approach as a crosscheck. However, that crosscheck involved only one sale before the date the properties were sold. This has significance as both valuers agreed the property market improved after July 2020.
Difficulties in relation to Mr Beasley’s evidence
[69] Mr Beasley took no account of the fact the properties had an associated resource consent, albeit one that would need to be varied if sold to someone other than Finesse, when determining the value of the properties. Mr Beasley did not accept the resource consent would increase their value; a view that presents as unyielding.
[70] Mr Beasley’s approach did not address the value of the properties as a single economic unit, even though they had been bought for that purpose.
Value?
[71] For these reasons, I consider the value of the properties to lie between the figures given by Mr Wigmore and Mr Beasley. I conclude a reasonable and prudent purchaser, drawn from the open market, would be prepared to pay $1.875 million for the (three) properties in July 2020. I acknowledge an element of impression in the conclusion; that reflects the nature of the task.
[72] As will be apparent, the figure leans a little toward Mr Wigmore’s evidence in recognition of the value of the properties as a single economic unit. But as will also be apparent, the figure is appreciably below that advanced by Mr Wigmore. This recognises the uncertainty attaching to the property market in July 2020; the absence
18 Mr Philson was more direct. He said the area was “just not a good part of Auckland” and Finesse had to hire security guards to prevent materials being stolen overnight.
of developers as buyers in the area at the time (other than Finesse); the perception of the area as low-cost housing; and the proximity of a very busy road.
[73] Some oblique support for the $1.875 million figure is available. Finesse, a presumably reasonable and prudent developer, paid $1.7 million for the three properties, having already expended $250,000 on development costs across the four. Oddly, Mr Philson was not asked, at least directly, to what extent the purchase price reflected these earlier costs. A projection by Finesse dated 1 December 2017 reveals
$165,000 of these costs was anticipated to be external, that is, costs payable by Finesse to external providers. Mr Philson said all of Finesse’s projected costs ended up being “well over budget”. If one begins with the $1.7 million purchase price, adds the projected external costs of $165,000 and allows a $10,000 margin for those costs also being “well over budget”, the figure is $1.875 million.
[74] The point cannot be taken far though. Any number of considerations might have influenced the purchase price and again, no one asked Mr Philson to directly address the extent to which it reflected Finesse’s earlier costs.
[75] It follows Ms Frith sold the properties at an undervalue, conduct engaging s 174 of the Companies Act.
May Mr Jorna rely on the deeming provisions of the Companies Act in relation to oppressive, unfairly discriminatory, or unfairly prejudicial conduct?
[76] Section 129 of the Companies Act creates rules in relation to major transactions. Sale of the three properties to Finesse was a major transaction.
[77] A company may not enter a major transaction unless it is approved by special resolution or contingent on approval by special resolution. If there is no special resolution, the major transaction is, by s 175(1)(l) of the Act, deemed to be unfairly prejudicial conduct within s 174.
[78] A special resolution requires the approval of 75 percent of the company’s shareholders.19 Under s 96(a) of the Act, a shareholder means “a person whose name
19 Companies Act 1993, s 2.
is entered on the share register as the holder for the time being of 1 or more shares in the company”. Ms Frith was the only shareholder whose name was on the share register when Sealord sold the properties to Finesse.
[79] Mr Jorna contends he may rely on the deeming provision despite s 96(a) because Ms Frith failed to enter his name on the register, and she should not be able to profit from that wrong. Mr Grove argues Modern Built Investments Ltd v O’Brien supports this contention.20
[80] In that case, the appellant failed to record the respondent as a shareholder. Unsurprisingly, the Court of Appeal concluded this did not bar the respondent from availing herself of s 174 of the Act:21
However it cannot be the case that failure by a company’s directors to create and maintain a share register disentitles the persons who would otherwise qualify as shareholders from seeking relief under s 174. That would be a perverse outcome. The reference in s 174 to shareholders must also extend to persons who are entitled to be registered as shareholders under s 84, but who have not been so registered.
