Herzog v Myriad International Limited
[2017] NZHC 858
•2 May 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2863 [2017] NZHC 858
UNDER The Companies Act 1993 IN THE MATTER OF
the liquidation of MYRIAD INTERNATIONAL LIMITED
BETWEEN
LAWRENCE HERZOG Plaintiff
AND
MYRIAD INTERNATIONAL LIMITED Defendant
Hearing: 22 March 2017 Appearances:
Mr R B Hucker for Plaintiff/Respondent
Mr J Ropati for Defendant/ApplicantJudgment:
2 May 2017
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
02.05.17 at 3.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
HERZOG v MYRIAD INTERNATIONAL LIMITED & Anor [2017] NZHC 858 [2 May 2017]
AND CIV 2016-404-2625
UNDER Section 290 of the Companies Act 1993
IN THE MATTER of an Application to set Aside Statutory
Demand
BETWEENMYRIAD INTERNATIONAL LIMITED Applicant
ANDLAWRENCE HERZOG Respondent
Background
[1] This case involves an application which the plaintiff brings for the liquidation of the defendant company.1 The plaintiff served a statutory demand on the defendant company which he intended should assist them to prove one of the grounds upon which liquidation was sought, namely that the company was insolvent.
[2] The defendant company has now applied to stay the liquidation proceedings. It also seeks an order setting aside the statutory demand. The plaintiff resists both of those applications and applies for orders liquidating the company.
[3] A further procedural aspect of the dispute between the parties is that Mr Herzog has brought proceedings for oppression pursuant to s 174 of the Companies Act 1993.
[4] The parties behind this litigation are Mr Phillip Jones, who is the sole director
of Myriad International Limited (“MIL”), and Mr Lawrence Herzog.
[5] Mr Jones and Mr Herzog became friends in 2002. Mr Jones established MIL in October 2003. Mr Jones says that Mr Herzog had “been [his] personal lawyer, and one of the company’s lawyers since this time”.
[6] There are 100 shares in MIL, 99 of which are owned by the Arnside Family
Trust. Arnside holds 50 of those shares on trust for Mr Herzog.
[7] Initially, Mr Herzog was a 25 percent shareholder. He moved to a 50 percent shareholding in 2011. Mr Jones says that Mr Herzog did not pay any money for the shares, but Mr Herzog says there are other background matters which explain how he came to be a shareholder.
[8] The company carries on a paper business. It has, at least in recent years, been profitable. Mr Jones also has other business interests in a boat chartering
undertaking, apparently.
1 Herzog v Myriad International Limited, CIV 2016-404-2863.
[9] Mr Herzog does not claim to be involved in the operational side of the company’s paper business. There is, however, a dispute between them as to the extent of Mr Herzog’s other activities on behalf of the company.
[10] Mr Herzog says that he has been involved “in every aspect of the business” since he first became a shareholder in 2009. These aspects include financing, dealing with bankers, negotiating major contracts and a significant number of other company issues Mr Herzog says that he has assisted “with company issues in [his] capacity as a shareholder and consultant to MIL”. Mr Herzog said he had undertaken liabilities for the company in order to assist it.
[11] Mr Jones, on the other hand, says that he is the sole person who has contributed capital to the company and provided security to borrowers. He also functions as the managing director (a fact which I find to be proved). He says that he works full time in the business.
[12] My conclusion is that in fact Mr Jones does run the business on a day to day basis.
[13] Mr Jones says that, in 2015, he made a proposal that the shareholders formalise their agreement. As part of that proposal, Mr Herzog would receive an income from the company. He says that the formula he suggested was that Mr Herzog would receive a payment of 20 percent of what he, Mr Jones, was being paid. The income described as Mr Jones’ “wages”, namely what the company was paying him. He said that, at the time, his total remuneration was $200,000. Therefore, that would result in Mr Herzog receiving a dividend payment of $40,000. Mr Jones said that the payment was based on the “position, profitability and [return on investment] of the company at the time, and the banks position”.
[14] He said that Mr Herzog subsequently received the sum of $40,000 plus GST, following his rendering a tax invoice for that amount in 2015. However, Mr Jones says that there was no question of any permanent, ongoing entitlement to payment or any guarantee that Mr Herzog would be paid a minimum of $40,000 per annum.
