Mediaflow Limited v Marin
[2024] NZHC 2369
•22 August 2024
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2023-425-80
[2024] NZHC 2369
UNDER Section 164 of the Companies Act 1993 BETWEEN
MEDIAFLOW LIMITED
Applicant
AND
LUCAS MARIN
Respondent
Hearing: 21 May and 21 August 2024 Appearances:
B B Gresson and B Russell for Applicant D L Marriott for Respondent
Judgment Result:
21 August 2024
Reasons:
22 August 2024
JUDGMENT OF MCHERRON J
Table of Contents
1. INTRODUCTION [1] Background to the dispute [5] Employment agreement between Mediaflow and Mr Marin [10] Access to Mediaflow software and source code [16] Mediaflow’s first injunction application [19] The present applications [22] Issues to be determined [25] Summary judgment application [25](a) Interim injunction application [25](b) 2. APPLICATION FOR SUMMARY JUDGMENT [26] Legal principles — summary judgment [26] Unfairness to Mediaflow of Mr Marin’s remuneration (as pleaded) [32] Application of s 161 of the Companies Act 1993 [33] Burden of proof [34] Inadvertent April 2024 resolution [36] Mediaflow’s submissions [38]
MEDIAFLOW LIMITED v MARIN [2024] NZHC 2369 [21 August 2024]
My assessment[41]
Major transaction not adequately pleaded[61]
Conclusion[65]
3.APPLICATION FOR INTERIM INJUNCTION[66]
Legal principles applicable in an injunction application[71]
Developments since the hearing[74]
Further affidavit of Mr Marin[76]
Further affidavit of Mr Akal[79]
Mediaflow’s submissions[83]
Mr Marin's submissions [103]
My assessment[109]
Serious question to be tried[109]
Adequacy of damages[121]
Balance of convenience[127]
Overall justice[139]
4.RESULT[142]
Costs[145]
5.CONCLUDING OBSERVATIONS[149]
1. INTRODUCTION
[1]A dispute has arisen between:
(a)two director/shareholders of Mediaflow Ltd, David Akal and Nahuel Lukomski; and
(b)Mediaflow’s third director/shareholder, Lucas Marin.1
[2]The dispute concerns:
(a)money paid by Mediaflow to Mr Marin; and
(b)control of software, source code and other services and tools paid for and used by Mediaflow.
[3] Messrs Akal and Lukomski have used their majority control of Mediaflow to bring the present proceeding against Mr Marin. Mediaflow seeks summary judgment and an interim injunction.
1 On 30 July 2024, Mr Marin resigned as a director. He remains a shareholder as at the date of this judgment.
[4]For the reasons below, I:
(a)decline the application for summary judgment;
(b)grant the interim injunction.
Background to the dispute
[5] Messrs Akal and Lukomski sought out Mr Marin in June 2020 to assist them with their new startup. They intended to provide digital photo and video recording equipment and services to various tourism operators in Queenstown. They were aware that Mr Marin had relevant experience as a software engineer in automated media production.
[6] These three men incorporated Mediaflow on 7 July 2020. Upon the company’s incorporation, each of them:
(a)held 33 per cent of Mediaflow’s shares; and
(b)became a director of the company.
[7] Difficulties soon arose. The relationship between Mr Akal and Mr Marin, in particular, soured from 2021. Mr Akal said Mr Marin restricted his access to software and source code, preventing Mr Akal from being able to deal with clients or develop and maintain hardware. From Mr Marin’s point of view, Messrs Lukomski and Mr Akal began to withdraw from the business during late 2021 and early 2022. As a result, Mr Marin took over Mr Akal’s business responsibilities.
[8] In September 2022, both Mr Akal and Mr Lukomski resigned as directors of Mediaflow. Just before doing so, they withdrew $12,000 from the company’s bank account without Mr Marin’s agreement. They considered selling their Mediaflow shares and advised the company’s commercial partners of their departure.
[9] Mr Marin was then left to run the business on his own as Mediaflow’s sole director. He engaged a contractor, Hyperfocal Ltd, to assist him from June 2023.
Employment agreement between Mediaflow and Mr Marin
[10] On 12 December 2022, after Messrs Akal and Lukomski had stepped aside, Mr Marin formalised an employment agreement between himself and Mediaflow (the Employment Agreement). The Employment Agreement provided:
(a)for Mr Marin to be paid a gross annual salary of $500,000 per annum;
(b)for a payment of 12 months’ salary to be made to Mr Marin were he to be made redundant; and
(c)that Mr Marin would not be subject to any restraint of trade restrictions upon termination of his employment.
[11] After taking legal advice, Messrs Akal and Lukomski re-appointed themselves directors of Mediaflow on 6 June 2023. They then discovered that, between December 2022 and May 2023, Mediaflow had paid Mr Marin $183,076 pursuant to the Employment Agreement, without their knowledge or approval.
[12] Mr Marin did not receive the full $500,000 per annum salary provided for under the Employment Agreement. In June 2023, after Messrs Akal and Lukomski had returned to the company, Mediaflow reduced Mr Marin’s annual salary from
$500,000 to $180,000. Mr Marin’s salary was then reduced again to $130,000 per annum, with effect from August 2023.
[13] The total amount Mr Marin received pursuant to the Employment Agreement was $269,418.97 (as at 31 August 2023).
[14] Mediaflow avoided the Employment Agreement under s 141 of the Companies Act 1993 (the Act) on 20 September 2023.2 The company then resolved to negotiate a new contract with Mr Marin with a salary of $700 per week. This salary was later increased to $908 per week.
2 Mr Marin disputes the validity of this action.
[15] On 30 July 2024, counsel for Mr Marin advised counsel for Mediaflow that Mr Marin had resigned as an employee with immediate effect. Mr Marin alleges that Mediaflow has constructively dismissed him.
Access to Mediaflow software and source code
[16]Messrs Akal and Lukomski allege that Mr Marin:
(a)continues to withhold access to Mediaflow-owned software and source code; and
(b)claims he and not the company is the legal owner of the software and source code.
[17]Mr Marin says:
(a)he restricted Mr Akal’s access to the software and source code before Mr Akal resigned as a director, to avoid the risk of Mr Akal damaging it;
(b)Mr Akal’s lack of programming experience had previously caused problems;
(c)Mr Akal did not require access to the source code to perform his role;
(d)Messrs Akal and Lukomski now have access to everything they need to resume the Mediaflow roles they had before they resigned as directors.
[18] Mr Marin undertook to ensure the company can continue to use the source code (as long as he is not excluded from the company), until the question of Mediaflow’s ownership of it can be resolved.
Mediaflow’s first injunction application
[19] In September 2023, under Messrs Akal and Lukomski’s direction, Mediaflow applied to this Court, without notice to Mr Marin, for an interim injunction to restrain
him from withdrawing funds from its bank account. In that application, Mediaflow argued that an injunction was necessary to ensure the company could remain solvent.
[20]Dunningham J was not prepared to deal with the matter without notice. She:
(a)dismissed Mediaflow’s application;3 and
(b)acknowledged there was an arguable basis for saying that Mr Marin had breached s 161 of the Act, which provides (as far as is relevant):
161 Remuneration and other benefits
(1)The board of a company may, subject to any restrictions contained in the constitution of the company, authorise—
(a) the payment of remuneration or the provision of other benefits by the company to a director for services as a director or in any other capacity:
…
if the board is satisfied that to do so is fair to the company.
…
(4)Directors who vote in favour of authorising a payment, benefit, loan, guarantee, or contract under subsection (1) must sign a certificate stating that, in their opinion, the making of the payment or the provision of the benefit, or the making of the loan, or the giving of the guarantee, or the entering into of the contract is fair to the company, and the grounds for that opinion.
