Johnson v Johnson

[2020] NZHC 1563

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2018-485-144

[2020] NZHC 1563

BETWEEN

B E JOHNSON, D H WALE and

C D WILLIAMS as trustees of the Abel Trust

Plaintiffs

AND

C B JOHNSON and M B JOHNSON

First Defendants

LITTLE SCHOOL LIMITED
Second Defendant

JOHNSON PRESCHOOL LIMITED

Third Defendant

Hearing:

17 June 2020

Appearances:

R Fowler QC for plaintiffs (leave to withdraw)

C Stevens and T Mijatov for first-named first defendant
M Wigley for second-named first defendant and third defendant No appearance for the second defendant

Judgment:

3 July 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

Introduction and the primary matter for determination

[1]    This is a debt recovery proceeding. The plaintiffs are the trustees of a family trust known as the Abel Trust. The first-named plaintiff, Mr Bryan Johnson, is the father of the first-named first defendant, Mr Craig Johnson (Craig). Craig and the second-named first defendant, Mrs Maria Johnson (Maria), are a married couple, though they separated some years ago. Craig and Maria are equal shareholders and

JOHNSON v JOHNSON [2020] NZHC 1563 [3 July 2020]

the two directors of the third defendant, Johnson Preschool Ltd. Johnson Preschool is one of several businesses apparently owned and operated by Craig and Maria. Between June 2011 and December 2012 the plaintiff trustees advanced monies on three occasions in connection with Craig and Maria’s businesses. To the extent that these loans have not been repaid and are due and owing, the trustees sue to recover outstanding principal and interest. They sue Craig, Maria and Johnson Preschool. They have abandoned any claim against the second defendant (which, I am told, did not exist at the time any of the loans were made).

[2]    Since it was commenced on 28 February 2018, the scope of the proceeding has expanded. Why that has happened is not difficult to discern. Craig and Maria appear to be engaged in a no-holds-barred relationship property dispute in which their liabilities and those of their businesses to the plaintiff trustees are relevant.

[3]    The primary matter before the Court for determination is an interlocutory application for an order pursuant to s 165 of the Companies Act 1993 granting leave for a cross-claim in this proceeding against Craig by Maria on behalf of Johnson Preschool.

[4]    Mr Fowler for the plaintiff trustees indicated at the outset of the hearing that they were taking a neutral position as to whether or not the Court should grant the leave sought. Presumably, the plaintiff trustees are reluctant further to complicate matters by engaging in this interlocutory skirmish. For that the Court should probably be grateful. Mr Fowler was granted leave to withdraw.

Law

[5]Section 165 of the Companies Act provides:

165     Derivative actions

(1)Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—

(a)bring proceedings in the name and on behalf of the company or any related company; or

(b)intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.

(2)Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—

(a)the likelihood of the proceedings succeeding:

(b)the costs of the proceedings in relation to the relief likely to be obtained:

(c)any action already taken by the company or related company to obtain relief:

(d)the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.

(3)Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—

(a)the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b)it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

(4)Notice of the application must be served on the company or related company.

(5)The company or related company—

(a)may appear and be heard; and

(b)must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.

(6)Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.

[6]    It is well settled that the Court will entertain applications for leave to commence derivative actions where a company is deadlocked. It is common ground that that is the case here. Craig and Maria, as equal shareholders and the directors, have very different views as to whether the company should commence the proposed claim.

[7]    The dispositive question is whether, in the circumstances, the Court should make the order sought having regard to the considerations identified in sub-s (2) of   s 165 and any other relevant considerations.

[8]    The leading case is the Court of Appeal’s judgment in He v Chen.1 In that case the Court of Appeal confirmed that the statutory criteria — those set out in s 165(2)

— are not exhaustive, that the Court has a discretion whether or not to grant leave, and may take into account other relevant considerations.  The Court went on to say that   s 165 “requires the Court to assess each consideration separately” and that “in assessing each statutory criterion the Court should adopt the standard which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding to bring a claim.”2

Some preliminary considerations

[9]    I pause at this point to mention two preliminary matters which I regard as potentially important aspects of the context in which the Court must deal with this application.

[10]   First, the application arises in the context of a straightforward debt collection proceeding with which the plaintiff trustees are entitled to proceed without undue delay.

[11]   Having regard to the position adopted by the plaintiff trustees in relation to this application, I place less reliance on this consideration than might otherwise have been justified. Nevertheless, I regard this as a factor that should figure in the assessment.