[15] Mr Jones further says that, in early 2016, Mr Herzog had the company solicitor prepare a draft shareholders’ agreement and that, up until this point, all his dealings with Mr Herzog had been based on a “handshake”. He said that he had no input into the preparation of the shareholders’ agreement and therefore did not sign it. This was despite pressure that Mr Herzog, he alleges, placed on him to sign.
[16] The $40,000 plus GST was, the parties agree, paid in April 2016. Mr Herzog has in the meantime continued to render invoices to the company based on a remuneration rate of $40,000 plus GST per year. It is one of those invoices which is the basis for the statutory demand that Mr Herzog issued and which MIL has applied to set aside in this proceeding.
[17] Mr Herzog confirms that he was paid what he calls his “agreed consultancy/management invoice” for the 2015 financial year, but has not been paid since. He says that Mr Jones has never disputed any of the invoices. He now seeks payment for the 2016 financial year.
[18] Mr Herzog says that the parties began to discuss this issue in September 2015 and says that Mr Jones proposed a meeting to discuss the shareholders’ arrangement. He says that Mr Jones told him that he had been in touch with MIL’s accountant, Ms Vinh Nguyen, about it but that no action was to be taken (presumably on the question of remuneration for Mr Herzog) until they had “worked through a structure”.
[19] In fact, the involvement of the accountant in the process was discussed in an email that Mr Jones sent to Mr Herzog on 17 September 2015. In that email, he said:
Hi
Have not heard from you for a while.
The accounts for MIL are nearly finished.
We should have a meeting on the structure before any paper work ie share transfer or what we decide to do is actioned.
I am travelling and will be back in [New Zealand] week beginning the 5th October. If you are around we can meet that week.
I have advised Vinh [Nguyen] that we will not action anything until you and I have worked through a structure.
[20] Mr Herzog says that, on 5 October 2015, Mr Jones emailed him a draft copy of the accounts for the 2015 financial year and arranged for a meeting in the afternoon of 8 October 2015.
[21] Mr Herzog alleges that, on 8 October 2015, he and Mr Jones met. The draft profit and loss statements for part of the 2015 and 2016 financial years were amongst the matters discussed. Mr Herzog said that Mr Jones told him that he was receiving little over $200,000. Mr Herzog said he had never received any remuneration or other financial benefit from MIL. Mr Herzog said they agreed at that meeting that Mr Jones would be paid a minimum of $200,000 per annum or 6.5 percent of the annual turnover (before tax and expenses) of MIL. Mr Herzog also alleged that they agreed Mr Herzog was to be paid a minimum sum of $40,000 per annum or 20 percent of the total sum received by Mr Jones in each year, whichever was the greater. Any dividend distribution left thereafter was to “reflect the 50/50 shareholding”. Mr Herzog said matters were left on the basis that they would have a meeting with the company’s accountants to record the agreement.
[22] Mr Herzog says that meeting then took place on 29 October 2015. He said that, at the meeting, Mr Jones advised Ms Nguyen of both the “remuneration structure” that they had agreed and the profit sharing and financial reporting requirements for MIL. He says that, in the presence of Ms Nguyen, Mr Jones requested that Mr Herzog send his invoice for the 2015 year consultancy payment directly to Ms Nguyen for inclusion in the 2015 financial year accounts. Mr Herzog said he sent off the invoice to her on 4 November 2015.
[23] On 5 November 2015, Mr Herzog says Mr Jones sent an email to him asking him to backdate the invoice earlier provided so that it was dated 20 March 2015 and recording that it would be for $40,000 plus GST. Mr Herzog said he did as requested on the same day.
[24] On 6 November 2015, Mr Herzog says, and this appears to be uncontested, that Ms Nguyen sent an email to him and Mr Jones recording the terms of the meeting. The email should be set out in full:
Hi guys
HI have received invoice from Lawrence and will aim to get the final accounts to you early next week.
Just a few notes from our meeting:
1. We will look at doing an interim set of accounts late January to the
31. December 2015. This will enable us to meet again to discuss results and planning to the 31.3.2016.
2.Phills wage will be a minimum of $200K per annum or 6.5% of turnover.
3. Lawrence will invoice 20% of Phills wages i.e based on $200K Phill
Lawrence will invoice $40,000.