…
Precisely the same reasoning applies under the current companies legislation, despite differences in terminology. For the purposes of s 174, a person who is entitled to be registered as a shareholder under s 84 is treated as a shareholder, and can apply for relief in respect of unfairly prejudicial conduct (including the failure to keep a share register and/or to register the transfer of shares into their name).
[81] As will be apparent, Modern Built Investments was not about the effect of the deeming provisions but s 174 itself. Therein lies its distinguishing feature.
[82] Mr Jorna’s contention would rewrite ss 96(a) and 175(1)(l), and call into question the notice requirements attaching to the share register. Moreover, it would do both needlessly as Mr Jorna suffers no prejudice by not being able to invoke the deeming provisions of the Companies Act. Mr Jorna can rely on s 174. Indeed, he has done so successfully.
20 Modern Built Investments Ltd v O’Brien [2021] NZCA 405.
21 At [110] and [112] (footnotes omitted).
[83] For these reasons, it is not material whether Ms Frith failed to register Mr Jorna as a shareholder, for, even if she did, that would not engage the deeming provisions of the Act.
Did Ms Frith breach her obligations as a trustee by selling the properties at an undervalue?
[84] I have already concluded Ms Frith breached s 174 through Sealord’s sale of the properties to Finesse at an undervalue. This question asks whether by the same conduct, Ms Frith also breached her obligations as a trustee under the trust agreement.
[85] Mr Grove made wide-ranging submissions about this aspect of the claim despite the modesty of his relevant pleading:22
By selling the Properties at an undervalue, the defendant breached her fiduciary duties as a trustee under the declaration of trust.
The essence of Mr Grove’s contention is that Ms Frith had an obligation, as a trustee, to maintain the value of the shares, and this she breached by selling the properties at an undervalue.
[86] Mr Long resists this analysis on the basis the trust agreement described Ms Frith as a “bare trustee”, and the obligations of a bare trustee are confined.23
[87]I do not consider that description dispositive.24 Rather, I consider dispositive:
(a) the duties identified by the trust agreement; and (b) the relationship between Ms Frith and Mr Jorna as framed by that agreement.
[88] The trust agreement identifies only two duties of significance upon Ms Frith. The first is captured by clause 2.1, and concerns the trust property, meaning, the shares in Sealord:
Declaration of Trust: The Trustee declares that the Trustee holds the Property and all rights pertaining to the Property and all income and proceeds of the Property accrued or to accrue upon trust for the Beneficiary and agrees
22 Statement of claim, para 31.
23 Silver Fern Farms Ltd v Southern Deer Corporation HC Dunedin CIV-2010-412-319, 5 August 2011 at [42]; and Eden Refuge Trust v Hohepa [2011] 1 NZLR 197 (HC) at [74].
24 Burns v Steel [2006] 1 NZLR 559 (HC) at [62].
to transfer, pay and deal with the Property and all income and proceeds of the Property in such manner as the Beneficiary shall from time to time direct.
The second is captured by clause 2.2, and concerns Sealord’s directorship:
Appointment as Director: At any time during the duration of this Deed, the Trustee will, at the request of the Beneficiary, cause Gerard Emile Jorna to be forthwith appointed as a director of the Company.
[89]On the face of the trust agreement, Ms Frith’s obligations went no further than:
(a)An obligation to hold the shares on trust for Mr Jorna.
(b)An obligation to appoint Mr Jorna a director if the beneficiary requested Ms Frith to do so.
[90] The contention Ms Frith had a duty to preserve the value of the shares goes beyond the duties identified in the trust agreement, into the relationship framed by it. Two points are illustrative. First, the trust agreement left Ms Frith to direct Sealord as she wished, subject of course, to her obligations to the company as its director, and to s 174 of the Companies Act. Second, if Mr Jorna disagreed with Ms Frith’s manner of directorship of Sealord, including as to conduct potentially affecting the value of its shares, his remedy was simple: request appointment as a director, and once so, deal with Ms Frith as Sealord’s other director, in turn influencing the company’s affairs, including as to share value.
