Jeffreys v Morgenstern - [2014] NZHC 308

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-8432 [2014] NZHC 308

BETWEEN STEPHANIE BETH JEFFREYS AND TIMOTHY WILSON DOWNES Plaintiffs

ANDARTHUR SYLVAN MORGENSTERN First Defendant

TANYA MAY LAVAS Second Defendant

Hearing: 30 September and 1 - 4 October 2013

Counsel: N H Malarao and K Wakelin for Plaintiffs
C T Walker and A T B Joseph for Defendants

Judgment: 27 February 2014

JUDGMENT OF RODNEY HANSEN J

This judgment was delivered by me on 27 February 2014 at 11.30 a.m., pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date: ………………………….

Solicitors: Meredith Connell, Auckland
Gilbert Walker, Auckland

JEFFREYS v MORGENSTERN [2014] NZHC 308 [27 February 2014]

TABLE OF CONTENTS

Introduction [1] The Axon House claims – background [4] Axon House – liquidators’ claims [19] The rental underwrite
When the duty arose [27] Solvency of companies [29] Knowledge when duty arose [46]

Carpark deed

Plaintiffs’ case [56] Defence response [61] Discussion [66]

Sale of shares in MS St Lukes

Background [71] Plaintiffs’ claim [76] Defence response [78]

Claim under s 298

Value of shares [81] Feasibility study [84] Whether consideration for shares exceeded their value [94]

Claims under s 301

Breach of s 131 – good faith [97] Breach of s 135 – reckless trading [111] Breach of s 137 – duty of care [113]

Relief [117] Summary and conclusions [121] Result [127]

Introduction

[1] The plaintiffs are the liquidators of Morningstar Enterprises Limited1 (MSE), GS & LD Lease Limited2 (GLL) and Kingdon Development Limited (KDL). They are among a group of companies engaged in property development operated by the first defendant, Arthur Morgenstern. He was at all times the sole director of the
companies. The second defendant is his partner, Tanya Lavas.

[2] Mr Morgenstern began his career as a property developer in California, coming to New Zealand in 1988. He has since undertaken a number of property developments in Auckland and elsewhere. Two of the major projects he undertook in recent years were the construction of a commercial building known as Axon House in Khyber Pass Road, Newmarket, and a mixed residential-commercial-retail development at St Lukes. The liquidation of the three companies was the result of problems that arose from the sale of Axon House and in the latter stages of the St Lukes development. The liquidators say transactions undertaken by the three companies at this time involved breaches by Mr Morgenstern of his duties under the Companies Act 1993 (the Act).

[3] In relation to the sale of Axon House, the liquidators say Mr Morgenstern caused or allowed the companies to enter into obligations which risked serious loss to creditors or which he should have known they would be unable to perform. The alleged breach in relation to the St Lukes development arose from the sale to MSE of the defendants’ shares in the company which undertook the development. The sale was for $3.5 million. The shares turned out to be worthless when the development was completed at a loss. In relation…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Jeffreys v Morgenstern

Details

AGLC: Jeffreys v Morgenstern [2014] NZHC 308
Case: [2014] NZHC 308
Decision Date: 27 February 2014

CaseChat Overview and Summary

In Jeffreys v Morgenstern, the plaintiffs were liquidators of three companies. They alleged breaches of directors’ duties by Arthur Morgenstern, the sole director of the companies, and sought compensation under the Companies Act 1993. The Axon House claims related to a rental underwrite and carparking incentive entered into by one of the companies in relation to the sale of a commercial building. The plaintiffs argued that Mr Morgenstern had breached his duties to avoid incurring obligations that the company could not meet and to trade without recklessly risking serious loss to creditors. The court found that at the time the obligation was incurred, there was no basis to claim that it created a risk of loss to creditors. The carpark deed was also contingent and, though the company was insolvent, it was reasonable to expect that it would be able to meet its obligations under the deed. The claims under s 301 were dismissed. The sale of shares in MS St Lukes related to a property development project. The plaintiffs alleged that the shares were sold for an excessive consideration and that the transaction breached various directors’ duties. The court found that the consideration for the shares was excessive but was unable to determine by how much. The claim under s 298 failed. The court found that the sale of the shares breached the duty to act in good faith, the duty to avoid incurring obligations that risked serious loss to creditors and the duty of care. The plaintiff was ordered to contribute to the company $3,499,999.

Orders