Miedema v Petrou
[2024] NZHC 3169
•31 October 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-1205
[2024] NZHC 3169
BETWEEN MARK NIEKLAAS MIEDEMA, JULIE MIEDEMA and ALH TRUSTEE CO LTD as
trustees of the MIEDEMA FAMILY TRUST Plaintiff
AND
LOUKAS SOTERI PETROU
First Defendant
CANAM CONSTRUCTION (BOP) LIMITED
Second Defendant
STEPHEN WARD JONES
Third Defendant
Hearing: 6-9, 20-24, 27, 28, 30 November and 1 December 2023 Appearances:
M A Corlett KC, A G Needham and D S Howell for Plaintiff D L Bennington for First Defendant
J L Land and S Nicolson for Second Defendant
D A Campbell and N M Thompson for Third DefendantJudgment:
31 October 2024
JUDGMENT OF ANDERSON J
This judgment was delivered by me on 31 October 2024 at 3.00 pm pursuant to r 11.5 of the High Court Rules 2016.
………………………………
Registrar/Deputy Registrar
Solicitors: Holland Beckett Law, Tauranga
Duncan Cotterill, Auckland Lowndes Jordan, Auckland
Dentons Kensington Swan, Auckland
MIEDEMA v PETROU [2024] NZHC 3169 [31 October 2024]
Table of Contents
Page No
Facts[5]
Canam BOP is established [5]
Initial perspectives[13]
Canam Group support[15]
Charges for Canam Group support[20]
Canam BOP performance 2013–2015[22]
Changes in ownership/directorship[26]
Increasing shareholder account balances[28]
Alexandra Park arbitration[32]
Dividends[35]
August 2019 and October 2019 meetings [42]
Mr Miedema brings matters to a head[46]
Proceedings are issued[55]
Canam BOP performance in 2020[59]
Mr Petrou raises the “Reimbursement Charge” in his affidavit of
23 October 2020[60]
Mr Miedema resigns[70]
Canam BOP after Mr Miedema left[72]
The Reimbursement Charge and 2021 Head Office Costs are journaled[76]
This proceeding[79]
Causes of action[80]
The issues[83]
Evidence[84]
Legal framework under s 174 [87]
First cause of action: Deemed prejudicial conduct under s 174[90] Annual overhead charges to Canam Group companies for group support [96] Annual retrospective charge[99]
Recognition of an existing liability under an agreement [104]
Evidence consists only of Mr Petrou’s assertion[108]
Evidence vague on the details[109]
Not corroborated by other evidence[111]
No contemporaneous record[118]
Contrary to commercial common sense[121]
Contingent liability[124]
Agreement not supported by invoices[126]
Conclusion on agreement[127]
Recognition of an existing liability – quantum meruit? [128] The Reimbursement Charge was entered into by Canam BOP [135] The transaction was a “major transaction” [138]
Conclusion on first cause of action[139]
Second cause of action: “Cash stripping”[140]
Reimbursement Charge[145]
2021 Head Office Costs[151]
Legal fees[155]
The procedural background[158]
What fees were incurred to 31 March 2021?[162]
Costs on derivative action[164]
Fees on s 174 proceeding[170]
Mr Petrou’s personal legal fees[174]
Warranty provision[175]
Use of Canam BOP funds for Alexandra Park litigation [178]
Withholding of payment of dividends to the Trust to assist with the
Alexandra Park arbitration[181]
Unjustified salaries recorded for Mr Petrou and Mr Jones[185]
Conclusion on second cause of action[186]
Third cause of action: Advances in the Treasury Account[187]
Access to information/financial control[192]
Shareholder advances[198]
Relief under s 174[206]
Approach to granting relief [209]
Whether lack of attempts to resolve stands in the way of relief[215] Fairness as a basis for potentially disentitling relief[221] Alleged disentitling conduct by Mr Miedema in his operation of,
and exit from Canam BOP[223]
Mr Petrou’s “standing”[227]
Could Mr Miedema’s conduct disentitle the Trust from relief?[228] Mismanagement or performance allegations[234] Asserted disentitling conduct associated with Mr Miedema’s exit[237]
Cause and effect[274]
What relief is appropriate? [300]
Fourth cause of action: Claim against Canam BOP — did Canam BOP
breach duties owed to the Trust as shareholder in contravention of s 171?[312]
The claim[315]
Breach of a duty to declare dividends? [319]
Did Canam BOP breach its duty to allow the Trust to exercise
voting rights?[326]
Summary[330]
Result[331]
[1] Mark and Julie Miedema are the trustees of the Miedema Family Trust (the Trust).1 The Trust owns 33 per cent of the shares in Canam Construction (BOP) Ltd (Canam BOP). Until a restructure in mid-2018, the remaining 67 per cent of the shares were owned by Canam Group Ltd (CGL) (now Medway Ltd). CGL is wholly owned by the interests of Loukas Petrou and Stephen Jones, who are the first and third defendants.2 Mr Petrou and Mr Jones are the directors of Canam BOP, and CGL. Mr Miedema was a director of Canam BOP until he resigned in the first quarter of 2021.
[2] The Trust brings three claims for relief under s 174 of the Companies Act 1993 (the Act) alleging oppressive, unfairly discriminatory, or unfairly prejudicial conduct by Mr Petrou and Mr Jones in the management of Canam BOP. The Trust also brings a claim against Canam BOP itself alleging breaches of a duty to pay the Trust dividends and a duty to allow the Trust to exercise voting rights.
[3] The current 67 per cent shareholder in Canam BOP is CBOP Investments Ltd (CBOP). CBOP’s directors are Mr Petrou and Mr Jones and it is wholly owned by their interests. Neither CBOP nor CGL are parties to the proceeding.
[4] Behind that bland description is an unfortunate story of a positive business relationship that has broken down.
Facts
Canam BOP is established
[5] Since the 1950s, companies trading under the Canam brand have specialised in the construction, refurbishment, and fit-out of commercial buildings. The group structure at the start of events material to this proceeding comprised CGL with several wholly-owned subsidiaries incorporated to operate specific business and operational functions (Canam Group).
1 Together with ALH Trustee Co Ltd.
2 For simplicity, when I refer to the “defendants” I am referring to Mr Petrou and Mr Jones unless the context requires otherwise.
[6] There were four wholly-owned trading subsidiaries of CGL: Canam Interiors Ltd, Canam Joinery Ltd, Canam Construction Ltd, and Canam Building Ltd.3 Another subsidiary, Canam Management Services Ltd, employed administrative and senior staff. The companies in Canam Group4 shared common directors, Mr Petrou and Nicholas Page, whose trusts owned CGL. Mr Petrou and Mr Page took over operation of the Canam Group in 2006. A further company now owned by trusts associated with Mr Petrou and Mr Jones, Five Hills Ltd, owned plant, equipment and vehicles used by the Canam Group companies.
[7] Mr Miedema has had some 30 years’ experience in the construction industry. He had worked within the Canam Group for about seven years as site manager, then project manager between around 2000 and 2007. This was primarily based in Auckland. He left to take up employment with Watts & Hughes Construction Ltd in Tauranga.
[8] In late 2011, Mr Miedema, Mr Petrou, and Mr Page began discussions about the formation of a new Canam company, which would operate in the Bay of Plenty, and be managed by Mr Miedema. Canam Group was looking to expand beyond Auckland. Mr Miedema had local knowledge and connections in the Bay of Plenty, as well as familiarity with Canam Group. Mr Miedema had been wanting to move into a senior role. Mr Miedema did not have prior experience with running a business, or with financial reporting, accounting or corporate governance. Nor did his interests have much in the way of available capital.
[9] It was agreed in December 2011 that Canam BOP would be incorporated to start the new Bay of Plenty venture. Mr Miedema would head up management of the company. Originally it was proposed that Mr Miedema’s interests would take a 15 per cent shareholding. At his request, this was increased to 33 per cent with the 67 per cent balance of the shares held by CGL. The shareholding was acquired for a nominal price of $1. The company was to have capital of $1,000. Set-up costs for Canam BOP were to be funded by $300,000 in shareholder advances proportionate to
3 These had previously been business units but were subsequently incorporated.
4 There were other companies in the Canam Group, but these are irrelevant for present purposes.
the shareholdings: Mr Miedema’s interests were to advance $100,000 and CGL
$200,000.
[10] Canam BOP was incorporated in February 2012.5 The directors were to be Mr Miedema, Mr Petrou, Mr Page and Andrew Clark. Canam BOP did not adopt a constitution. The shareholders discussed entering into a shareholders’ agreement. Mr Miedema sent Mr Petrou a list of items for the shareholders’ agreement for comment and review. Although the subject was raised at later meetings, the initiative did not progress. Each side says this was the responsibility of the other.6
[11] Mr Miedema negotiated an employment agreement under which he was to be paid a salary of $140,000 and have a company car.7 Mr Miedema’s start date with the new business was 6 February 2012. During the first quarter of 2012, Mr Miedema negotiated a sub-lease of premises in Tauranga, hired staff and started submitting registrations of interest for work.
[12] The parties discussed Mr Miedema’s interests ultimately buying in to CGL (at the Canam Group level). That is in context where Mr Petrou and Mr Page were planning to exit and succession planning for the Canam Group.
Initial perspectives
[13] Until relationships soured, Mr Petrou and (in a lesser way) Mr Page acted as mentors and gave support to Mr Miedema, particularly for aspects of the new role that he did not have experience with. Mr Petrou would also refer Mr Miedema to staff within Canam Group for assistance with things such as IT and accounting. Mr Clark
5 Mr Petrou owned all the shares on incorporation. A transfer to the Trust and CGL of their respective 33 per cent and 67 per cent was implemented later that year. The transfer to the Trust was not prepared until 17 April 2012, and was effected only in June 2012. Nothing turns on this timing. Mr and Mrs Miedema settled the Trust to hold their shares in Canam BOP on 14 February 2012.
6 Mr Miedema provided notes for what he considered should be covered in a shareholders’ agreement on 29 February 2012. He followed up on 10 July 2012 asking whether there was any progress on the agreement. Mr Miedema followed up on the shareholders’ agreement and asked for a discussion of this at a planned meeting at Cable Bay on 23 November 2012. After that meeting Mr Petrou advised that he would “follow up with the agreement” suggesting that the ball was in his camp on preparing a first draft.
7 His salary was later increased to $160,000 in December 2016 and then $170,000 in December 2019.
provided operational support to Mr Miedema and guidance on tendering and contractual matters.
[14] Mr Petrou and Mr Page saw Mr Miedema as part of a succession plan to have good people take over the Canam Group and to grow business in the Bay of Plenty. For his part, Mr Miedema was grateful for the opportunity, mentoring and support. He saw this as an important next step for himself professionally, and for his family’s financial growth and security. He explained that the prospect of dividends was a driver in his move from being just an employee.
Canam Group support
[15] Upon commencing operations, Canam BOP came into the Canam Group fold. It was largely operated and treated like the other companies in the Canam Group, as if it was a wholly-owned subsidiary, when in fact one third of the company was owned by the Trust.
[16] CGL or its administrative subsidiaries or associated companies provided a range of support to the Canam Group companies. This included administration; executive management; internal and external accounting/reporting; HR and IT support; licenced systems and subscriptions; insurances; health and safety certifications and procedures; and branding/goodwill. Assets owned by Five Hills were used to carry out the construction activities. CGL maintained these and paid costs for upkeep and storage. Each Canam Group subsidiary met its own running costs, such as repairs and fuel, but did not pay lease costs for the equipment.
[17] Mr Miedema says he was told at the outset that Canam Group would provide the above support to Canam BOP where required. Canam BOP did then receive the benefit of this support, just as did the other (wholly-owned) trading subsidiaries of CGL.