[91] In summary, Mr Grove’s contention reaches beyond the balance struck by the trust agreement and seeks to impose an obligation incommensurate with it. This aspect of the claim fails for this reason.
Allegations beyond the pleadings
[92]Before addressing relief, I return to the topic foreshadowed at [27].
[93]Mr Grove’s opening address identified five “key issues”:
(a)What was the market value of the Properties as at 25 August 2020?
(b)Did Ms Frith sell the Properties at an undervalue?
(c)Were Ms Frith’s actions oppressive or unfairly prejudicial in terms of s 174 of the Act?
(d)Did Ms Frith breach her fiduciary obligations as a trustee of the plaintiff’s shares in SPL?
(e)What relief should be ordered?
[94] These issues largely mirror the statement of claim, and as will be apparent, the analysis thus far. However, when opening, Mr Grove also said:
(a)Sale of the properties at an undervalue constituted a breach of Ms Frith’s fiduciary obligations to Sealord as a director.
(b)Ms Frith “appropriated … for her personal use” a GST refund in relation to the properties.
[95] The statement of claim says nothing about either, albeit in fairness to Mr Grove, Ms Frith’s brief of evidence may explain [94(b)]. I return to this shortly.
[96] Mr Grove’s closing address went even further. In addition to the unpleaded allegations at [94], Mr Grove said Ms Frith:
(a)Withheld information from Mr Jorna about Sealord’s finances.
(b)Breached, in various ways, her obligations as a director of Sealord, including by:
(i)Allowing Sealord’s business “to drag on for three years without putting any pressure on Finesse”.
(ii)Failing to prepare for the repayment of Sealord’s loans.
(iii)Acting in her own interests, rather than those of Sealord, by preferring “to call up the loan” to Nuincum.
(iv)Failing to take legal advice in relation to Finesse’s development costs.
(v)Failing to obtain a valuation for the properties before their sale.
(vi)Misrepresenting to Mr Jorna “the financial position of the company and her contribution” to it.
[97]The statement of claim says nothing about these allegations either.
[98] Rule 5.26 of the High Court Rules 2016 is clear about what a statement of claim must contain:
Statement of claim to show nature of claim
The statement of claim—
(a)must show the general nature of the plaintiff’s claim to the relief sought; and
(b)must give sufficient particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances to inform the court and the party or parties against whom relief is sought of the plaintiff’s cause of action; and
(c)must state specifically the basis of any claim for interest and the rate at which interest is claimed; and
(d)in a proceeding against the Crown that is instituted against the Attorney-General, must give particulars of the government department or officer or employee of the Crown concerned.
[99] That rule must be read with r 5.1(2), which concerns identification of the proper registry in relation to “the cause of action sued on”, and r 5.28, which allows a plaintiff to include “several causes of action in the same statement of claim”.
[100] The High Court Rules therefore require that all material facts and causes of action be pleaded in the statement of claim. This observation is hardly novel. In Yan v Mainzeal Property and Construction Ltd (in liq), the Court of Appeal reiterated the importance of this principle and the allied one concerning natural justice:25
…. Pleadings play a fundamental role in defining the parameters of a trial. The parties are entitled to prepare for trial on the basis that the pleadings
25 Yan v Mainzeal Property and Construction Ltd (in liq) [2021] NZCA 99, [2021] 3 NZLR 598 at [493]–[494].
identify the facts in issue and the nature and scope of the case that the plaintiff will present and the defendant must meet. For good reason, after the close of pleadings any amendment requires the leave of the court. It is not open to a plaintiff to present a case beyond the scope of the pleadings at trial without seeking leave to amend. ...
The pleading rules are not arid technicalities. They give effect to fundamental requirements of natural justice protected by s 27 of the New Zealand Bill of Rights Act 1990. The courts rightly emphasise substance over form. But ensuring that a plaintiff has a proper opportunity to present their claim, and have their day in court, cannot take precedence over a defendant’s entitlement to procedural fairness including fair notice of the material elements of the claim they are required to meet. ...
