Mike Pero Mortgages Ltd v Pero
[2018] NZHC 528
•23 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2014-404-2193
[2018] NZHC 528
UNDER the Companies Act 1993 IN THE MATTER
of MPRE Limited
BETWEEN
MIKE PERO MORTGAGES LIMITED
Plaintiff
AND
MIKE PERO
First Defendant
MPZ ONE LIMITED
Second DefendantMPRE LIMITED
Third DefendantMP REAL ESTATE LIMITED
Fourth Defendant
Hearing: 19 February 2018 Appearances:
G P Blanchard QC and J E M Lethbridge for Plaintiff N A Till QC and M E Gall for Defendants
Judgment:
23 March 2018
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 23 March 2018 at 4 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date: ...................................
MIKE PERO MORTGAGES LIMITED v PERO [2018] NZHC 528 [23 March 2018]
Introduction
[1] This judgment determines an application by the first and second defendants (“application”, “Mr Pero” and “MPZ”) for orders:1
Staying the proceeding, or staying the execution of the judgment of Her Honour Justice Katz in this proceeding dated 27 October 2017 and/or staying the enforcement of that judgment and the judgment of Her Honour Justice Katz in this proceeding dated 21 December 2016.
Background
[2]The ownership structure of the parties relevant to this proceeding is as follows:
Liberty Financial Pty Limited (“Liberty”)
100%
Mike Pero Group Limited (“MP Group”)
Mr Mike Pero (“Mr Pero”)
Trustees of the Mike Pero Trust (“MPT”)
100% 50%
Mike Pero Mortgages Limited (“MP Mortgages”)
MPZ One Limited (“MPZ”)
MPRE Limited (“MPRE”)
100%
Mike Pero Real Estate Limited (“MP Real Estate”)
1 Amended Interlocutory Application on Notice for Stay of Judgment Pending Appeal and for Stay of Enforcement dated 26 January 2018.
[3] MPRE is a joint venture between MPZ and MP Mortgages, formed in 2011. MPRE and its subsidiary, MP Real Estate (together the “jv companies”), operate a national chain of real estate agencies.
[4] Mr Pero has been the Chief Executive of the jv companies since inception and he and Mr Mark Collins, a director of MP Mortgages, are the companies’ current directors. Mr Sherman Ma is Mr Collins’ alternate director on the board. MPZ and MP Mortgages are parties to a shareholders’ agreement executed in February 2011 (“shareholders’ agreement”).
[5] As a result of two judgments given by Katz J, one as to liability in December 2016 and the other as to quantum in October 2017, Mr Pero and MPZ are required to pay MPRE a principal sum of $2,179,370.34, including GST, plus interest at five per cent per annum running from various dates.2 The principal sum comprises sums that Mr Pero wrongly paid away to himself or related entities. As of 10 October 2017, the principal sum and accrued interest totalled $2,381,725.45.
[6] After determining quantum, Katz J granted MP Mortgages leave to bring derivative proceedings in the name of, and on behalf of, MPRE (“s 165 application”).3 Although Mr Pero and MPZ are appealing this judgment to the Court of Appeal, they do not dispute their liability or quantum.
[7] On 22 December 2017, the Court sealed a charging order in respect of all of Mr Pero’s and MPZ’s personal property, including Mr Pero’s shares in MPZ and MPZ’s in MPRE (together the “charged shares”); Mr Pero and MPZ applied for this stay; and MP Mortgages has applied for an order for sale of the charged shares and other assets. On 15 January 2018 Edwards J granted an interim stay, which I continued at the hearing before me pending delivery of this judgment.
2 Mike Pero Mortgages Ltd v Pero [2016] NZHC 3185; and Mike Pero Mortgages Ltd v Pero [2017] NZHC 2486.
3 Mike Pero Mortgages Ltd v Pero [2017] NZHC 2647.
High Court Rules 2016, r 17.29
[8] The application was argued primarily, and I have decided it, on the power to stay enforcement in High Court Rules 2016, r 17.29. The power to stay pending appeal is touched on below.