(5)Where a payment is made or other benefit provided or a guarantee is given to which subsection (1) applies and either—
(a)the provisions of subsections (1) and (4) have not been complied with; or
(b)reasonable grounds did not exist for the opinion set out in the certificate given under subsection (4),—
the director or former director to whom the payment is made or the benefit is provided, or in respect of whom the guarantee is given, as the case may be, is personally liable to the company for the amount of the payment, or the monetary value of the benefit, or any amount paid by the company under the guarantee, except to the extent to which he or she proves that the payment or benefit or guarantee was fair to the company at the time it was made, provided, or given.
3 Mediaflow Ltd v Marin [2023] NZHC 2636.
[21]Dunningham J also:
(a)noted that Mr Marin had not complied with the requirement in s 161(4) to certify that entering into the Employment Agreement and the payments made pursuant to it were fair to the company;
(b)observed that at the time Mr Marin entered into the Employment Agreement, Mediaflow’s turnover from 1 December 2021 to 30 November 2022 was approximately $340,000. This was much less than the amount payable to Mr Marin under the Employment Agreement. She considered it was arguable that payments to Mr Marin exceeding the company’s total turnover would not be fair to the company and would jeopardise its solvency. However, the position in respect of the amended payments of $180,000 was less clear;
(c)expressed reluctance to intervene in respect of what was, on its face, an employment dispute;
(d)directed Mediaflow to serve its proceeding on Mr Marin, with the view to timetabling the application to an urgent hearing.
The present applications
[22] Mediaflow withdrew its first injunction application and filed the current applications. Mr Akal has explained the reason for bringing the proceeding as follows:
The proceeding has been brought because the board of the company has resolved that Lucas’s payments to himself, as well as his refusal to provide or acknowledge the company’s ownership of its proprietary resources and intellectual property, is of significant concern and detriment to the company.
[23]Mediaflow seeks the following orders:
(a)summary judgment for $205,418.97, being a salary authorised by Mr Marin to be paid by Mediaflow to himself which was not approved by the other shareholders nor validly authorised under s 161 of the Act; and
(b)an interim injunction requiring Mr Marin to deliver to Mediaflow all source code and related software, services and tools used for the purpose of its business, which he has refused to deliver and has asserted ownership of.
[24]Mr Marin opposes the orders sought in each application.
Issues to be determined
[25]The issues to be determined in this judgment are as follows:
Summary judgment application
(a)whether Mr Marin has an arguable defence under s 161 of the Act to the claim for repayment of the $205,418.97; and
Interim injunction application
(b)whether there is a genuine question to be tried in respect of the ownership of the source code and software, and other services and tools paid for and used by Mediaflow, and whether the balance of convenience and overall justice favour the making of orders requiring Mr Marin to deliver to Mediaflow the source code and software and other services and resources paid for and used by it.
2. APPLICATION FOR SUMMARY JUDGMENT Legal principles — summary judgment
[26] The legal principles applicable to an application for summary judgment are well established. Rule 12.2(1) of the High Court Rules 2016 provides:
12.2 Judgment when there is no defence or when no cause of action can succeed
(1)The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
[27] To obtain summary judgment, the plaintiff must demonstrate that there is no real question to be tried, on the basis that the defendant has no defence to the claim.4 The Court “must be left without any real doubt or uncertainty” that there is no defence.5
[28]In Pemberton v Chappell, Somers J noted:6
Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment. There may however be cases in which the Court can be confident — that is to say, satisfied — that the defendant’s statements as to matters of fact are baseless.
[29]In MacLean v Stewart, the Court of Appeal stated:7
The defendant cannot escape liability for summary judgment by raising a false, hypothetical or frivolous “defence” and then contend that the Court cannot be satisfied that he or she has no defence.
[30] The Court will take a “robust and realistic” view on any purported defences or disputes of fact raised in affidavit evidence.8 While it will not normally resolve material conflicts of evidence or assess the credibility of deponents, the Court need not accept evidence uncritically.9
[31] The Court can determine questions of law on a summary judgment application, even where the question of law is difficult and requires argument, including reference to authority.10
Unfairness to Mediaflow of Mr Marin’s remuneration (as pleaded)
[32] In its reply to Mr Marin’s statement of defence, Mediaflow pleads that the payments to him were not fair to the company for reasons including, but not limited to:
4 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26], citing
Pemberton v Chappell [1987] NZLR 1 (CA) at 185.
5 Partners Finance v Richmond [2019] NZHC 34, [2019] NZAR 168 at [62].
6 Pemberton v Chappell, above n 4, at 185.
7 MacLean v Stewart (1997) 11 PRNZ 66 at 69.
8 Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA) at 86.
9 Krukziener v Hanover Finance Ltd, above n 4, at [26].
10 Zurich Australian Insurance Ltd t/a Zurich New Zealand v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383 at [37].
(a)the payments under the Employment Agreement were much higher than the payments all three shareholders had previously received, despite the services provided by or the financial performance of the company not materially changing since then;
(b)the payments were not justified by reference to the market value of the work carried out by Mr Marin;
(c)the payments represented a significant portion of Mediaflow’s total turnover and exceeded its gross profit for that period, causing the business to run at a loss;
(d)the payments significantly reduced Mediaflow’s net assets;
(e)the payments were not approved by any valid Board resolution or contract, the Employment Agreement having been avoided on 23 September 2023 under s 141 of the Act;
(f)the payments were made without consultation with the other shareholders, in circumstances where those shareholders were actively seeking information regarding the financial position of the company;
(g)the payments (in aggregate) constituted a major transaction which was not approved by shareholders under s 129 of the Act;
(h)the payments were not supported by a forecast increase in sales or performance due to work carried out by Mr Marin that was not previously carried out by all three director/shareholders; and
(i)Mr Marin had further organised the payment of $15,000 per month to a third party contractor without justification.
Application of s 161 of the Companies Act 1993
[33] It is not disputed that the payments made by Mr Marin pursuant to the Employment Agreement were remuneration and that s 161 applies to them. Despite that, Mr Marin, as the then sole director, did not sign a certificate under s 161(4) stating that the payments were in his opinion fair to the company with grounds for that opinion.
Burden of proof
[34] Mediaflow has the burden of establishing that Mr Marin has no arguable defence to its claim for summary judgment.
[35] Given that the requirements of s 161(1) and (4) of the Act were not met, the burden shifts to Mr Marin under s 161(5). He must show a tenable basis on which the payments he received were fair to Mediaflow at the time they were made. However, the overall question is whether Mediaflow has satisfied the Court as to the absence of a defence.11
Inadvertent April 2024 resolution
[36] In April 2024, nearly a year after they had re-joined the Board, Messrs Akal and Lukomski resolved that the “payments to Directors or Shareholders of the Company by way of salaries, Directors fees and other emoluments…” included in the reports and statements from the year ended 31 March 2023 were approved and “fair to the Company”. Mr Marin submits that, as the Act does not specify the timing nor form of a certificate required under s 161, the April 2024 resolution constitutes a certificate for those purposes. Mr Marin’s salary was at its highest level ($500,000) during the last three months of that financial period, so he says it is at least arguable that absent any material change in the business, the continuation of that salary was equally fair. Mr Marin says he was the only person exercising responsibility for the business at the time, he had received very little compensation prior to entering the employment agreement, and he had managed to substantially grow the business since the other two directors had left.
11 Auckett v Flavey HC Wellington CP296/86, 20 August 1986.
[37] Mr Akal deposed that he had inadvertently added his signature to the April 2024 resolution. After realising the error, he called a Board meeting on 20 May 2024. At that meeting, and Messrs Akal and Lukomski revoked the previous resolution and confirmed the Board did not approve the payments to Mr Marin as fair to Mediaflow.
Mediaflow’s submissions
[38]Counsel for Mediaflow, Mr Gresson, submits that only $64,000 of the
$269,418.97 salary that Mr Marin authorised Mediaflow to pay to himself between December 2022 and 31 August 2023, was fair to the company. Mediaflow seeks to recover the balance of $205,418.97. It contends there is no arguable basis that those payments were fair to the company.