[18] Canam BOP was also treated the same as the wholly-owned trading subsidiaries from a banking perspective and for bonding support on projects. Canam Group had only ever had a single bank account operated by CGL, which it referred to as the Treasury Account. All income earned by CGL companies was paid
into this account, and all expenses were paid from it. Financial accounts were operated for each subsidiary with a running ledger as well as end of year adjustments. This is not unusual for a wholly-owned group of companies. However, when Canam BOP joined, it was operated in the same way, despite being part-owned by the Trust.
[19] Operation of the Treasury Account had benefits for Canam BOP. During Canam BOP’s initial loss-making years, the Treasury Account allowed Canam BOP to be funded by the CGL “bank”. Financial integration of Canam BOP into the Canam Group also enabled it to take the benefit of CGL’s bonding facility where bonds were required on projects. CGL had a standing Bank of New Zealand Ltd bonding facility of $4.5 million for performance bonds required on construction projects. Bonds would be taken out by the relevant subsidiary and guaranteed by CGL (ultimately guaranteed by Mr Petrou’s interests and assets).
Charges for Canam Group support
[20] Historically, the Canam Group operational companies had been debited with charges by CGL for support from Canam Group as an end of year adjustment in the annual accounts. It is common ground that it was agreed at the outset that Canam BOP would only start being charged anything for CGL support once it became profitable, after which it would be debited like the other subsidiaries.
[21] The defendants say that these charges for Canam Group support were (and were understood by Mr Miedema to be) “nominal only”. The Trust disputes this. There is also a key issue of whether, as the defendants contend, there was an oral agreement at the outset concerning arrangements for later charging Canam BOP for the actual value of CGL’s support in the event that the Trust did not become a shareholder in CGL. The Trust says there was no such agreement. I return to this issue later.
Canam BOP performance 2013–2015
[22] While successful in tendering for some projects, as was expected, Canam BOP was not profitable in its first few years of operation (financial years ended 31 March 2013–2015).
[23] In the first three years, on the 31 March balance date, Canam BOP’s current account with CGL was overdrawn at $578,861 in 2013; $954,917 in 2014; and
$987,068 in 2015. CGL did not charge interest on its subsidiaries’ current accounts.
[24] As at the end of the first three years, the Trust had only contributed $50,000 of the $100,000 start-up funding. It advanced the balance in November 2015 after Mr Petrou requested this in October 2015. At that time, Mr Petrou expressed concern to Mr Miedema at the poor performance of Canam BOP to date, which was at an unsustainably low level. He observed that the company had only been able to stay in business to that point because CGL had been supporting it.8
[25] Canam BOP’s fortunes turned in the 2016 financial year. Before moving to this, I divert to what was happening at the ownership/directorship level.
Changes in ownership/directorship
[26] Mr Page ceased being a director of Canam BOP in May 2014. In 2016, Mr Page sold his shares in CGL to Mr Clark’s interests following his retirement from day-to-day involvement in the Canam Group. Mr Clark’s interests were in turn succeeded by Mr Jones’ interests in or around July 2017.9 From this point, Canam Group was owned by the interests of Mr Petrou (56 per cent) and Mr Jones (44 per cent). This was a progression for Mr Jones who had been an employee in the business since 2005. From 2012 he was Group Commercial Manager, until he became Canam Group General Manager in March 2017.
[27] By July 2017, the three directors of Canam BOP were Mr Miedema, Mr Petrou and Mr Jones. This remained the same until Mr Miedema resigned in February 2021, which was given effect on 12 March 2021. The directors of CGL from July 2017 were Mr Petrou, Mr Jones and Mr Page until the latter resigned in March 2023.
8 Mr Petrou directed, and Mr Miedema accepted, that the company should be restructured by disestablishing the estimator’s role, leading to an immediate $130,000 reduction in overhead. Ongoing, routine projects were to be priced by the Canam BOP quantity surveyors and for major projects estimating support would be provided from Canam Group in Auckland.
9 Mr Jones commenced as a director of Canam BOP and CGL in June 2016. Mr Clark resigned as director of Canam BOP in July 2017.
Increasing shareholder account balances
[28] During 2015, 2016 and 2017, Canam BOP secured several significant projects including around $25 million worth of work. Then between 2017 and 2021, Canam BOP completed around $28 million worth of work, including for the Bay of Plenty Regional Council in Tauranga and Whakatāne. The latter projects ran through 2018 and 2019, but were concluding by the end of 2019.
[29] Mr Miedema says, and I accept, that he worked hard to build Canam BOP’s reputation to become a high performing construction company. By around 2016, Mr Miedema says his confidence had grown and he had become familiar with processes. He characterises his management of Canam BOP as mostly self-sufficient after three years. However, Canam BOP also owed its success to the support received from Canam Group including the guidance from his co-directors.
[30] The performance of Canam BOP meant that it accumulated significant positive annual balances in its shareholder current account with CGL in operation of the Treasury Account. The positive balances recorded at each 31 March balance date are as follows:
(a) 2016: $140,408;
(b) 2017: $1,282,350;
(c) 2018: $1,268,621;
(d) 2019: $2,245,803;
(e) 2020: $1,755,958; and (f) 2021: $2,278,962.
[31] CGL paid interest at the fringe benefit tax rate on these balances, as it did for all subsidiaries.
Alexandra Park arbitration
[32] In 2017, Canam Construction won the contract valued at $80 million to build apartment buildings at Alexandra Park for the Auckland Trotting Club. CGL was the guarantor of the performance bond held by the client. In 2018 Canam Construction ceased project work due to non-payment by the Auckland Trotting Club. The contract was terminated. From mid-2018, significant legal expenses commenced being incurred on the dispute which ultimately proceeded to a 13-week arbitration in 2020.10 The arbitration took up considerable management time. It was particularly diverting for Mr Petrou, both in the lead up, and during the hearing. It was also very stressful.
[33] In 2018 Canam Group underwent a restructure. Canam Construction continued to be wholly owned by CGL but CGL was removed as the holder of any shares in the other subsidiaries. For Canam BOP, CBOP replaced CGL as the 67 per cent shareholder. This was at Mr Miedema’s request. For the other trading subsidiaries, a layer of new holding companies was interposed as the 100 per cent shareholder, with those holding companies owned directly by the interests of Mr Petrou (56 per cent) and Mr Jones (44 per cent). Mr Petrou described this as a strategy to reassure clients that the Alexandra Park matter should not be a deterrent to future contracts.
[34] The Alexandra Park dispute resulted in a final arbitration award against Canam Construction of some $85 million on 24 March 2022.11 CGL and Mr Petrou currently face a High Court claim by the Auckland Trotting Club arising out of that project in effect claiming to recover that liability from them.
Dividends
[35] By September 2017, Mr and Mrs Miedema wanted to buy a new house. On the back of Canam BOP’s very positive performance, Mr Miedema initiated discussions with Mr Petrou to ask that a net dividend of $200,000 be arranged to fund
10 It ran for eight weeks from July–August 2020 (during which Mr Petrou was cross-examined for 11 days). It then adjourned and recommenced on 5 October 2020 for a further five weeks.
11 An interim award as to liability was made on 18 May 2021.
this. He also asked for repayment of the initial $100,000 shareholder advance. This was repaid in October 2018.
[36] Mr Miedema’s requests for dividends then (and subsequently) are against a disputed backdrop as to certain representations he says had been made to him about payment of dividends, which I address later. There was never any Canam BOP dividend policy.
[37]In November 2017, Canam BOP declared a gross dividend of $500,000, being
$335,000 net ($110,550 to the Trust). This was journaled in the 2018 accounts but not paid out until two payments: $100,000 on 6 May 2019 and $10,550 on 4 December 2019.12 Although ostensibly “declared”, I find that Mr Miedema was not aware of the dividend until he saw this in the 2018 accounts when they were distributed for signing in March 2019.
[38] In February 2019, Mr Miedema told Mr Petrou that the Trust was counting on payment of dividends for their house purchase.
[39] Mr Miedema made requests to Mr Petrou that a dividend be paid by email on 7 September 2017, 25 September 2017 and 13 December 2017. The Trust made further requests on 15 February 2019, 22 March 2019, 1 April 2019 and 21 May 2019. In the event, the only dividend declared was the 2018 financial year dividend referred to above.
[40] Both the timing of payment and level of dividends caused much friction. Mr and Mrs Miedema came to conclude that CGL was using funds to the Trust’s credit in the shareholder advance account to either pay for the arbitration or to provide necessary cashflow for the Canam Group as a result of the circumstances it found itself in due to the Alexandra Park dispute. The Trust saw this as the true basis for why Mr Miedema’s co-directors refused to pay dividends at a level the Trust sought to be paid.
12 Mr Petrou says the shortfall of $10,550 was due to a miscommunication at the time of payment.
[41] The defendants fairly characterise the trigger for the breakdown of the parties’ relationship as Mr Petrou and Mr Jones declining to agree to a sufficient dividend to assist Mr and Mrs Miedema to finance the purchase of the new house. Mr and Mrs Miedema viewed CGL as in the meantime helping itself to “unauthorised loans” from Canam BOP’s retained earnings in the form of the annual balances reported in the financial accounts of Canam BOP.
August 2019 and October 2019 meetings
[42] The directors of Canam BOP held few board meetings and there are almost no minutes. That is not particularly surprising given the regular communications that occurred during the company’s operation, and the personalities involved.
[43] As relevant to the proceeding, Mr Miedema sought to raise his issues of concern at meetings on 5 August 2019 and on 22 October 2019. The former was attended only by Mr Miedema and Mr Petrou because Mr Jones went home unwell. What was discussed at these meetings is not fully agreed.
[44] I find that at those meetings Mr Miedema raised his concerns at what he described as the “loans” to CGL recorded in the annual balance of the shareholder current account and said that there needed to be better approval processes and transparency. He also put back on the table a request for a Canam BOP shareholders’ agreement. The defendants say that it was accepted that this would be progressed after the conclusion of the Alexandra Park litigation. The issue of future dividends was also discussed.
[45] It is common ground that at both meetings the directors agreed that there would be a separate bank account established for Canam BOP. Mr Miedema acknowledges that it was agreed that this would not be implemented until after the arbitration was concluded.
Mr Miedema brings matters to a head
[46] Canam Group used an external accountant, Navin Hira, including for provision of the annual group and subsidiary accounts. Typically these were not finalised until after the end of the financial year following that to which they related.
[47] On 18 March 2020, Mr Miedema was sent a copy of the 2019 Canam BOP financial statements for signing. The 2019 financial statements showed an increase of
$977,182 in the shareholder current account with CGL, bringing the total balance advanced to CGL to $2,245,803. This was very alarming to Mr and Mrs Miedema against the background of the 2019 meetings and what they saw as risk to Canam Group due to the ongoing Alexandra Park arbitration. The Trust had previously taken accounting advice in 2019 on the increasing Canam BOP account with CGL. That advice raised that the increase in the annual shareholder advance account may be an unauthorised major transaction of Canam BOP.
[48] Mr and Mrs Miedema wanted to bring matters to a head. On 22 April 2020, Mr Miedema wrote to Mr Petrou and Mr Jones. This was around a month into the first nationwide Level 4 COVID-19 lockdown. I set out Mr Miedema’s email in full because it captures both the substance and tenor of the Trust’s complaints at this point:
Thank you for e-mailing me a copy of the 2019 financial statements for Canam BOP on 18/03/20. I received the originals in the mail a few days later.
We have reviewed the statements and we (both myself as a director and Julie and I as shareholders via our trust) have a number of questions and points we would like to raise with you. We would also like to put measures in place to regulate the company to ensure that neither you, Stephen, nor Julie and I, carry risk going forward especially in these uncertain times.
Before I outline these matters, I highlight that the company is my passion and I am committed to running it to achieve outcomes for our mutual benefit.
First, in relation to dividends – we do not agree with the position that no dividends are being paid to shareholders.
However, our biggest issue is the transfer of funds from Canam BOP to Canam Group. In effect, this has increased the debt owed to Canam BOP by
$977,182.00. It now totals $2,245,803.00 as at 31/03/2019.