4. After this the profit will be shared 50%50%.
5.We need to always keep in mind banking covenants requiring 3.5x interest cover.
[25] At some point Mr Herzog and Mr Jones came to an understanding that they would involve the company solicitor to establish an agreement and, in due course, a meeting took place on 3 November 2015.
The meeting with the solicitor on 3 November 2015
[26] In his first affidavit, Mr Herzog did not provide any detailed evidence about what happened at the meeting on 3 November 2015.
[27] Mr Jones said that the meeting with the solicitor did not proceed smoothly. He said that discussions between himself and Mr Herzog became quite heated, both inside the offices of the solicitors and outside in the carpark after the meeting had ended. He states that there was no agreement reached between the parties and, although a shareholders’ agreement was subsequently circulated after the meeting, it was never signed because there was no consensus.
[28] Ms Quinn, the solicitor with whom the parties met on 3 November 2015, said she was of the view that Mr Jones was not a particularly willing participant in the meeting. She said she raised the fact that there was no record of Mr Herzog being a shareholder in the company’s register. Mr Herzog said that he had introduced his own funds into the company, “but when pressed for more details as to the sum of money introduced, and the date when the funds were introduced, [Ms Quinn] did not receive a definite answer”.
[29] Ms Quinn’s recollection was that Mr Herzog was mainly leading the discussion and he outlined what he believed the financial agreement between the parties would be. She said there were many times during the meeting when the discussions became heated, with both men talking over each other. She said it was clear to her that there was a disagreement between the parties. Ms Quinn said that, at the conclusion of the meeting, she told the men that she would prepare a draft shareholders’ agreement, which would then be circulated to the parties for further discussion prior to the final shareholders’ agreement being agreed upon and signed off. She said that the men then left her office and she recalled both of them being involved in what appeared to be a “very animated discussion” in the driveway outside her office. She said that, in due course, she sent out the draft agreement and received a response from Mr Herzog that he was happy with the agreement, but that he was waiting for Mr Jones to review the draft. She said, so far as she was concerned, the agreement was never finalised or signed by the parties.
[30] Mr Herzog says that what effectively occurred was a joint instruction to the lawyer, Ms Quinn, advising her of “our agreed remuneration structure”. Mr Herzog said “[t]he remuneration structure is recorded at paragraphs 3.6 and 3.7 of the Draft Shareholders Agreement emailed to Phill and I on the 2 December 2015”.
[31] In an affidavit which Mr Herzog filed in other proceedings, he denies there was a heated discussion outside the office and said that the only topic discussed was where they were going to go for lunch. He said that Mr Jones never raised any objection to any of the terms of the shareholders’ agreement or to the payment of invoices from Mr Herzog. I should add, as I have already noted, Mr Herzog has
continued to invoice the company ever since his first invoice was rendered and paid.
Subsequent events
[32] The draft agreement which Ms Quinn forwarded to the shareholders contained the following provision:
3.7Remuneration of Lawrence – Lawrence … shall receive the minimum sum of $40,000 per annum or 20% of the total sum received by Phillip in each year (whichever is the greater) …
[33] Mr Herzog says that, after the meeting on 3 November 2015, he emailed Ms Quinn to advise that the shareholders’ agreement represented the shareholders actual agreement and he was waiting for Mr Jones to review it before setting up another meeting. However, he says that Mr Jones would only say that he had not “looked at it yet”.
[34] Mr Jones said that discussions between himself and Mr Herzog were ongoing with a view that they would need input from all the parties, including the company’s accountants, on how best to structure a shareholders’ agreement. Mr Jones said that he expected that Mr Herzog would inject personal funds into the company and accept personal liability for any lending in the company’s name. He rejected any suggestion that he was going to guarantee a minimum payment of $40,000 per annum plus GST to Mr Herzog.
[35] Mr Herzog said that he and Mr Jones had a further meeting on 18 May 2016 at MIL’s offices. He said the draft shareholders’ agreement was discussed. He said that Mr Jones said he had read it and it was fine, but needed a further two weeks to review it. However, he said that Mr Jones did not “raise any objection to the terms of the shareholder’s agreement”. I interpolate that, while that might be so, neither did Mr Jones apparently agree to its terms, even on Mr Herzog’s evidence.