[9]Rule 17.29 provides:
17.29 Stay of enforcement
A liable party may apply to the court for a stay of enforcement or other relief against the judgment upon the ground that a substantial miscarriage of justice would be likely to result if the judgment were enforced, and the court may give relief on just terms.
[10]Mr Pero and MPZ are liable parties within the meaning of r 17.29.
[11] There is no dispute that the principles which apply to an application under r 17.29 are:4
(a)The onus is on an applicant to persuade the Court to exercise its discretion.
(b)A “substantial” miscarriage of justice must be involved. “Substantial” means something more than “minor or insubstantial”. In the usual course of things, and subject to the circumstances of the particular case, it is not a substantial miscarriage of justice for a party that has had the use of another’s money to be required to repay that money or for a creditor to be able to take whatever steps it sees fit to pursue recovery.5
(c)A substantial miscarriage of justice must be “likely to result”, that is there must be a real and substantial risk of a miscarriage of justice if the judgment were enforced.6
4 Bay Cities Real Estate Ltd v Re/Max New Zealand Ltd HC Napier CIV-2010-441-134, 8 June 2011 at [19].
5 At [19] and [30].
6 At [19] and [28].
(d)The Court must seek to recognise and reconcile the conflicting interests of both parties in such manner as will best serve the overall interests of justice. A balancing exercise is involved.
(e)A miscarriage of justice is unlikely to result where a party is required to pay to another an amount that is owing to it and the paying party is free to pursue its claim against the other party in the usual way.
(f)Other factors which may be relevant include: the apparent strength or weakness of the claim; the ability of the applicant for the stay to meet the judgment being enforced; and the potential bankruptcy or liquidation of a party seeking to pursue an apparently strong claim. Delay in making the application to stay may also be relevant.7
Payment of the judgment debt
[12] There being no dispute as to liability or quantum, the critical issue is how the judgment debt is to be paid (and, by the appeal, whether MP Mortgages should continue to have leave to enforce the judgment).
[13] Mr Pero’s evidence is that neither he nor MPZ is presently able to pay the debt, and that he did not use the sums he was found to have misappropriated to acquire any assets but rather as income which he applied mainly to legal fees. Mr Pero’s evidence is that his and MPZ’s only assets are the charged shares, so it is a matter of selling those or of MPRE declaring a dividend in a sum that is sufficient to allow MPZ to pay the debt. As appears below, Mr Collins will not agree to MPRE declaring a dividend. His evidence is that this is for bona fide reasons, whereas Mr Pero contends the refusal stems from MP Mortgages’ wish to acquire some or all of MPZ’s shares in MPRE, and at an undervalue through a forced sale by the High Court.
Borrowing
[14] Although there has previously been discussion of Mr Pero or MPZ borrowing to pay the debt, the recent evidence filed in respect of the application for stay is to the
7 Harnish v Bruce [2014] NZHC 302 at [16].
effect that this is unlikely. Mr Pero’s evidence is that, despite his best efforts, only one offer of finance has been made, and on terms so onerous that neither Mr Pero nor MPZ could agree to them.
Real estate
[15] In addition, Mr Pero’s evidence is that neither he nor MPZ has a beneficial interest in any real estate. Although the trustees of the MPT, of which Mr Pero is one, own property (directly or otherwise), it is of minimal value or is security for loans made by the ASB Bank, which are so substantial that the trustees have only minimal equity in the property.8
Dividend
[16] Mr Pero’s preferred option for payment of the judgment debt is the declaration of a dividend by MPRE, with MPZ then to pay back its receipt to MPRE. Mr Collins, however, does not agree to the declaration of a dividend.
[17] The issue of MPRE’s failure to declare a dividend has been the source of longstanding dispute between the parties.