You will appreciate why I am concerned. Firstly, I was not consulted on this and have not agreed to this either, making the transfer unlawful. Secondly, there has been no attempt to follow the correct approach of having proper
resolutions formalised. You will recall that it was agreed in our meeting in Auckland on 5/08/2019 that major decisions such as any advances are to be discussed and formalised by a way of a proper resolution. This has not happened.
Putting aside our lack of consent, taking this much money out of the company places it at risk of being deemed insolvent. My understanding is that all of us, as directors, could have personal liability if this was to occur. We really need to shore up this position ASAP.
For us, the personal risk is too great. Through no fault of ours, Julie and I find ourselves in a ridiculous situation where we are shareholders in a successful business, which I work very hard to manage and develop here in the Bay of Plenty. To then find that money, which rightfully belongs to this company, has been taken out of it without my approval, could have serious ramifications. Really, we get very little financial reward beyond my salary, while Canam Group continues to drain Canam BOP. In our private life, we are servicing a larger mortgage than we are comfortable with all because we are not receiving dividends which I have earned and are rightfully ours.
At this point there is no incentive for me to continue under these conditions.
The recent arrival of COVID 19 and the certain economic slowdown which will follow is going to put businesses in our industry at risk. In addition, the on-going and unresolved arbitration case on the Alexander Park project where the likelihood of a successful outcome for Canam Group seems marginal at best, leaves us highly exposed. It seems like Canam BOP, as an unrelated entity, is being used to prop up another entity, creating a conflict of interest for you as a director of both.
I have discussed the statements with my accountant who has pointed out that the way Canam BOP has been structured is highly irregular and needs to be rectified.
We cannot allow this situation to continue.
To resolve this, the following immediate steps need to be taken:
- Canam Group needs to repay the shareholders advance taken from Canam BOP. Canam Group may need to source additional funding elsewhere as we cannot afford to wait for the outcome of the Alexander Park arbitration.
- A formal shareholders agreement needs to be set-up for Canam BOP so that clear procedures are established for financial decision making, control and management.
- A separate bank account needs to be opened for Canam BOP (with me as a director, being one of the signatories on the account) so that I have complete visibility of BOP’s financial situation.
- A substantial dividend needs to be declared and paid to shareholders.
It is important that the steps I have proposed are undertaken with urgency for the protection of Canam BOP. In these uncertain times we need to put Canam
BOP’s affairs in order for the protection of the business, the directors and our staff.
Please confirm by return e-mail that you support the actions I have proposed and come back to me on when the shareholders advance taken from BOP will be repaid.
In the mean time I could arrange for a draft shareholders agreement to be prepared for our collective review. I can also make contact with the BNZ here in Tauranga to get the new bank account underway.
I am committed to working through the changes required for the protection of Canam BOP, as I’m sure you are too.
However, I note that unless the issues I have raised above are resolved with urgency, I will have to re-consider my position with respect to Canam BOP.
I would appreciate your response by close of business on Friday, 24th April.
[49] The timing of this email was abrasive given the COVID-19 lockdown and the corresponding utmost uncertainty facing the construction industry. As well, the Alexandra Park arbitration was scheduled to commence shortly and was consuming Mr Petrou and, to a lesser degree, Mr Jones.
[50] Two emails from Mr Jones and Mr Petrou following Mr Miedema’s email capture their views on Mr Miedema pressing for urgent action on the matters he had raised.
[51] First in time, there was a behind the scenes email from Mr Jones to Mr Petrou at 11 pm on the night Mr Miedema’s email was received. Mr Jones retorted:
Why would anyone issue this type of email given the current situation and the impending Alex Park case. It is clearly not about the interests of Canam BOP, more personal gain.
BOP didnt make any money this year so Navin [Hira] should give an explanation about the transfer, as explained to Mark previously this is probably just a book keeping excercise [sic] and there is not that much in BOP.
We should be firm and if he wants to resign as a Director and GM please give us 8 weeks notice to give us time to find a replacement.
If required I will go down there for 12 months to get on top of things…
The next few months can go either way, a big push and boom in construction or the total opposite, given the worst case scenario it would not be ethical for shareholders to be taking dividends at this time, particularly for BOP where there are no confirmed projects on the books after June. Group has secured
$60m turnover in projects to start in November, it is likley thay [sic] BOP will need Groups cashflow in the next 18 months.
I would not be happy with Mark controlling a bank account, he does not have enough commercial acumen. All he needs to know is income vs expenditure to know BOP balance, if BOP had systems in place this is an easy exercise for them to calculate on a monthly basis.
If we put BOP Investments portion of potential dividends back into Canam BOP (on paper) are we able to dilute his shares?
[52] The Trust highlights this last sentence as a telling insight into the conduct and motivations of the defendant directors. I take the suggestion of dilution with a grain of salt given that it was Mr Jones’ immediate, late night and heated reaction to Mr Miedema’s email. More relevantly, the email expresses Mr Jones’ genuine (unrehearsed) concern that it would not be ethical to take dividends at that point. In addition to the COVID-19 uncertainty, he refers to the fact that Canam BOP did not have any projects booked after June, and that the picture created by the positive balance in the Treasury Account could not necessarily be taken at face value.
[53] Mr Petrou said that he felt insulted by Mr Miedema’s email. He replied to it on 29 April 2020. Again, I set out the text in full to capture his perspective on the matters Mr Miedema had raised:
Your email has taken me by surprise.
I guess a phone call with your concerns in the first place would have been perhaps preferable.
First of all you need to understand what is the amount of $2,245,803 consists of and what is it all about,
Have spoken to Navin about it?
You are talking about a ridiculous situation of finding yourself in, of being a shareholder of a successful business and are taking too much risk.
I think Mark you may choose to ignore the fact the BOP was funded for three years at a significant cost to the Group and it would not have been able to survive without it.
You also ignore the fact that the bonds that enable BOP to operate are raised by Auckland and guaranteed by myself and not you. Your house is not placed as a collateral, my assets are.
The fact that I personally injected $6m into the Group to keep the companies going has been very quickly forgotten. Irrespective what the reasons were,
the fact remains that all companies in the Group including BOP, would have gone into liquidation had I not provided that funding.
I told you and Stephen the reasons why I did that. There was no benefit to myself what so ever, quite the opposite. I did it for you and Stephen.
I could have retired with my $6m and enjoy life rather than having all these battles, stress and negative energy to deal with every day for the last two years. This has also affected my private and family life to a degree that you cannot imagine but I still have not given up. I have done this to get the companies into a healthy shape again, for you and Stephen.
As you are aware I have not asked you for any securities or personal undertakings for this injection of my money or any restructure, as I am sure you know and will understand that I am absolutely entitled to do so.
I doubt very much that there are many people out there that would have done such a thing. Look at Arrow and Ebert just to mention a couple of them.
You are aware that we are going through arbitration at the moment and we have a significant amount of work to do to get us there and we need more support rather that more battles.
I will get Navin to prepare for you an explanation in the first place. I assure you that no one is taking any advantage of you.
Personally I need to focus on the arbitration, getting some work for us and the other personal issues that I am currently facing.
Under the current time table arbitration is expected to be concluded end of July unless a new timetable is instructed due to the lockdown.
Once this is concluded we can get together.
[54]The reference in Mr Petrou’s email to $6 million paid by him is to a sum of
$3.1 million of his own funds that I accept he injected to pay for the arbitration, and another $3 million from his interests to meet CGL’s performance bond over the Alexandra Park project.
Proceedings are issued
[55] Mr Miedema took Mr Petrou’s response that they should work through things after the arbitration as indicating Canam Group was relying on support from Canam BOP. He responded on 7 May that the Trust was prepared to wait until the outcome of the arbitration for the “loan taken” by CGL to be repaid. However, his email continued that the Trust required security for Canam BOP’s “loan” to CGL in the form of a personal guarantee from Mr Petrou. If that was not received, Mr Miedema said
he would follow the legal advice received and bring proceedings. He required a reply by close of business the following day.
[56] On 15 May 2020, the Trust’s solicitors sent a letter of demand to Mr Petrou requiring repayment of the shareholder advances to CGL and requesting Canam BOP’s 2020 financial statements. Mr Petrou did not respond. The Trust’s solicitors sent a follow up letter on 8 June.
[57] The Trust then issued proceedings in July 2020 against Mr Petrou under s 174 and against Canam BOP. Separately Mr Miedema also filed an application by the Trust for leave to bring a derivative action against CGL and Mr Petrou on behalf of Canam BOP. I discuss these proceedings later.
[58] On 4 September 2020, Mr Petrou wrote to Mr Miedema recording that he was surprised and saddened to receive proceedings. He stated that he and Mr Jones had been totally immersed in the Alexandra Park arbitration for a number of months and had not had time for anything else.
Canam BOP performance in 2020
[59] COVID-19 naturally created significant uncertainty in the construction industry during 2020. Canam BOP tendered for 10 contracts in 2020. By November 2020, Canam BOP’s cashflow had become negative, with the company receiving GST refunds in both November and December. There is disagreement on whether Canam BOP’s deterioration in performance and lower tendering was due to Mr Miedema’s reduced efforts for the company.
Mr Petrou raises the “Reimbursement Charge” in his affidavit of 23 October 2020
[60] On 7 September 2020, Mr Petrou called a directors’ meeting for 10 September 2020 to appoint solicitors for the company in the derivative proceedings. The day before, Mr Miedema requested that further matters be included on the agenda (effectively the issues raised in the proceedings). Mr Petrou advised there was not sufficient time to prepare to discuss these matters as part of the meeting. He suggested that Mr Miedema call a further meeting.
[61] At the 10 September meeting, Lowndes Jordan and John Land (counsel) were appointed for Canam BOP, to be briefed by the company. Mr Miedema was outvoted by the other directors on this. He wanted the Court to appoint lawyers and/or wanted the Trust to brief the lawyers.
[62] Among other things, the proposed derivative claim Mr Miedema sought leave to bring was against CGL for repayment of the shareholder advance account. Canam BOP’s opposition to the derivative application was directed at how unwise it was for Canam BOP to sue CGL for repayment given Canam BOP’s dependence on all of CGL support.
[63] An affidavit sworn on 23 October 2020 and filed by Mr Petrou on Canam BOP’s behalf in that application provided a description of all the ways that CGL provided support or services to Canam BOP. As part of his narrative on the establishment of Canam BOP, Mr Petrou deposed that the following had been agreed back then:
[38] … in the event that Mark did not wish to become a Canam Group shareholder, it was agreed that all the Canam Group support provided up to that date and from there on, would be charged to Canam BOP at a fair business rate and not the nominal fee charged to the Canam companies. Therefore, it was apparent from our discussion that Mark understood, there would come a time when Canam BOP would ultimately reimburse Canam Group for the CGL Services and support that they provided at fair business charges, if he did not wish to purchase shares in the Canam Group. …
[39] There was no doubt in my mind that Mark clearly understood that if he was not going to become part of the Canam Group then Canam BOP (and ultimately himself or his interests as a shareholder) would need to pay for all the CGL Services and support received from day one, at fair business rates.
[64] Mr Petrou outlined that the “true and actual costs of CGL Support … calculated on a conservative basis” were $364,721.06 annually for the years 2016–2020. A table in the affidavit broke this down into individual “values” for directors’ salary, vehicle leases, group admin salary cost, website, safety pre-qualifications, procedure use, fee for guaranteeing bonds, bank charges, “Head Office Rent, Electricity etc. for providing accounts, HR and IT services”, branding rights, and plant yard usage.
[65] Mr Petrou applied a different treatment for CGL support in 2013–2015 when Canam BOP was unprofitable. Mr Petrou’s reasoning was that in those years,
Canam BOP had not paid even nominal charges for support but had different needs then. For 2013–2015 he made an estimate of $250,000 per year ($750,000 in total) as a conservative assessment of the value of CGL support.