[36] To continue, Mr Herzog said that Mr Jones agreed to make payment of
Mr Herzog’s consultancy invoice for the 2016 financial year in four instalments.
This was the second invoice that Mr Herzog sent to Mr Jones.2 Mr Herzog says that
2 As earlier noted, Mr Herzog had been paid for the 2015 financial year.
“no dispute was raised” in relation to the invoice for the 2016 financial year for
$40,000 plus GST when it was received by MIL in January 2016, subject to changing the date of the invoice to the end of the 2016 financial year. Mr Herzog said the first time that a dispute was mentioned was after the statutory demand was served when the 2016 invoice was rendered.
Issues
[37] The key issue that arises in this case is whether the two shareholders of MIL, Mr Jones and Mr Herzog, actually entered into an agreement between themselves and MIL. The alleged agreement was that MIL should pay Mr Herzog a periodic payment in the nature of a retainer of $40,000 per year plus GST or 20 percent of what Mr Jones received by way of income from the company, whichever was the greater.
[38] That issue is the key issue because it arises in the two proceedings which have been filed. First, it is at the heart of the application in this proceedings to set aside the statutory demand because that originating application is opposed on the basis that there is no substantial dispute that Mr Herzog was entitled to the periodic
payments.3 If the Court concludes that there is a substantial dispute or doubt about
the question of whether such an agreement was entered into, then the likely outcome is that the orders sought in the originating application would be granted and the statutory demand set aside.
[39] The question of whether there is a debt owing to Mr Herzog is also a key issue in regard to the liquidation proceedings seeking the winding up of MIL on the grounds, inter alia, that it is just and equitable for such an order to be made.4
Mr Herzog alleges, and Mr Jones does not deny, that the parties are equal shareholders in the company.5 Mr Herzog alleges in those separate proceedings in which he is the plaintiff that there is no dispute that an agreement was entered into between himself, Mr Jones, and the company for the payment of the periodic
payments, but that he cannot compel the company to pay him because Mr Jones, the
3 Companies Act 1993, s 290.
4 Companies Act, s 241(4)(d).
5 Mr Herzog is the beneficial owner of 50% of the shares. These are held on his behalf by
Arnside Family Trust.
co-shareholder, will not agree to that occurring. Mr Herzog says that, as a result, the company is deadlocked and this is a further ground for an order to be made placing it into liquidation.
Is there a debt owing to Mr Herzog?
[40] On behalf of the applicant, MIL, Mr Ropati submitted that one of the items of independent evidence was the email from Ms Nguyen dated 6 November 2015, which concerned the results of the meeting about Mr Herzog’s remuneration. Mr Ropati pointed out that, in the email, Ms Nguyen noted that Mr Jones’ wage was to be a “minimum of $200K per annum”. On the other hand, Mr Ropati submitted that Mr Herzog’s income was simply stated as being an invoice based on “20% of Phills wages i.e. based on $200K Phill Lawrence will invoice $40,000”. Mr Ropati contended that it was significant that, in the case of Mr Jones, the literal meaning of the email was that he was to receive “$200K per annum” – that is from the point where the agreement was reached into the future. In terms of Mr Herzog’s income, Mr Ropati submitted that the omission of the words “per annum” was significant and supported the contention that Mr Jones only ever agreed to one year’s remuneration for Mr Herzog.
[41] He further noted that, despite Mr Herzog’s contention that the parties were agreed about what was to go into the shareholders’ agreement, the proposal had been prepared in advance by Mr Herzog for the meeting, but was never signed by Mr Jones. In other words, the draft shareholders’ agreement was not a consensual document. Mr Ropati also submitted that it would be unrealistic from a business point of view for the company to commit itself to a minimum sum of $40,000 per year when there was no way of knowing how the company would perform in the future.
[42] He said that it was obvious that further discussions had to settle what the parties were agreeing on before a concluded agreement could be regarded as having been reached. That was as true after the meeting at the lawyer’s office as it was before that meeting took place.
[43] Mr Ropati pointed out that, while it is correct that Mr Jones requested a change to the date on one of the invoices (and thereby implicitly stated it was otherwise in order), that was with regard to the 2015 invoice which he did not deny he had agreed the company would pay. There is no document originating from Mr Jones which contained a similar implied acquiescence to the account issued for the 2016 financial year.