[12]   Second, as articulated in correspondence between the parties’ solicitors and counsel and elsewhere, the allegations made against Craig by Maria on behalf of Johnson Preschool are wide-ranging in their nature.

[13]   In the course of argument Mr Wigley accepted that any derivative action in the form of a cross-claim in this proceeding would necessarily be limited in its scope,

1      He v Chen [2014] NZCA 153.

2      At [30] citing Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.

confined to allegations of breaches of duties owed by Craig to Johnson Preschool which resulted in Johnson Preschool becoming liable in relation to a $1m loan by the plaintiff trustees on 13 June 2011. This follows from the fact that the proposed claim proceeds on the premise that it is only as a result of Craig’s actions that the company is liable for that loan.

[14]   Accordingly, a derivative action in the form of a cross claim in this proceeding would not dispose of all aspects of the claim against Craig that Maria is asserting Johnson Preschool may have, and raises the prospect of a further claim or further claims in the future. This too appears to me to be a factor which should properly be bought to account in considering whether to grant the application.

The statutory considerations

[15]   Having identified those  two  preliminary  considerations,  I  turn  to  what  Mr Wigley identified as the material factors in s 165(2) — those in s 165(2) (a), (b) and (d).

[16]   As to the apparent merits of the proposed claim (s 165(2)(a)), at this stage, all the Court is in a position to do is form an impression. Having said that, in this case, counsel has put before the Court what appears to be a comprehensive collection of relevant contemporaneous documentation (with one very obvious qualification) and argued the merits of the case fully, with the result that the Court is better placed than it might have been to assess its merits.

[17]   Mr Wigley developed this aspect of the case in detail. With the benefit of that argument, it appears to me to be possible to articulate the proposed claim quite succinctly. I do so as follows:

(a)On 13 June 2011 the plaintiff trustees paid the sum of $1m to the ANZ joint account of Craig and Maria (their “00” account).

(b)From contemporaneous correspondence involving Mr Bryan Johnson and Craig, it is clear that the former, and therefore the plaintiff trustees, believed that this was a loan being made by them on commercial terms

to Johnson Preschool in order to enable the company to fund the acquisition of a property at 34 Long Drive, St Heliers, Auckland, where it was proposed to establish a new preschool.

(c)Irrespective of any analysis of what happened to these funds after they reached Craig and Maria’s “00” account, Johnson Preschools’ financial statements for the financial year ending 31 March 2012 did not record the $1m as a liability. Nor did the company’s financial statements for the fifteen-month financial period ending 30 June 2016. Earlier, I qualified my observation concerning the comprehensive nature of the contemporaneous documentation before the Court because not all of the company’s financial statements are in evidence. Although there is, amongst the material before the Court, some suggestion that the $1m may have been included as a liability in the company’s financial statements for one or more of the intervening financial years, in the absence of the financial statements themselves, I am not prepared to accept that. I accept Mr Wigley’s submission that the fact that the liability — if liability it was — was not so included in the financial statements for the financial year in which the funds were advanced or any later year for which we have financial statements is powerful evidence that the company never included it as a liability in its financial statements.

(d)Johnson Preschool’s financial statements should be treated as definitive. Mr Wigley described the financial statements as the gold standard. He submitted that the Court would be wrong to look past them.

(e)It follows that if the plaintiff trustees are entitled to “recover” the amount lent by them together with any outstanding interest against the company, that can only have been as a result of Craig’ actions, which were unbeknown to Maria until well after the event, that Mr Wigley summarised as follows in his submissions:

6.… Craig has breached his Companies Act and fiduciary duties as director in relation to the treatment of a $1 M payment by the Abel Trust, including that he told Abel Trust and his father that JPL is the debtor to Abel Trust, when that is not the case (as he knows as he controlled drafting of the JPL accounts and the $1 Million was not recorded as a debt). The funds were used for purposes outside JPL. Overlapping is that Craig’s alleged misrepresentation to his father and JPL breaches s 9 Fair Trading Act, and that has caused JPL to be liable to Abel Trust for a sum it would not otherwise be liable for.

