Mike Pero Mortgages Ltd v Pero
[2017] NZHC 2647
•27 October 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2014-404-002193 [2017] NZHC 2647
BETWEEN MIKE PERO MORTGAGES LIMITED
Plaintiff
AND
MIKE PERO First Defendant
MPZ ONE LIMITED Second Defendant
MPRE LIMITED Third Defendant
MIKE PERO REAL ESTATE LIMITED Fourth Defendant
Continued …
Hearing: 13 October 2017 (final submission received 27 October 2017) Counsel:
G P Blanchard QC and J E M Lethbridge for the Plaintiff
D R Bigio QC and A E Malone for the DefendantsJudgment:
27 October 2017
JUDGMENT OF KATZ J
This judgment was delivered by me on 27 October 2017 at 4:30pm pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Lowndes, Auckland
Duncan Cotterill, Auckland
Counsel: G P Blanchard QC, Auckland
D R Bigio QC, Auckland
MIKE PERO MORTGAGES LIMITED v MIKE PERO [2017] NZHC 2647 [27 October 2017]
CIV-2017-404-1405
BETWEEN MIKE PERO MORTGAGES LIMITED Applicant
ANDMIKE PERO First Respondent
MPZ ONE LIMITED Second Respondent
MPRE LIMITED Third Respondent
MIKE PERO REAL ESTATE LIMITED Fourth Respondent
Introduction
[1] MPRE Ltd and its wholly owned subsidiary, MP Real Estate Ltd (together, “MPRE”), operate a nationwide real estate agency network. MPRE was set up as a joint venture between Mike Pero Mortgages Ltd (“MP Mortgages”), a company ultimately owned by the Liberty Financial Group, and Mike Pero Marketing Ltd (now called MPZ One Ltd (“MPZ”)), a company owned by Mike Pero.
[2] MP Mortgages and MPZ each hold a 50 per cent shareholding in MPRE. On
3 February 2011 they entered into a shareholders’ agreement regarding their new real
estate business. It provided, amongst other things, that Mr Pero would be paid
$200,000 per annum for his executive role within MPRE. Each shareholder has one appointee on the board of MPRE. Currently Sherman Ma is the director appointed by MP Mortgages. Mr Pero is MPZ’s appointee. The quorum of directors is two.
[3] During a period when Mr Pero was the sole director of MPRE, he purported to pass a number of directors’ resolutions that, amongst other things, dramatically increased his own remuneration package. MP Mortgages subsequently brought proceedings (CIV-2014-404-2193) seeking to have the resolutions declared unlawful and to have all the sums that had been paid to Mr Pero and MPZ in excess $200,000 refunded to MPRE. MP Mortgages argued that Mr Pero and MPZ had breached the shareholders’ agreement, the MPRE constitution and the Companies Act 1993 (“Act”). It sought relief as an unfairly prejudiced shareholder under s 174 of the Act.
[4] In an interim judgment delivered on 21 December 2016 (“Interim Judgment”) I declared that the challenged resolutions were invalid and were therefore not binding on MPRE.1 I ordered Mr Pero and MPZ to repay to MPRE all amounts that they (namely Mr Pero and MPZ) or their related entities had received in excess of
$200,000 per annum for services provided in relation to the businesses of MPRE.2
I made ancillary directions requiring the disclosure of documentation relevant to calculating the quantum of the overpayments.3
1 Mike Pero Mortgages Ltd v Mike Pero [2016] NZHC 3185.
2 At [63](a).
3 At [63](c).
[5] Mr Pero and MPZ have since calculated that they have been overpaid in the sum of $2,179,370. Judgment has been sealed for that amount. MP Mortgages believes that further sums may also be owing. Its investigations are ongoing. No money at all, however, has yet been repaid by Mr Pero or MPZ to MPRE.
[6] To progress matters, MP Mortgages has now filed an originating application under s 165 of the Act seeking leave to bring derivative proceedings in the name of and on behalf of MPRE, against Mr Pero and MPZ (“the Enforcement Application”). In the alternative, it seeks enforcement orders, as part of the final relief under s 174 of the Act in its original proceedings (CIV-2014-404-2193).4
Should the Enforcement Application be granted?
[7] I will consider the Enforcement Application first. Mr Bigio QC, for Mr Pero and MPZ, submitted that the Court should decline to grant leave to MP Mortgages to bring derivative proceedings in the name of and on behalf of MPRE. His key submission was that granting such leave would not be in the best interests of MPRE.