[44] I will not set out all of the detailed arguments that Mr Hucker, on behalf of the respondent, presented in the course of his submission and the helpful supplementary memoranda he filed at my invitation following the hearing. However, brief mention will now be made of some of those points.
[45] Mr Hucker first noted the point about the amended date of the 2015 invoice.
[46] He pointed out that the email from the accountant on 6 November 2015 was unconditional in its terms. This was not an email initiated by Mr Herzog, but by the accountant.
[47] Mr Hucker stated that the request to “re-date” the email followed the receipt by MIL of Mr Herzog’s 2016 invoice, not the 2015 invoice. This, Mr Hucker submitted, gave rise to the implication that Mr Jones accepted the 2016 invoice was a legitimate claim against the company.
[48] Mr Hucker referred to the evidence of Mr Herzog that at the meeting with the solicitor on 18 May 2016, after there was discussion about the 2016 financial year accounts, Mr Herzog asked when Mr Jones was going to “pay [Mr Herzog’s] share. Phill said it would be paid immediately”.
[49] Mr Hucker also referred to the fact that, on 24 May 2016, Mr Herzog sent a series of texts to Mr Jones pressing for payment of his 2016 invoice, amongst other
things.6
6 The dates of these texts are not immediately clear because of the date formatting which appears on the screen shots, but it would appear that it was from about May 2016 onward.
[50] Matters reached an impasse on 2 June 2016 when Mr Jones texted back:
There will be no payment for shareholder at present.
[51] Mr Hucker then drew attention to the fact that Mr Herzog sent back a text saying:
I am shocked. How can your agreement at our meeting two weeks ago to make the payments now result in your advice that no shareholder dividends can be made?
[52] Mr Hucker says that there was no denial or refutation of the assertions contained in the last texts.
[53] Mr Hucker also submitted -
“Commercially it is naïve to suggest that a shareholder of the Defendant Company would not receive remuneration in some form either by way of dividend, management fees or shareholder salaries where the other shareholder has taken remuneration through current account credits or other remuneration.”
Discussion of application to set aside statutory demand
[54] The application to set aside the statutory demand was made under s 290 of the Companies Act 1993. The relevant parts of the section are as follows:
(4) The Court may grant an application to set aside a statutory demand if it is satisfied that—
(a) There is a substantial dispute whether or not the debt is owing or is due; or
(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c) The demand ought to be set aside on other grounds.
(5) A demand must not be set aside by reason only of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside.
[55] The application to set aside the statutory demand relied upon the existence of a substantial dispute whether or not the alleged debt, that is the debt for the 2016 invoice, was owing or due by the applicant. It was also stated that another ground was that it should be set aside in the interests of justice, but no separate basis for supporting the application on this ground was raised before me at the hearing of this matter.
[56] The approach that the Court is required to follow when considering such an application is well settled. The principles which are applicable when the Court is applying the section were stated in the judgment of Abbott AJ in this Court in North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd, where the following statement of principle was made:7
[17] The general principles which the Court applies in approaching its discretion in this matter are conveniently set out in Brookers Company and Securities Law at CA 290.02(1):
“(1) General principles
…
These principles … are as follows:
(a) The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.
(b) The mere assertion that a dispute exists is not sufficient.
Material, short of proof, is required to support the claim that the debt is disputed.
(c) If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.
(d) An applicant must establish that any counterclaim or cross demand is reasonably arguable in all the circumstances.
(e) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
[57] It is with such an approach in mind that I now consider the opposing contentions which counsel have put forward in this case.
7 North Harbour Equine Hospital Ltd v DK Little Corporate Trustee Ltd HC Auckland CIV-
2006-404-7585, 19 February 2007.
[58] I agree that the email from the accountant Ms Nguyen on 6 November 2015 constitutes potentially valuable evidence to assist the Court in deciding where the truth lies between the competing accounts which the parties have put forward.
[59] I deal firstly with the significance that Mr Ropati attached to the fact that the email confirming the payment did not state that it was to be made on a per annum basis. Any weight to be attached to that purely textual consideration will be slight or negligible.
[60] In my view the search for the meaning of the parties’ arrangements more profitably lies in looking at the commercial background to the agreement and other factors which I have mentioned in this judgment.