[101] Heightened pleading expectations exist in relation to allegations of fraud or dishonesty for the simple reason such allegations “are very serious”.26 It follows an allegation of fraud or dishonesty must “be pleaded with care and particularity”.27 “Fraud cannot be left to be inferred from the facts—fraudulent conduct must be distinctly alleged and as distinctly proved”.28 As the Supreme Court has said, an allegation of fraud or dishonesty must be “fully and precisely pleaded, particularised and of sufficient apparent cogency that it should go to trial”.29 Expressed another way still, such a pleading must be specific, pointed, and relevant.30
[102] Given all this, the statement of claim is materially deficient in relation to the unpleaded allegations. Unsurprisingly, Mr Long objected to their ventilation, pithily observing, “Mr Jorna continues to ignore his own pleaded claim”. I uphold the objection, to which I return, apart from two exceptions below.
[103] In his brief of evidence, Mr Jorna questioned Ms Frith’s accounting treatment of GST refunds received by Sealord. Ms Frith responded this way in her brief:31
At [127], Gerard raises an issue about GST. He appears to be insinuating that I banked GST refunds into my own personal bank account. This is incorrect. An ASB bank account was set up for SPL in order to receive the GST. This GST was transferred to Nuincum’s Westpac account to help cover the operational costs of SPL – interest, rate, insurance etc and rent. While in Nuincum’s name, it was essentially used as the operating/cash account for
26 Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].
27 At [15].
28 At [15].
29 Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013] 1 NZLR 804 at [33].
30 Prosser v NZ Investment Trust Ltd [1937] GLR 93.
31 At [158]–[160].
SPL. The relevant GST deposits were made on 27 March 2018 ($69,510); 21 July 2018 ($84,000) and 11 June 2019 ($65,900).
I told Gerard all of this before – “all GST money claimed has been put into the working account for [SPL] to cover all outgoings etc – rates, insurance, maintenance, compliance costs etc”.
In May 2019, I did personally borrow $13,000 from SPL. This was for approximately 20 days, as my cashflow was low and I was struggling to pay my bills. This was subsequently paid back. This is all recorded in the statements.
[104] This exchange obviously came after the pleadings. I allow ventilation for this reason. I also allow ventilation of the contention Ms Frith misrepresented to Mr Jorna “the financial position of the company and her contribution” because it is somewhat connected. Both can be addressed quickly. Doing so first requires me to revisit the directors’ meeting of 3 September 2019.
[105] At that meeting, Ms Frith told Mr Jorna Sealord was running at a loss of approximately $160,000, and this was being met by GST refunds from the acquisition of the properties and Nuincum’s overdraft facility. Ms Frith said the facility was coming to its limit and Mr Jorna would need to address the deficit of $6,000 per month. Mr Jorna accepts Ms Frith told him this. Moreover, the minutes of the meeting, which Mr Jorna promptly received, confirm as much. However, Mr Grove argues Ms Frith misrepresented the financial affairs of the company to Mr Jorna, as the GST refunds were sufficient to cover Sealord’s losses until 2021, and there was no need for her or Nuincum to provide Sealord funds. Mr Grove put this to Ms Frith, and took her to the accounts, in cross-examination.
[106]Ms Frith said there were delays in receiving the GST refunds: the first, for
$69,510, came 27 March 2018; the second, for $84,000, came 21 July 2018; and the third, for $65,900, came 11 June 2019. Meanwhile, Sealord had to pay interest to the finance company in relation to its borrowings, and meet other costs as they became due, including rates, insurance, and maintenance. So, while each GST refund sustained Sealord once it arrived, there was often a shortfall until it did, and this was met by (a) Nuincum’s overdraft facility and (b) cash injections by Ms Frith. Furthermore, after the third and final refund of 11 June 2019, Sealord had no income
beyond rent. Shortfalls thereafter would have to be met by Nuincum and Ms Frith, a position that was unsustainable.
[107] I accept Ms Frith’s evidence as truthful and accurate. It accords the minutes of the directors’ meeting; Sealord’s accounts, which Mr Jorna accepted as accurate in cross-examination;32 and most obviously, Ms Frith’s financial anxiety—the very anxiety that drove the behaviours constituting oppressive, unfairly discriminatory, or unfairly prejudicial conduct in Sealord’s July 2020 sale of the properties to Finesse. It follows Ms Frith did not misrepresent Sealord’s financial position or her contributions to the company.