[39] Citing Madsen-Ries v Petera, Mr Gresson submits that, in assessing fairness under s 161, the impact of the payments on all relevant interests — including the company, its directors, and its shareholders — is to be considered.12 He submits that Mr Marin’s explanation that he was protecting himself from the majority shareholders by seeking to authorise the payments is itself an acknowledgment that the decision was self-interested.
[40] Mr Gresson submits the payments were plainly unfair to Mediaflow and should be repaid because:
(a)Mr Marin was not the only person working in the company after Messrs Akal and Lukomski resigned as directors, as Mr Marin engaged Hyperfocal Ltd in June 2023. There is no evidence that Mr Marin or the contractor were doing more work to warrant the additional pay, compared to what all shareholders had been receiving prior to Messrs Akal and Lukomski’s resignations.
(b)The mere fact that Mediaflow’s sales had increased did not justify Mr Marin’s substantial salary increase, as an upward trend in sales was expected anyway. In any event, the salary payments were disproportionate, as they exceeded the company’s gross profit for that
12 Madsen-Ries v Petera [2016] NZCA 103, [2018] 2 NZLR 500 at [38].
period. Moreover, the company’s net assets were also affected by the payments, falling from $103,118.80 in December 2022 to $15,514.53 in August 2023.
(c)Mr Marin’s general reference to his hours worked and a $100 hourly
rate is not supported by any evidence.
(d)The payments were not approved by Messrs Akal and Lukomski, even after they were reinstated as directors. In East Coast Aluminium Ltd (in liq) v Perry, this was found to be a relevant factor in determining whether payments are fair to the company.13 The payments were also made in a secret and underhanded manner.
(e)The payments were major transactions under s 129 of the Act, as they amounted to $269,418.97 over eight months. The company’s assets in December 2022 (when the payments to Mr Marin were first made) were worth just $114,464. Under s 175 of the Act, the payments would therefore automatically be deemed unfairly prejudicial to those shareholders who did not vote in favour of them, and could not be considered fair to the company.
My assessment
[41] As Mr Gresson submits, the leading case in relation to the issue of fairness to the company under s 161 of the Act is Madsen-Ries v Petera.14 In that case, the Court of Appeal upheld a decision of Lang J that salaries paid to Mr and Mrs Petera by Petranz Ltd were fair to that company when paid. The issue on appeal was whether the Judge, in reaching that conclusion, gave appropriate consideration to the very poor financial situation of Petranz at the time the remuneration was paid. The appropriateness of the remuneration in terms of the work done was not challenged. Rather, it was argued that since the company was insolvent at the time, it could not be fair to creditors to continue to pay the directors anything, unless it was for work done towards stopping the company trading and preserving the position of creditors. Thus,
13 East Coast Aluminium Ltd (in liq) v Perry [2018] NZHC 317.
14 Madsen-Ries v Petera, above n 12.
it was argued Lang J was wrong to find that the test under s 161 was primarily an assessment of whether the company received “full value” in terms of hours worked vis-à-vis salaries paid.15
[42] The appeal was dismissed and Lang J’s decision was upheld. The Court of Appeal rejected the proposition that the duty under s 161 to certify as to fairness reflects a director’s s 131 fiduciary duty or that creditor interests must be considered.16
[43] Rather, the Court of Appeal held that the issue for directors under s 161 is fairness as between directors and the company. When certifying fairness, including under s 161, directors do not need to consider creditor interests.17 Writing for the Court, Clifford J noted that liability in respect of a company’s failure to meet its obligations to its creditors could arise under s 301, by reference to a breach of the director’s duty not to trade recklessly. Clifford J noted that “it is to be remembered that, in the context of that duty, the decision of directors to ‘purchase’ services from one of their number is no different from any other trading decision they make”. Clifford J revisited this concept at [34]:
As already noted, the scheme of the Act reflects that in the ordinary course, if payment of director remuneration is fair to the company, creditor interests would not normally arise. To the extent that they do, the duty not to trade recklessly in s 135 can be seen as recognising those interests. Hence, the Act does not require directors to certify as the solvency (the creditor protection test) when authorising their own remuneration under s 161.
[44] The Court of Appeal concluded as a matter of principle that the concept of fairness in the Act is one that calls for a consideration of the potentially competing interests of the company and its directors, a company and its shareholders, and shareholders themselves, but not the interests of creditors.18
[45] Indeed, in the present case Mr Gresson acknowledged that whether Mediaflow received value out of the work that Mr Marin was doing at that time is more important than the effect on creditors of the payments to Mr Marin.
15 At [14].
16 At [16].
17 At [17].
18 At [38].
[46] This approach corresponds with the approach taken by Lang J at first instance in Madsen-Ries v Petera.19 I have found it helpful to refer to the following part of Lang J’s analysis:20
[48] The liquidators also challenge Mr and Mrs Petera’s entitlement to receive the salaries that they declared for taxation purposes, and in respect of which the company paid PAYE. The liquidators point out that Mr and Mrs Petera failed to comply with the requirements of s 161 of the Act when setting the salaries they were to receive from 31 October 2007 and 6 May 2008 respectively. The payments were not authorised by a resolution of the directors as required by s 161(1), the directors failed to record particulars of the payments in the interests register as required by s 161(3) and the directors also failed to complete the certificate required by s 161(4). The payments were therefore unauthorised, and the directors will be personally liable to repay them by virtue of s 161(5) unless they prove that the payments were fair to the company at the time they were made.
[49] There can be no dispute that Mr and Mrs Petera failed to comply with the requirements of s 161 when they caused the company to pay the salaries. Mr Malarao points to numerous authorities confirming that the issue in this context is not whether the payments were fair in a general sense so far as Mr and Mrs Petera are concerned, but rather whether they can properly be regarded as being fair to the company having regard to the actual and contingent creditors of the company at the time they were made. Payments to a director may not be regarded as being fair to a company when they are made at the expense of the company’s creditors.
[50] I acknowledge the liquidators’ concerns regarding the payment of wages or salaries to the company’s directors during a period in which the company was unable to meet its tax obligations. I consider, however, that they are answered to some extent by the fact that the company paid PAYE in respect of the payments. To that extent the debt owing to the Commissioner did not become larger during the period in which the payments were made. More importantly, Mrs Petera’s unchallenged evidence was that during this period Mr Petera worked 60 to 70 hours per week overseeing the company’s operations and driving one of the company’s trucks. Mrs Petera worked approximately 20 hours per week attending to the administrative needs of the company.
[51] I consider that the company gained full value from the work carried out by Mr and Mrs Petera notwithstanding the fact that the company’s liability for GST continued to increase during the same period. In particular, the company was able to derive profit from Mr Petera’s work because it was able to charge customers for the driving duties that he undertook on the company’s behalf. Its administrative needs were fulfilled by Mrs Petera. I therefore consider that Mr and Mrs Petera have proved that the salaries they received and declared were fair to the company at the time they were made. The liquidators’ claims under this head fail as a result.
19 Madsen-Ries v Petera [2015] NZHC 538.
20 Footnotes omitted.
[47] What this passage shows is that for the purposes of s 161 assessing fairness is done on the particular facts of the case by reference to factors such as whether the company derived full value from the work. Moreover, fairness in a general sense can be established notwithstanding the existence of competing claims to the company’s money.
[48] Lang J’s assessment of whether the salaries received by Mr and Mrs Petera were fair to Petranz Ltd followed a four day trial in which Mrs and Mrs Petera gave evidence. By contrast, in the present summary judgment application the witnesses’ affidavit evidence could not be tested in cross-examination. In my view, this makes it difficult if not impossible for the Court to evaluate the primary question under s 161, namely whether payments were fair to Mediaflow at the time they were made. The answer to this question will depend, at least in part, on Mr Marin’s evidence of exactly what work he carried out in return for those payments. It will also depend to some extent on his assessment of the likely impact of those payments on the company’s finances at the time they were made. Mediaflow will need to have an opportunity to test Mr Marin’s assessment of these matters.