[61] It cannot be overlooked that the accountant made reference in her email of 6
November 2015 to the necessity of keeping in mind banking covenants “requiring
3.5x interest cover”. This reference could mean that, while the parties had indeed come to an agreement to pay Mr Herzog a $40,000 salary per annum, they would need to be careful that the banking covenants were not exceeded. On the other hand, she might be warning that this was a factor which they would need to take into account in any remuneration arrangement.
[62] It cannot be lost sight of, either, that the meeting with the accountant occurred shortly before the parties were due to meet their solicitor concerning the proposed shareholders’ agreement which, they would have appreciated, would cover Mr Herzog’s remuneration.
[63] Then there is Mr Ropati’s point that it is unlikely that the company would commit itself to paying a minimum annual remuneration to Mr Herzog when there was no way of knowing whether that payment would be affordable in the future. That point loses some force when it is considered that exactly that outcome was proposed in respect of Mr Jones. There was no explanation as to why there should be a difference of approach depending on whether it was Mr Jones’ or Mr Herzog’s remuneration that is under consideration.
[64] I agree that the circumstances surrounding the meeting with the lawyer on 3
November 2015 provide evidence which is supportive of the applicant’s position. Conversely, it does not support Mr Herzog’s position as strongly as his counsel contended. There is real room for argument that the draft shareholders’ agreement, which was prepared and circulated prior to that meeting, was entirely the doing of Mr Herzog and that Mr Jones had no input into it. Further, the circumstances of the meeting as described by Ms Quinn paint a picture which is quite different from that which Mr Herzog suggests. She spoke of a heated discussion, with the point of difference being Mr Herzog’s proposed remuneration. Mr Herzog, on the other hand, recalled that the only argument that occurred in the driveway afterwards was where the men were going to have lunch. As well, the fact that the matters were left on the basis that Ms Quinn was to circulate another draft after the parties had discussed matters further is significant.
[65] As a matter of common sense, it could be supposed that, if there were angry exchanges at the meeting, they were not just concerned with settling the wording of an agreement to share remuneration which had already been decided upon in substance. The account that Ms Quinn gives favours the view that that there were real matters of substance still not agreed upon when the parties met with her. On the other hand, Ms Quinn also says that the meeting ended on the basis that she would prepare a draft agreement. It is difficult to understand why she would be instructed to do that if the parties had not come to at least some agreement in principle concerning remuneration.
[66] There is a further aspect of the shareholders’ agreement which neither party mentioned. It may be that the intention of the parties to have a shareholders’ agreement drawn up and executed is consistent with the view that the parties did not intend any legal relationship to actually arise until the completed shareholders’ agreement had been executed.8
[67] Much of the case for Mr Herzog depended on his word being accepted in preference to that of Mr Jones. Where a respondent is putting forward a case which
it says displaces any substantial dispute, that is unlikely to be a promising basis
8 Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 (CA) at 388.
unless supported by contemporaneous documents or from the general pattern of events which make the account put forward by the respondent more likely to be true.
[68] There were, however, some references to the surrounding circumstances which Mr Hucker put forward. One that needs to be dealt with is the argument of Mr Hucker concerning the circumstances around the re-dating of the 2015 invoice. Mr Jones does not dispute that they requested Mr Herzog to re-date that invoice. That would, of course, be inconsistent with him now taking a different stance to the effect that he never agreed to the 2015 invoice. However, he does not take such a position. Mr Jones says that he agreed to remuneration being paid to Mr Herzog for the 2015 financial year, but the agreement went no further than that and it did not extend to an agreement pursuant to which Mr Herzog would be paid remuneration for every subsequent financial year.
[69] Another matter that needs to be considered is the allegation by Mr Herzog that, at the solicitors meeting, Mr Jones said that the management fee “would be paid immediately”. However, that comment would seem to be related to the 2015 invoice, which, as I have already noted, Mr Jones did consent to.
[70] Mr Hucker also submitted that it did not make sense that Mr Jones would agree to pay remuneration for the 2015 year on the basis that he gave no commitment at that point for Mr Herzog to be paid remuneration in succeeding years. Why would he agree remuneration for only one year?