[18]   Mr Stevens submitted that that analysis was artificial. He contended that the Court was entitled to “follow the money”. He said that it is at least conceivable that, however erroneously, the company failed to account for this loan in its financial statements because it was viewed as irrelevant to its day-to-day operations, being of a long-term capital nature. He suggested that the evidence demonstrated that the $1m transferred by the plaintiff trustees to Craig and Maria’s “00” account, an account which they clearly used both as a personal account and as a clearing account for their various business interests, ultimately found its way to Johnson Preschool and that the plaintiff trustees were therefore entitled to recover the debt from Johnson Preschool, irrespective of whether or not the company’s accounts recognised the same as a liability. He did not put the case in quite these terms, but might have submitted that, even if the trustees were not entitled to sue the company in contract, if it received the benefit of the funds then it would be vulnerable to a claim in quasi contract for money had and received, or some other restitutional remedy.

[19]   Mr Stevens then submitted that on the evidence it was possible to demonstrate by reference to exchanges between the plaintiff trustees and Craig, Johnson Preschool’s bank  statements  and  documentation  relating  to  the  acquisition  of  34 Long Drive that the $1m paid by the plaintiff trustees to Craig and Maria’s “00” account on 13 June 2011 was employed on Johnson Preschool’s behalf in the acquisition of that property.

[20]   On the evidence, it is clear that, as between the plaintiff trustees and Craig, the arrangements relating to the $1m loan were that it was made on commercial terms between the former and Johnson Preschool. In order to demonstrate that it is only necessary to refer to an email exchange between Mr Bryan Johnson and Craig in October 2011.

[21]On 12 October 2011 Mr Bryan Johnson wrote to Craig in following terms:

Craig

Re 1,000,000 advance for St Helliers Property.

Abel Trust has advanced Little Schools 1 million on 13/06/2011. As discussed yesterday interest will be charged at say 6% p.a. payable 6 monthly in arrears.

So on 13/12 and 13/6 you should arrange to pay into:

Jarden Corporation Limited

Account No: [Account number] $30,000 less withholding tax of 9.900 = 20,100 net

Abel Trusts IRD No: [IRD number].

If okay please acknowledge and confirm. Regards

Dad

[22]Craig responded by email on 14 October 2011 saying:

All good.

[23]   Given that Craig was a director and, on Maria’s evidence, was held out by the company as having responsibility for the management of the business, it is difficult to see how, as between the plaintiff trustees and the company, that exchange could not be binding on the latter.

[24]   On 13 June 2011 there was a payment into Craig and Maria’s “00” account from the plaintiff trustees of $1 m.

[25]   The narration in the bank statements was “JARDEN PROPERTIES ABEL TRUST FUNDING LITTLE SCHOOL”, and it is common ground that at this time the parties used the term Little School to refer to the business of Johnson Preschool.

[26]   Immediately following that transaction, Craig and Maria’s “00” account had a balance of $750,939.46.

[27]   On 14 June 2011 there was a payment out of the account to a firm of solicitors, Jones Law, who were apparently acting for Craig and Maria or Johnson Preschool in relation to the purchase of 34 Long Drive of $1,036,085.42.

[28]The narration in the bank statements was “CHEQUE/WITHDRAWAL.”

[29]   Immediately following that transaction, Craig and Maria’s “00” account had a debit balance of $246,167.32.

[30]The acquisition of 34 Long Drive was settled on 14 June 2011.

[31]   The certificate of title for 34 Long Drive indicates that title was transferred to Johnson Preschool on 14 June 2011, since which date the company has been the registered owner. No one suggests that the company is not the owner, in law and equity.

[32]   There is considerable force in the submission made on behalf of Maria by Mr Wigley that the directors of a company, responsible as they are for its governance and the accuracy of its records, are generally unable to contradict its financial statements.

[33]   Having said that, even if Johnson Preschool became liable for the debt as a result of Craig’s actions as alleged, if there is evidence demonstrating that the company received the benefit of those monies, it is difficult to see how it suffered any loss that would justify a claim.

[34]   On the available evidence it appears to me to be more likely than not that those monies were employed in the acquisition of 34 Long Drive, and it is accepted by all parties that the property was purchased and registered in the name of Johnson Preschool Ltd.

[35]   Against that background, the preliminary view I have reached is that a claim by Johnson Preschool against Craig on the basis proposed would face difficulties.

[36]   That brings me to the second s 165(2) criterion which is the likely cost of such an action.

[37]   Mr Wigley helpfully provided an analysis of the likely scale costs of such an action on a stand-alone basis. He arrived at a figure of $135,000, inclusive of costs and disbursements. Mr Stevens did not disagree. That appears to me to be a fair assessment.

[38]   However, Mr Wigley contended that as all relevant parties will be involved in the hearing in any event, and the allegations that would be involved in the proposed derivative action are to an extent at least a replication of the allegations made in the crossclaim against Craig by Maria already filed and served, the marginal cost of the derivative action would be appreciably less. I accept that.

