Goldman v Kiwi Vision Limited
[2015] NZHC 2441
•6 October 2015
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2014-419-231 [2015] NZHC 2441
BETWEEN A GOLDMAN
First Plaintiff
A GOLDMAN and A GOLDMAN FAMILY TRUSTEE LIMITED as trustees of the Allan Goldman Family Trust
Second Plaintiff
NZ CREATIVE MARKETING PROJECTS LTD
Third Plaintiff
AND
KIWI VISION LIMITED First Defendant
VC INVESTMENTS (2012) LIMITED (In Liquidation)
Second Defendant
Hearing: 19 August 2015 Appearances:
Mr Haig for Plaintiffs
Mr M D Branch for First, Second and Third Defendants
Mr M Ward-Johnson for Fourth and Fifth DefendantsJudgment:
6 October 2015
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE [on Application for Strike Out]
This judgment was delivered by me on
06.10.15 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
GOLDMAN v KIWI VISION LIMITED [2015] NZHC 2441 [6 October 2015]
C R J HYLAND Third Defendant
I D BENTLEY and W K STARTUP, in their capacities as executors of the estate of ROY WILSON
Fourth Defendants
A H WILSON Fifth Defendant
Introduction
[1] The defendants apply to strike out the plaintiffs’ claim or, in the alternative,
seek security for costs.
Background
[2] The first plaintiff was the accountant for a group of companies associated with the late Mr Roy Wilson, whose estate is represented by the fourth defendants. A shareholder and director of some of the entities, and in particular, Kiwi Vision Ltd (KVL), the first defendant, was a Mr Hyland.
[3] Mr Goldman was adjudicated bankrupt on 28 September 2009 but he has since been discharged.
[4] The core business of KVL was apparently the ownership of properties located in Morrinsville from which it carried on the business of a stock food processor.
[5] Mr Wilson, who was the majority shareholder in KVL, transferred a share in KVL to Mr Goldman. However Mr Goldman relinquished that share and ceased to be a director of KVL in July 2006.
[6] The first claim which the plaintiffs bring arises out of an option to purchase
75,000 shares in KVL which was granted to the first plaintiff conditionally by Mr Wilson on 14 June 2006. That option had to be exercised during the lifetime of Mr Wilson and could only be exercised once all KVL’s tax losses had been used up.
[7] The first plaintiff attempted to exercise that option without success on 29 July
2008 and again on 7 May 2009. The case for the first plaintiff is that he is the beneficial owner of the option which he held for the benefit of his Family Trust, the Allan Goldman Family Trust (the Family Trust). It is not alleged that he actually assigned the rights under the first option to the Family Trust. The trustees of the Family Trust are the second plaintiffs. The process therefore involved Mr Goldman
acquiring the contractual right to the option to purchase shares from Mr Wilson in
KVL and Mr Wilson declaring that he held the option as trustee for the Family Trust.
[8] The plaintiffs, having reached the view that there may be little advantage in confining their claims for remedies to the estate of the late Mr Wilson (which has been distributed), have sought to devise causes of action against other persons involved in KVL, including Mr Hyland as a shareholder and director of that company.
[9] The plaintiffs have framed their claim as a proceeding based upon s 174
Companies Act 1993 (the Act). The substance of the claim is that the circumstances in which KVL disposed of its assets and business in such a way that made it impossible for the KVL option to be exercised last causing caused financial disadvantage to the plaintiffs as the holder of the option.
[10] In broad terms, the defence position on the strike-out application is that the plaintiffs have no standing to bring such a claim, even though it is correct that, at one time, the first plaintiff owned one share in KVL. Eventually, the first plaintiff left the employment of the company and at that point relinquished his single share.
[11] KVL took steps to dispose of its assets and, on 4 June 2008, sold those assets to a related company, Seales Ltd, for $3.185 million. From there, the assets were further onsold to a company called Hamden NZ Ltd (“Hamden”) for consideration of
$12 million. Eventually, the assets were onsold from Hamden to a company called
Seales Winslow Ltd for a price which the evidence did not disclose.
[12] The plaintiffs’ complaint is that, had the option been exercised, they would have been in a position to tap some of the additional wealth that was generated at the stage of the transaction between Seales Ltd and Hamden. They assert that at the prior stage, the sale from KVL to Seales Ltd was at a substantial undervalue.
[13] The proceeding involves a further company VC Investments (2012) Ltd (in liquidation) (“VCI”). VCI obtained an option from Mr Wilson to acquire 312,500 shares in KVL for the sum of $10 which was conferred on or about 10 June 2006.
This second option was never exercised. VCI was placed in liquidation on 22
September 2014.
[14] The claim is again brought pursuant to s 174. In substance, the claim is that those in control of VCI, and in particular Mr Hyland, who was a director of the company, caused it to act oppressively in relation to the second plaintiffs by failing to take up the option. I understand that it claimed that, had the second option been exercised, the sale of the assets and business at the alleged undervalue would not have occurred or VCI would have obtained compensation for the sale at the alleged undervalue which would have, as a result, benefited the second plaintiffs as shareholders in VCI.
[15] Of course, the Goldman interests were never in control of VCI and would not have been able to impose their wishes to enforce the option against Mr Wilson, even if it was financially prudent to do so. It is alleged that Mr Hyland was in control of VCI and that his actions amounted to oppressive conduct under s 174.
[16] Given the allegation that it was Mr Hyland who brought about the failure of VCI to enforce the option, the plaintiffs are of the view that it is relevant to have regard to the fact that he exercised an option to purchase from Mr Wilson (on the same terms as the first plaintiff’s option) 433,333 shares on or about 10 July 2008.
[17] Unlike VCI, it turned out that Mr Hyland was successful in exercising his option. It is alleged that he therefore derived substantial benefit from the eventual distribution of the sale proceeds for the assets and business of KVL.
[18] It should also be mentioned that the purported reason why Mr Wilson/his estate did not respond to the claimed exercise of the option by the first plaintiff was that the conditions upon which the option was contingent had not occurred, namely, that the tax losses available to KVL had not all been used up on either of the two dates when he attempted to exercise the option. The plaintiffs do not accept that this was a bona fide answer to the attempt to exercise the option. They point to the fact that the VCI option was subject to the same contingency and yet Mr Hyland was able
to successfully exercise his option which was apparently contingent also on the tax losses not having been exhausted.
[19] The position of the fourth and fifth defendants needs to be mentioned. As noted, the fourth defendants are the personal representatives of the late Mr Wilson. They resist the claim on the same grounds that the first three defendants do; namely, that relief is not available to the defendants under s 174. However, they additionally face the claim that they have wrongly distributed the estate when on notice that the plaintiffs intended to bring the claims which are now the subject of this proceeding. They claim that even if the plaintiffs may have had a justified claim under s 174, these proceedings cannot result in any advantage to the plaintiffs because the estate has been distributed without any irregularity.
