McGrouther v Paulden HC Christchurch CIV 2010-409-1124
[2010] NZHC 2174
•7 December 2010
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2010-409-001124
BETWEEN JOHN CLIFFORD MCGROUTHER JEAN CHERRY MCGROUTHER Plaintiffs
ANDTHOMAS LEIGH PAULDEN Defendant
Hearing: 1 December 2010
Appearances: P M James for Plaintiffs
G D Jones for Defendant
Judgment: 7 December 2010
JUDGMENT OF ASSOCIATE JUDGE DOHERTY
on Application for Summary Judgment
The issue
[1] The issue in this summary judgment application is whether or not the defendant has a reasonably arguable equitable set-off.
The facts
[2] Bodyguard Limited was incorporated on 4 June 2008 with the plaintiffs and defendant (amongst others) as shareholders. The shareholders entered into an agreement to regulate the affairs of Bodyguard (“the Shareholders’ Agreement”).
[3] The plaintiffs licensed the Bodyguard to use certain intellectual property rights attaching to a range of health supplements (“the Licensing Agreement”).
MCGROUTHER AND ANOR V PAULDEN HC CHCH CIV-2010-409-001124 7 December 2010
[4] Bodyguard borrowed $162,000 from Ashburton Finance Limited
(“Ashburton”) upon terms.
[5] At the same time as the security documentation was entered into with Ashburton, the plaintiffs, the defendant and other shareholders entered into an agreement settling the rights between themselves as guarantors of the obligations to Ashburton (“the Guarantors’ Agreement”). The Guarantors’ Agreement provided for recovery of debt as between the guarantors.
[6] Bodyguard was unable to repay the loan, and the plaintiffs settled with Ashburton by paying $177,566.50 on 29 October 209. In accordance with the Guarantors’ Agreement, the defendant’s share amounted to $44,391.62, which the defendant has refused to pay.
[7] The defendant accepts that amount is owing in respect of the obligations to Ashburton and as between guarantors, but says that he has an equitable set-off because of certain actions of the plaintiffs in respect of the business of Bodyguard.
[8] In particular, the defendant says:
i)Bodyguard was incorporated as a joint venture vehicle for the particular purpose of marketing and selling a range of health supplements.
ii)That pursuant to the Shareholders’ Agreement, the plaintiffs owed the defendant both contractual and fiduciary duties.
iii)The actions of the plaintiffs breached those duties in a number of ways, including:
a. in appropriating for themselves the intellectual property upon which the business of Bodyguard depended;
b.headhunting (or aiding and abetting a related party to headhunt) a key employee of Bodyguard;
c. soliciting Bodyguard’s customers;
d. appropriating Bodyguard’s stock;
e. appropriating Bodyguard’s telephone number and website.
[9] The defendant also alleges that the breaches of those duties meant that Bodyguard failed and was therefore unable to meet its obligations to Ashburton. Also, the defendant’s liability under the guarantee to Ashburton was increased and he lost his investment in Bodyguard.
Summary judgment principles
[10] The principles which apply to an application for summary judgment have been clearly established through decisions of the Court of Appeal such as Pemberton v Chappell [1987] 1 NZLR 1; Grant v NZMC Ltd (1989) 1 NZLR 8 (CA) and Westpac Banking Corporation v MM Kembla New Zealand Limited [2001] 2 NZLR
298.
[11] Summary judgment proceedings are designed for cases where there is clearly no defence. A balancing exercise is required within which it is entirely proper for the Court to take a robust approach when considering whether defences have any arguable validity or are simply a smoke screen, but defendants are not to be deprived of an opportunity for full trial unless there is no reasonable possibility of the defence succeeding. Excessive robustness must not be allowed to cause an injustice.
[12] While in some cases a summary judgment application may be an appropriate vehicle for the Court to exercise a discretion, in others it is not.
Where… the evidence before the Court shows that an inquiry is necessary, or there is insufficient evidence to enable the Court to be satisfied the defence must fail or that discretionary relief will not be given, the proper
course will be to refuse to enter summary judgment. If, however, it is apparent that there was no further evidence available, and that the defence cannot succeed, then judgment should be entered.
Australian Guarantee Corporation (NZ) Ltd v Wyness [1987] 2 NZLR 326 at
330, Somers J.
[13] Generally the mere existence of a cross claim will not prevent the entry of a judgment if there is no arguable defence to the plaintiffs’ claim, but where a defendant sets up a cross claim which so affects the plaintiffs’ claim that it would be unjust to allow the plaintiffs to have judgment without bringing the cross claim into account, then judgment cannot fairly be given on the claim without regard to the cross claim.