[66] Mr Petrou then aggregated the annual shortfall in amounts charged to Canam BOP for all years of its operation:
Year
Head Office Overheads charged
Actual costs of CGL Support
Undercharged
31-03-13 $0.00 $250,000.00 $250,000.00 31-03-14 $0.00 $250,000.00 $250,000.00 31-03-15 $0.00 $250,000.00 $250,000.00 31-03-16 $55,550.00 $364,721.06 $309,171.06 31-03-17 $61,000.00 $364,721.06 $303,721.06 31-03-18 $72,500.00 $364,721.06 $292,221.06 31-03-19 $138,000.00 $364,721.06 $226,721.06 Total $1,881,834.24
[67] Based on this analysis, Mr Petrou deposed that as at 31 March 2019, if the annual “undercharges” were now charged, the balance due from CGL to Canam BOP in the shareholder account balance was only $363,969, not $2,245,803 as appearing in the 2019 accounts. He concluded by proposing an accounting of the position as at the end of September 2020 (the March 2021 accounts not yet having been completed). If that showed an amount still owing by CGL, that figure less any current Canam BOP bonding exposure should be transferred to a separate account for Canam BOP. He said Canam BOP would need to transfer funds back to CGL for any further bonding support.
[68] This retrospective assessment of alleged “shortfall”, including a calculation for the 2020 financial year, is the basis of a “Reimbursement Charge” later journaled against Canam BOP in the accounts for the year ended 31 March 2020. The Trust strongly contests that the Reimbursement Charge and a subsequent head office costs charge for 2021 have any legal foundation.
[69] Mr Miedema’s application to bring a derivative action was subsequently discontinued by agreement in around November 2020 with no issue as to costs. The
present proceeding continued. In the meantime, the parties arranged a mediation, scheduled for June 2021. Ultimately this did not proceed.
Mr Miedema resigns
[70] By letter dated 12 February 2021, Mr Miedema gave notice to Mr Petrou and Mr Jones that he was resigning from his employment with, and as director of, Canam BOP with effect from 12 March 2021. On 24 March 2021, Mr Miedema’s solicitors wrote to Canam BOP alleging that he had been constructively dismissed, although this claim was not progressed.
[71] Mr Miedema left to join a Q Construction Ltd subsidiary, Q BOP Ltd, in a management role (with no ownership interest). The defendants’ position is that prior to resigning, there had been performance issues with Mr Miedema’s management of Canam BOP. Mr Miedema had also not advised Mr Petrou or Mr Jones of his intention to go to Q BOP before they received his resignation letter. Mr Jones’ evidence was that he only became aware that Mr Miedema was joining a competitor once Mr Miedema left Canam BOP. The defendants say that this, and various alleged other misconduct by Mr Miedema leading up to his exit means the Trust should not be entitled to relief if its s 174 claims are established.
Canam BOP after Mr Miedema left
[72] When Mr Miedema left, Canam BOP had seven projects underway. All but one was close to practical completion. It finished these and undertook a few relatively small new projects but its operations dwindled.
[73] I referred earlier to Mr Miedema’s request that a separate bank account be set up for Canam BOP. This was implemented in December 2020.13 As a result, Canam BOP did not have access to CGL’s bonding facility. Canam Commercial started bidding for work in the Bay of Plenty instead. This is a company outside the Canam Group owned by Mr Petrou’s and Mr Jones’ interests that had been operational
13 Lowndes Jordan advised on 4 December 2020 that this had occurred and gave details of the account. It took almost a year following this for all AML requirements to be satisfied, due to delay in the Trust providing the correct documents and in certified form.
in Northland. The defendants say Canam Commercial bid only for projects Canam BOP could not tender on because a bonding facility was needed.
[74] Q Construction had not previously had a presence in the Bay of Plenty. Through Q BOP, with Mr Miedema in management, it started competing with Canam BOP. Five of Canam BOP’s staff subsequently commenced working with Q BOP or its holding company.
[75] The parties agree that as at today’s date, Canam BOP is no longer a going concern. It has negative equity and no value.
The Reimbursement Charge and 2021 Head Office Costs are journaled
[76] When Mr Miedema was sent the draft financial accounts for the 2020 year in April 2021, he saw that CGL had “charged” Canam BOP for head office costs in the sum of $2,141,163 (the Reimbursement Charge).
[77] A further charge for head office costs of $181,066 appeared for the financial year ended 31 March 2021. This was derived on a similar basis as the Reimbursement Charge. I refer to the charge made in 2021 as the “2021 Head Office Costs”.
[78] When CBOP replaced CGL as the holding company of what had been CGL’s 67 per cent interest in Canam BOP in 2018, CGL ceased being its shareholder. I re-state this for two reasons. First, the defendants emphasise that at this point CGL became no more than a creditor of Canam BOP for the Reimbursement Charge and 2021 Head Office Costs (notwithstanding that in error in the 2019 financial year the accounts continued to refer to its indebtedness with Canam BOP as a shareholder advance). Second, apparently CGL assigned its advance account to CBOP in the 2021 financial year, although no documents have been disclosed about this assignment. For simplicity I continue to refer to the balance in the account as a shareholder advance.
This proceeding
[79] In March 2022, the Trust filed an amended statement of claim. This now included the Reimbursement Charge as a basis for oppressive conduct and added other
complaints. Mr Jones was added as a defendant. That remains the current claim. The Trust now characterises the Reimbursement Charge as the gravamen of the s 174 claims.
Causes of action
[80]The Trust advances three claims under s 174 against Mr Petrou and Mr Jones:
(a)That the Reimbursement Charge was a “major transaction” within s 129 of the Act which was not approved by special resolution and hence, by s 175 it is deemed oppressive conduct under s 174.
(b)That Mr Petrou and Mr Jones engaged in what the Trust describes as “cash stripping” so as to conduct the affairs of Canam BOP in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the Trust as shareholder of Canam BOP. The transactions alleged as “cash stripping” include the Reimbursement Charge and 2021 Head Office Costs, plus others I describe below.
(c)That in authorising the shareholder advances in Canam BOP’s current account (recorded as $2,278,962 as at 31 March 2021) Mr Petrou and Mr Jones have acted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the Trust as shareholder of Canam BOP.
[81] The pleading seeks relief by way of an order that Mr Petrou and Mr Jones “and/or their interests” acquire the Trust’s shareholding at fair value, or alternatively that they pay compensation plus interest. There is a catch all for “[s]uch other relief as the Court deems appropriate”. The Trust’s preferred relief changed in closing to seeking an order for liquidation of Canam BOP accompanied by compensation.
[82] The fourth cause of action is against Canam BOP under s 171 of the Act. By this section a shareholder may bring an action against the company for a duty owed to them as shareholder. The Trust submits that Canam BOP breached duties it owed to
pay dividends and to allow the Trust to exercise its voting rights in respect of the advances to CGL. Equitable compensation in an unspecified amount is sought.
The issues
[83]Arising from the above there are the following broad issues:
(a)First cause of action: Is the Reimbursement Charge a major transaction under s 129 and therefore deemed oppressive?
(b)Second cause of action: Do the asserted “cash stripping” transactions relied upon amount to conducting the affairs of Canam BOP in a manner unfairly prejudicial to the Trust?
(c)Third cause of action: Did Mr Petrou and/or Mr Jones operate the Treasury Account in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial?
(d)Should relief be granted under s 174 under any of the above causes of action (including issues raised as to alleged disentitling conduct)?
(e)If so, what is the appropriate relief?
(f)Fourth cause of action: Did Canam BOP breach the alleged duties to the Trust and if so, what consequences flow?
Evidence
[84] In assessing these issues, I have evidence from the following: Mr and Mrs Miedema; Darren Wisbey14 and Stefan Bulmer15 (previous employees of Canam BOP); Roger Butcher16 (ex-employee of Canam Construction); Michael Coory (director of a Canam BOP client); Amanda Sutcliffe (an accountant the Trust engaged
14 Contracts Manager for Canam BOP who worked at Canam BOP from 2016 to the end of 2020.
15 Quantity Surveyor for Canam BOP who left in May 2021.
16 Operations Manager at Canam Construction from 2015–2016.
from 2017); Tobias Braun (a Waikato-based lawyer called as an expert to give evidence on legal fees); and Matthew Kemp (independent accounting expert).
[85] For the defendants and Canam BOP I have evidence from Mr Petrou, Mr Jones, Mr Page, Mr Hira (the group accountant),17 and Shane Hussey (independent accounting expert).
[86]I turn to the s 174 claims.
Legal framework under s 174
[87] Section 174 permits a shareholder to seek relief where it is alleged that the affairs of a company have been, are being or will be conducted in a manner that was, is or is likely to be “oppressive, unfairly discriminatory, or unfairly prejudicial” to the applicant. It provides:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
…
(f)directing the rectification of the records of the company; or
(g)putting the company into liquidation; or
(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
17 Mr Hira’s evidence was taken as read.
(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[88]The Court of Appeal recently summarised the approach to s 174 as follows:18
[12] “Oppression”, standing alone under previous legislation, was said to imply a “visible departure from the standards of fair dealing, and a violation of the conditions of fair play”. Those words are apt in this case, but oppression was joined by unfair discrimination and unfair prejudice in a 1980 amendment. Together they expand the basis for intervention. As Richardson J observed in 1984, in Thomas v H W Thomas Ltd, the provisioning to an extent overlaps, but is directed at conduct “amounting to an unjust detriment to the interests of a member or members of the company”. In Sturgess v Dunphy this Court confirmed that the statutory standard should not be read restrictively. The conduct need not be undertaken in bad faith or be otherwise unlawful. Reflecting the original premise of oppression, “unfairness” requires a visible departure from the standards of fair dealing, assessed in light of the history and structure of the company and the expectations of its members. A broad view is taken in the authorities of the expression “the affairs of the company”. It may encompass anything generally concerning the company. The prejudice to the shareholder or entitled person applicant may be in a capacity other than purely shareholder, such as a director or creditor of the company. In short, s 174 offers a broad, flexible, remedial rather than punitive, jurisdiction.
[89] The outcome of an application is intensely fact specific. The current proceeding is no exception.
First cause of action: Deemed prejudicial conduct under s 174
[90] By s 175 of the Act, certain conduct is deemed to be oppressive conduct within s 174, including a failure to comply with s 129. Section 129 precludes a company entering into a “major transaction” unless the transaction is approved by, or contingent on, a special resolution of the company.
[91] “Major transaction” is defined in the Act as including the disposition of company assets, the value of which is more than half of the company’s assets before the disposition.19 The amount of the “Reimbursement Charge” in the 31 March 2020 accounts represents at least that.
18 Vey Group Ltd v Vance [2020] NZCA 232, [2021] 2 NZLR 541 (footnotes omitted).
19 Companies Act 1993, s 129(2).
[92] However, the defendants submit that the Reimbursement Charge was not a major transaction, because it was not a “transaction” entered into in 2020 at all. There are two ways the defendants characterise the source of the liability. The first is that Canam BOP simply recognised and quantified an existing liability of Canam BOP to meet the cost of support owed to CGL since its incorporation. This is founded in contract. The second, and alternative, is liability under quantum meruit principles.
[93] Thus, the defendants say that although only later quantified and journaled to appear in the 2020 financial accounts, the Reimbursement Charge represents independent and individual liabilities incurred over several years for all the items of support as outlined in Mr Petrou’s October 2020 affidavit.
[94] For that reason, the defendants submit that this case is distinguishable from Hogg v Sheppard which is relied upon by the Trust (where a company entered into 95 sale and purchase agreements at the same time as part of a single arrangement and hence was a major transaction).20 The defendants submit this case is more analogous to Central Avion Holdings v Palmerston North City Council (a staged development where the company could pull out before the next stage).21 Unlike Hogg, but like Central Avion, the defendants say that in this case the transactions comprising the liability are not truly interdependent.
[95] To provide the context for these arguments and how the parties viewed the merits, I first explain how the charge for group support journaled to Canam Group Companies (including Canam BOP) on an annual basis was derived. This is what the defendants characterise as a nominal charge. I then describe how Mr Jones came to a figure of $364,721.06 applied to the 2016–2020 years, which comprised the various line items referred to in Mr Petrou’s October 2020 affidavit.