[18] It seems clear that MPRE is solvent and has the financial means to declare a dividend sufficient to enable payment of the judgment debt. This appears from expert evidence filed in advance of the 165 application. For Mr Pero and MPZ, Mr John Hagen’s evidence was that MPRE had retained earnings of at least $7.4 million as at 31 March 2017; that the jv companies’ “earnings before tax” are approximately
$3 million per annum; that there is no requirement for material capital expenditure; and that, MPRE could “clearly afford to pay” a “substantial dividend”.9 Mr Hagen’s evidence as to a lack of any impediment was supported by Mr Mark Hucklesby, a senior audit partner at Grant Thornton, Auckland.10 In his affidavit of 26 January 2018, Mr Pero says that cash reserves then on hand were $6.12 million. He proposes that MPRE declare a dividend of $5 million; MPZ will repay to MPRE the $2.5 million
8 Affidavit of M Pero sworn 15 February 2018, Exhibit AA.
9 Affidavit of John Carlaw Hagen dated 27 July 2017.
10 Affidavit of M Hucklesby sworn 4 August 2017.
it receives, plus whatever else is required to pay the judgment debt and interest in full; and the net result will be that the debt has been repaid and MPRE will have at least
$3.5 million in cash.
[19] On the other hand, the evidence of Mr Grant Graham for MP Mortgages was that there remained outstanding issues as to the audit of MPRE’s financial statements to 31 March 2013 and that these may have “flow on” effects for the financial statements for subsequent years.11 Mr Graham’s view was that the board would be “totally justified in determining that no dividend be declared until such time as the board could sign a balance sheet”, i.e. the audit was completed.
[20] Before me, each party relied on more recent correspondence from the auditors as to whether or not they can complete the audit which Mr Collins considers a pre-requisite to the declaration of a dividend. There is no suggestion, however, that completion of the audit would evidence a deterioration in MPRE’s financial position
– on the contrary, the jv companies appear to have been very successful. Moreover, completion of an audit is not a pre-requisite to the lawful declaration of a dividend. The only pre-requisite in the Companies Act 1993 is solvency.
CIV 1035
[21] Mr Pero and MPRE have taken legal proceedings to bring about a determination of whether the failure to declare a dividend is proper in the circumstances of MPRE. The first of these proceedings was as part of a broad counterclaim by Mr Pero and MPZ in the trial before Katz J on liability. The counterclaim alleged numerous omissions such as a failure by MP Mortgages to appoint a director for a period; a failure or refusal to discuss any increase in Mr Pero’s remuneration as Chief Executive; a failure to declare a dividend; and a general breakdown in the governance structure. For reasons not explained to me, however, Mr Pero and MPZ abandoned that counterclaim in the course of the trial.
[22] Then, in May 2017, Mr Pero and MPZ commenced a separate proceeding against MP Mortgages (“CIV 1035”) seeking orders that MP Mortgages submit to
11 Affidavit of G R Graham sworn 25 September 2017.
dispute resolution in accordance with the shareholders’ agreement, alternatively seeking relief for what they contend is shareholder oppression, in terms of s 174 Companies Act 1993. The “dividend” issue is a very large part of this proceeding. In support of his submissions, Mr Till QC, counsel for Mr Pero and MPZ, referred me to Court of Appeal authority that a failure to declare a dividend for many years may constitute oppression.12
[23] Mr Pero and MPZ sought summary judgment on their case that the parties are required by the shareholders’ agreement to submit to dispute resolution but MP Mortgages opposed the order. Associate Judge Sargisson has recently dismissed the application for summary judgment, so CIV 1035 will now proceed to trial in the usual way.13
Sale of shares
[24] The alternative remedy by which the judgment debt could be paid is by a sale of some or all of the charged shares.
[25] Mr Pero estimates that MPZ’s 50 per cent shareholding in MPRE is worth at least $12,500,000 but submits that any sale achieved by the Court is likely to be at an undervalue.
[26] Whether or not that is correct, it is obvious that a sale of any of the shares will reduce MPZ’s shareholding to less than 50 per cent.
[27] As to the likely buyer, I accept that MP Mortgages has an interest in purchasing some of MPZ’s shares in MPRE, as that would give it a majority shareholding, although I record that Mr Collins has disclaimed MP Mortgages having any such interest. MP Mortgages has pre-emptive rights if MPZ’s shares in MPRE are offered for sale, under the shareholders’ agreement and MPRE’s constitution. The fact that a new shareholder will be required to accede to the terms of the shareholders’ agreement may also deter some potential purchasers.