[14] The defendant accepts he owes the amount sought, but that he has a defence by way of an equitable set-off. In the context of summary judgment application, this aspect was dealt with in the Court of Appeal in Grant. The Court of Appeal set out the principle of equitable set-off thus (at 12):
The defendant may set-off a cross-claim which so affects the plaintiffs’ claim that it would be unjust to allow the plaintiffs to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiffs' demand. It is neither necessary, nor decisive, that claim and cross- claim arise out of the same contract.
[15] The plaintiffs submit that in claiming an equitable set-off the onus shifts to the defendant to establish it. That may well be the case at ultimate disposition, but it does not displace the overall onus on plaintiffs in a summary judgment application to show the defendant has no arguable defence. However, there is an evidential onus on the defendant to point to evidence which supports the alleged set-off.
[16] I therefore propose to apply to this case the following general principles:
a) Have the plaintiffs satisfied the Court that the defendant has no arguable equitable set-off to the claims for contributions to the Ashburton shortfall?
b)It is generally not possible to determine disputed issues of fact based on affidavit evidence alone, particularly when issues of credibility arise.
c) Although the Court should adopt a robust approach, nevertheless summary judgment may be inappropriate where the ultimate determination turns on a judgment which can only properly be reached after a full hearing of all the evidence.
d)Has the defendant pointed to sufficiently cogent evidence to support his claim?
e) If there is an equitable set-off, is it just that the plaintiffs should not have judgment for the admitted liability under the Guarantors’ Agreement?
Discussion
[17] The defendant’s equity is founded in alleged breaches of the Shareholders’ Agreement.
[18] Whilst the plaintiffs do not accept Bodyguard was set up as a joint venture arrangement, they accept fiduciary duties arise under the Shareholders’ Agreement.
[19] In Chirnside v Fay [2007] 1 NZLR 433 (SC), Elias J (at [15]) said:
[15] Not every breach of duty by a fiduciary is a breach of a fiduciary duty. The distinguishing obligation of a fiduciary is the obligation of loyalty. Within the scope of the joint venture, both Mr Chirnside and Mr Fay were subject to that obligation. Consistently with it, neither was permitted to place himself in conflict of interest with the venture. Each was obliged to account to the other for any unauthorised profit obtained by opportunity arising through the venture. The appropriation of a joint venture by one of the parties to his sole account is as fundamental a breach of fiduciary duty as can be imagined.
[20] Whilst Chirnside might be distinguished on the basis that in this case
Bodyguard was not a joint venture enterprise, the comments of the Chief Justice are
apposite for the type of fiduciary duty the plaintiffs accept arises under the
Shareholders’ Agreement.
[21] The defendant recites a litany of actions which he says breached the obligation of loyalty between the shareholders, and in particular between the plaintiffs and the defendant:
a) The plaintiffs drew money from the business contrary to directors’
resolutions.
b)The plaintiffs treated the Licensing Agreement as being terminated and appropriated the intellectual property of the company.
c) The plaintiffs appropriated assets of the company, namely: stock, customers, website, phone numbers.
d)The plaintiffs purported to terminate an employee’s employment and immediately procured that employee to work for another entity connected with the plaintiffs.
e) The plaintiffs used those assets in their own business to derive income solely for themselves.
[22] If all or any of these alleged breaches could be proved, a Court could find that there had been a breach of a fiduciary duty. Whether that breach gives rise to any remedy is another matter. The real issue in that regard is whether or not the evidence is sufficient to show the breach led to the downfall of the company and the crystallisation of the contingent liability under the guarantee with Ashburton.
[23] That is debatable. But it is the ability to debate the evidence that is crucial.
[24] The defendant’s affidavit recounts the results of a meeting on 16 June 2009 wherein it was agreed in principle that the defendant and other shareholders would sell their shares to the plaintiffs. He says:
Taking into consideration the amount the company owed to Ashburton Finance Limited and the value of the company at that time, we agreed in principle that [the other shareholders] and I would pay $20,000 respectively and transfer our shares in settlement of our interests and obligations relating to the business.
[25] That is a clear indication that the company was in trouble and likely to have been in a deficit situation. In effect, the defendant proposed to pay $20,000 to escape other liabilities. However, the defendant might be able to show that the actions thereafter of the plaintiffs meant that his contingent liability under the Ashburton guarantee (and therefore his obligations to the plaintiffs under the Guarantors’ Agreement) was increased (eg continuing accrual of interest).