[71] Mr Jones, on the other hand, puts forward the fact that any future remuneration for Mr Herzog would depend upon the financial results for the company. The question would be whether the company could in future years afford to pay remuneration to Mr Herzog. While that is possible, as I have noted, it is curious that Mr Jones did not concede that his own remuneration should also be linked to future financial performance of the company.
[72] At the same time, it must be said that the overall tenor of Mr Jones’ evidence is that he never agreed to subsequent payments, including that payment claimed in the 2016 invoice.
[73] Then there is the evidence of Mr Herzog of the failure on the part of Mr Jones to respond to his text demanding payment of the 2016 invoice. After Mr Herzog said that he was “shocked” that Mr Jones was now taking the position that there would be “no payment for shareholder at present”, Mr Hucker regards it as significant that Mr Jones did not respond to Mr Herzog’s exclamation of “shock”. While it would be understandable if he had responded, I do not regard the failure to explicitly respond to that text as giving rise to an inference of the kind that Mr Hucker says should be drawn, which is apparently that silence indicated assent.
[74] A further aspect of the dispute was whether Mr Herzog actually did anything which would justify the payment of remuneration. Mr Herzog claimed that he took an active part in the management of the company’s affairs. To be fair, it is correct that he was able to refer to documents which corroborate the fact that he was involved in exploring the possibility of obtaining a patent for one of the company’s processes. There is also documentation evidencing that he provided input into negotiations between the company and a New Zealand company called Sato New Zealand. Mr Herzog says, and this has not been contradicted by Mr Jones, that as part of pursuing a further business opportunity with Sato, he and Mr Jones travelled to India where they met with one of the company’s suppliers, Cosmo Films. Some of these events are evidenced by email exchanges, which took place in around February 2015. However, Mr Jones says Mr Herzog travelled to India for his own purposes.
[75] However, a significant question surrounds the extent of Mr Herzog’s level of contribution. It does not appear that he was engaged full-time in the company’s business, in contrast to Mr Jones. Perhaps an annual remuneration of $40,000 was intended to be the best estimate of what his services to the company would be worth. One other possibility needs to be mentioned, namely that it would seem that Mr Herzog was going to share the profits of the company in any event. As a shareholder in this small company, he might have provided unpaid assistance where he could from time to time because it was going to be in his interests for the company to be successful and therefore earn profits.
[76] These are the types of factual enquiry which simply cannot be resolved in the context of an application to set aside a statutory demand. Nor is the Court able to consider in a meaningful way the possibility that the company might only have been big enough to justify the payment of one full time salaried employee, Mr Jones. That could be the explanation for why Mr Jones got paid for his apparent full-time services, but Mr Herzog was not to expect remuneration for assisting from time to time.
[77] These aspects can probably be best summarised as follows. When deciding what the parties likely agreed to, the Court will consider the commercial reality of the situation. Here, the Court must decide whether or not Mr Herzog and the company had come to an agreement that he would be paid an annual salary. Such an enquiry would involve trying to get an accurate picture of the extent of Mr Herzog’s commitment of time and effort. If these were found to be at quite a high level, it would seem unlikely that they would have been provided on a voluntary basis. However, all of these factors lie well beyond the ambit of what can be resolved in the context of an application to set aside a statutory demand.
[78] In the end, the Court, in determining an application of this kind, needs to keep the real issue that is to be decided at this stage firmly in mind. That is to say the Court is not deciding the case on the merits. What the Court is required to do is to assess whether there are arguable contentions either way and, if there are, to accept that coming to a conclusion which balances those various arguments must be left to a trial Court.
[79] Following consideration of the evidence, the Court does have to reach provisional conclusions about the likely outcome that will be reached when the matter goes to trial. Such views are relevant only to the extent that the Court may consider that the contentions put forward by the applicant are insufficiently cogent, so tenuous or even far-fetched that there is a low probability that they will be regarded as reasonable propositions by a trial Court. In such a circumstance, the Court would not be justified in concluding that there is a dispute of substance that should be argued at trial. I have not been persuaded that is the position in this case, though, after listening to the evidence and contentions of the parties in this case.
Conclusion concerning statutory demand
[80] Having summarised the main contentions that the parties put forward, it would seem to me that this case is one where the applicant is able to demonstrate that there is a substantial dispute about the 2016 invoice. It would be open to a Judge at trial to come to a view based on the evidence that there was no agreement of the kind that Mr Herzog alleges. For those reasons, I consider that the application to set aside the statutory demand ought to be granted and I order accordingly.