[39]   Mr Wigley’s assessment was that the marginal cost of the proposed derivative action would be no more than $15,000.

[40]   Mr Stevens questioned that, suggesting that the figure would be significantly higher.

[41]   I agree. My assessment is that the inclusion of the proposed derivation action would likely increase the hearing time by between one and a half and three days. I am inclined to think that this would increase Johnson Preschool’s solicitor and client costs materially, perhaps by as much as one third of Mr Wigley’s starting figure, so something like $45,000.

[42]   Pursuant to s 165(2)(d), the Court must have regard to Johnson Preschool’s interests. It appears to me that in one sense at least this is the ultimate issue. I will return to it in due course.

A further factor

[43]   In addition to the two preliminary points identified above, and the statutory criteria, there is authority for the proposition that the Court may also have regard to any ulterior purpose or purposes on the part of the applicant. I take the references in the authorities, to which I will refer shortly, to ulterior purposes to mean anything other than the best interests of the company on behalf of which it is proposed to commence proceedings.

[44]   Torrice v Hayhow3 is an example of the courts having regard to an applicant’s ulterior purposes which were, in  and  of  themselves,  legitimate.  In  Swansson  v RA Pratt Proprietors Pty Ltd4 the New South Wales Supreme Court considered ulterior motives that it concluded amounted to lack of good faith on the applicant’s part.

[45]   In relation to Swansson Mr Wigley pointed out that the Australian legislation differs from our own because the statutory criteria there expressly include the applicant’s  motivations.  I  do  not  perceive  that  makes  any  difference.  The   New Zealand courts have been very clear that there exists an element of discretion and that the Court is not limited to considering the statutory criteria. The existence of an ulterior purpose on the part of the applicant is, to my mind, an obvious consideration.

[46]   Both Mr Wigley for Maria and Mr Stevens for Craig focussed attention on the question of whether Maria could be seen to have an ulterior purpose in making this application. Mr Wigley took the position that her sole motivation was the interests of the company. Mr Stevens tended to ascribe motives to her which related to her own position rather than that of Johnson Preschool. The view I take is that it is unnecessary to attempt to examine in any detail what may be motivating Maria. It appears to me an unavoidable conclusion that the purposes of a claim against Craig by Johnson Preschool cannot be the interests of the company alone.

[47]   The proposed claim must by definition be based on the assumption that the plaintiff trustees are entitled to recover the debt in question against Johnson Preschool; the case against Craig is that it is his actions that have brought that liability into being. If Craig and Maria were not separated, and their interests had not diverged, no useful purpose would be served by the proposed proceeding. A successful claim would simply reduce their collective personal wealth and increase the wealth of a company in which they have equal interests by a corresponding amount (less the costs of the proceeding of course). The unavoidable inference is that the proposed claim is being pursued in order to advantage Maria as against Craig in one way or another.

3      Torrice v Hayhow HC Auckland CIV1453/04, 14 May 2004.

4      Swansson v RA Pratt Proprietors Pty Ltd [2002] NSWSC 583, (2002) 42 ACSR 313.

[48]   I do not say that any such motivation on Maria’s part is improper, much less unlawful. However, the view I take is that any purpose which is not directly related to the interests of the company should be brought to account in the analysis against the making of the order sought.

Discussion

[49]   It seems to me that the first of the two preliminary points made earlier in this judgment — relating to the nature of the proceeding — weighs in the balance against the granting of leave. The plaintiff trustees are entitled to pursue their debt recovery proceeding without undue delay, and there can be no serious doubt that the introduction of the proposed derivative action would add a further dimension to the proceeding and delay the disposal of it.

[50]   However, as already said, in view of the position taken by the plaintiff trustees, I do not place significant reliance on this factor.

[51]   Turning to the second preliminary point, this case is unusual, if not unique, to the extent that what is proposed is a derivative action in the form of a cross claim involving defendants in an existing proceeding.

[52]   In applying the prudent business person test, the Court must place itself in the position of a prudent business person in the circumstances facing the company. Those circumstances include the fact that what is proposed is a cross claim in existing proceedings. In my view, a prudent business person would be cautious about embarking upon a claim in circumstances where he or she was limited to advancing only some aspects of a claim that he or she perceived to be available. Such a course might involve two risks. First, the company might find itself precluded from advancing wider claims in the future. Second, it might result in the company having to shoulder the costs in two proceedings rather than one.