[108] The contention Ms Frith misappropriated a GST refund in relation to the properties is answered by Ms Frith’s own evidence. Ms Frith volunteered in her brief she used $13,000 of such a refund to pay her own bills as she was “struggling” to pay them. Ms Frith said she repaid the money. No evidence exists to support the contention Ms Frith took more than $13,000, and Mr Grove did not put a higher figure to Ms Frith in cross-examination.33 No more need be said, therefore, about this topic.
[109] I disallow all of the other unpleaded allegations for seven, overlapping reasons. First, and most obviously, the statement of claim does not plead them by way of fact or cause of action. Second, the allegations could not be said to be implicit to the statement of claim or mere elaboration of a pleaded allegation. By way of illustration, a director of a company could engage in conduct in contravention of s 174 of the Companies Act without necessarily breaching her or his fiduciary obligations to the company. Third, the contention Ms Frith breached those obligations comprises a derivative claim for which permission was required but never sought.34 Fourth, Mr Jorna could have sought permission to amend the statement of claim. He did not. Fifth, the disallowed allegations do not materially advance the core one Ms Frith, through Sealord, sold the properties at an undervalue. Sixth, the disallowed allegations do not affect relief. Seventh, the allegations are, therefore, gratuitous.
32 Save perhaps for the accounts in 2021, to which Mr Jorna agreed there was “a little bit of some uncertainty”.
33 Evidence Act 2006, s 92.
34 Companies Act 1993, s 165. Obligations of this nature are owed to the company. Shareholders have no direct right of action against the director for breaches of these duties: Foss v Harbottle (1843) 2 Hare 461; (1843) 67 ER 189.
Another pleading point
[110] This leaves another topic conveniently addressed here. Ms Frith’s statement of defence contained positive allegations to which Mr Jorna did not reply. During trial, Mr Long observed r 5.63(2) governed these allegations: “An affirmative defence or positive allegation in a statement of defence that is not denied is treated as being admitted”. Mr Grove sought to tender a late reply in the middle of trial. The proposed reply acknowledged many of the positive allegations as correct, but denied others. Counsel agreed no ruling was required during trial, and the case continued.
[111] I permit the late reply on the bases it narrowed otherwise contentious facts and Ms Frith did not suffer prejudice.
Relief
[112] This issue arises because Ms Frith failed to consult Mr Jorna about Sealord’s sale of the properties to Finesse, and more significantly, because that sale was at an undervalue. Again, Ms Frith engaged in oppressive, unfairly discriminatory, or unfairly prejudicial conduct.
[113] Once such conduct is established, the Court has a broad discretion concerning relief. Relief is granted when it is “just and equitable to do so”.35 Wrong and remedy are closely linked; it is the unfairly detrimental effect of the conduct on the complainant that brings the remedy into play.36 Relief is remedial, not punitive.37
[114] Relief in this context often involves a share buy-out: an order requiring one party to sell her, his or its shares to the other at a specified price. That would be inapt here given the likely impact on the value of Sealord’s shares by the sale of the properties. Instead, Mr Jorna seeks compensation.
[115] Mr Grove contends compensation should be calculated according to a counterfactual: the profit Mr Jorna would have received had the properties been sold,
35 Companies Act 1993, s 174(2); and Sturgess v Dunphy [2014] NZCA 266 at [144].
36 Sturgess v Dunphy, above n 35, at [148].
37 At [148]
for value, on the open market. Mr Grove says this requires me to begin with the market value of the properties I have identified; deduct two percent for reasonable, real estate agency fees; deduct the sale price to Finesse; and then divide that “profit” in two. In other words, begin with $1,875,000 as the value of the properties; deduct $37,500 in “agency” fees; deduct $1,700,000 as the actual sale price; and divide the resulting figure of $137,500 by two, to arrive at compensation of $68,750 for Mr Jorna.