[20] The fifth defendant is the widow of the late Mr Wilson. She is represented by the same counsel as the executors, Mr Ward-Johnson. She resists any suggestion that the legacy of $50,000 that she received can be clawed back to meet any successful claim that the plaintiffs might be able to bring for oppression.
Issues
[21] As I have already noted, the proceedings which the plaintiffs have brought are pursuant to s 174 of the Act, which is put in the following terms:
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.
…
[22] The key issue between the plaintiff’s and the first three defendants is whether relief is available to the plaintiffs under s 174 arising out of the two options. The defendants are of the view that the claims are unjustified and have sought to strike out the claims.
Principles and law relating to strike out applications
[23] It is necessary to briefly refer to the basis upon which the Court is invited to strike out the various claims that have been brought. As will become apparent, the first to third defendants take the view that there is no cause of action available to the Goldman interests under either of the two option agreements and that therefore the proceedings ought to be struck out.
[24] In broad terms the applicants invoke the principles in Couch v Attorney- General1. I will approach the present application on the basis that the court indicated in that case, namely that it is inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed.
Standing to bring a claim under s 174 of the Act – the requirement of temporal connection between membership and breach
[25] The first point of a decidedly procedural flavour concerns whether the second plaintiffs ought to have been included as plaintiffs. This involves a brief enquiry into the question of who was the legal owner of the option to purchase the shares.
[26] Mr Branch argued that Mr Goldman alone could avail himself of any rights under the share purchase option. He was critical of the inclusion of the Family Trust as a claimant because it did not own the option.
[27] The argument for the plaintiffs is that Mr Goldman was the person who actually acquired the option to purchase shares in KVL.2 The document granting the option which is in evidence identifies Mr Goldman as the grantee of the option. Mr Goldman was therefore at all times the legal owner of the option.
[28] In his affidavit in the proceeding, Mr Goldman said that the:
1 Couch v Attorney-General [2008] 3 NZLR 725
2 I am referring here to the Goldman option to purchase and not the option which VCI
obtained.
Benefit of the option to purchase KVL shares was conferred on the trust by me on or before 30 June 2006. The agreement dated 30 June 2006 records that I was to act as trustee for the Trust for its benefit.
[29] What Mr Goldman says about the agreement dated 30 June 2006 would not seem to be correct. That agreement actually records that the Family Trust which is described as “the principal” has requested that Mr Goldman act as trustee for it. The only way in which an agreement of that kind could make sense as if there had been an antecedent transaction on the part of Mr Goldman conferring the beneficial interest in the share option on the Family Trust which was then followed by the agreement of 30 June 2006 involving the Family Trust as the beneficial owner of the option transferring it to Mr Goldman to hold on trust for itself. The circumstances are confused. However, given that both Mr Goldman and the Family Trust are listed as plaintiffs, the ambiguity about their respective positions should not be viewed as fatal to the claims which between themselves they bring.
[30] A more substantial question concerns ownership of the single share that Mr Goldman owned in KVL. The relevance of this point emerged from a submission made by the first to third defendants that s 174 requires the party bringing the claim be a shareholder or former shareholder. Shareholder is defined in s 96 of the Act as follows:
96 Meaning of “shareholder”
In this Act, the term shareholder, in relation to a company, means—
(a) A person whose name is entered in the share register as the holder for the time being of one or more shares in the company:
(b) Until the person's name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company:
(c) Until the person's name is entered in the share register, a person who is entitled to have that person's name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company.
[31] The obstacle which the first to third defendants say arises in this case is, first, that the owner of the option, the Family Trust, was never a member of the company. The response from the plaintiffs is that the first plaintiff had the status of a
shareholder until he relinquished his share in the circumstances to which I have referred above. Further consideration will be given to this point below in this judgment.
The first and third causes of action
The claims made
[32] By the first cause of action, the plaintiffs allege that the first, third and fourth defendants are liable for breaches of the obligations owed to them pursuant to s174 of the Act.
[33] In summary, the oppressive conduct is said to have arisen in the following way. The plaintiffs, or either of them, held an option which was granted by Mr Wilson to sell part of his shares in KVL. The option was only exercisable once all the tax losses that had accrued to KVL had been used up. If, which apparently is what the plaintiff alleges, the sale price of the assets of KVL was set at an artificially low level, then there would be a reduced recovery of depreciation which had previously been written off in the financial accounts which KVL submitted as part of its tax returns. That would have the effect of maximising the continued value of tax deductions.
[34] It is alleged that the defendants who had control of KVL conducted its affairs in such a way as to contrive a way of escaping from the option. Specifically, it was asserted that they caused KVL to enter into a transaction, which will subsequently be described in more detail, designed to ensure that the tax losses were not used up. At the same time the transaction disposed of the business of KVL and ensured the capital returns to the company from the sale were distributed. The option thereby became of no value or considerably reduced value.
[35] It also appears to be part of the claim that that the properties were sold at below market value with a view to making the increase in value in the properties available to the shareholders in Seales Ltd rather than to KVL.
Strikeout ground
[36] These matters were relevant to the submission that Mr Branch made, which was to the effect that Mr Goldman was not a shareholder of the company at the point where he made attempts to exercise the options. He ceased to be a shareholder on 10
July 2008. It was accepted for the defendants that a person with the status of a former shareholder is entitled to invoke the jurisdiction under s174 of the Act.
[37] Mr Branch, for the first to third defendants, made reference to RPB Solutions Ltd v Avoca Holdings Ltd.3 That proceeding was concerned with the position of a former shareholder of the company who had not held shares in it for a number of years. The question was whether it was correct that statutory protection is extended to persons whose interests have been prejudiced prior to the transfer of their shares in the company but not otherwise.
[38] Reference was made to Canadian authorities in jurisdictions where standing to sue had been conferred upon former shareholders. That is the authorities referred to cases which have equivalent statutory provisions to the form that the New Zealand legislation has taken since it was amended.
[39] Ellis J noted that the first of these decisions, Jacobs arose in the context of a derivative action brought under the Ontario Business Corporations Act R.S.O. 1990, c. B.16 and more specifically, in relation to the question of standing arising from the following parts of the definition of “complainant” in s 245(b) of that Act:
A registered holder ... and a former registered holder ... of a security of a corporation ....;
A director or an officer or a former director or officer of a corporation ....;
[40] Ellis J noted that, at [30] of the judgment, Blair J stated:
Frans Jacobs is a former shareholder and a former director of Jacobs Farms Limited. On the surface, then, he would appear to qualify as a complainant. It could not have been the intention of the legislature, however, to clothe every former shareholder and every former director with the status of a complainant for the purpose of bringing a derivative action. Such an interpretation could lead to absurd situations. There must be some
3 RPB Solutions Ltd v Avoca Holdings Ltd [2010] 2 NZLR 857 (HC).
parameters within which the concept of “former shareholder” and “former director” are confined. Those parameters can reasonably be drawn by requiring some connection between the timing of the events which are the subject matter of the proposed derivative action and the position of the application as shareholder or director.