20 Hogg v Sheppard HC Auckland CIV-2002-404-1958, 3 September 2003.
21 Central Avion Holdings Ltd v Palmerston North City Council (2006) 3 NZCCLR 311 (HC).
Annual overhead charges to Canam Group companies for group support
[96] The Court only has visibility on how the annual group support charge was implemented for the 2019 financial year.22 The detail is complicated, but I need only make the following headline points:
(a)The percentage split of costs as between each of the operating companies was derived by Mr Petrou on an annual basis. Canam BOP’s allocated percentage for Five Hills plant might be different from its share of administration overheads. The percentage appears to have been Mr Petrou’s view as to what was appropriate for each company to contribute.
(b)The aggregate of Canam BOP’s share of the Five Hills plant costs plus its share of the balance of CGL’s overheads ledger is the “administration fees” appearing in its annual accounts (ie, “the nominal charge” the defendants refer to).
(c)The balance of the CGL overhead ledger23 comprised transactions for a range of item cost codes including bank charges, website, accounting, insurance and computer maintenance.
(d)The ledger also included transactions for Canam Management Services which, as set out above, employed staff. Canam Group operating companies “charged” their staff to construction projects at cost plus a margin. Commonly this charge was built into the tender price, although there was also margin made on some staff time that was not. The net overall salary and wage cost in the CGL ledger was the total wages bill paid to staff plus tax paid, credited with the amount charged to projects or for tender preparation. That means that in the CGL overhead ledger
22 On discovery, the defendants provided only the 2019 Canam overhead ledger and workings of the overhead split for that year.
23 That balance reflected a figure after certain non-group expenses were removed (such as for a vineyard operated by Mr Petrou) as well as certain other group company transactions.
there was a negative wages expense (that is, income), representing the margin on the staff expense charged to projects. 24
(e)The resulting balance of the CGL ledger was then allocated between the Canam Group companies at the percentage split assessed by Mr Petrou.
[97] The Trust made much of the fact that the balance of the Canam Group ledger was “zeroed out” annually between the Canam Group companies by allocating the full balance between the operating companies. This founded the submission that the charges reflected all costs incurred by the Canam Group (and hence could not be a “nominal charge”). But the “zeroing out” was of a net figure that incorporated a margin on staff charges. For that reason, as Mr Petrou put it in evidence, the balance of the CGL ledger is misleading as representing total costs incurred by Canam Group. The substantive effect of this is that the operating companies shared the benefit of the total margin charged on staff. For this reason, while I do not accept that the annual charges can be described as “nominal”, they were calculated on a basis that did not capture actual cost.
[98] The Trust also suggested that in 2020 when Mr Jones assessed a line-by-line analysis for costs such as website and bank charges to come up with an annual charge to be applied retrospectively against Canam BOP, this was a double recovery of those charges. However, the Reimbursement Charge was calculated by crediting the annual administration fees charged to Canam BOP. There was no additional deduction for what had already been charged.
Annual retrospective charge
[99] The Trust was justifiably critical of the way that Mr Petrou and Mr Jones had come up with the annual charge: both the estimate for 2013–2015 which had no
24 The individual operating company accounts also recorded the recovery of overheads billed to projects. For example, in 2020 Canam BOP’s salary and wages expense was $203,170. Its revenue recorded an “Overhead recovery” of $223,797. The “Overhead recovery” represents the labour charge rendered to individual Canam BOP projects, including margin. As I understand, it does not include margin on Canam Management staff time not transparent in the tender on individual projects, with the latter remaining in the CGL overhead ledger and “zeroed” out.
supporting breakdown; and the composition of the $364,721.06 allocated annually for 2016–2020.
[100]In summary:
(a)Salaries: Mr Jones took the cost of the two annual director salaries (his and Mr Petrou’s) as at 2020 and allocated Canam BOP 20 per cent of the total. This 20 per cent represents that there are five operating subsidiaries in Canam Group, so Canam BOP should bear one fifth of the charge. Canam BOP was also allocated 20 per cent of bank charges and 20 per cent (one day a week) of the group administration salary. This 20 per cent was justified by the level of revenue contributed to the Canam Group, although it was higher than the split Mr Petrou had allocated between subsidiaries in 2019, before the dispute arose.
(b)Branding, procedures, and pre-safety qualification: The annual figures of $20,000 and $30,000 for branding rights and procedure use respectively were derived simply by Mr Petrou and Mr Jones discussing what they considered as the “value” of services to Canam BOP. The defendants justified this on the basis that they had appropriate industry expertise to make the assessment or that these were conservative estimates. There is insufficient basis for either of those propositions.25 Similarly, an annual figure of $7,500 for contractor time to provide safety pre-qualification assessments was simply an unsupported estimate.
(c)Vehicle expense: The Trust was fairly critical that Mr Jones adopted the 2020 year as a baseline for how many vehicles were used by Canam BOP per annum and used those particular vehicles as representative for 2016–2020 even though it turned out, for example, that one of the vehicles was owned by a Canam BOP staff member. Moreover, instead
25 I acknowledge that Mr Hussey’s brief suggests that both the $20,000 for branding and $30,000 for procedure use was justified. However, Mr Hussey does not purport to be an expert on these matters and his evidence on these points was impressionistic.
of allocating Canam BOP the actual cost to Five Hills of the vehicle expense, Mr Jones assessed a figure for what he considered reflected the fair estimate of the benefit of the vehicles to Canam BOP. He derived this from online research for lease costs, cross-checked by what a usual salary vehicle allowance would be (which he says would be more).26
(d)Website: Mr Jones added an annual charge for $5,500 for “website” when from the discovered documents the actual cost to CGL for the Canam Group was $6,406.32 per year. Mr Jones accepted this error. Moreover, Canam BOP did not feature on the website.
(e)Administration salary: The Trust contended that the figure for overhead salary of $91,455 per annum was insufficiently supported.27 This was derived from averaging a schedule Mr Petrou provided of total payroll from 2012–2022 to which was annexed lists of named staff who worked at CGL each year and their precise salary. Unusually, given that precision, there was no underlying supporting documentation for these figures, and the Trust was advised no records existed pre-dating 31 March 2016. Despite that anomaly, I accept the figures.
(f)Office rent, electricity and other costs: A sum of $36,000 per annum was charged for head office rent, electricity etc as a proportion of the Auckland head office rent of $237,110 per annum. The lessor is Praxis Ltd, a Petrou entity. However, Canam BOP had its own office in Tauranga where staff and an administrator were based, whereas other entities, excluding Canam Joinery, operated from the Auckland office. The defendants say that Canam BOP’s position was appropriately accommodated by it being charged 15 per cent not 20 per cent of rent
26 The Trust noted that expenses for vehicles were charged to Canam BOP accounts and recovered by project overhead costs (in the same way overhead salary was charged to projects).
27 This figure was not used for the financial year ended March 2021 as monthly charges were being made to each company, which by that point had separate bank accounts, rather than being included in annual overheads.
and only 6 per cent of the other charges associated with this line item. In my view, even these allocations were excessive.
(g)Bonding: Mr Jones assessed $20,000 per annum for the ability or privilege of Canam BOP having access to CGL’s bonding facility (and Mr Petrou’s interests’ guarantees that lay behind them).28 Mr Jones said he chose this figure based on websites showing that off-shore insurance bonding facilities were 15–20 per cent of the bond or 3 per cent of total contract value. Mr Hussey’s evidence for the defendants was that
$20,000 was very conservative given that the charge would cover exposure to be met by CGL/guarantors of up to $1.1 million. I heard much evidence on whether Canam BOP could have funded its own bonds in the years it was profitable, and how the access to bonding should be recognised. The analysis is artificial given the way the Canam Group operated which underlines why (as I discuss below) this retrospective analysis is impermissible.
(h)Plant yard usage: Mr Jones said he derived a figure of $35,000 as a “facility fee” for Canam BOP having the benefit of use of plant being made available by Five Hills (in a similar reasoning to the benefit of access to a bonding facility).
[101] The defendants note that there was no charge to Canam BOP for the benefit of intercompany advances from CGL in the 2013–2015 years (whereas interest at fringe benefit tax rates was charged when the advance account turned to credit). They say Canam BOP was also allocated less than other companies for insurance. Support from head office on estimating and quantity surveyor services were also not included, nor any salary cost of Mr Clark or Mr Page. They say that while Mr Petrou’s estimate of support of $250,000 per year for the 2013–2015 is unsupported, this will be conservative.
28 This was for the benefit of the access to the bonding facility as opposed to the bank charges, cost of maintaining the facility, or related directly to the actual projects where bonds were required.
[102] As can be seen from the above, the line items are a mix of actual cost and Mr Jones’ and/or Mr Petrou’s (unsupported or insufficiently supported) assessments of “benefit”. The primary answer to this from the defendants is to say the assessments are conservative. Hence, they say that the Reimbursement Charge is a conservative assessment of the support received by Canam BOP since its incorporation. This underscores the artificiality in Mr Petrou and Mr Jones undertaking this analysis retrospectively, impressionistically, and on the basis of perceived benefit.
[103]I turn to the legal foundation for the Reimbursement Charge.
Recognition of an existing liability under an agreement
[104] The defendants contend that the Reimbursement Charge is a liability owed under an agreement made at the outset between Mr Petrou, Mr Miedema and Mr Page.
[105] I set out an extract earlier of how Mr Petrou’s October 2020 affidavit described the agreement.29 In his evidence before me, Mr Petrou described what was agreed as follows: 30
[70]With respect to the cost of the CGL Support, Nick and I explained to Mark that the Canam group subsidiaries were charged a nominal fee that did not really matter, as all of the companies in the Canam group had the same shareholding structure, and therefore overall it did not make any difference to the bottom line of the consolidated group financial performance. I explained to Mark that this nominal fee, charged to the Canam group companies, was assessed at the end of each financial year based on the net costs incurred for the services provided and by considering the profitability of each Canam group company. I explained to Mark that this was not a precise assessment and was less than the actual total costs incurred by CGL in providing the CGL Support, but that it did not matter because it did not make any difference to the final profitability of the group. At that time, it was my expectation and understanding that Mark, after a period of time, would also purchase shares in CGL, and therefore be in line with the shareholding structure in place for all of the Canam group companies.
[71]I told Mark not to expect Canam BOP to turn a profit for the first few years. We also discussed with him that CGL would not charge for all the CGL Support provided, until Canam BOP became profitable and from then onwards CGL would charge a nominal fee as per the other
29 At [63].
30 I note that this is not precisely how the claim was pleaded but it was how the case was run, and no issue was taken with that by the Trust.
Canam group companies (as explained above). However, this was on the basis that Mark would become a shareholder by buying shares in CGL.
…
[73] In the event that Mark did not wish to become a CGL shareholder, it was agreed between Mark, Nick and myself that all the CGL Support provided up to that date from there on, would be charged to Canam BOP at a fair business rate and not the nominal fee charged to the Canam companies…
[106] To break this down, CGL was not going to charge for support until Canam BOP became profitable. From then Canam BOP would be charged for the support it received as a proportion of the group overheads at the end of each year in line with how the other Canam Group companies were charged. These aspects are not in issue. However, Mr Miedema says it was never discussed, nor did the Trust understand, that if the Trust decided not to become a shareholder in CGL, Canam BOP would in effect be billed retrospectively for past services and assistance on some other basis than had applied on the way through.
[107] I conclude that, for a range of reasons advanced by the Trust, the defendants have failed to establish that there was any agreement as asserted.
Evidence consists only of Mr Petrou’s assertion
[108] The defendants bear the onus of proof in establishing that there was such an agreement. However they have provided very limited evidence to support it. When examined, the evidence in support is limited to Mr Petrou’s oral assertions as to its existence. Mr Petrou may have convinced himself that such an arrangement was agreed, but I conclude that it was not. I come back to other asserted evidence in support below.