12 M Yovich & Sons Ltd v Yovich CA187/00, (2001) 9 NZCLC 262,490.
13 Pero v Mike Pero Mortgages Ltd [2018] NZHC 253.
[28] I accept Mr Till’s submission that, if there is a sale now of MPZ’s shares in MPRE, it may be impossible to restore MPZ to a 50 per cent shareholding if Mr Pero and MPZ succeed in CIV 1035. On the other hand, if Mr Pero and MPZ fail in CIV 1035, additional interest will have accrued on the debt to MPRE, but there is no risk that MPRE will not be paid all it is owed.
Other matters
[29]Other submissions made in opposition to the stay are that:
(a)MPRE has been wrongly deprived of its funds and the debt has been outstanding for some time.
(b)In her judgment as to liability, Katz J used words such as “high handed” and “unilateral” and “egregious” and “flagrant”. Those who conduct themselves in such a manner cannot expect an indulgence from the Court.
(c)Mr Pero and MPZ delayed in seeking a stay. MP Mortgages relies on
Harnish v Bruce in support of this submission.14
(d)Mr Pero has a conflict of interest in pressing for a dividend, ie he is both a director of MPRE and a judgment debtor of the company.
[30] First, I accept MPRE should not have to wait for its funds and I am fully cognisant of the principle referred to in [11](b) above. Equally, however, MPRE has no urgent need for money and the debt and all interest will be paid even if Mr Pero and MPZ fail in CIV 1035.
[31] Secondly, the conduct giving rise to the underlying debt may be a relevant factor in the exercise of discretion but even if it is, I would not place great weight on it in this particular case. Mr Pero’s conduct has given rise to liability. He cooperated
14 Harnish v Bruce [2014] NZHC 302 at [16].
in ascertaining the quantum that was due on the Judge’s findings. It would not be just to withhold a stay to him or MPZ on the basis of his past omissions.
[32] Thirdly, I am not persuaded there has been undue delay. The judgment debtor in Harnish v Bruce made an application for stay seven months after the charging order was made; at least four weeks after the Court had made an order for sale; and two days before the scheduled public sale of his shares. In this case, Mr Pero and MPZ filed their appeal on 24 November 2017, and the charging order and application for stay were both made on 22 December 2017. No order for sale has yet been made and Associate Judge Sargisson’s judgment was delivered at the end of February 2018.
[33] Fourthly, I accept that Mr Pero has a conflict of interest, but of course he makes the same point as regards Mr Collins.
Decision
[34] Standing back, I am persuaded that a substantial miscarriage of justice in the required sense would be likely to result if the judgments of Katz J dated 21 December 2016 and 27 October 2017 are enforced. That is because there is a clear risk of an irreversible alteration to the status quo if the charged shares, or some of them, are sold and Mr Pero and MPZ subsequently succeed in CIV 1035; MPRE has no urgent need of the funds; and there is no real risk of a shortfall to MPRE if Mr Pero and MPZ are unsuccessful in CIV 1035.
Stay pending appeal
[35] Given the decision I have reached, it is unnecessary for me to address the issue of a stay pending appeal.15
Result
[36] I grant the stay sought pursuant to High Court Rules 2016, r 17.29 until 5 pm 28 September 2018. This time limit is subject to any further order of the Court. I have allowed this six-month period to enable Mr Pero and MPZ to pursue CIV 1035 and
15 Court of Appeal (Civil) Rules 2005, r 12.
their appeal. I reserve leave to apply and record that I shall consider the imposition of any condition on the stay that MP Mortgages may reasonably propose to ameliorate any disadvantage it considers might arise.
[37] I encourage the parties to agree costs, but they may submit brief memoranda if unable to do so.
Final comments
[38] As I said to junior and senior counsel for MP Mortgages at the hearing, an affidavit is for evidence, not argument. Counsel’s submissions are to assist the Court in determining the issues which arise. Neither an affidavit nor submissions should contain pejorative characterisations of the conduct of the opposing party, or speculation, or indeed anything not directed to the purpose to which I have referred.
Peters J
Solicitors: Lowndes Limited, Auckland
Young Hunter, Christchurch
Counsel: G P Blanchard QC, Auckland
N A Till QC, Christchurch
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