[49] At this preliminary stage, on the basis of the affidavit evidence alone, it is reasonably arguable that Mediaflow has gained full value from the work carried out by Mr Marin notwithstanding the large amount of money paid to him in proportion to the company’s turnover. Rather, the evidence shows it was a company in its early stage of development but one which has progressed relatively successfully without the payments resulting in a significantly increased risk of failure. However, I acknowledge at this interlocutory stage the state of Mediaflow’s financial health, both historically and currently, could not be comprehensively aired and tested.
[50] I do not accept Mediaflow’s submission that Mr Marin’s reduction of his salary payments, because he was concerned they might not be sustainable if he was to engage a contractor, necessarily demonstrates unfairness to the company. The contrary argument would be that Mr Marin was demonstrating appropriate sensitivity to and concern for the company’s finances and the impact on it of the salary payments to him, by adjusting the level of payments.
[51] When Mr Marin was receiving the most remuneration, he was Mediaflow’s only director and the only shareholder who was working in the business. His affidavit evidence is that he worked from 9am to 7pm, seven days a week. Mr Marin makes a fair point that, by leaving, Messrs Akal and Lukomski had made him indispensable to the business. Mr Marin argues that he managed to grow the company’s profitability in the period he was running it, despite the impact his salary had on company finances.
[52] Mr Gresson acknowledged that Mediaflow’s position has improved more or less steadily since it was incorporated. He did not deny that Mr Marin was entitled to take credit for the work he put into the company. I accept Mr Marin’s submission that any assessment of fairness to the company must take into account the importance to Mediaflow of his being retained.
[53] In relation to the employment agreement, s 161 of the Act distinguishes between the entering into a contract for the payment of remuneration to a director (s 161(1)(e)) and payments made in accordance with that contract (s 161(1)(a)). Section 161(3) provides that payment of remuneration in accordance with a contract authorised under s 161(1) need not be separately authorised under that subsection. As is common ground, Mr Marin’s employment agreement with Mediaflow was not authorised. It follows that, in the absence of an authorised employment agreement each individual payment of remuneration under the agreement needs to be justified as fair to the company at the time it was made. If Mr Marin cannot prove fairness to the company then he will be personally liable under s 161(5) for the amount of each payment.
[54] Accordingly, Mr Marin does not need to demonstrate the fairness to the company of the employment agreement itself and, in particular, the $500,000 per annum remuneration payable under it. That is because, in fact, Mr Marin did not receive anywhere near that amount of remuneration.
[55] Rather, as set out at [12]–[14], the salary payable to Mr Marin was reduced in three stages, to $180,000, then to $130,000 and finally to $700 per week. That explains why the total amount Mr Marin received under the employment contract only amounted to $269,418.97, of which Mediaflow seeks to recover $205,418.97.
[56] Mediaflow adduced no evidence that the payments to Mr Marin were made at the expense of the company’s creditors. Nor was there any evidence that Mediaflow was unable to meet its tax obligations.
[57] As yet, there is insufficient basis upon which the Court could definitively conclude that Mediaflow did or did not gain full value from the work carried out by Mr Marin during the period in which he was the sole director and taking sole responsibility for the operation of the company.
[58] However, for the purposes of defending the present application for summary judgment, Mr Marin has established that it is reasonably arguable that Mediaflow gained full value from the work he carried out. This is despite the level of his remuneration amounting to a large proportion of the company’s turnover at the relevant time. It seems likely that Mediaflow has been able to derive profit from Mr Marin’s work because it has been able to continue successfully in business. Mediaflow did not dispute that its sales have trended upwards since incorporation. It has been successful and has continued to improve its financial performance without any evidence of lasting detriment to its performance as a result of the amount of remuneration taken by Mr Marin.
[59] In order to resolve this dispute at trial, the Court would need more extensive analysis of the company’s finances, and the impact of Mr Marin’s remuneration on them, supported by expert accounting evidence. Mediaflow would also need the opportunity to cross-examine Mr Marin about the work that he did to justify his remuneration.
[60] However, Mr Marin has established an arguable defence to Mediaflow’s claim that the payments were not fair to the company. Therefore, Mediaflow has not left me “without any real doubt or uncertainty” that Mr Marin has no defence.21
21 Partners Finance v Richmond, above n 5.
Major transaction not adequately pleaded
[61] Mr Marriott, for Mr Marin, resisted Mediaflow’s allegation that the payments to Mr Marin constituted major transactions under s 129 of the Act which were not approved by shareholders.
[62] Mr Marriott submitted that Mediaflow did not adequately plead this allegation. Mr Gresson responded that the major transaction allegation was included in Mediaflow’s reply to Mr Marin’s statement of defence.
[63] It is well established that a new cause of action may not be raised in a reply. The purpose of a reply is limited to answering an affirmative defence or positive allegation.22
[64] In any event, I do not consider the major transaction allegation adds anything to Mediaflow’s claim that the payments were unfair. Mr Marin does not dispute that the payments were made without reference to or authorisation by Mediaflow’s shareholders. However, whether any remedy was available to Mediaflow as a consequence of a finding that the payments amounted to a major transaction, including whether it may be possible for the transaction to be set aside, would depend on the issue being properly raised and pleaded. The Act does not state what is to happen should a company enter a major transaction without shareholder approval.23 Mr Marriott is correct in responding that this ought to have been pleaded as a separate ground of Mediaflow’s claim, together with an application for relief under s 174 of the Act.
Conclusion
[65] Mr Marin has an arguable defence to Mediaflow’s claim under s 161 of the Act. He has established a tenable basis for saying that the payments he authorised or received were fair to the company at the times they were made. However, in reaching this conclusion, I do not intend in any way to prejudge the ultimate success of
22 High Court Rules 2016, r 5.63; Williamson v London & North Western Railway (1879) 12 Ch D 787.
23 Tom Pasley Morrison’s Company Law (NZ) (online ed, LexisNexis) at [24.3].
Mr Marin’s defence, which would need to be fully tested at any trial (if the parties cannot settle their dispute sooner).
3. APPLICATION FOR INTERIM INJUNCTION
[66]Mediaflow seeks an interim injunction:
(a)requiring Mr Marin to allow Mediaflow to access all software, source code and all other services and resources used for the purpose of Mediaflow’s business; and
(b)restraining Mr Marin from using all source code and related software used by Mediaflow for the purpose of its business for any purpose other than its business.
[67] The grounds for the injunction derive from the second cause of action in the statement of claim. Mediaflow asserts there is a serious question to be tried that Mediaflow is the owner of the source code and related software used by it in respect of its business.
[68] The pleaded allegations in the second cause of action are headed “Breach of intellectual property rights”. The allegations are set out at [34]–[36] of the statement of claim, which provide:
[34] The computer software, source code, and all other services and resources paid for and used by the company such as but not limited to Amazon Web Services, Windcave, Bitwarden, Zerotier, Zoho and tools are the intellectual property of Mediaflow.
[35] The source code, web services and tools were created and developed collaboratively by Messrs Marin, Akal and Lukomski in their capacity as shareholders and directors of Mediaflow, for the use and benefit of Mediaflow.
[36] To the extent Mr Marin developed source code, web services and tools:
(a)he was commissioned by Mediaflow to develop the source code, software and tools, and developed them pursuant to that commission, in which case Mediaflow is their owner under s 21(3) of the Copyright Act 1994;
(b)he was employed by Mediaflow to develop the source code, software and tools, and developed them in the course of his employment, in which case Mediaflow is their owner under s 21(2) of the Copyright Act 1994; or
(c)he developed the source code, software and tools in his capacity as director of Mediaflow, in which case, and pursuant to the fiduciary duties he owes to Mediaflow, he owns them on trust for Mediaflow and must assign them when called upon to do so.
[69]Mr Marin has pleaded simple denials in respect of each of these paragraphs.