[53]   In my assessment, these considerations would weigh in the balance against the granting of leave in the mind of a prudent business person, and accordingly must weigh in the balance against the granting of leave here.

[54]   Turning to the apparent merits of the proposed claim, my judgment is that these are relatively evenly balanced for the reasons already referred to. It is impossible to deny the conceptual purity of Mr Wigley’s starting point that, absent Craig’s actions, if the financial statements of Johnson Preschool did not recognise the payment made by the plaintiff trustees on 13 June 2011 as a debt then the company would have had a strong defence to any claim against it for recovery of that debt, and if, by his actions, Craig rendered the company liable, then a claim against him may lie. As against that, there is comparatively strong evidence that the company received the benefit of the loan as the monies concerned were employed in the purchase of 34 Long Drive that it has owned from the outset, and if that is the case the company may face difficulties in establishing any entitlement to damages.

[55]   In my view, a prudent business person would be hesitant about embarking upon litigation in which it could not be said with confidence that there was an appreciably better than even prospects of success.

[56]   Accordingly, this factor appears to me to weigh in the balance against the granting of leave.

[57]   As to costs, this is probably a neutral consideration. Johnson Preschool’s costs would certainly increase if the proposed claim were to be made, but not by a very large margin over the costs it will incur in any event in defending the claim.

[58]   Turning finally to the question of the motivation behind this application, whilst I make no criticism of Maria, the view I take is that she clearly has an ulterior purpose, that is to say a purpose other than the company’s interests.

[59]   As already said, but for Craig and Maria’s separation it seems clear that no useful purpose would be served by a derivative action. It appears to me to follow that a significant motivating consideration for this application is to advance Maria’s position vis-à-vis Craig in connection with their relationship property dispute.

[60]   Doing the best I can to weigh all of these considerations, the view I have reached is that the best interests of Johnson Preschool — which, as already said,

appears to me to be the overriding consideration — would not be served by granting the leave sought.

The ongoing conduct of the defence of the proceeding by Johnson Preschool

[61]   There is a second issue for determination, namely whether it is appropriate for Maria, through her solicitors and counsel, to continue to carry the burden of the conduct of Johnson Preschool’s defence in this proceeding. The current position was brought about by agreement between the parties and a consent order made by Ellis J on 21 October 2019. Given that Johnson Preschool was deadlocked, Craig and Maria agreed that one or either of them should have responsibility for the conduct of its defence and that that should be Maria.

[62]   Both parties however reserved their positions very carefully. In making the consent order Ellis J recognised this.

[63]   Craig’s agreement was expressed to be both without prejudice to his contention that the company had no defence to the plaintiff trustees’ claim, and given on the basis that the position could be reviewed in the future.

[64]   Craig now raises this issue and effectively withdraws his consent to Maria having the conduct of the company’s defence. His contention is that neither he or she should have responsibility for that, recognising that they have diametrically opposed views as to the position which the company should adopt.

[65]   In my judgement, it is not necessary to go further than that to conclude that the time has come when the defence of the company in this litigation ought to be placed on a different footing. I do so without reaching any views as to conduct of the defence to date. As I view it, this is a straightforward matter of a holding position contingent upon mutual consent that no longer exists.

[66]   Craig’s proposal is that independent solicitors and counsel now be appointed to act for Johnson Preschool, with the company being responsible for the costs involved (as it is now).

[67]   The practical difficulty is of course that that will involve the company appointing solicitors and counsel, which throws everyone back to the underlying reality that the company is deadlocked.

[68]   There are of course mechanisms for dealing with a deadlock, but it is appropriate for the Court to do what it can to assist the parties to avoid the costs of satellite litigation. In order to facilitate that I invite Mr Stevens and Mr Wigley to liaise and agree on solicitors and counsel. That should not be impossible. If however it proves so, the parties may come back by memorandum with a view to inviting the Registrar to appoint solicitors and counsel to act for the company.

Conclusion

[69]The second-named first defendant’s application is dismissed.

[70]   The consent order made by Ellis J on 21 October 2019 as to the third defendant’s representation is revoked.

[71]   Costs are reserved. If counsel cannot agree on costs, as I would expect them to do, they may come back by memoranda in the usual way.

Associate Judge Johnston

Solicitors:

Lane Neave, Wellington for plaintiffs
DLA Piper, Wellington for first-named first defendant

Wigley and Company, Wellington for second-named first defendant and third defendant