Relevant legal principles
[8] Section 165 of the Act empowers the Court to grant leave to a shareholder of a company to bring proceedings in the name of and on behalf of the company. In determining whether to grant leave, the Court is required to have regard to:5
(a) the likelihood of the proceedings succeeding;
(b)the costs of the proceedings in relation to the relief likely to be obtained;
(c) any action already taken by the company to obtain relief; and
4 I note that since the hearing on 13 October 2017 I have received a memorandum for counsel for the plaintiff dated 24 October 2017, a memorandum of counsel for the first and second defendants in response dated 26 October 2017, and a supporting of Mr Pero of the same date. I have reviewed those documents (which would not have altered my analysis) but in my view their content is not sufficiently material to justify the rare step of granting leave to admit them as post hearing submissions and evidence.
5 Section 165(2).
(d) the interests of the company in the proceedings being commenced.
[9] Leave to bring derivative proceedings may be granted only if the Court is satisfied that either:6
(a) the company does not intend to bring the proceedings itself; or
(b)it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
[10] The leading authority is Vrij v Boyle. In that case Fisher J suggested that, when considering the mandatory factors I have set out at [8] above, the Court should apply a “prudent business person” test:7
Applying those criteria, the first requirement is that the Court have regard to “the likelihood of the proceedings succeeding”. I adopt in that regard the useful test suggested in a slightly different context in Smith v Croft [1986] 1
WLR 580. It is not for me to conduct an interim trial on the merits. The appropriate test is that which would be exercised by a prudent business
person in the conduct of his or her own affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the
amount at stake, the apparent strength of the claim, likely costs and the prospect of executing any judgment.
[11] In subsequent cases the “prudent business person” test has been applied, not just to the likelihood of the proceeding succeeding, but to all factors set out in s 165(2).8 In Peters v Birnie Asher J said:9
There is no need for a test which varies depending on the nature of the cause of action. In all cases the court needs to address the specific factors set out in sub-section (2). The court then needs to stand back and decide whether on an overview, taking into account those factors and any other relevant matter, a prudent business person using his or her own funds would choose to proceed.
6 Section 165(3).
7 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.
8 See, for example, Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57 (HC) at [23]; Peters v Birnie HC Auckland CIV-2009-404-8119, 22 April 2010 at [28]; Greymouth Holdings Ltd v Jet Trustees Ltd HC Auckland CIV-2011-404-5309, 19 December 2011 at [27]; He v Chen [2014] NZCA 153, [2015] NZAR 437 at [30]; and Nobilo v Nobilo [2015] NZCA 54, [2015] NZAR 450.
9 Above n 8, at [29].
Likelihood of the proceedings succeeding
[12] This case is somewhat unusual in that leave is being sought not to bring substantive proceedings, but rather to enforce court orders (for a liquidated sum) that have already been sealed.
[13] Mr Pero and MPZ have not provided any evidence of their respective financial positions, although it is common ground that in recent years they have received a least $2,179,370 (excluding interest) in excess of their entitlements from MPRE. Further, there is evidence that Mr Pero has interests in significant real property. Although full recovery of the judgment sum may not be possible, there is no reason to believe that substantial recovery will not result from enforcement proceedings.
Any action already taken by MPRE to obtain relief
[14] No action has yet been taken by MPRE to obtain relief, and indeed there has been no board meeting to discuss the issue. The reason for that, essentially, is that MPRE’s two shareholders (and therefore their appointees to the MPRE board) have different views as to the appropriate way forward. The board cannot act unless there is consensus.
[15] Mr Pero’s view is that the judgment debt should be met by declaring a dividend to shareholders sufficient for the judgment debt to be satisfied by way of set-off. If that course is followed, he says, then enforcement proceedings will be unnecessary. Mr Pero has provided a supporting affidavit from John Hagen, a chartered accountant. Mr Hagen’s expert opinion is that MPRE is in a financial position to pay a dividend sufficient to clear the judgment debt and that that would be the appropriate way forward (for reasons discussed further below).
[16] MP Mortgages’ view, on the other hand, is that enforcement proceedings are the best way forward. In its view Mr Pero’s insistence on a dividend is driven by self-interest and is a “continuation of the same sort of self-interested conduct that was the subject of the interim judgment”. MP Mortgages’ position is that there are real impediments to MPRE declaring a dividend at this time. That view
is supported by an affidavit from MP Mortgages’ expert witness, Grant Graham, also a chartered accountant.
[17] Given this difference of views between the shareholders, no action has been taken by MPRE to obtain payment of the judgment debt. I am therefore satisfied that MPRE does not currently intend to bring proceedings itself.