[41] Reference was also made to another Canadian case, L & B Electric Limited, which considered the definition of “complainant” in relation to a claim for an “oppression remedy” pursuant to the Third Schedule of the Companies Act R.S.N.S
1989 c. 81 (a provision equivalent to s 174). The definition was similar to that considered in Jacobs but, notably, included:
A registered holder or beneficial owner, and a former registered holder or
beneficial owner, of a security of a company or any of its affiliates.
[42] The emphasis was inserted into the quote by Ellis J in her judgement. The Judge agreed with the submission which was made for the company that the Nova Scotia Court of Appeal appeared to have adopted the views which were stated in the passage from Blair J’s judgment but held that the claimant qualified as a complainant with standing, for the purposes of the oppression remedy sought because the Judge at first instance had found that its ownership and/or beneficial ownership of the shares in the relevant company was in fact contemporaneous with the events about which he was complaining. The Judge agreed with the approach taken in the Canadian cases to which reference has been made with the result that the relevant relationship as defined by, and confined to, the time when the former shareholder was in fact a
shareholder.4
[43] Reference was also made in the judgment to Jacobs by the authors of
Brookers Company Law in the following terms: 5
The issue of standing in Jacobs arose in the context of the definition of “complainant”, in s 245(b) Ontario Business Corporations Act R.S.O 1990, c. B.16. A “complainant” was defined, for derivative proceeding purposes, as including “…a former registered holder…of a security…”. The Ontario Court in Jacobs concluded that:
“[30] …It could not have been the intention of the legislature…to clothe every former shareholder…with the status of a complainant…Such an interpretation could lead to absurd situations.
4 Avoca Holdings, above n 2, at [26].
5 Brookers Company Law (online looseleaf ed, Brookers) at [CA174.01].
There must be some parameters within which the concept of ‘former shareholder’…[is] confined. Those parameters can reasonably be drawn by requiring some connection between the timing of the events which are the subject matter of the proposed…action and the position of the [applicant] as shareholder…”
[44] The commentary goes on to say of the L & B Electric case:6
The issue of standing in L & B Electric similarly arose from the definition of “complainant”. In that case, it arose in the context of pursuing a remedy for oppression under the Third Schedule of the Companies Act R.S.N.S 1989 c.
81, a provision equivalent to s 174. The definition was similar to that in
Jacobs, but extended to former beneficial owners of securities. The Nova
Scotia Court of Appeal appeared to accept the approach of the Ontario Court in Jacobs as authoritative.
[45] The effect of the judgment, then, was that it is only matters which are linked to the time when a former shareholder had the status of shareholder in the company. As a result, the Judge in RPB Solutions determined that a former shareholder has no standing to make an application under s 174 in relation to conduct that was alleged to have occurred at least five years after his shareholding was transferred.
[46] I respectfully agree with the approach taken in Avoca Holdings and intend to apply it in the context of this case.
[47] Another way of analysing the plaintiffs’ assertion to an entitlement to relief under s 174 concerns a suggestion that unfairness arose in the following circumstances. Reference was again made to the fact that the option which Mr Wilson granted was conditional upon the company, KVL, having used up all its tax losses. It is the case for the plaintiffs that those in control of the company contrived to ensure that the tax losses were not used up as they would have been in the usual course of business.
[48] In more detail, the allegations which the plaintiffs make are as follows. KVL expended considerable sums of money on installing a feed mill on its land in Morrinsville. However, while the expenditure on that plant was noted, the resulting structure and associated equipment was not registered in the depreciation schedules
to the company accounts for the relevant periods. Thereafter, the property was sold
6 At [147.01].
to Seales Ltd. The plaintiffs’ analysis is that had this been done, one would expect that the financial accounts would reflect a recovery against depreciation on the sale of the property.
[49] Mr Branch submitted that in the RPB Solutions case, the focus was on a temporal connection. He submitted it must equally require a material causal connection with the conduct complained of. He said:
23. It is notable that RPB Solutions was a strike out application. While the focus in that case was on the necessity for a temporal connection, it is submitted it must equally require a material causal connection with the conduct complained of. That must follow from the inclusion of the extension being remedial and that this was a change made to address unfairness where the value of a share had been diminished during ownership but had since been sold.
[50] The first to third defendants took issue with the statement that the oppressive conduct may relate to the shareholder or former shareholder in any capacity. I was referred to Thomas v H W Thomas Ltd, where Richardson J said:7
In the same way it is the unfairly detrimental effect of the conduct of the company on the interests of the complaining member which brings into play the just and equitable subs (2) of s 209. That detriment may be to the financial interests of the member as a member or it may be conduct which is adverse to his interests in other capacities, as where, for example, he is excluded from management participation in the company.
[51] The plaintiffs’ response to this issue is found in the following extracts from
the submissions which Mr Haig filed on their behalf:
24. … A shareholder or former shareholder is allowed to bring a claim for prejudice “in that capacity or any other capacity”. Here, Mr Goldman has been prejudiced in his capacity as discretionary beneficiary of the trust and/or as trustee for the option trust.
…
32. … If the gateway requirement under s 174 is established (shareholder or former shareholder) together with a temporal connection as set out in RPB Solutions, the oppressive conduct may relate to that person in any capacity. To restrict s 174 otherwise would diminish the remedial equitable purpose of the provision and leave applicants without a remedy in situations such as the present where rights or benefits flow from or are contingent on the performance of a company (such as share bonus or loyalty schemes for example).
7 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 694.
Discussion
[52] In Thomas v HW Thomas Ltd, Richardson J summarised the intentions of the New Zealand Macarthur Committee in making a recommendation that former shareholders of the company ought to be able to invoke s 174.8 He said the committee considered that:
..
if properly amended s 209 would provide a valuable and workable remedy (and one which was originally intended) to deal with the expulsion or exclusion of members of the company from participating in its affairs in other capacities and accordingly that the section should expressly apply not only to the oppression of members as members but also to members in their capacity as directors or servants or any other such capacity.
[53] My conclusion is that the jurisdiction under s 174 is not to be interpreted narrowly to restrict remedies only to the rights arising out of ownership of the shareholding in regard to which the member is registered as a shareholder. However the entitlement to relief is not unlimited and there must be some demonstrated connection which the member has with the company to give rise to an expectation or entitlement, such as his or her employment by the company.9 The right which the plaintiffs put forward as the basis for intervention into s 174 is based upon their entitlement as an option holder to buy shares in the company. Of course, any person can buy shares in the company, subject to restrictions in the constitution in that
regard. The buyer of shares does not need to be an existing member of the company. There is no connection between the acquisition of the option and membership in the company. In practical terms, only an existing member of the company will be in a position to offer shares for sale. But the contract to buy the shares under the option does not arise under or incidentally to the constitution which
binds the shareholders of the company.10
8 At 697.
9 Thomas v H W Thomas, above n 6.
10 For the effect of the constitution, refer to Companies Act 1993, s 31(2).
[54] The terms of the option in this case, other than in the negative sense that there may be restrictions as to whom shares can be sold to, are not affected by the company’s constitution.