Evidence vague on the details
[109] Mr Petrou’s evidence was vague on the details. For example, there was nothing agreed as to the term of the arrangement or how a fair business rate would be calculated retrospectively. The agreement was said to be that if the Trust decided not to be part of CGL then the recharge would be made, but there was no timeframe for when this
would need to occur. Mr Petrou says it was expected to be “around 2018” when Mr Miedema would need to make a decision because that is when Mr Petrou anticipated retiring, but the arbitration extended this. The lack of precision undermines the agreement existed, and potentially its terms are too uncertain.
[110] It is telling that when Mr Miedema brought matters to a head in April 2020, Mr Petrou’s response referred him to benefits Mr Miedema was obtaining from the group (bonding support and its funding in Canam BOP’s unprofitable years) but made no mention of the agreement now asserted.
Not corroborated by other evidence
[111] The alleged agreement is not corroborated by any other witness, including Mr Page with whom it was supposed to have been agreed.
[112] The only support from Mr Page was what he said was made clear to Mr Miedema from an email he wrote on 22 December 2011 which stated:
… The start up will be funded through shareholder advances which can then be repaid from future profits. The advances will be required in proportion to the shareholding. As discussed we expect to require about $300,000 to cover the company start up including vehicle purchases, salaries for the first few months, office costs etc so your share would be about $100,000.
[113] In cross-examination, Mr Page confirmed that reference to advances being repaid from future profits was limited to there being an agreement that the shareholder advances of $300,000 would be repaid when Canam BOP became profitable. That is not disputed but does not support the agreement alleged as to a retrospective charging for support.
[114] Mr Jones, although not there at the time, said that he “got … wind” of the agreement when there was discussion of setting up a separate account for Canam BOP. The fact that Mr Jones had been a director for a number of years before he heard of an agreement that would have built up a large contingent liability undermines rather than supports the defendants’ case.
[115] The defendants rely on Mr Miedema’s apparent recognition of a principle of reimbursement at cost. Among other things, the defendants refer to Mr Miedema’s acceptance in cross-examination:
(a)That he had put an expense claim in for company set-up costs and it would be reasonable for the other shareholder, CGL, to be reimbursed for support provided or costs incurred as well.
(b)Mr Page had said to him that shareholder advances would be paid from future profits, including those in cash form or support services that were not initially paid for.
(c)That he knew that CGL expected payments for services. He accepted that this was the reasonable expectation when the company was set up, and that Mr Petrou had said that CGL was happy not to charge for the support until Canam BOP became profitable.
(d)That it was reasonable that CGL charge group support on a cost recovery basis.
[116] However, in the context of Mr Miedema’s evidence as a whole, I find as follows:
(a)These acknowledgements do not support the existence of the agreement alleged. Mr Miedema rejected that Mr Petrou made it clear that the charge levied to each of the Canam Group subsidiaries was a nominal fee. I also accept Mr Miedema’s evidence rejecting that Mr Petrou made it clear that if the Trust was not going to be involved in CGL then a fair business rate would then be charged for the group support provided from the outset.
(b)Mr Miedema acknowledged that he agreed with the other directors (then Mr Petrou, Mr Page and Mr Clark) that if CGL charged for all of the support from the start that would have created a significant financial
burden for the newly established company, so the financial support that each shareholder would provide would not be repaid until the company had financial capacity to do that. However, in context this acknowledgement related to repayment of the shareholder advances of
$300,000 made to fund set-up costs.
(c)Mr Miedema’s acceptance that there would be “reimbursement at cost” related to Canam BOP reimbursing Canam Group for the charges based on the annual journaling to the various subsidiaries of administration costs. The defendants described Mr Miedema’s evidence to this effect in re-examination as self-serving and not credible. They say that as an experienced contracts manager Mr Miedema cannot have regarded the administration fees actually levied among the various Canam Group companies as anything more than a nominal contribution. I accept his evidence that he had no understanding or expectation of more being required to be paid.
[117] In my view the other evidence does not establish the existence of the agreement asserted by the defendants.
No contemporaneous record
[118] There is no agreement or contemporaneous record from 2011 or 2012 supporting the existence of the alleged agreement. Nor were there any minutes detailing the rising contingent liability (although I acknowledge that there were no directors’ minutes, generally). I accept Mr Corlett KC’s submission for the Trust that if such a liability existed, one would expect the directors to be attuned to and concerned about it.
[119] The defendants point to a proposed list of items for a shareholders’ agreement that Mr Miedema sent to Mr Petrou on 29 February 2012 as items he considered should be covered. That list identified that CGL would provide bonding facilities; administration, accounting, HR and IT support; and potentially plant and equipment. It raised as an issue, “How are the costs of all the items provided by [CGL] dealt with?”
The defendants say this demonstrates both an appreciation that there was an expectation of payment and that this was a matter being discussed.
[120] The list indicates only an appreciation that support would be provided, not the existence of an agreement as to payment. I come back to the “expectation” aspect when considering quantum meruit.
Contrary to commercial common sense
[121] The defendants say that it would make no commercial sense for CGL to support a non-wholly-owned subsidiary in the way it did without an agreement in place of the nature asserted. However, in my view that was simply how Canam BOP had been set up, bearing in mind two factors.
[122] First, CGL owned 67 per cent of Canam BOP so the development of that company’s business was for its benefit. Second, as the defendants emphasise, it was contemplated that Mr Miedema would buy into CGL in due course. That would bring in Canam BOP as a wholly-owned subsidiary. On the defendants’ own case, the status quo was expected to be an interim position only. It is not altogether surprising that there were loose ends in the meantime. It is far more likely that Canam BOP was receiving an interim unrecoverable benefit, than that there was an agreement (or expectation) at the outset for a retrospective catch up of unquantified liabilities.
[123] Conversely, I accept the Trust’s submission that the asserted agreement makes no sense commercially. Canam BOP was required to price costs into jobs. If Canam BOP had large and accruing overhead costs, it risked appearing profitable when in fact it was not. It was put to Mr Kemp, the accounting expert for the Trust, that as a fixed, not variable, cost the reimbursement charge would not have been taken into account in pricing jobs. He responded:
… not directly but at the end of the day … if you don’t know what your overheads are you are a bit in the dark as to what gross profit you should be aiming at”.
That is a fair point.
Contingent liability
[124] Relatedly, if there was an agreement, one might expect the resulting contingent liability to be included in Canam BOP’s financial statements. I have had regard to Mr Hussey’s evidence, accounting expert for the defendants, that the accounts prepared were for tax purposes so were in the nature of special purpose accounts. However, it remains telling that Mr Petrou signed at least one set of financial statements which stated that there were no contingent liabilities. Further, none of the tenders disclosed contingent liabilities. This subsequent conduct and the conduct discussed below points away from there being an agreement as submitted by the defendants.31
I am committed to working through the changes required for the protection of Canam BOP, as I’m sure you are too.
However, I note that unless the issues I have raised above are resolved with urgency, I will have to re-consider my position with respect to Canam BOP.
[266] That Mr Jones and Mr Petrou were aware of the risk of Mr Miedema resigning is evident from Mr Jones’ retort on receipt of this email, set out at [51] above, in which he told Mr Petrou:
We should be firm and if he wants to resign as a Director and GM please give us 8 weeks notice to give us time to find a replacement.
[267]Similarly, in the Trust’s solicitors’ letter of 8 June 2020, they record:
… Mark will also need to consider whether he can tenably remain as a director and whether he needs to end his relationship with the Canam Group.
[268] The relationship had only got worse in the meantime, with Mr Miedema issuing proceedings and the response in the affidavits filed in October 2020. I infer that a likely outcome for the parties of the intended mediation was some form of exit for the Trust/Mr Miedema.
[269] The position on the extent or scope of a duty of a director to disclose an intention to leave for a competitor has not been much explored in New Zealand courts.96 The defendants rely on overseas case law including Item Software (UK) Ltd v Fassihi97 and Southern Real Estate Pty Ltd v Dellow98 decisions of the Court of Appeal of England and Wales and the Full Court of the Supreme Court of South Australia. The law does not usually penalise intentions alone, and care is needed to avoid effecting an unjustified restraint of trade.99 However, in my view, there inevitably can be a duty to disclose an intention to leave for a competitor on certain facts.
[270] In any event, Mr Miedema did not just have intention alone. His intention was accompanied by other preparatory steps to compete such as sending the confidential information in February, meeting with Mr Eastland, and other steps referred to above. I also conclude that by 27 December 2020, when Mr Miedema told Mr Eastland that he had “had enough”, it is unlikely that Mr Miedema had been applying himself to Canam BOP.
96 See generally, Peter Watts Directors’ Powers and Duties (3rd ed, LexisNexis, Wellington, 2022) at [6.4.8]. I prefer not to characterise this as a duty to disclose one’s own wrongdoing.
97 Item Software (UK) Ltd v Fassihi [2005] EWCA Civ 1244, [2005] 2 BCLC 91.
98 Southern Real Estate Pty Ltd v Dellow [2003] SASC 318, (2003) 87 SASR 1.
99 See Balston Ltd v Headline Filters Ltd [1990] FSR 385 (Ch) at 412.
[271] I agree with the defendants that Mr Miedema ought to have advised that he was joining a competitor. The defendants’ awareness that such a move was on the cards, has some relevance, but in my view the exit of Mr Wisbey meant that Mr Miedema ought to have given a greater advance warning he was intending to leave Q BOP once he had finally decided to do so. This was by Christmas, or the third week of January 2021 at the latest.
[272] However, I am not satisfied the consequences of this failure have been shown to have had appreciable impact. That is because I think the effect on Canam BOP of Mr Miedema leaving would have been equivalent even had there been an orderly handover/more advance notice. I come back to this below.
[273] Finally, the defendants also say that Q BOP picked up jobs that Canam BOP would have expected to receive. In doing so they say that Mr Miedema took advantage of corporate opportunities available through being a director of Canam BOP. Although these were ostensibly associated with Canam BOP’s prior work, I do not find it established that these jobs have the requisite connection to be a Canam BOP corporate opportunity, as opposed to flowing from Mr Miedema’s own connections.
Cause and effect
[274] It has been held in the context of whether orders should be made for a buyout or winding up that for a plaintiff to be barred from relief under s 174, the misconduct or lack of clean hands must be the cause of the breakdown of the relationship and not merely a symptom of the breakdown.100 The Trust says the real cause of the breakdown is the defendants’ oppressive conduct now complained of, and not what Mr Miedema then did.
[275] Identifying cause and effect in binary terms is not straightforward in this case. That is because of the chronology, and how it interacts with the findings I have made on conduct engaging s 174. In this section I discuss the primary issues of cause and effect. In the next section I draw my conclusions on relief informed by this.
100 Vujnovich v Vujnovich [1989] 3 NZLR 513 (PC); and Hayes v Taniwha Buses Ltd [2014] NZHC 1965 at [50].
[276]First, I need to expand on the facts.
[277] I referred earlier to Mr Miedema being content to leave financial matters to the other directors.101 However this changed from September 2017 and beyond. Canam BOP had been performing well, and Mr Miedema was hoping for dividends, particularly with a view to financing a new home. This coincided with communications between the Trust and Ms Sutcliffe, the Trust’s accountant, about dividends and the Trust’s accounts.
[278] When Mr Miedema raised his first request for dividends in September 2017, Mr Petrou left Mr Miedema with the impression that there would be a dividend of around $200,000 plus repayment of the Trust’s $100,000 shareholder advance.102
[279] Mr Miedema did not have any real appreciation of the test to be applied in declaring dividends or the process for the board by which this occurred. He appears to have regarded this largely as a matter of having Mr Petrou action a request for dividends. He would be forgiven for having that understanding because that appears to be largely how Mr Petrou treated his requests at the time. In that sense the sentiment of Mr Miedema that Mr Petrou was the “controlling director” is not misplaced. It is how the two of them engaged.