[70] Mr Marin has added a counterclaim against Mediaflow that it has converted Mr Marin’s “Client Delivery Software” and all copyright therein by issuing the present proceeding against him, and by asserting ownership in the software, thus acting in a manner inconsistent with Mr Marin’s rights of possession of that software. In this counterclaim, Mr Marin seeks a declaration that the Client Delivery Software and all copyright therein is owned by him.
Legal principles applicable in an injunction application
[71] The test for obtaining an interim injunction is well settled. The Court must assess:24
(a)whether there is a serious question to be tried;
(b)whether the balance of convenience favours relief; and
(c)where the overall justice of the case lies.
[72] The balance of convenience is often described as “the balance of the risk of doing an injustice”.25 While this involves a flexible inquiry, the Court usually has regard to the following factors:26
(a)the adequacy of damages to both parties;
(b)the status quo;
24 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).
25 McLaughlin v McLaughlin [2019] NZHC 2597 at [37].
26 At [38].
(c)the relative strength of each party’s case;
(d)the effect on innocent third parties; and
(e)the conduct of the litigants.
[73] Mediaflow acknowledges that it is seeking a mandatory injunction to compel conduct by Mr Marin as opposed to merely prohibiting conduct. Mediaflow submits that the principles applying to mandatory injunctions are the same as those for restraining injunctions.27 The Court of Appeal has observed that arguments distinguishing prohibitory and mandatory injunctions are barren and that what matters are practical consequences of the actual injunction, and the practical implications of the order for the affected parties, informing an assessment of the overall interests of justice.28 Ultimately, the overriding consideration is which course of action is likely to involve the least risk of injustice if it is wrong.29
Developments since the hearing
[74] On 31 July 2024, Mr Gresson filed a memorandum updating the Court on facts relating to Mediaflow’s application for an interim injunction. Mr Gresson annexed correspondence from Mr Marriott indicating that Mr Marin has resigned as a director of Mediaflow and considers himself to have been constructively dismissed from his employment.
[75] I considered that these developments may have an impact on the interim injunction application. I held a telephone conference with counsel on 1 August 2024 and made timetabling directions for each party to file further affidavit evidence. I also scheduled a further hearing of this matter, which took place on 21 August 2024. At the end of that hearing I gave a results judgment on Mediaflow’s two applications.
27 Telecom New Zealand Ltd v Clear Communications Ltd (1997) 6 NZBLC 102, 325 at 102, 335.
28 Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 559 at [90].
29 Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [HR 7.53.16(2)].
Further affidavit of Mr Marin
[76] In his affidavit affirmed on 9 August 2024, Mr Marin states the pressure of working full time for $908 (gross) per week had become too much for his family. This, and Mr Marin’s claim that the other directors were not treating him fairly or reasonably, prompted his decision to resign as an employee, on the basis that (Mr Marin alleges) he had been constructively dismissed.
[77] Mr Marin still had access to the company’s bank account. On his last day he took the opportunity to schedule payment of his final salary payment together with all accrued leave, and the sum of $13,398.02 (gross). He also processed the payment of a dividend to himself of $18,829.96.
[78] Acknowledging that Messrs Akal and Lukomski would now be the only directors in the business, Mr Marin says he also arranged:
(a)new company email accounts with administrator access for them;
(b)administrator access to remaining applications, including Amazon Web Services (AWS);
(c)to begin collecting and returning any remaining company assets.
Further affidavit of Mr Akal
[79] In his reply affidavit affirmed on 19 August 2024, Mr Akal disputes that Mr Marin had already provided everything needed for the operation of the business. Mr Akal lists the specific software or information that Mr Marin has refused to provide:
(a)user passwords for at least 47 of the 70 devices on Mediaflow’s network. Mr Akal says this meant he and Mr Lukomski were unable to provide customer support with respect to any of the issues associated with the devices as they did not have the password to log into them. Mr Akal says this has had a direct effect on Mediaflow’s ability to
provide service to its clients. Mr Akal instances Shotover Jet, the lead mechanic of which had to ask Mr Marin on 10 August 2024 to provide the password after he had refused to provide it to Messrs Akal and Lukomski, meaning they could not upgrade a jet boat. Mr Akal says that, even then, the password was incorrect. Mr Akal deposes that it was only on 12 August 2024 that Mr Marin provided the correct passwords.
(b)the required credentials for Zerotier, the provider of remote desktop access, in order to allow assistance, troubleshooting and installation of updates to be carried out from a remote location. These credentials were only provided on 15 August 2024.
(c)full administrative access to Zoho, Mediaflow’s email service provider. Mr Akal deposes that Mr Marin currently retains full control over the email system and has the ability to view all correspondence, make changes or terminate the service.
(d)full access to AWS which is the software hosting service which holds all the source code, virtual servers, databases and website hosting services. It also contains all the media (photos and videos) captured on site. Mr Akal deposes that Mr Marin claimed on 25 April 2024 to provide him and Mr Lukomski with access to AWS, but the access provided was extremely limited and did not allow access to the source code. On 12 August 2024, Mr Marin provided updated permissions (contrary to his claim that all access had been provided earlier). Again, however, Mr Akal complains that Mediaflow does not have access to the source code. Mr Akal deposes that this means it cannot access work, assess or resolve faults, or update or upgrade the system. It also cannot provide a contractor developer with relevant access to allow that to occur. In Mr Lukomski’s case, he is unable to access anything due to incorrectly configured security settings which only the administrator, Mr Marin, can rectify.
(e)access to Xero’s account settings in order to change the details on the subscription.
(f)access to Windcave, the provider of Mediaflow’s online payment and EFTPOS service. Without access to this service, the company cannot carry out key functions such as provide transaction reports to clients, or process refunds to customers. According to Mr Akal, Mr Marin claimed to provide access to the service months ago. However, he only provided the password to allow logging in on 12 August 2024.
[80] Mr Akal annexes Mr Marin’s email on 30 July 2024 in which he communicated his resignation. It states:
As you might’ve learned from your lawyer already, I’m no longer a director nor an employee of Mediaflow.
…
I will continue to support Mediaflow’s partners as a contractor.
My hourly rate is $130 plus GST. Mediaflow will be invoiced weekly on Mondays.
Any communication with you will also be billed.
[81] Mr Akal deposed that Mr Marin provided “no information as to how he proposed to leave things with Mediaflow’s clients, no information whatsoever as to what a business would expect when a person carrying out work for the business (be they a director or employee) resigns.” Mr Akal describes Mr Marin’s email as an “attempt to hold the company ransom and require it to pay his $130 plus GST hourly rate in order to keep its business going and prevented from folding.”
[82]Mr Akal also:
(a)provided evidence of Mr Marin refusing to return Mediaflow property, including a laptop and phone.
(b)described the amounts Mr Marin took from the company bank account as final pay and dividends as unauthorised and amounting to theft from the company.
(c)described Mr Marin’s post-resignation deletion of Mr Akal’s and Mr Lukomski’s email accounts and replacement with new accounts as “entirely malicious” destruction of company property preventing clients from contacting them on existing email addresses.
(d)provided evidence suggesting Mr Marin had attempted to use a newly incorporated company to provide Mediaflow’s existing hardware and software to service one of Mediaflow’s clients, Oxbow, instead of Mediaflow doing so. Mr Akal also provided evidence that he had been notified by Oxbow on 15 August 2024 that it would be terminating its agreement with Mediaflow as it was not happy with the level of support it had been receiving. Further, Mr Akal deposed that Mr Marin has been re-negotiating a contract with Shotover Jet without notifying him or Mr Lukomski.
Mediaflow’s submissions
[83] Mr Gresson submits that Mediaflow has a strong arguable case that it is the owner of the source code, software and other tools and services used by and for the company as part of its business and that the balance of convenience and overall justice favour the making of an interim injunction.