[55] The option does not arise out of an employment contract with the company, which is another way in which it might be explicable that the section concerned with relationships between shareholders might come into play. Such a claim in expanded form would be to the effect that the way in which the affairs of the company had been conducted, impacted the shareholder in his capacity as an employee. It would appear to follow from the explanation of the jurisdiction which is put forward in Thomas that it is not necessary for a claimant to show that its rights under the constitution of the company have been breached before relief will be available under s 174. It is correct that exercise of the share purchase option relates to an agreement between two persons, neither of which is the company. Any breach of that agreement is not a breach of a legal obligation in the strict sense that the company owes to the option holder. That point would be of particular significance if the existence of such a legal obligation were a pre-requisite to relief being available under this section. Thomas establishes that it is not.
[56] Further, it would be understandable why a shareholder should be able to invoke the oppressive dealing provision in circumstances where the actions of the company acquire the colour of oppressiveness from circumstances not involving the company itself in a breach of legal obligation. It is at least arguable that intervention should be available where powers available to those in control of the company are being used to give them an advantage in a dispute to which the company is not an immediate party but which involves differences between a shareholder and the controlling majority concerning a matter which has some connection with the company.
[57] I accept that there is force in the point which Mr Branch makes for the defendants that the share purchase option is between shareholders of the company and does not directly involve governance of the company itself. On the other hand, it is not inconceivable that a party to a share purchase option of this kind could, because of the position of influence or control he has over the company, bring about
a situation which would be to his advantage if he wished to escape the consequences of the share purchase option. The two matters are therefore not to be viewed necessarily as being within watertight compartments. The acquisition and sale of shares in small private companies may not strictly involve the company as a party. The way that the company is governed in the background though may have an influence on the rights of the parties. The affairs of the company may be managed oppressively if those in control direct its affairs for some ulterior purpose which may be harmful to one of the shareholders.
[58] At the same time, it is necessary for the plaintiff to show that there is a temporal connection between the events which related to the governance of the company and when he held his shares in the company. In this case, it will be a question of fact whether at the time when Mr Goldman was a shareholder in the company steps were taken for the management of its affairs which were designed to defeat Mr Goldman’s rights under the share purchase option.
[59] If the unfairness is said to arise from the failure to properly reflect in the accounts a matter of recovered depreciation, and therefore a resulting diminishment of tax losses carried forward, then that cannot have occurred until the calendar year
2008, at the earliest, because that was the year that the assets of the company were transferred to Seales Ltd.
[60] Before I set out my decision in this matter it is necessary to say something additional about the relationship between the first cause of action and the third cause of action. I will deal with them together because it seems appropriate to take an overview of the causes of action before deciding whether or not to strike them out. Such an order should not be made if it is arguable that, between them, the two pleadings disclose the elements of at least one viable cause of action. It will be sufficient if the plaintiffs are able to link together ownership of the share purchase option with a claim that the affairs of the company in which the shares were owned were conducted oppressively for the purposes of defeating the share purchase option.
[61] The conclusions, in summary, are these. Mr Goldman was a shareholder of the company until July 2008. The transfer of the assets from KVL to Seales Ltd took
place in June 2008. The transaction that the company entered into which led to the transfer of its assets in June 2008, obviously took place sometime before that date and necessarily while Mr Goldman was a shareholder in the company.
[62] In this context, it is not clear on what basis the Court could decide in favour of the plaintiff they were subject to oppressive conduct. An argument could be made that it would not be before the point where the transaction with Seales Limited had, in fact, first been brought to account as between KVL and the Commissioner of Inland Revenue. It was at that point that calculations would have been made carrying forward earlier tax losses which would not have been used up because the Commissioner apparently accepted the level of depreciation written back by KVL as a consequence of the Seales Limited transaction. Obtaining the approval of the Commissioner for the construction of the accounts in this way was part of the claimed scheme which the plaintiffs say contravened the rights of Mr Goldman as a shareholder. The scheme therefore is unlikely to be viewed as all taking place at one particular point of time. Elements of the alleged scheme may have occurred both before and after Mr Goldman ceased to be a shareholder. Because of the imprecision about the timing question, it is my view that it would not be an appropriate exercise of the power to strike out to determine that he was not a shareholder at the time when conduct contravening s 174 occurred.
[63] Mr Goldman would appear to therefore have standing to complain about oppressiveness in relation to that transaction. Whether the small amounts of the monetary effect on his interest that resulted from the transaction would justify a strike out claim will be considered in the next section of this judgment.
[64] Given, though, that Mr Goldman may be able to establish that he was a shareholder at the time when the transfer of the assets and undertaking to Seales Ltd took place, there may have been the necessary connection in place between himself and the company of which he was a member to enable a claim to be brought under s 174. In the light of that conclusion, the application to strike out the first two causes of action, on grounds which might be summarised as lack of standing, is declined.
The claim that proceedings are an abuse of process – the de minimis ground
[65] In his affidavit, Mr Hyland stated that, at the time when KVL’s business and assets were transferred to Seales Ltd, there were 1,250,000 shares on issue in KVL. As he points out Mr Goldman’s shareholding amounted to 0.0001%. He said that even if Mr Goldman could establish that KVL had undersold its assets by
$7,906,739, the value of his claim arising from that transaction would be $6.33.
[66] This essentially amounts to an argument that the amounts that are potentially recoverable are so trifling that the Court ought not to entertain a claim accordingly.
[67] A similar but different approach to this issue would be to enquire whether it was likely that, assuming the quantum claimed has been correctly analysed by Mr Hyland, the Court would make a finding that there had been oppressive, unfairly discriminatory, or unfairly prejudicial conduct on the part of the company and that remedies ought to be granted when any interest that the first plaintiff had in the company was of a purely nominal kind.
[68] It is correct that the plaintiffs, in addition to seeking compensation, apply for an order directing that 5.77% of KVL’s shares be transferred to them. It is to be emphasised, though, that this order is sought as relief obtainable under s 174 rather than by means of an application for specific performance of the option agreement. I am not able to see how such relief could be available to the plaintiffs for the reasons that the share transaction between two shareholders of the company is not a matter that will attract the operation of s 174, the reasons being those that I traversed in the preceding section of this judgment.
[69] Reverting to the de minimis point, it is to be observed that the first to third defendants did not point to any decided cases where the claim had been struck out on such a basis. I agree that the Court on hearing this application may be reluctant to grant a remedy if in fact a breach of section 174 has been established, in order to compensate the plaintiffs for what would appear to be a trifling loss. It has not been suggested that the obtaining of orders has a wider significance so as to have the equivalent effect of a declaration which might be of precedent value with respect to
other claims. Therefore, in assessing this submission, it is appropriate to proceed on the basis that the amounts that the first to third defendants say represent the maximum recoverable are correctly stated.
[70] However, in the absence of any authority supporting the argument based upon de minimis considerations, I consider that the plaintiffs ought to be given the benefit of the doubt and I decline to strike out the claim on this ground.