[280] On 13 December 2017, Mr Miedema emailed again asking Mr Petrou if he had thought about how much would be paid out in dividends and asked for as much dividend as is sensible to be declared. This is just after Mr Hira had been instructed to, and had prepared, dividend statements for a dividend of $500,000 (gross) ($110,550 to the Trust) on 28 November 2017 with accompanying board resolutions. No signed copy was provided of these resolutions, although the dividend was taken as declared in November 2017 in the 2018 accounts later circulated in March 2019. I infer that Mr Petrou did not tell Mr Miedema about this instruction/dividend in December 2017.
[281] At the end of December 2018 into early 2019, Mr Petrou and Mr Jones would not release subcontractor payments to Canam BOP contractors on its Regional House
101 See [195] and [197] above.
102 That is the tenor of Mr Miedema’s 7 September 2017 email following up on this.
project. Mr Miedema understood this was because funds were not available. Mr Petrou gave evidence that there were always funds, but he was simply insisting that payment be made in accordance with the contract. However, this coincides with the evidence of when Mr Petrou started injecting funds for the arbitration. I have not been able to conclude funds were unavailable, but I accept that Mr Miedema’s concerns were genuinely held.
[282] As set out above, in February 2019, Mr Miedema told Mr Petrou that the Trust was counting on payment of dividends for their house purchase. At this point Mr and Mrs Miedema had contracted to buy a house and had contracted to sell their own.
[283] In March 2019, Mr Miedema requested financial statements for 2018. He received these on 14 March 2019. At this time, the industry (both subcontractors and clients) was unsettled about Canam Group’s position in light of the arbitration. For example, Mr Petrou addressed a request from the Bay of Plenty Regional Council seeking confirmation that Canam BOP was sound having regard to the recent voluntary administration of Arrow International. Subcontractors were seeking confirmation that retentions were being held. This was also naturally unsettling for Mr Miedema and the Trust.
[284] As set out at [47], the Trust obtained accounting advice on the 2018 financial statements. It was advised that on the basis of the retained earnings shown of
$1,180,011, if CGL repaid its “loan” in full this should enable Canam BOP to declare a dividend of $360,000. The accountant raised the prospect that the increase in the loan account was a major transaction which should have a special resolution.
[285] On 22 March 2019, Mr Miedema asked Mr Petrou what he expected the 2019 dividend to be. He raised the level of retained earnings and that this value was tied up in loans to CGL. He wanted to know when these loans would be repaid. Through the accounts, Mr Miedema had come to learn of the dividend declared in November 2017, which had been journaled, but not paid, to the Trust. He raised his concern that this dividend (of $110,550 net) was not sufficient for their house purchase. Mr Miedema commented: “It does not make sense for us to have a large mortgage (and pay interest)
while Canam BOP has significant retained earnings.” Mr Miedema requested an additional $250,000, or alternatively a shareholders’ advance. Mr Miedema subsequently followed up, seeking a response.
[286] Mr Petrou was absorbed in the arbitration and was not communicative. Mr Miedema was eventually told that a further dividend would not be declared. The parties disagree about the reasons for this. As I found above, I have not been able to conclude that it was due to Canam BOP funds being absorbed in the arbitration. There were then the meetings in August 2019 and October 2019 in which Mr Miedema raised concerns at the “loans” to CGL and wanting greater transparency.
[287] The 2020 draft accounts showed the large increase in the shareholder advance account. Mr Miedema’s ill-timed 22 April 2020 email reacting to these accounts crystallised a breakdown between the parties. It provoked Mr Jones’ heated internal email to Mr Petrou and Mr Petrou’s indignant but more measured response to Mr Miedema that I set out at [53]. Things went downhill from there.
[288] I have not been able to conclude that non-payment of dividends engaged s 174. Despite that, in terms of the breakdown of the relationship, The Trust/ Mr Miedema were justified in their perception and frustrations that Canam BOP had significant retained earnings and substantial increases in the advance account, but that the request for a dividend (or shareholder advance) to assist with his house purchase had been rebuffed. The Trust’s position was also based on the misapprehension that the accounting showed annual unauthorised loans in the nature of major transactions. This was plainly wrong. The concern that the advance created potential risk to Canam BOP was not. As much has turned out to be correct, given that CGL is facing legal proceedings for the amount of the Alexandra Park arbitration award.103
[289] The defendants say that Mr Miedema ought to have taken greater steps to understand the operation of the Treasury Account, through taking the opportunity to discuss this with Mr Hira. Mr Miedema said that he tried. Mr Petrou’s response to Mr Miedema’s April email told him he needed to understand the advance and said he
103 “Potential risk” embraces the inevitable costs of such litigation, irrespective of its merits, on which I cannot comment.
would have Mr Hira provide an explanation. Mr Miedema specifically followed up on this with Mr Petrou subsequently on 12 June 2021, but never received one.104 In his evidence, Mr Hira gave examples of instances where he had discussed issues directly with Mr Miedema. I accept this course was open to Mr Miedema. However, Mr Hira was copied on Mr Miedema’s 12 June request. It is not clear to me why Mr Hira did not respond.
[290] If Mr Hira had explained to Mr Miedema how the Treasury Account worked, this would have only assisted Mr Miedema in appreciating there were not unauthorised loans and/or major transactions. That would have perhaps avoided the first claim the Trust sought to bring based on unauthorised major transactions, as well as that aspect of the derivative action. It would not have been of comfort on the wider issue of risk.
[291] As set out at [217], after legal proceedings were served in July 2020, Mr Petrou raised the prospect of a meeting to discuss possible ways forward. Mr Miedema accepted he did not respond. Mr Petrou also said that after the 10 September board meeting appointing lawyers, he asked Mr Miedema whether he wanted to try and resolve matters. Mr Miedema said he was not then prepared to engage.
[292] Then, in response to the derivative proceedings Mr Miedema issued, Mr Petrou filed his 23 October 2020 affidavit. A key conclusion Mr Petrou invited the Court to draw from the extensive affidavit was that:
140. The value of the so called “loans” is significantly altered when proper account is taken of the historic undercharging of CGL Support to Canam BOP.
…
142. Mark has failed to understand the full picture of the relationship between parties inside the Canam group and the benefit that Canam BOP takes by supporting and taking support from CGL, both when CGL was the parent company, and now.
…
144.It would be extremely unwise for Canam BOP to bite the hand that feeds it, by suing CGL to call in its so-called “loans”. CGL’s response to such an action will be determined by its board. Nevertheless, I anticipate that CGL would likely respond by withdrawing its bonding
104 Email dated 12 June 2020.
support and by calling up for payment amounts owing for its past undercharged CGL Support.
145.The withdrawal of binding [sic] support would jeopardise all of Canam BOP’s projects which are in process, putting Canam BOP in breach of its contractual obligations to those clients. It would also completely end Canam BOP’s ability to win further work.
[293] The “amounts owing” referred to in paragraph 144 is the basis for the Reimbursement Charge subsequently journaled in the March 2020 accounts and advised to Mr Miedema in April 2021.
[294] There was then the agreed withdrawal of the derivative action in November 2020, with a view to the parties going to mediation the following year. As noted earlier, the costs of Canam BOP on the derivative action were directed at affidavits that form the basis of the defendants’ evidence in this proceeding and were founded on the concept of the Reimbursement Charge.
[295] It is between the withdrawal of the derivative proceeding, and the Reimbursement Charge being journaled and appearing in the 2020 accounts provided to Mr Miedema in April 2021, that Mr Miedema exited as director and manager of Canam BOP. I have concluded above that in various respects in the immediate lead up to when he left, Mr Miedema’s conduct was in breach of his obligations to the company.
[296] On the above facts, the defendants ask me to conclude that the Trust should be disentitled to relief because of Mr Miedema’s conduct, including his bringing of the derivative action and causing the costs associated with that. The defendants say that although foreshadowed in October 2020, the Reimbursement Charge was only recorded in the 2020 accounts which were not signed or provided to the Trust until April 2021. Because the actual charging post-dates Mr Miedema’s misconduct in the process of joining Q BOP, the defendants say the Reimbursement Charge could not have caused or contributed to it. Hence, Mr Miedema’s conduct disentitles the Trust from relief.
[297] Conversely, the Trust asks me to conclude that I should approach relief by valuing the Canam BOP business as at March 2021 because to do otherwise would
bed in, to the detriment of the Trust, the oppressive and unfairly prejudicial conduct of the defendants.
[298]I accept neither proposition. In my view:
(a)My summary above shows the Trust and the defendants are both responsible for the relationship breakdown as a matter of fact. Mr Miedema was misguided in his understanding of the Treasury Account but his overall concerns were otherwise fair. Although Mr Jones does not appear in the narrative much, I do not believe I can set him out to one side, given he was a director of CGL and involved in the Reimbursement Charge. The defendants were preoccupied with the arbitration, and wrongly put up the Reimbursement Charge as a rationale in October 2020.
(b)Mr Miedema had no restraint of trade. He was entitled to exit the company. Going forward, CGL was not required to continue supporting Canam BOP in the way it had done, in light of the relationship breakdown.
(c)In substance therefore, the position on the exit of Mr Miedema was a joint venture that had collapsed with the fault not being wholly on either side. There was no incentive for CGL to provide support as it had done, and the driving force of the business with his connections had left, with Canam BOP’s workforce soon to follow.
(d)It is the collapse of the relationship that has led to Canam BOP having negative equity by 31 March 2022 and no longer being a going concern, not the conduct of Mr Miedema in the weeks before he left. I find that Mr Miedema’s misconduct did not materially impact what then happened to the fortunes of Canam BOP.
(e)However, I have concluded that the approval of the Reimbursement Charge was both deemed and actual oppressive conduct within s 174.
The defendants assert that the derivative application was misconceived and has caused the company cost. There is some merit in that. However, the Reimbursement Charge was key to the opposition to the derivative proceeding in October 2020 (and inevitably a significant contributor to the legal and expert costs of that opposition). I have found that the premise on which this lay is without foundation. The costs Canam BOP bore on its vigorous defence of that action effectively also saved the defendants costs in this proceeding given the overlap on the affidavit evidence.
[299] Where does all this leave cause and effect and the result on relief? I turn to this now.
What relief is appropriate?
[300] The defendants were wrong to permit or accept the journaling of the Reimbursement Charge, and subsequent 2021 Head Office Costs calculated on the same basis. This was contrary to how Canam BOP had been run and the parties’ reasonable expectations on the way the company was set up to operate at the outset. It was a response to the Trust’s own steps to (as Mr Petrou put it) “bite the hand that feeds it”.
[301] It is appropriate that there is a remedial response to both of those aspects. The remedy is flexible. I do not see anything that impedes me from requiring compensation to address this response from the directors who were responsible for it.
[302] Everyone agrees that Canam BOP is no longer a going concern. I do not have detail on its current position, but only draft 2022 accounts. They show that the company has negative equity. It certainly has no future as an entity in its current shareholding.
[303] The Trust now asks me to liquidate the company. I am not prepared to make such an order:
(a)This was not properly signposted as the relief sought. It is raised by the pleading only because of a catch all in the s 174 causes of action of “such other relief as the Court deems appropriate.”
(b)Section 174(3) provides that orders can only be made against a party to the “proceeding”. Canam BOP is not a respondent to the s 174 applications. It is before the Court only as defendant to the fourth cause of action for breach of duty to shareholders. I reject this for reasons I return to.
(c)Even if I could view Canam BOP relevantly as being a party to the “proceeding,” the other shareholder, CBOP, is not before the Court. Mr Corlett submits that in substance it is in that its directors are defendants. Particularly when this relief was foreshadowed only in the Trust’s closing, I do not consider a substance over form approach is appropriate or consistent with natural justice.
[304] However, the circumstances require the parties to be disentangled from joint ownership of Canam BOP. I intend to make an order transferring the Trust’s shares to Mr Petrou and Mr Jones or as they direct at a nominal value. I do not characterise this in the nature of a buyout but simply a recognition that the shares are now worthless, and the parties need to be split. It is novel to make an order to transfer the applicant’s shares to a person other than another of the shareholders in the company, but I do not have any other shareholder before me as party to the s 174 application.