[116] Mr Long contends for the same basic methodology on behalf of Ms Frith, albeit with higher agency fees and additional factors punctuating the counterfactual. Mr Long says reasonable agency fees should be fixed at 2.5 percent, not 2 percent, and there should be a deduction for (reasonable) marketing costs of $7,000, plus GST. More significantly, Mr Long says I should also:
(a)Deduct a sum in recognition of Finesse’s $250,000 development costs: and
(b)Determine compensation according to entries in Sealord’s accounts.
[117] Mr Long contends if Sealord had sold the properties to someone other than Finesse, it is beyond argument Finesse would have sought to recover those costs from Sealord, in turn precluding any profit. Mr Long also contends entries in Sealord’s accounts have the same effect. Mr Grove resists both submissions.
[118] I begin with the straightforward. Mr Wigmore said sales of this nature would ordinarily attract commission of between 1.5 and 2.5 percent of the sale price. I adopt the mid-point (rather than the top of the range) for just this reason.
[119] Marketing costs would have been incurred had the properties been sold on the open market because it was a challenging environment in July 2020, including logistically; COVID-19 and related lock downs compromised people’s ability to view property.38 Alison Weakley, a real estate agent called on behalf of Ms Frith, said a
38 Mr Wigmore said the commission would likely have covered any marketing costs. I hold otherwise for the reasons above.
larger project would “typically” attract marketing costs of $7,000.39 Ms Weakley was not asked if this figure included GST. I assume it would.
[120] This brings me to the issue of Finesse’s development costs. Ms Frith said after Finesse bought the fourth property, it required Sealord to contribute to development costs as Finesse now owned one of the properties. Failing this, Sealord’s share of the profits would be reduced. No agreement was concluded between Sealord and Finesse in relation to this aspect or the project more generally (once Finesse acquired the fourth property). Mr Philson could not offer much on this topic as it was Finesse’s other director, who has since died, who was primarily dealing with Ms Frith. However, Mr Philson did say he raised recovery of development costs when Ms Frith approached Finesse in or about June 2020 in relation to selling the properties. Mr Jorna could not offer much on this topic either because he had few dealings with Finesse, and from 22 May 2019, that company appeared to have assumed Mr Jorna had no material role to play in Sealord.
[121] Two contemporaneous documents support Ms Frith’s evidence. A Finesse projection dated 15 May 2017 identifies profits being shared equally between each “JV Partner”.40 Finesse had not then bought the fourth property. A second Finesse projection dated 1 December 2017 omits the entry. By then, Finesse had bought the fourth property. Commercial imperatives also support Ms Frith’s evidence. Finesse now owned one of the properties, a departure from its model in which it developed properties owned by another.
[122] I accept, therefore, Finesse would have looked to recover its development costs from Sealord if the properties had not been sold to it. Indeed, given Finesse had incurred $250,000 on development costs by the time of sale, it is highly likely it would have looked to Sealord to recover some of these costs even if it had not raised an issue about them when it acquired the fourth property. The evidence cements this view: Mr Philson raised the issue with Ms Frith when she approached him in or about June 2020 even though he could not meaningfully comment on what Finesse’s other
39 Charlie Brothers, an agent called on behalf of Mr Jorna, said marketing costs would be “around the $5,000 mark”.
40 Meaning between Finesse and Sealord.
director might have conveyed to Ms Frith at the time of its acquisition of the fourth property.
[123] Mr Grove contends these costs remain irrelevant to compensation because no agreement was reached between Finesse and Sealord in relation to them, and therefore, Sealord had no obligation to pay them.
[124] That no agreement existed is clear. Less clear is whether Sealord might have been compellable to contribute, say, as a partner to a joint venture. Sadly, no argument was offered on this question.
[125] I am not persuaded the legal position, whatever it may be, is determinative. Sealord could not have avoided the issue of cost recovery had it sold the properties to someone other than Finesse, the assumption animating the counterfactual. I raised this with Mr Jorna during his evidence:41
THE COURT:
Q.Are you saying that from your point of view Finesse’s position could be ignored? You seem to be suggesting that as if $250,000 was not really anything at all?