Limitation period
[71] The transaction between KVL and Seales Ltd, according to the pleadings that the plaintiffs filed, was entered into on 1 July 2007. This proceeding was issued on
26 May 2014. The first to third defendants submitted that a six year limitation period applied. Mr Haig, on behalf of the plaintiffs, did not disagree that that was the appropriate limitation period. However he did not accept the further submission that the proceeding, to the extent it was based upon the KVL/Seales Ltd transaction, was time-barred. Mr Haig referred to the fact that the date when the properties were transferred to Seales Ltd was not until 4 June 2008 and therefore the proceeding was commenced in time, if this latter date is the correct point at which to begin calculating the limitation period.
[72] Having regard to the remedial nature of the enactment, I can see no justification for concluding that time should begin to run from the date when the agreement to sell the Seales Ltd property was entered into. Consistent with the reasons that I set out dealing with the “former shareholder point” point, there may be an argument open to the plaintiffs that the alleged conduct on the part of Mr Wilson and Mr Hyland ought to be considered as not just including the entry into the transaction with Seales Ltd but taking the agreement to its conclusion by the transfer of the company’s assets to Seales Ltd and the resulting effect this had from a taxation point of view. It is not straining matters to view that episode in its entirety as having an arguably oppressive effect on the plaintiffs. In any case, it would seem likely that at least one of the directors is likely to have been involved in executing transfers and other documents necessary to implement the transaction with Seales Limited with the authority of the board of directors. Beyond that point, the filing of taxation returns that had the effect of perpetuating the tax losses available to the company are
part of the scheme which the plaintiffs allege and is likely to have only been possible because the directors sanctioned settling the financial statements in the form that made that possible.
[73] It scarcely needs to be mentioned that whether or not a Court might ultimately find that it is proved that Messrs Hyland and Wilson had such objectives in view is another question altogether and not one that arises in the context of this strike out application.
[74] Accordingly the claim is not statute barred and ought not to be struck out on this ground.
The effect of the bankruptcy of Mr Goldman on 28 September 2009
[75] The further contention that the first to third defendants put forward was that because the claim in respect of the KVL option under s 174 was dependent upon the rights arising from Mr Goldman’s membership of the company, it is necessary to consider the effect of his adjudication in bankruptcy on 28 September 2009, if any, on the claim.
[76] Mr Branch referred to s 101 of the Insolvency Act 2006 which is in the following terms:
101 Status of bankrupt's property on adjudication
(1) On adjudication,—
(a) all property (whether in or outside New Zealand) belonging to the bankrupt or vested in the bankrupt vests in the Assignee without the Assignee having to intervene or take any other step in relation to the property, and any rights of the bankrupt in the property are extinguished; and
(b) the powers that the bankrupt could have exercised in, over, or in respect of any property (whether in or outside New Zealand) for the bankrupt's own benefit vest in the Assignee.
(2) This section is subject to section 104.
[77] It was his submission that those rights are caught by the very comprehensive definition of the effect of the statutory assignment of the bankrupt’s property on adjudication. He further submitted that any rights under s 174, having passed to the Official Assignee, remained with him, notwithstanding Mr Goldman’s subsequent discharge from bankruptcy.
[78] The submission for the plaintiffs was that s 101 is restricted to property that is owned beneficially.
[79] In considering this matter, it seems to me that it is necessary to keep in mind the distinction between rights attaching to the ownership of the share, on the one hand, and the rights arising under the share purchase option on the other. It is from the former that any rights under s 174 will arise. The issue is therefore whether any rights ancillary to ownership of the share passed to the Official Assignee.
[80] The evidence establishes that Mr Goldman owned his share in the company beneficially. His rights to invoke s 174 entitlements were not held by him on trust for anyone.
[81] I agree with the submission that Mr Branch made, which is that the right attaching to the share formerly held (in this case a right to bring a s 174 claim) therefore vested in the Official Assignee11 and remained with the Official Assignee
notwithstanding discharge from bankruptcy.12 There is no suggestion that the official
assignee has abandoned the share in KVL or that he has agreed to assignment back to any of the plaintiffs. On these grounds, the first cause of action ought to be struck out and there will be an order accordingly.
The second cause of action
[82] The second cause of action which is pleaded by the second plaintiffs is based upon an option that Mr Wilson granted to VCI, the second defendant, to acquire
11 Insolvency Act 2006, s 101.
12 Section 304 and the commentary from Brookers Insolvency Law and Practice (online looseleaf ed, Brookers) at [IN304.02].
312,500 shares that he owned in KVL. The second cause of action is pleaded against the second to fourth defendants.
[83] The second plaintiffs allege that the option was never exercised by VCI. That is not denied. The second plaintiffs claim that the option was to be exercisable during the lifetime of Mr Wilson and, again, was subject to the requirement that was present in the KVL option which is that all tax losses be used up before the option could be called upon.
[84] The second plaintiffs seek from the Court a declaration, amongst other things, that the tax losses of KVL were used in or before the 2009 financial year.
[85] On the assumption that the tax losses were used up and that the option was exercisable, the second plaintiffs claim that there was a failure to exercise the second option prior to the death of Roy Wilson and to obtain a transfer to VCI of the
312,500 shares that would have been transferred by Roy Wilson if there had been a successful enforcement of the option. The relief sought is that the shares in KVL be transferred to VCI or that the second plaintiffs proportionate share of the option shares (based upon the fraction of their shareholding in VCI) of 2.4 per cent be transferred to the second plaintiffs and that there be an accounting for dividends, capital distributions etc.
[86] I understand that the point the first to third defendants make is that the second plaintiffs, who claim that, as trustees of the Family Trust, they are entitled to relief under s 174 because it is a shareholder in KVI, are incorrect because there has been a misstatement of who the shareholders actually were. That is to say, the company register of VCI shows persons as the shareholder/trustees who are no longer trustees of the Family Trust. The current trustees of that trust are Mr Goldman and A Goldman Family Trustee Ltd. Because the second plaintiffs are not the registered shareholders, it is said they cannot apply for relief under s 174. The point is a technical one.
[87] The response of the second plaintiffs is that because the company has been placed into liquidation, they have been prevented by s 248 of the Act from seeking
correction of the shareholders register without leave from the Court. An order is apparently to be sought to that affect.
[88] I do not regard this point as being a substantial one. There must be a reasonable prospect of the plaintiffs obtaining leave to obtain a correction of the company’s records. Once that is done, the correct legal owners of the shares in right of the Family Trust will be in a position to proceed with the claim for oppression. This part of the application to strike out is therefore dismissed.
[89] The first to third defendants raise a limitation defence in answer to the claim of oppression which is alleged to arise out of the failure by the directors of VCI to exercise the option of that company owned to acquire shares from Mr Wilson in KVL. Consistently with the view that arises out of the plaintiffs’ claim under the option to buy shares in KVL, I consider that it is arguable that the option lost a substantial part of its value at the date when KVL transferred the assets to Seales Ltd on 4 June 2008 and that if, as I consider to be arguable, oppression was caused or augmented or amplified in its effect by that event, then that is the starting point for the limitation period and, as a consequence, it is arguable that the proceeding was brought within the six year limitation period.