Liquidation based on insolvency of company
[81] Given the conclusions set out in the preceding part of this judgment, it follows that the statutory demand having been set aside, it will be incumbent upon the plaintiff to put forward some other evidence of insolvency. There are generalised statements in the evidence of Mr Herzog to the effect that the company is insolvent but the overall evidence is equivocal on that subject in this area. But it cannot be said that the evidence justifies the conclusion that the company is insolvent.
[82] I appreciate that the parties apparently did not expect that the substantive liquidation application would be dealt with before me. Their application is concerned whether the statutory demand could be set aside and whether there could be a stay of the liquidation proceedings on the ground that they are an abuse of process.
[83] However, it may be helpful if some comment is offered concerning the solvency or otherwise of the company and the existence of a debt which would give the plaintiff standing to apply for a liquidation of the company.
[84] On the basis of the evidence before the court, it is difficult to follow how the plaintiff would be able to apply for the liquidation of the company pursuant to section 241 (1)(d) if there is no debt owing because the plaintiff would not have the necessary standing of creditor of the company to enable him to bring such proceedings. Rather than dismissing the proceeding for that reason, it may be that the Court would prefer to adjourn the application so that a general proceeding can be
instigated which would resolve between the parties whether or not the debt which
Mr Herzog claims is in fact owed to him.
[85] I record that Mr Hucker advised me in the course of submissions that there is another debt which the plaintiff claims the company owes to him. In reliance on that debt, the plaintiff has apparently served an additional statutory demand. Mr Hucker told me that it is the intention of the plaintiff to amend the proceedings to rely upon this debt and upon the presumption of insolvency arising from what he says was the failure of the company to respond to the statutory demand based upon that other debt. There is therefore the possibility that the plaintiff could yet establish that, as a creditor, he has standing to bring the proceedings and that the company is insolvent.
[86] I will return to the question of what of any order ought to be made on the application of the company after I consider the possibility that a winding up order may be made in reliance upon the just and equitable ground
Just and equitable grounds
[87] Mr Hucker referred to the fact that the plaintiff could justify the application for a liquidation order on the basis that it would be just and equitable for such an order to be made under s 240(1)(d).
[88] It is however an oversimplification to suggest that because the managing director of the company will not accede to a claim by one of the shareholders for remuneration under an alleged agreement that the company is therefore deadlocked and that an order is required from the Court winding it up.
[89] It is also relevant to the exercise of the discretion under the just and equitable ground to consider whether there are alternative remedies available to the party who claims that an order for liquidation is required: Jenkins v Supscaf.9
[90] Whether or not Mr Herzog would in the end succeed in establishing that there are just and equitable grounds for winding up the company is not a matter that is
directly before the Court on the basis of the present applications. What can be said is
9 Jenkins v Supscaf [2006] 3 NZLR 264, at [97].
that the Court cannot conclude on the basis of the information presently before it that an application for liquidation on the just and equitable ground could not succeed. Therefore it would not be appropriate to make an order staying the proceeding.
The shareholders oppression proceedings
[91] Mr Herzog has also commenced proceedings alleging that he is an oppressed shareholder and seeks relief pursuant to s 174 of the Companies Act.
[92] Mr Jones has applied on behalf of the company for a stay of those proceedings. Sargisson AJ has previously made an interim order restraining advertising of the claim. I consider that the order which Sargisson AJ has made ought to remain in place until further order of the Court and I direct accordingly.
[93] In my view, directions are required to bring the various substantive proceedings to a hearing.
Conclusion
[94] The parties are to confer on a timetable to ready the proceedings including the s 174 proceeding for hearing. Counsel must please submit a memorandum within 10 working days. If I am correct that the plaintiff intends to file an amended statement of claim as Mr Hucker has foreshadowed in his submissions and defence there will need to be a timetable for doing that as well.
[95] The parties should also confer on the question of costs within the same time frame and, if they are unable to reach agreement, should file submissions not exceeding four pages on each side within 10 working days.
[96] Leave is provided for either party to apply for further directions.
J.P. Doogue
Associate Judge
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