A. Well it’s a lot of money, your Honour. Because the situation did eventuate, I would have thought that, yeah, it would have left them exposed. I, how Kerry and I would have dealt that at a later date is I guess something we’d have to face. I mean I did try and involve Geoff in the sale. The fact that he, they had spent $250,000, if they’d incorporated their property as well then something could have been dealt with during that negotiation.
Q. But you earlier just said that it was just tough luck that the agreement hadn’t been reduced to writing. You couldn’t seriously think that Finesse was just going to roll over about its development costs, could you?
A. I don’t believe they would, no. I don’t think they would roll over.
[126] I conclude it highly likely Sealord would have accepted responsibility for some of the development costs, if only to avoid (expensive) litigation. That would be the commercially prudent outcome in light of the sums involved. Given Finesse incurred
$250,000 development costs—a figure Mr Jorna never contested—and given at least
41 Notes of evidence, p 97, lines 1–15.
$165,000 of these comprised external costs, it is difficult to conceive Sealord’s contribution being less than $82,500, that is, half of the external costs. It bears repeating that on this scenario, Sealord has sold three of the four properties Finesse was going to develop, in relation to which Finesse had already expended a considerable amount of money. I, therefore, deduct $82,500.
[127]The arithmetic thus far is: $1,875,000 (market value of the properties) –
$37,500 (agency fees) – $7,000 (marketing costs) – $1,700,000 (actual sale price) –
$82,500 (contribution towards development costs) to give $48,000 as the potential surplus before that sum is divided in two to reach Mr Jorna’s profit share.
[128] I say “potential surplus” as there is still the issue of the entries in Sealord’s accounts. These imply $107,666 remains outstanding to Ms Frith from Sealord, and Mr Jorna owes the company $35,923. If correct, no surplus would exist, in turn vitiating compensation.
[129] Three difficulties exist, however, in relation to the entries. First, no accounting evidence was adduced. So, what the entries mean remains unclear. Second, the applicability of the entries to this exercise—a counterfactual—is equally unclear. Plainly, that is important. Third, while Mr Long cross-examined Mr Jorna about the accounts, he did not question Mr Jorna about the entries. In other words, Mr Long did not put this limb of Ms Frith’s case to Mr Jorna as required by s 92 of the Evidence Act 2006. Just as pleadings are important, so is the duty to put the case. All of which is to conclude Ms Frith has not established these entries affect compensation.
[130] To avoid doubt, this is not a conclusion Ms Frith is not owed money by Sealord, nor a conclusion Mr Jorna does not owe the company money. It is merely one I do not find this limb of Ms Frith’s case established within the context of Mr Jorna’s claim.
[131] It follows Mr Jorna is entitled to compensation of $24,000, that being his share of the profit if the properties had been sold, for value, on the open market in July 2020.
Standing back
[132] I stand back and ask whether the level of compensation is just and equitable given Ms Frith’s oppressive, unfairly discriminatory, or unfairly prejudicial conduct.
[133] Doing so does not change the calculus. No matter how the case is approached, Mr Jorna asks the Court for the benefit of the profit he would have derived had there been no oppressive, unfairly discriminatory, or unfairly prejudicial conduct; in other words, had Sealord sold the properties on the open market, for value, in July 2020. That transaction, however, would not generate much profit for the reasons explained earlier. Therein lies an important feature of the case.
Result
[134] The claim succeeds under s 174 of the Companies Act insofar as the properties were sold without consultation, and at an undervalue. Accordingly, Ms Frith must pay Mr Jorna compensation of $24,000 and interest under s 10 of the Interest on Money Claims Act 2016.
[135]The claim otherwise fails—and is dismissed.
Costs
[136] If the parties do not agree on costs after reflection and dialogue, they may file memoranda of not more than eight pages each:
(a)On or before 27 April 2023 on behalf of Mr Jorna.
(b)On or before 11 May 2023 on behalf of Ms Frith.
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Downs J
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5
1