[305] A transfer at a nominal value means that I do not recognise value in the company. I heard expert evidence directed at the valuation of Canam BOP as at 31 March 2021 and current date both on a net tangible assets basis and future maintainable earnings basis. There was debate as to what facts I should assume for the valuation and specifically to what extent valuation approaches should take into account the effect of the parties’ conduct. Key issues were whether I should approach valuation on a counterfactual basis that Mr Miedema “retires” rather than that he “competes” with the company and relatedly whether I should remove the effect of the line items making up the annual reimbursement charge. There was also considerable
disagreement on what effect on value there is if Canam BOP was required to bond its own projects as a stand-alone company.
[306] In the end, I do not need to delve into the detail of the valuation issues. The primary finding relevant to valuation is that I cannot place all the responsibility of Canam BOP’s inevitable failure on either the defendants or on the Trust/Mr Miedema. As outlined above, in terms of cause and effect, it would be wrong to vest on the defendants all the effect of Mr Miedema leaving the company in February 2021. Nor can all the consequence be placed on the Trust/Mr Miedema.
[307] For that reason, it is artificial to value the company as at March 2021 when assessing the causes and consequences of the parties’ break-up. In my view the company was pregnant with the losses it then made for reasons other than simply the conduct I have found to be engaged by s 174. In substance this means I accept the defendants’ position that Canam BOP should be regarded as having nil or negligible value for the purposes of the s 174 assessment of relief based on its present value.
[308] In those circumstances, I make an order that the Trust transfer its shares in Canam BOP to Mr Petrou and Mr Jones, or as they direct, for a nominal $1. Mr Petrou and Mr Jones can then deal with those shares as they see fit.
[309] However, it remains necessary that Mr Petrou and Mr Jones remedy the unfairly prejudicial conduct exhibited by Canam BOP’s acceptance of the Reimbursement Charge and 2021 Head Office Costs, totalling approximately
$2,322,229 ($2,141,163 plus $181,066). This sum was in substance taken out of the company in the financial years to which the charges relate when it should not have been. Although the company then failed (and hence that value might then be swallowed up in losses), it would be wrong not to provide a practical remedy for the effect of that conduct.
[310] It would also be wrong to order compensation of 33 per cent of this $2,322,229 based on the Trust’s 33 per cent interest in Canam BOP. That is because the Trust would need to pay tax on a sum taken out of the company as a dividend. In my view, a remedial response should not ignore the tax effect. If the compensation sum is
treated as if the Trust is receiving a gross dividend of $766,335 (33 per cent of
$2,322,229) the net of tax effect requires a deduction of a further 33 per cent.105 That gives a compensation sum of $513,444.
[311] The orders I make are pragmatic, not wholly forensic. They are intended to correct for what I have concluded was an unjustified removal of funds from Canam BOP, and to effect a necessary divorce of the parties contributed to by that conduct. The flexibility of the s 174 jurisdiction enables me to be robust notwithstanding the strictures against derivate or reflective loss.
Fourth cause of action: Claim against Canam BOP — did Canam BOP breach duties owed to the Trust as shareholder in contravention of s 171?
[312] The Trust, as shareholder of Canam BOP brings a claim against the company under s 171 of the Act.
[313]Section 171 provides:
171 Personal actions by shareholders against company
A shareholder of a company may bring an action against the company for breach of a duty owed by the company to him or her as a shareholder.
[314] The requirements for a claim under s 171 were elucidated by the Court of Appeal in Provida Foods Ltd v Foodfirst Ltd:106
[44] As the text of this provision makes clear, a shareholder’s right to bring an action against a company is dependent on:
(a)the existence of a duty;
(b)owed by the company;
(c)to the shareholder in that capacity.
[45] Each of these requirements defines and limits the scope of the cause of action.
[46] There must be “a duty”, statutory, contractual, equitable or tortious. A provision in a company’s constitution which does not create or constitute a duty will not suffice.
105 That is 28 per cent for imputation credits and a further 5 per cent for withholding tax credits, as outlined by Mr Hussey.
106 Provida Foods Ltd v Foodfirst Ltd [2012] NZCA 326, (2012) 21 PRNZ 546 (footnotes omitted).
[47] The duty must be owed by the company. A duty owed by the directors or management of the company will not suffice.
[48] The duty must be owed by the company to the shareholder “as a shareholder”. A duty owed in some other capacity will not suffice.
[49] In the absence of one or more of these requirements, there will be no cause of action under s 171. This interpretation of s 171 is consistent with its purpose, the scheme of the Act and the rule in Foss v Harbottle.
[50] The purpose of s 171, which codifies the common law, is to confer a right of action on a shareholder in limited circumstances. An example of a duty a shareholder could personally enforce against a company is a breach of the duty to allow a shareholder to exercise voting rights. Breach of this duty is a wrong done to an individual shareholder, justifying an individual remedy. Conversely, the proper plaintiff for a wrong done to the company is the company.
The claim
[315] The Trust pleads that in about June 2014, Mr Petrou and Mr Page made verbal representations attributable to Canam BOP to Mr Miedema as a trustee of the Trust that:
(a)Mr Petrou would not leave value in Canam BOP and dividends would be paid.
(b)Canam BOP would act properly and fairly in declaring dividends.
[316] As a result of those representations, it is asserted that Canam BOP had a duty to its shareholders to declare dividends and a duty to “allow the Trust to exercise its voting rights.”
[317] The Trust says that despite making a number of requests for dividends, Canam BOP declared only one. This is the dividend of $500,000 (producing net $110,550 to the Trust), in the 2018 financial year. It alleges that this was a breach of Canam BOP’s duty to pay further dividends. It also alleges that Canam BOP breached its duty by “failing to allow the Trust to exercise its voting rights as shareholder in relation to each of the Unauthorised Loans” made by CGL to Canam BOP (referencing the annual shareholder advances in the shareholder advance account with CGL). Unquantified
equitable compensation is sought for the loss said to have been incurred as a result of the breaches.
[318]This cause of action was not pressed strongly by Mr Corlett in closing.
Breach of a duty to declare dividends?
[319]I reject that there was any duty on Canam BOP to declare dividends.
[320] Mr Miedema’s evidence was that in about the third year of trading he asked how the Trust would get compensated or receive dividends, to which Mr Petrou responded: “we don’t typically leave value sitting in the business”. This is evidently repeated from an email on 13 December 2017, when Mr Miedema commented: “I understand from our previous discussions that we normally do not leave value in the business.”
[321] With justification, the defendants were critical that Mr Petrou was not questioned on whether he made the representation. I am not satisfied that he did say this. Mr Petrou (and Mr Page) is also said to have represented that Canam BOP would act properly and fairly in declaring dividends. The context for this is unclear. Even if these representations were made, they fall far short of a representation or undertaking by Canam BOP to pay dividends. Moreover, the issue of what it would mean to “leave value” in the business is opaque. For example, the defendants fairly say that there needed to be headroom for potential bonding liabilities, working capital and retentions.
[322] I reject that such statements would have the legal significance attributed to them by the Trust. The Act sets out the circumstances in which a company can declare a dividend.107 The starting point is that a board may authorise a dividend if it is satisfied that a company will, immediately after the distribution, satisfy the solvency test.108 Dividends may only be made in compliance with a director’s duty to exercise
107 Companies Act, ss 52–57.
108 Section 52(1).
the care and skill expected of a reasonable director,109 if in the best interests of the company110 and in compliance with the Act and any company constitution.111
[323] There is no judicial support for a duty by a company to declare dividends generally or arising due to prior statements made by one or more of the directors.112 That would be inconsistent with the broad discretion provided to directors by the statutory scheme.
[324] For the claim to have any consequence I would also have to conclude that a dividend ought to have been declared. From Mr Miedema’s evidence and his contemporaneous emails pressing for a dividend, I accept that he did not engage in a proper assessment as director as to whether it was appropriate to declare a dividend. He was very focussed on the Trust’s imperative for funds for their house transaction. Canam BOP had been performing well and appeared to be accumulating significant earnings. I accept the evidence of Mr Petrou and Mr Jones that there were wider issues for the board to consider, particularly bonding, retention, further work scenarios and working capital requirements.113 There was also an issue in 2017 regarding Canam BOP falling victim to off-shore scammers that led to misappropriation of $500,000 due to be paid to Canam BOP. By March 2020, there was the uncertainty created by COVID-19.
[325] While it may have been open to the board to declare a further dividend, I reject that there was any duty on Canam BOP to do so.
Did Canam BOP breach its duty to allow the Trust to exercise voting rights?
[326] I turn to the Trust’s claim that Canam BOP failed to allow the Trust to exercise voting rights regarding repayment of the “unauthorised loans” to CGL.
109 Section 137.
110 Section 131.
111 Section 134.
112 The Court of Appeal suggested in M Yovich & Sons Ltd v Yovich, above n 63, that non-payment of a dividend might amount to oppression in the context of a s 174 claim. That is not equivalent to a legal duty to do so. As well, this comment was merely obiter. It related to circumstances of a company which was readily able to pay dividends without affecting the drawings of working shareholders or putting strain on the core business.
113 Notably, in an email to Mr Hira on 20 February 2019, Mr Petrou advised that the dividend declared for 2017 had not been paid because it was needed to secure bonds for projects.
[327] Management of a company is reserved for the board under s 128 of the Act. The current claim no longer asserts that the transactions through the shareholder advance account amount to a major transaction. Accordingly, in that sense, the operation of the Treasury Account was not a matter that the shareholders were entitled to vote on.114 In fact, there were no unauthorised annual loans, as Mr Miedema appears to have taken from the annual balances, but Canam BOP’s multitude of transactions through, and fluctuating balance in, the Treasury Account. As addressed above,115 the operation of the Treasury Account in this way was not oppressive or unfairly prejudicial.
[328] As shareholder, the Trust could have called a shareholders’ meeting to discuss the “unauthorised loans” under s 121(b), which is how the Trust referred to the shareholder advance. Mr Miedema confirmed in evidence that the Trust never requested such a meeting. There is no evidential support for a breach of any duty by the company (or the board) to preclude any relevant vote.
[329]This claim fails.
Summary
[330]In summary:
(a)The Reimbursement Charge was an unauthorised major transaction hence there is deemed to be conduct by Mr Petrou and Mr Jones engaging s 174.
(b)I also conclude that there is actual conduct by Mr Petrou and Mr Jones engaging s 174 by the acceptance of the Reimbursement Charge and 2021 Head Office Costs.
(c)Simplistically, the effect of the conduct was to remove approximately
$2.3 million from Canam BOP. This requires a remedial response.
114 Companies Act, s 36.
115 See [187]–[205].
(d)The conduct of Mr Miedema and the Trust prior to Mr Miedema’s exit in February 2021 does not disentitle the Trust from relief.
(e)I consider that Canam BOP shares should be attributed only a nominal value reflecting that it has had negative equity since March 2022 and is not a going concern.
(f)An appropriate remedial response to the break-down of relationships in part caused by the conduct in (b) is to give effect to a split. I implement this by transferring the Trust’s Canam BOP shares to Mr Petrou and Mr Jones jointly for a nominal $1.
(g)However, compensation to the Trust is appropriate for the specific conduct engaging s 174. I direct compensation be paid by the first and third defendants of $513,444.
(h)The other claims fail.
Result
[331]I order the following relief under s 174 of the Act:
(a)Mr Petrou and Mr Jones are jointly liable for compensation to the Trust in the sum of $513,444.
(b)The Trust is to transfer its shares in Canam BOP to Mr Petrou and Mr Jones jointly or to their nominee in such shares as are directed by them.
(c)Mr Petrou and Mr Jones are jointly liable to the Trust for $1 in consideration for the Trust’s Canam BOP shares.
[332] Costs submissions are to be filed by the Trust within 21 days and by the defendants within a further 21 days. I will then address costs on the papers unless the Trust makes a case for a reply.
Anderson J
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