The third cause of action
[90] This cause of action is dealt with in the section of the judgment dealing with the application to strike out the first cause of action and nothing needs to be added at this point.
The fourth and fifth causes of action
[91] These causes of action are brought by the plaintiffs against the fourth defendants who were the personal representatives of the late Mr Wilson. The causes of action are based upon the assumption that Mr Goldman effectively exercised the option to purchase the shares in KVL. I interpolate that the plaintiffs assert that Mr Goldman did not own the beneficial interest in the option. It is alleged that the Family Trust did. This allegation is required to be accepted for the purposes of the
strikeout application. That being so, Mr Goldman’s adjudication on bankruptcy in
September 2009 does not affect his right to bring the present action.
[92] The key element of the claims of the fourth and fifth causes of action is based on the proposition that Mr Wilson became a constructive trustee for 35,000 of the shares that he owned in KVL from the time when Mr Goldman attempted to exercise the option for the purchase of those shares. Again, the claims presuppose that the option was exercisable on one of the two dates on which Mr Goldman purported to exercise it, with the latter of those two dates being 7 May 2009.
[93] A buy-back of KVL’s shares occurred on or about 30 January 2009 with
1,299,870 of its 1.3 million shares being re-purchased, leaving a balance of 130 shares still on issue. The exact ramifications of that event on this particular cause of action cannot be usefully commented on at this point. It is sufficient to note that if Mr Wilson had been required to hold the shares in equity for the plaintiffs following a successful exercise of the option to purchase which the plaintiffs allege, then it seems likely that any claim in regard to the shares would be capable of being converted into an interest in the proceeds of which Mr Wilson received as part of the buy-back initiative.
[94] The plaintiffs seek compensation for losses arising from an alleged breach of obligations of the fourth defendants owed as a result of the successful exercise of the option. Mr Wilson personally, during his lifetime, and Mr Bentley (and Mr Startup), as Mr Wilson’s personal representatives, are alleged to have breached the duties arising from their constructive trusteeship, including to hold proceeds from KVL’s shares on trust and to disclose information including that Mr Hyland or his trust had exercised their KVL share option
[95] The fourth defendants apply to strike out this claim. It is accepted that they have distributed the estate of Mr Wilson. They also claim that they did not have any notice of claim of the kind now brought against them at the time when they made the distribution. The submission which Mr Ward-Johnson put forward was as follows:
8.It is submitted that the Court’s discretion should be exercised to strike out the plaintiffs’ claim as:
8.1the executors of the estate of Roy Wilson were not on notice of any claim;
8.2 in the absence of notice distribution was appropriate;
8.3 the extent of funds distributed to Sam Wilson as against the
extent of the plaintiffs’ claim; and
8.4Sam Wilson received funds from the estate in good faith and has altered her position in the reasonably held belief that distribution was appropriate.
[96] The plaintiffs’ position is that the fourth defendants, as executors, have actual notice of the plaintiffs’ interests through Mr Bentley’s role in drafting the options, acting as Mr Wilson’s agent for service of notice of exercise of the options, and by letter from Mr Goldman dated 7 May 2009:
“I therefore put you and Mr Wilson on notice that no action should have occurred nor must not occur which might prejudice either my or [VCI’s] equitable interests in the company in accordance with the warranties given within the Agreements made on 14 June 2006.”
[97] The plaintiffs responded to the submissions of the fourth and fifth defendants as follows:
11. The fourth defendants submit they have a complete defence to the plaintiffs’ claims on the basis they cannot be liable as they were not on notice of the plaintiffs’ claims when they distributed the estate. However, it is not clear what statutory provision or other authority is relied to establish this ‘king hit’ defence. The authority that is cited is:
(a) Commentary from Nevill’s Law of Trusts13 regarding s 47 of the Administration Act 1969. This provision imposes a limitation period of 6 months following probate for claims against administrators for the specific applications set out in s 47(1)(a)-(f). None of the plaintiffs’ causes of action are caught by that provision.
(b) Public Trust v Public Trust14. In that case the executor trustees sought directions under s 4(4) of the Family Protection Act on whether claimants should be notified of the estate against which they had a potential claim. Here, the fourth defendants have never sought directions and therefore cannot shield behind having done so. Further, the duty of
13 N Richardson (ed) Nevill’s Law of Trusts, Wills and Administration (9th ed, LexisNexis, Wellington, 2004).
14 Public Trust v Public Trust (2009) 27 FRNZ 554 (HC).
disclosure pleaded in this case arises from Mr Bentley’s obligations as constructive trustee and/or trustee of the plaintiffs’ interests in KVL and Cornage shares. It is not pleaded that the fourth defendants failed to notify the plaintiffs in their capacity as executors but it is pleaded that Mr Bentley and Mr Wilson were on notice at all material times that the plaintiffs’ claimed an interest in the shares in question.
(c) Sadler v Public Trustee. That claim involved the 12 month limitation period to bring claims as of right pursuant to s
9(2) of the Family Protection Act 1955. That limitation is not relevant here.
[98] In my view, all of those points are well taken. In particular, I agree that the limitation period of six months following probate for claims against administrators under the enactments in s 47(1)(a) to (f) is not applicable in the circumstances of this case because the claim which the plaintiffs bring is not one which falls within those categories.
[99] It would appear that the issues that the Court needs to decide under this part of the application are these:
(a) Were the plaintiffs obliged to give notice? (b) Did they give notice?
(c) Ought the proceeding against the fourth defendants or the fifth defendant be struck out?
[100] An important consideration when determining the application with reference to this part of the plaintiffs’ claim is that, as Mr Haig pointed out, the fourth defendants do not rely on s 35 of the Trustee Act 1956 (administrators or trustees have a defence if claims are not made following advertisement). Accordingly, on the face of the submissions for the fourth defendants, there is no clear defence established.
Was notice required?
[101] The common law position has been summarised in Williams Mortimer and
Sunnucks, Executors Administrators and Probate as follows:15
It is important that a representative takes proper steps to ascertain the debts for, unless he is misled by the creditor, he is liable for debts (to the extent that he has assets to pay them) even if he had no notice of them. It is not therefore safe to rely simply upon information obtained from the documents of relatives before distributing.
[102] An executor in the position of the defendants in this case who does not advertise is therefore exposed to liability which reflects the principle that the whole real and personal estate to which the deceased is beneficially entitled is liable in the hands of the representative to the payment of the debts of the testator. That principle extends to future and contingent debts which also take priority over payment to
beneficiaries.16
[103] If the approach that I have outlined is accurate, then it is at least arguable that the fourth defendants, not having advertised pursuant to s 35 of the Trustee Act, could face a personal claim in regard to the contingent claim that the plaintiffs may have under s 174 arising out of VCI’s failure to take steps to enforce the option to acquire shares from Mr Wilson in KVL. A personal claim would be available to the plaintiffs in the event they are able to establish that part of Mr Wilson’s shares, which were sold as part of the re-purchase programme, belonged to the plaintiffs and that the plaintiffs had a restitution type claim available to them against the executors.