[84] Mr Akal’s evidence contains some background as to the development of the software that is being used by the company. He refers to a “temporary agreement” in place in June 2020 in which Mr Lukomski and Mr Akal would install, build and maintain the hardware and system, deal with clients, and maintain customer service. Mr Marin would then focus on the development of the backend software hosted by AWS.
[85] Mr Akal produced a printout from the online group messaging platform Discord showing that between 12 June 2020 and 23 June 2020, discussions took place
between the three of them relating to their proposed venture. They later moved those discussions to another group messaging platform called Zoho. They also used an online workplace collaboration tool called Trello. A screenshot from Trello was attached to Mr Akal’s affidavit. On the “things to do” tab is stated “develop an end to end generic site workflow: infrastructure/capture/production/sales/ online hosting/content delivery”.
[86]Mediaflow submits that:
(a)where a director of a company creates work in their capacity as director the company is the equitable owner of the work;30
(b)it is strongly arguable that Mr Marin worked on the development of the software for and as part of his role as director of Mediaflow.
[87]This aspect of Mediaflow’s claim is disputed.
[88] On the one hand, Mr Akal’s evidence is that he and Mr Lukomski invited Mr Marin to join as a director and shareholder of the company for the purpose of developing the company’s software.
[89] On the other hand, Mr Marin says that at the early stage of the three men’s working relationship “the idea was” that Mr Marin would allow the business to use Mr Marin’s software and Mr Akal and Mr Lukomski would allow it to use their device and software. Mr Marin says there was never any suggestion that the business would buy the software off him or pay him to create any software, just as there was no agreement that the business would own the device developed by Mr Akal and Mr Lukomski or pay them for creating it. By contrast, Mr Akal’s position was that any software was only created and developed once the business had been set up. It would have been impossible for Mr Marin to create the software before this as it was created for a specific idea and purpose.
30 Burden v ESR Group (NZ) Ltd [2016] NZHC 1542 at [179]–[180].
[90] Mr Akal says that if it had been agreed that Mr Marin would retain the software as his own property as he developed it, then that would have been documented and clearly recorded as it would have a significant impact on the company’s value — essentially changing the software from a company asset to something it pays for the right to use but not own.
[91] Mediaflow submits there is no evidence of any agreement that Mr Marin would retain all ownership of the software he developed. It submits that such an agreement would not make commercial sense, as the value of the company is centred around the software and hardware it creates. According to Mediaflow, it would be totally against the company’s interests to allow its director to create software for the company on the company’s time whilst allowing the director to retain ownership of it.
[92] Mediaflow also submits that even if Mr Marin was undertaking software development for the business in the weeks prior to the incorporation of the company, the work was carried out with the incorporation of the company in mind. Mediaflow points out that the same day Mr Marin joined the venture, a company name was being discussed by its future directors and shareholders. It submits that all of the evidence showing the software development, and the communications between the parties post- date the contemplation of a company.
[93] Mediaflow relies on Vitof Ltd v Altoft in which the Chancery Division of the High Court of England and Wales granted summary judgment in favour of a company which claimed that a director who wrote source code for Vitof held copyright in the code on trust for the company. Richard Arnold QC (sitting as a Deputy High Court Judge) accepted that in respect of the 1–2% of the source code which the director estimated was created before the incorporation of Vitof, the director likewise held this on trust for Vitof because the work was done in contemplation of the incorporation, and for the benefit of, Vitof.31
31 Vitof Ltd v Altoft [2006] EWHC 1678 at [148]–[149], Gwilym Harbottle and others Copinger and Skone James on Copyright (18th ed, Sweet & Maxwell, London, 2021) at 5-214 citing A-One Accessory Imports Ltd v Off Road Imports Ltd (1994) 34 IPR 306 (FCA).
[94] Based on the same principles applied in Vitof Ltd v Altoft, Mediaflow submits that all of the work Mr Marin carried out and software he created or developed was done so for the company’s benefit. He holds that software as trustee for the company and must provide it to the company when called upon to do so.
[95]As explained by Mr Akal in his reply affidavit of 19 August 2024:
There was no suggestion the business would “buy” any software from Lucas, because there was no software to buy – it was only created and developed once the business had been set up. It would have been impossible for Lucas to create the software prior to this as it was created for a specific idea and purpose.
…
If we had agreed that Lucas would retain the software as his on property as he developed it, given the whole point of its development and Lucas’s involvement was for the company’s benefit, then that would have been documented and clearly recorded as it would have a significant impact on the company’s value – essentially changing the software from a company asset to something it pays for the right to use but not own. Further, if the arrangement was simply for Mediaflow to buy the right to the software then Lucas would not have been invited to join as a shareholder – we would have simply paid for him to work for the company or bought the software off him.
The idea was clear and known by all parties – we would develop everything (software and hardware) for the use by and the benefit of the company.
[96] Mr Gresson submits that in cases involving disputes over intellectual property, the Court has been willing where appropriate to make orders requiring the delivery of property pending final determination of the dispute.32 Similarly, in disputes between a company and its officers, the Court has been willing to make interim orders requiring property used by the company, such as computer files, to be delivered up by those officers.33
[97] Mediaflow’s position is that it is the legal or equitable owner of the source code and software used by and for the company as part of its business.
[98] Under s 21 of the Copyright Act 1994, the “author” of a work is the first owner of any copyright in the work. “Author” in the context of computer software means the
32 Information Tools Ltd v Codeshed Ltd HC Auckland CIV-2010-404-377, 27 January 2010.
33 Greymouth Holdings Ltd v Jet Trustees Ltd HC Auckland CIV-2011-404-5309, 19 December 2011 at [40]–[50].
person who arranged for its creation.34 Mr Gresson submits that where a director creates work in their capacity as director, the company is the equitable owner of the work.35 He argues that it is clear, or at least strongly arguable, that Mr Marin worked on development of the software in his capacity as director for the benefit of the company, given that he was expressly introduced into the company to do so. Mediaflow contends that even where Mr Marin was undertaking software development prior to incorporation of the company, this was done with incorporation of the company in mind, which means the information was held on trust for the company.36
[99] Mr Gresson submits that the balance of convenience favours making the orders sought, for the following reasons.
[100] First, if the injunction is refused the company will be unable to properly function. Mr Marin’s refusal to provide the source code means that the software remains solely in his control, which prevents the other shareholders from undertaking essential tasks and the board from exercising its powers and responsibilities.
[101] Second, damages would be an inadequate remedy if Mediaflow is found to be the owner of the software, as it will be too difficult to quantify the loss to the company (for instance through goodwill or missed opportunities) as a result of Mr Marin’s refusal to provide access to the software.
[102] Third, while an injunction would not involve maintaining the current status quo, it would not go beyond restoring the parties to the position they were in two and a half years ago, when all shareholders had access to the company software. Such action has been considered appropriate by this Court in the past.37 This would also not compromise the interests of the company or Mr Marin but would allow the company to make informed decisions and proceed with all parties on an equal footing.
34 Copyright Act 1994, s 5.
35 See Burden v ESR (NZ) Ltd [2016] NZHC 1542 at [179]–[180].
36 Vitof Ltd v Altoft, above n 31, at [148] and [149].
37 Waimate Land Development Ltd v Morven Glenavy Ikawai Irrigation Co Ltd HC Timaru CP 7/93, 17 August 1993 at 4.
Mr Marin’s submissions
[103] Mr Marin submits that Mediaflow’s cause of action for breach of intellectual property rights, which the application for interim injunction relates to, is misconceived and both legally and factually flawed. Mediaflow’s application for an injunction does not assert ownership of intellectual property rights at all. Rather, Mediaflow simply pleads ownership of “source code and related software”. No breach or likely breach has been pleaded that could or would justify injunctive relief. Further, there was no pleaded breach of any actionable right in respect of any intellectual property or any breach of ownership rights in respect of property. Rather Mediaflow has simply pleaded ownership and relief in the form of a declaration and an order for “administrative access”.