Is there sufficient evidence to back the defendant’s claim?
[26] The defendant has produced documentary evidence to support his allegations of detrimental conduct on the part of the plaintiffs referred to in [21] above.
[27] The fact that these things occurred is not denied by the plaintiffs, but their evidence in reply construes their actions as being for the benefit of Bodyguard, not its detriment.
[28] An example is that Mrs McGrouther, on behalf of the plaintiffs, denies they continued to take drawings without authority notwithstanding the existence of the directors’ resolution. She deposes that another shareholder/director, independent of the plaintiffs and defendant, authorised drawings. There is no evidence from that shareholder/director, nor are copies of bank statements or management accounts produced.
[29] Another example relates to an argument as to the termination of the Licensing Agreement. Clause 6.1 of the Licensing Agreement provided that “one party may terminate this agreement [if any of a number of stipulated events] occur in relation to the other party”. The plaintiffs argued that because Bodyguard was unable to pay the debts as they fell due, this was a stipulated event entitling the plaintiffs to take back their intellectual property.
[30] Whilst the stipulated event may have constituted a breach of the Licensing Agreement, there is no evidence of any act of termination/cancellation on the part of the plaintiffs (s 8 Contractual Remedies Act 1979).
[31] On the other hand, the defendant has produced evidence of website information directing payment for licensed products into a specific bank account operated by the plaintiffs or their interests. Similarly, there is evidence of correspondence on 20 July 2009 to a Bodyguard customer advising the bank account had changed and referring the customer to the new bank account referred to on a website.
[32] Where the probabilities lie cannot be determined on the affidavit evidence.
[33] For these reasons, the plaintiffs have not satisfied me that there is no arguable defence by way of equitable set-off.
[34] I also think that in terms of Grant, the link between the guarantee arrangements and the possibility of breaches of fiduciary duties owed by the plaintiffs to the defendant means that judgment for the admitted liability under the guarantee could not be fairly given without regard to the reasonable possibility of damages arising from the alleged breach of fiduciary duty which gives rise to the equitable set-off. Had there been evidence that regardless of the actions of the plaintiffs, Bodyguard’s obligations to Ashburton did not increase because of those actions, I might have been persuaded to exercise my discretion in favour of the plaintiffs. But there is no such evidence.
[35] The defendant argued as a secondary point that the Ashburton loan agreement and the Guarantors’ Agreement should be re-opened pursuant to part 5 of the Credit Contracts and Consumer Finance Act 2003 on the grounds of oppression. Because I agree with the defendant’s primary argument, I need not deal with this argument except to say I do not believe this is an arguable defence on the fundamental ground that the Guarantors’ Agreement could not be treated as forming part of the credit contract represented by the Ashburton arrangement because it was not a term of that
credit contract that the Guarantors’ Agreement be entered into (requirement of s
119(2)).
Outcome
[36] The application for summary judgment is dismissed. There are costs to the defendant on a schedule 2B High Court Rules basis, plus disbursements as set by the Registrar.
Other
[37] The defendant applies to move the proceeding to the District Court as the subject matter is within that Court’s jurisdiction.
[38] This Court has the power to transfer proceedings commenced in the High Court to the District Court (s 46(2) District Courts Act 1947). The Court may exercise its discretion to transfer unless “in the opinion of the High Court or the Judge, some important question of law or fact is likely to arise in the proceeding”.
[39] In Moodie v Lane HC Auckland CP1484/87, 18 September 1990, Thomas J, the Court identified six relevant factors in reaching a decision as to which forum should be adopted:
• the nature of the case;
• the complexity of the case;
• whether the case is of general or public importance;
• the amount in issue;
• the likely length of the hearing; and
• the financial resources of the parties.
[40] This case is not one out of the ordinary as far as litigation in the District Court is concerned. It is not complex; alleged breaches of contract with claim and counterclaim. It is not of general or public importance. The amount in issue is well within the jurisdiction of the District Court and in either claim or counterclaim terms is likely to be less than $50,000. The hearing will be able to be accommodated in
either Court from a logistical point of view, and although I am not privy to the financial resources of the parties, the costs are likely to be less in the District Court than the High Court in any event.
[41] Counsel for the plaintiff has accepted this proceeding was filed in this Court to take advantage of an earlier opportunity to apply for judgment that is available pursuant to the District Court Rules 2009.
[42] I order the proceeding be transferred to the District Court at Christchurch.
Associate Judge Doherty
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