[104] Apart from a personal claim, the plaintiffs may be able to establish that they have a proprietary interest in part of the shares. A claim of that kind would not be defeated by any considerations of absence of notice.17 The reason is that the executors could have no warrant for passing property that did not belong to the executor to the beneficiaries of the estate. Any expression of views on these topics must necessarily be tentative because the type of claim being addressed is far from
straightforward.
15 J R Martyn and N Caddick (eds) Williams Mortimer and Sunnucks, Executors Administrators and Probate, (20th ed, Sweet and Maxwell, London, 2015) at [51-03].
16 Re Yorke [1997] 4 All ER 907 (Ch ) at 917H.
17 Even though I have concluded that a notice type defence would arguably not assist the executors in this case.
[105] The important point, however, is that the fourth and fifth defendants, understandably, do not assert that no claim is available to the plaintiffs against the estate and the beneficiary who allegedly received property derived from shares in KVL which Mr Wilson, it is claimed, had granted them an option over. They cannot submit either that there was any time limit within which the claimant ought to have advised of a claim. Assuming that there is no requirement on the claimants to give notice, the tentative conclusion must be that the only limit to the time within which a claim ought to be made is any that arises from the Limitation Act which governs the time within which proceedings must be started, in distinction from the period during which notice of an intended claim is to be given.
Was notice given?
[106] In case I am wrong in the conclusion that no notice was required, I will consider the question of the adequacy of the notice which the plaintiffs have referred to.18
[107] An issue arises in this regard from the deposition that Mr Goldman made that:
I never signalled to any of the defendants or their advisors that I was going to bring a claim relating to my one KVL share before bringing this claim.
[108] This was relied upon by the fourth defendants as showing that they were not on notice and therefore no claim could be brought against them.19
[109] I do not consider that the statement that Mr Goldman has made above prevents him from now referring to an exchange with Mr Wilson as constituting notice of a claim. However, it has to be said that the terms of the letter which Mr Goldman wrote does not expressly warn that a claim is coming. A reasonable reader of the letter might see it as a case of Mr Goldman asserting his legal right to the shares but going no further than that. On the other hand, the fact that a party
gives a warning which refers to legal rights that he claims he has may, in some
18 This is the letter that Mr Goldman wrote on 7 May 2009
19 Because Mr Goldman has given this specific deposition in the context of the strikeout application, it cannot be assumed in his favour that the point is to be resolved by treating all of the allegations in the statement of claim as being correct.
circumstances, carry with it the inference that he or she will, if necessary, institute legal proceedings to enforce the position stated. That might particularly be so in a case where the reader is aware of other facts, for example, that the claimant has the resources to undertake legal action or that he or she has previously shown a readiness to institute proceedings to protect his or her position. I appreciate that there is no evidence on surrounding circumstances of this kind available to the Court at this stage but, in the context of a strike out application, I would not be prepared to conclude that there is no reasonably arguable basis for the plaintiffs to contend that the notice in the letter would suffice to inform the recipient that a claim might be forthcoming if the writer’s wishes were not adhered to.
[110] The plaintiffs also submit that because Mr Bentley had acted as Mr Wilson’s solicitor and agent throughout, he had actual knowledge that the plaintiffs asserted they had interests or rights arising from the KVL share option which had been wrongly declined. Mr Haig submitted that Mr Bentley, as a lawyer, cannot say he did not appreciate the significance of the notice that he received.
[111] For the purposes of this strike out application, I consider the fact that Mr Goldman had served Mr Wilson with a notice purporting to exercise the option, which was replied to by Mr Bentley, may qualify as a notice which fixed the executors with knowledge that the plaintiffs were going to be making a claim on the estate. I do not consider that, in the context of a strikeout application, the Court could confidently conclude otherwise. These are questions which cannot be resolved simply by way of analysing the counter posed legal propositions that each side puts forward. The question would be one that could only be reviewed satisfactorily in the context where evidence was heard.
[112] For these brief reasons, I do not accept the submissions that Mr Ward- Johnson has made to the effect that it is open to the fourth defendants to successfully strike out the plaintiffs’ claims.
Defence under s 51 Administration Act
[113] The fifth defendant further pleads that she has a defence under s 51 of the
Administration Act 1969 which provides as follows:
5 Restriction on following assets
In any case where an administrator or trustee has made a distribution of any assets forming part of the estate of any deceased person or subject to any trust, relief (whether under subsection (1) of section
49 of this Act or in equity or otherwise) against any person other than the administrator or trustee or in respect of any interest of any such person in any assets so distributed and in any money or property into which they have been converted, may be denied wholly or in part, if—
(a) The person from whom relief is sought received the assets or interest in good faith and has altered his position in the
reasonably held belief that the distribution was properly made and would not be set aside; and
(b)In the opinion of the Court it is inequitable to grant relief or to grant relief in full, as the case may be.
[114] The fifth defendant has given evidence that she had no knowledge of the circumstances that give rise to the claim which the plaintiffs make against her. Section 51 raises a number of considerations that I do not consider can suitably be disposed of by way of a strike out application. The very question of whether the fifth defendant received the assets in good faith, the question of whether she altered her position and whether she did so in the reasonably held belief that the distribution was properly made are all questions which, together with the final criteria of s 51(b), cannot be decided on a strike out application. It is doubtful that entry of judgment on these grounds would even be available on a defendant’s summary judgment application.
[115] The conclusion must be that, notwithstanding the comprehensive submissions which Mr Ward-Johnson has put before the Court, at this point in the litigation, the Court would not be justified in striking out the claims against the fourth and fifth defendants. Some of the matters that counsel raised could well be influential at a later stage if this matter were to go to trial, I accept.
Security for costs
[116] All of the defendants have applied for security for costs against the plaintiffs. The first to third defendants seek a sum of $74,625. The fourth and fifth defendants calculate the likely costs on a 2B basis as $83,625.00. They, too, put forward the
figure calculated as being the appropriate starting point for fixing security for costs. The total of the two figures is approximately $158,000.
[117] The plaintiffs oppose the making of such orders on the grounds that they would stifle the plaintiffs’ claims which are meritorious, and that the defendants’ prejudicial conduct has deprived the plaintiffs of substantial funds such that it is unfair to impose another financial burden on them.
[118] The plaintiffs concede that the first plaintiff is a resident overseas for the purposes of r 5.45(1)(a)(i) of the High Court Rules. However they say that it is relevant to take into account that, because he is residing in Australia, enforcement of costs orders will be reasonably straightforward.
[119] Notwithstanding that statement of position, the plaintiffs have since offered to pay the sum of $15,000 for each defendant group into their solicitors’ trust account to be held on undertakings.