[104] According to Mr Marin, Mediaflow conflates its claim to ownership of property (namely, “computer software, source code and all other services and resources paid for and used by the company”) with intellectual property that may subsist within or arise through the creation of property. The nature of Mediaflow’s interest in the property in respect of which it claims ownership has not been pleaded. There is also no pleaded breach of any actionable right in respect of any intellectual property. Furthermore, Mediaflow has not pleaded the ownership rights that would justify injunctive relief.
[105] At the first hearing Mr Gresson waived Mediaflow’s claim that Mr Marin was “commissioned [by Mediaflow] to develop the [property]” and is hence the owner under the Copyright Act. Indeed, there was no evidence of any payment or agreement to pay Mr Marin prior to the development of the source code and software. Moreover, Mr Marin could not have been commissioned to create the work by Mediaflow when it had not yet been incorporated. Any inference that a company may have been incorporated in future is insufficient to displace the starting presumption that the author, Mr Marin, is the owner of the work.
[106] Furthermore, under s 21(3) of the Copyright Act, Mediaflow’s claim can only extend to ownership of any copyright in the property, not the property itself. There is no pleaded breach of these copyright rights that would justify an injunction.
Mr Marriott submits that there can be no serious question to be tried without repleading.
[107] Mr Marin has given affidavit evidence that he repurposed and modified software that he had created for previous projects. If that is correct, as Mr Marin submits, Mediaflow cannot own copyright in this software nor any work that was substantially derived from it, as that work would not be original.
[108] Mr Marin submits Mediaflow cannot claim ownership through employee copyright, as Mr Marin was not subject to an employment agreement at the relevant times. Nor is he deemed to be an employee for the purposes of s 21(2) of the Copyright Act simply by virtue of his status as director.
My assessment
Serious question to be tried
[109] A plaintiff seeking interlocutory relief must adduce sufficiently precise factual evidence to satisfy the Court that there is a real prospect of succeeding in the claim for a permanent injunction at the trial.38
[110] None of the financial statements produced by Mediaflow in this proceeding contain a reference to the software or underlying source code. In verifying whether Mr Akal’s evidence that the software was a “company asset” was correct, I looked to see if it had been recorded as an intangible asset in the company’s accounts. However, the only fixed assets recorded in the 2023 financial statements and itemised in the depreciation schedule are computer/photography equipment and a processing laptop, with a combined value after depreciation of $17,782.
[111] Moreover, Mediaflow’s assertion as to ownership of the software used in the business is at odds with the proposition advanced by Mr Marin:
Akal and Lukomski authorised the new company to use the DVR device and operating software they had prototyped. I authorised it to use my personal cloud infrastructure services account and all of the software I had written.
38 Re Lord Cable (Deceased) [1976] 3 All ER 417 (CH) at 431; Hannon v Senior Trust Capital Ltd
[2023] NZHC 16, [2023] 26 PRNZ 205 at [40].
[112] However, both parties acknowledged that the question of ownership of the software/source code could not be finally resolved in this injunction application. Rather ownership will be an issue for trial (if the parties cannot settle their dispute beforehand).
[113] At this stage Mediaflow’s strongest argument appears to be based on the allegation at [36](c) of its statement of claim, that Mr Marin developed “source code, software and tools” in his capacity as a director of Mediaflow and so he holds them on trust for Mediaflow and must assign them to it when called upon to do so.
[114] The evidence advanced on behalf of Mediaflow as to what work was allegedly carried out by Mr Marin post-incorporation of the company as director, or in some other capacity such as an employee was unclear. In particular, it is unclear on the evidence the extent to which Mr Marin developed the source code, software and tools in his capacity as director of Mediaflow.
[115] But even if Mr Marin developed the code and/or software for the business in the weeks before the company was incorporated, the evidence indicates that the work was done with the incorporation of the company in mind. The evidence also indicates that almost immediately after Mr Marin joined the venture, the parties were discussing a company name. Moreover, it seems that the development of the software and the communications between the parties with respect to its development post-date the contemplation of the company. I accept that the principle in Vitof Ltd v Altoft applies.39 Work carried out prior to the incorporation of a company which is for the benefit of that contemplated company, is held on trust for the company regardless of the fact that it was not formally in existence at the time some of the work was carried out.
[116] It follows that I accept there is a serious question to be tried as to whether the work that Mr Marin carried out and software he developed was done for the company’s benefit. If so, Mediaflow is likely to be able to establish that Mr Marin holds it as a trustee for the company and must provide it to the company when called upon.
39 Vitof Ltd v Altoft, above n 31.
[117] For these reasons I consider that Mediaflow has adduced sufficient evidence at this preliminary stage to satisfy the Court that there is a real prospect it may succeed in its claim for a permanent injunction in relation to the software and source code.
[118] Accordingly, in my view, Mediaflow has established there is a serious question to be tried for the purposes of its injunction application.
[119] In reaching that conclusion I do not discount the possibility that Mr Marin could succeed at trial if he provides sufficient evidence to establish his prior ownership of the relevant software and source code. However, at this stage, my assessment is that the claim has sufficient factual foundation to meet the requirement of a serious question.
[120]I will turn to consider the remaining elements of the test.
Adequacy of damages
[121] If damages would be an adequate remedy were Mediaflow to succeed at trial then the usual position is that an interlocutory injunction should not be granted.40
[122] Mediaflow submits that damages would be an inadequate remedy if Mediaflow is found to be the owner of the software. This would be because, it submits, it will be difficult to know what missed opportunities the business may have had or what goodwill with customers it may have lost as a result of Mr Marin’s refusal to provide access to the software.
[123] In response, Mr Marin submits that it is impossible to assess whether damages would be an adequate remedy for Mediaflow in the event an injunction is not granted as Mediaflow has failed to provide evidence as to the nature of extent of harm it has suffered or is likely to suffer as a result of his actions. One of the reasons it is difficult to assess whether damages might be an adequate remedy is that it was challenging to gauge from Mediaflow’s evidence and submissions exactly what harm it alleges it is suffering as a result of the status quo being maintained.
40 American Cyanamid Co v Ethicon Ltd [1975] AC 396, [1975] 1 All ER 504 (HL) at 408B–C, 510f–g.
[124] In my view, it is doubtful that damages would be an adequate remedy. Mr Marriott did not persuade me that Mr Marin’s demand to be paid $130 per hour, plus GST, as a contractor, including for each communication with Mediaflow’s directors, allows the measure of damaged to be precisely ascertained. The relationship between the parties is so poisoned that I cannot see any ongoing working arrangement between them to be sustainable. Rather, it seems highly likely that the present dispute, unless resolved, will result in irremediable damage to the business. Recent events, including evidence that a client has notified it no longer requires Mediaflow’s services, suggest the situation has become urgent. Mediaflow now needs to take all steps to rescue the business from the real possibility of decline resulting from the relationship breakdown between the shareholders.
[125] Accordingly, I am not satisfied that damages would be an adequate remedy for Mediaflow.
[126]I will turn to consider the balance of convenience.
Balance of convenience
[127] The Court is wary of granting injunctive relief placing applicants in a better position than is justifiable prior to determination of the substantive matter in issue.41 Balance of convenience is often described as “the balance of risk of doing an injustice”.42
[128] Mediaflow submits that as long as Mr Marin retains control over the software and source code, the company cannot properly function. It submits that Mr Marin’s refusal to provide the source code means the company and its other shareholders cannot undertake essential tasks.
[129] On the affidavit evidence adduced in respect of the interlocutory matters currently before the Court, especially that adduced post-hearing, I conclude
41 McGechan on Procedure, above n 29, at [HR7.53.06].
42 McLaughlin v McLaughlin, above n 25, at [37] citing Cayne v Global Natural Resources Plc
[1984] 1 All ER 225 (CA) at 237.
unjustifiable detriment is likely to be suffered by Mediaflow if the status quo continues.
[130] Indeed, as I understood it from the evidence and submissions, the “status quo” would have been in effect a continuation of what occurred when Messrs Akal and Lukomski were not directors and Mr Marin ran the business single-handedly (assisted some of the time by a contractor). The difference, at the time of the first hearing, is that Mr Marin was not being remunerated at the same level as he was previously. By the second hearing he was no longer even a director or employee. As Lord Diplock said, all other things being balanced, “it is a counsel of prudence to take such measures as are calculated to preserve the status quo”.43 While determining the status quo is sometimes difficult, I think a better approximation of the status quo as at the first hearing may have been to allow continuation of the current state of affairs. This had apparently been the case effectively since the resignation of Messrs Akal and Lukomski without any clearly established detriment to the fortunes of the company. However, in light of recent developments, I am no longer persuaded that resumption or continuation of this “status quo” would be a just result.
[131] Mediaflow acknowledges that the injunction it seeks would go beyond maintaining the current “status quo”. It says that the injunction sought would restore the parties to the position they were in two and a half years ago when it is said that all shareholders had access to the software, prior to Mr Marin’s alleged actions limiting access.
[132] The main concern I formerly had with such a remedy is that rewinding everything that has occurred since shortly after the company’s incorporation would have risked injustice to Mr Marin. To do so at this preliminary stage requires the Court to be confident that everything Mr Marin has done since that early period needs to be unwound. I would have hesitated in going so far until the recent developments on the evidence now before the Court. However, I now consider that Mr Marin’s recent actions in relation to the company are detrimental to it and justify injunctive relief that would in effect return the company closer to (what is said to be) its original settings.
43 American Cyanamid Co v Ethicon Ltd, above n 40, at 408G, 511b–c.
[133] I initially saw some merit in Mr Marin’s submission that Mediaflow has failed to adequately distinguish between the “software” and the source code to that software. It was arguable that only Mr Marin, as the business’s primary programmer/developer, needed access to the source code. However, now I accept Mr Akal’s point that Mr Marin, especially through his recent actions, is essentially blocking the company from continuing to operate satisfactorily.
[134] Mr Marin also makes the valid point that Messrs Akal and Lukomski are not parties to this proceeding. Until his resignation, Mediaflow, the applicant, already had access to the source code through Mr Marin, its director, shareholder and sole employee. This argument is no longer persuasive, however, since Mr Marin’s resignation.
[135] Mr Marin says he has not appropriated any of the software for his own use or for the benefit of any person other than Mediaflow. He has undertaken not to apply any source code or software used by Mediaflow for his own use until this Court orders further. He has made this undertaking notwithstanding his claim to ownership of the source code and software.
[136] But Mr Marin is no longer bound by fiduciary obligations that follow from being a director and under the terms of his (avoided) employment agreement. Despite Mr Marriott’s attempts to persuade me otherwise, I am no longer confident that Mr Marin’s undertaking in his notice of opposition and emphasised at the hearing to abide by these constraints operates as a protective factor in support of his case. Rather, the undertaking seems bound up with his director and employee status, both of which he has now relinquished. His assertion that an injunction is unnecessary to reinforce his continued compliance with those obligations no longer carries the same weight.
[137] Regarding the balance of convenience, I agree with Mediaflow’s submissions that:
(a)There is a need for an interim injunction as the company has not been given unrestricted access to the assets in question through Mr Marin.
(b)Mr Marin is not the sole person working in the business (if he is indeed still working in the business at all).
(c)Mr Marin is not the sole person requiring access to those assets to fulfil the responsibilities of running Mediaflow’s business in the meantime.
[138] I accept there is a risk that if the injunctions were granted, they would allow Mr Akal and Mr Lukomski to interact with the relevant source code and software where they may not be qualified to do so, and that would arguably infringe copyright owned by Mr Marin. However, as Mr Gresson pointed out, Mr Marin earlier seemed content to allow his own contractor, Hyperfocal, to interact with the source code in a way that could equally have infringed Mr Marin’s asserted copyright in it. Mr Marriott’s retort that this took place before any dispute concerning ownership of the source code had arisen did not persuade me. There was no evidence that Mediaflow or Messrs Akal and Lukomski have ever agreed that Mr Marin owns the source code for the application at the heart of the company’s business. However, there is a greater risk that unless such access is provided, the company will be impeded from operating as it needs to. The balance of convenience therefore favours Mediaflow.
Overall justice
[139] I consider that overall justice favours granting the interim injunctions sought. My initial impression was that litigation was being used as a tool of oppression by the joint majority shareholders to coerce Mr Marin into withdrawing from what he claims to have singlehandedly (since Messrs Akal and Lukomski’s temporary departure) built up into a successful business.
[140] I also was initially attracted to Mr Marin’s submission that the fact Mr Akal and Mr Lukomski are now pursuing this action following the circumstances in which they had withdrawn from the business, then to return after they felt its prospects had improved, might suggest a degree of bad faith, weighing against the Court granting equitable relief (assuming grounds for it had otherwise been made out).
[141] However, recent events involving Mr Marin have shifted my assessment of the overall justice in Mediaflow’s favour. Whatever the merits of the intense disagreement
between the respective personalities involved, it is the interests of the company, and the continued operation of its business that must ultimately prevail at this interim stage.
4. RESULT
[142]The application for summary judgment is dismissed.
[143]The application for an interim injunction is granted.
[144] I grant an interim injunction applicable until further order of the Court in the following terms (as revised by Mr Gresson at the hearing on 22 August 2024):
(a)By 5pm on 23 August 2024, Lucas Marin is required to relinquish to Mediaflow Ltd (by its directors Messrs Akal and Lukomski) full administrative access to the following services and/or accounts used in Mediaflow’s business:
(i)Amazon Web Services (super administrative access must also be relinquished);
(ii)Zoho email;
(iii)Xero accounting service.
(b)Mr Marin is prohibited from using all source code, related software and other applications used by Mediaflow in its business, for any purpose other than for Mediaflow’s business, as specifically authorised by its directors.
(c)I grant leave to apply on two working days’ notice if any amendment to the terms of the injunction is required.
Costs
[145] Mr Marin submits that if Mediaflow’s summary judgment application is dismissed, the Court should fix costs in his favour, as this was a claim which was clearly inappropriate for summary judgment.
[146] In the usual course of events, where summary judgment is dismissed, costs are reserved pending trial.44 I do not consider there is any justification for departing from this practice in the present case.
[147] My preliminary view is that Mediaflow is entitled to costs assessed on a 2B basis in respect of the interim injunction application.
[148] I encourage the parties to resolve matters of costs among themselves. If this is not possible each party may file submissions on costs, not exceeding five pages, within 14 days of the date of this judgment, and I will determine costs on the papers.
5. CONCLUDING OBSERVATIONS
[149] Before committing further resources to litigation, I invite the parties to reflect on the following observations. I expressed similar remarks to counsel at the telephone conference on 1 August 2024.
[150] From my review of the evidence and consideration of the submissions very capably made on each side of this dispute, a solution may best lie in a commercial negotiation rather than in a decision of the Court. The individuals involved are undoubtedly experts in their fields of business and have produced a product which appears to be in demand from tourist operators. As was acknowledged in the first hearing, the business is successful and has a positive future.
[151] However, it seems apparent that when it was formed, the business lacked sufficient commercial and legal input to ensure that ownership of its assets, including intellectual property, was carefully thought through and properly assigned to its
44 NZI Bank Ltd v Philpott [1990] 2 NZLR 403.
rightful owner. In short, the parties did not apply legal and commercial foresight to plan for what might happen if their business relationship fell apart.
[152] The positive working relationship that the three directors initially had with each other has disintegrated. It may not be possible to restore it. Indeed, it may only be possible for resolution of the issues underlying this litigation for one of the two factions to buy out the other. To achieve that commercially may require adopting a more pragmatic consideration of “ownership” of the relevant intellectual property in order to overcome the factual and legal complexities (and expense) inherent in resolving that question through the Court.
McHerron J
Solicitors:
Todd & Walker Law Ltd, Queenstown
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