[120] I will not consider all of the submissions made in detail but the following issues seem to me to be relevant. There has been a reduction in the scope of the hearing following the determination I have made that the plaintiffs’ claims under s 174 relating to their share purchase option in KVI is to be struck out. However, the claim brought in regard to VCI is still a substantial one. I would not rule out that that claim, together with the claim against the fourth and fifth defendants, could take up to seven days hearing time.
[121] Mr Goldman is plainly impecunious and is living in Australia as already mentioned.
[122] The Court of Appeal held in A.S. McLachlan v MEL Network Ltd20 that the Court considering a security for costs application ought to attempt an assessment of the merits of the plaintiffs’ claims. That is not a straightforward undertaking in the context of this case. Points that are relevant, though, to the question of whether the
plaintiffs are likely to succeed are these.
20 A.S. McLachlan v MEL Network Ltd (2002) 16 PRNZ 747.
[123] The limitation arguments in relation to the claim are not all one way and the plaintiffs are at risk on the limitation point. There may be doubts about whether the court would be prepared to grant a remedy having regard to the apparently small amounts that are in issue in the proceeding.
[124] The claim which the plaintiffs bring, seeks relief under s 174, arising out of the alleged failure of the directors to enforce VCI’s claim. In deciding whether the directors acted oppressively, it will be necessary to examine the reasons why the directors did not actuate the option. Even if there might have been some resistance to that occurring on the part of Mr Wilson, questions may well arise whether the directors breached section 174 by failing to enforce a claim which had reasonable prospects of success. That returns the discussion to the issue whether the tax losses had all been used up at the point where the directors allegedly ought to have enforced the option.
[125] The VCI option was, as I have said, subject to using up of the tax losses of KVL. The plaintiffs assert that Mr Wilson and/or Mr Hyland deliberately contrived the state of affairs whereby the sale of the assets of KVL was constructed in such a way that proper value was not paid for them.
[126] The fact that Mr Hyland was able successfully to enforce his option which was substantially in similar terms to that granted to VCI may be of some evidential value for the case the plaintiffs bring. It might demonstrate that his successful exercise of the option showed that the condition precedent to his doing so, that is exhaustion of all tax losses, was satisfied. On the other hand, it may be possible that Mr Wilson, for his own purposes, decided to waive compliance with that condition so that Mr Hyland’s transaction does not, in fact, give rise to any relevant inference.
[127] The plaintiffs as indirect shareholders in KVL through their shareholding in VCI would in such a circumstance arguably suffer two forms of loss: the value of the indirect shareholding would be diminished and, because it would bring about a deferral of the point at which tax losses were consumed, it would result in a postponement of the time at which VCI would be able to exercise its option.
[128] Presumably the contention of the plaintiffs would be that the VCI transaction was so lacking in commercial merit to the company and so disadvantageous to the shareholders other than the majority, that the conduct must be seen as oppressive in terms of s 174.
[129] One issue that can be cleared away as not constituting an obstacle to success is Mr Goldman’s lack of financial resources because the exercise of the option that is personal to him to acquire shares in KVL only required payment of $10. Similar considerations apply to the position of VCI which, again, had only to pay nominal consideration for the exercise of the option. In the case of Mr Goldman’s personal option to acquire KVL shares, there is little doubt that he would have been willing and able to exercise the option which would appear to be a prerequisite to his invoking an equitable interest in the shares. If he were able to achieve such an outcome, then the next step to be considered is whether he or the Family Trust were the equitable owners of the shares comprised in the option.
[130] In the latter regard, there seems to be little doubt that specific performance could be ordered of an option to sell shares in a private company of the type under consideration in this case.21 However, consideration of any remedies that might flow from such a conclusion will not be straightforward. Whether the plaintiffs will be able to claim an equitable interest in the proceeds of sale of the shares and to trace the proceeds into the estate and beyond is not clear. The fact that the option related to an unappropriated portion of a larger number of shares which Mr Wilson apparently owned, is one matter that may be found to have significance. On the
other hand, a personal claim against the executors for breach of their obligations when distributing the estate on notice of claim (if indeed the Court concludes that that is what occurred) may be less complex.
[131] I accept that an order for security for costs directed at the level that the
defendants are seeking would have the effect of “stifling” the claims which the
plaintiffs bring.
21 John McGhee and others Snells Equity (33rd ed, Sweet and Maxwell, London , 2015) at 441.
[132] I do not consider that the actions or omissions of the defendants have lead to the impecuniosity of the plaintiffs. They have not acceded to the claim of the plaintiffs, that is true, but that is not the same thing as causing the impecuniosity of the plaintiffs. It is not as though the entirety of the plaintiffs’ business affairs comprised the interest in the VCI shareholding. Also, these events now lie some six years or more in the past and it is difficult to accept that the alleged breaches of s 174 have had the effect of rendering Mr Goldman without assets at all.
[133] I recognise that the first plaintiff may have difficulty obtaining funding to meet any security for costs order because of his status as a discharged bankrupt. It is not clear what, if any, other assets the Family Trust has which could be realised in order to meet the security order or offered as security for an advance for that purpose.
[134] Taking all of these matters into account, I consider that a relatively modest order for security for costs is called for.
[135] The plaintiffs are ordered to pay security in the sum of $20,000 to each group of defendants; $10,000 of that is to be paid within 28 days and $10,000 by the close of pleadings date. There will be an order staying the proceedings until the first tranche of the security is paid. The stay will then be lifted. Leave is reserved to apply for a further stay order if the second tranche is not paid punctually.
Summary
[136] I have concluded that the claim which the plaintiffs bring pursuant to s 174
based upon Mr Goldman’s previous one share owned in KVL ought to be struck out.
[137] I consider that, it is arguable that the plaintiffs, ought to be able to bring a claim pursuant to s 174, arising from the failure of the directors of VCI to take steps to enforce the option that the company had to acquire shares in KVL from Mr Wilson.
[138] The result is further that the plaintiffs are entitled to continue their proceedings against the fourth defendants because it is not clear that any notice of claim was required to be given prior to distribution of the estate and that, in any case, it is arguable that such communication as did take place could be viewed as the giving of notice if the matter goes to trial. Further, to the extent that the plaintiffs’ claim involves recovery of what is arguably property owned by them in equity, the issue of notice may not be relevant.
[139] The proceeding against the fifth defendant ought to be able to continue because any defences that she has to the plaintiffs’ claims are discretionary. Alternatively, she may have received property which was beneficially owned not by the late Mr Wilson but by the plaintiffs.
[140] I have also concluded that it would be reasonable to require the plaintiffs to provide security for costs.
[141] The conclusions set out in this judgment are, of course, subject to the usual proviso that the enquiry that I have carried out is limited to considering whether the claimants are able to show an arguable case. They do not mean that the Court is of the view that any or all of the claims are likely to succeed at trial.
Costs
[142] The parties are to confer on the question of costs and if not able to reach agreement, are to file memoranda not exceeding five pages on each side.
[143] Leave is reserved to any party to apply for directions in regard to this judgment.
J.P. Doogue
Associate Judge