Costs of the proceedings
[18] The costs of enforcement proceedings are likely to be low, relative to the judgment sum, as Mr Bigio accepted. He submitted, however, that the costs would not be inconsequential. In particular, Mr Bigio submitted that MP Mortgages was likely contemplating liquidation proceedings against MPZ and bankruptcy proceedings against Mr Pero. MPZ would likely seek to set aside any statutory demand on the basis that it has already made a proposal by which the amount owing can be repaid or secured, which MP Mortgages is frustrating. Similarly, with respect to bankruptcy proceedings, Mr Pero could ask the Court to refuse to adjudicate him
bankrupt on just and equitable grounds.10
[19] Mr Blanchard QC, for MP Mortgages, challenged the assumption that the sole or primary focus of any enforcement action would be bankruptcy or liquidation proceedings. He noted that there are a number of other enforcement options available, including obtaining charging orders and, ultimately, sale orders in respect of Mr Pero’s assets (including his interests in real property). Liquidation or bankruptcy proceedings are only two of many available options.
The interests of MPRE in enforcement proceedings being commenced
[20] The next matter I must consider is whether granting MP Mortgages leave to
bring derivative proceedings on behalf of MPRE is likely to be in MPRE’s overall
best interests.
10 Pursuant to s 37(c) of the Insolvency Act 2006.
[21] Mr Bigio submitted that it would not be in the best interests of MPRE to pursue enforcement proceedings against Mr Pero and MPZ. In essence, Mr Bigio’s argument was that bringing proceedings against Mr Pero and MPZ would cause significant collateral damage to MPRE and its brand, which is not in MPRE’s best interests.
[22] Mr Bigio relied in particular on Mr Hagen’s expert opinion that a reasonable business person would not take any enforcement action on behalf of MPRE that might result in the liquidation of Mr Pero’s shareholding company (MPZ) or Mr Pero himself being bankrupted. Mr Bigio noted that Mr Pero is the chief executive officer of MPRE, a 50 per cent shareholder, and the face of the MPRE brand. It is not in dispute that Mr Pero has played a key role in developing the MPRE businesses to a significant level of success. Mr Bigio submitted that the negative publicity and damage to the MPRE brand that would result from bankruptcy proceedings being brought by MPRE against its own chief executive would be considerable. This would impact negatively on both MPRE and innocent third party franchisees, which pay franchise fees to trade under the Mike Pero name.
[23] Mr Blanchard challenged this analysis. He noted that MPRE has suffered a very significant (over $2 million) misappropriation of its funds at the hands of Mr Pero and MPZ. The judgment debt has been outstanding since April 2017. Recovery has been frustrated, however, because Mr Pero (wearing his director hat) will not agree to enforcement proceedings to recover the monies that he has unlawfully taken.
[24] Mr Blanchard relied on Mr Graham’s expert opinion evidence that it is in the interests of MPRE that the misappropriated funds be restored to it without further delay, so that MPRE can use the funds for authorised purposes. Further, MP Mortgages will be suffering losses in terms of its interests as a 50 per cent shareholder, until the money is returned. On the other hand, Mr Pero’s personal interests are enriched during the delay.
[25] Mr Blanchard submitted that Mr Pero and MPZ have significantly overstated the “downsides” of enforcement action against them. Mr Hagen raises the spectre of liquidation of MPZ and bankruptcy of Mr Pero. Mr Blanchard submitted that that is a risk that Mr Pero himself seems willing to run. He said that Mr Pero has the answer in his own hands. If he has funds or assets to meet the debt, he can pay it. If Mr Pero provides evidence that he and MPZ are unable to meet the debt, Mr Graham’s evidence is that he would expect MPRE to take that into account in their enforcement strategy.
[26] Mr Graham considered the possibility that Mr Pero’s future contribution to the success of MPRE may be compromised by any enforcement action. In his view, however, Mr Pero’s obligations to MPRE are such that it would be entitled to expect him to continue to act professionally in leading the business, even while enforcement action proceeds.
[27] Finally, Mr Blanchard referred to the affidavit evidence of Mr Ma, MP Mortgages’ appointee to the MPRE board. Mr Ma’s view is that MPRE could still thrive without its namesake, as demonstrated by MP Mortgages (which Mr Pero is no longer involved with) and other comparable corporate groups such as Michael Hill. In Mr Ma’s view MPRE has reached a level of development such that it could continue to be successful, and could transcend its connection with Mr Pero, should that become necessary.
Conclusion on whether the Enforcement Application should be granted
[28] Taking into account the various matters I have addressed above, I must now stand back and decide whether a prudent business person, using his or her own funds, would choose to proceed with enforcement action against Mr Pero and MPZ.
[29] MPRE has a clear interest in recovering the funds owing to it. The likelihood of enforcement action succeeding, to a significant extent at least, is high. The costs of taking enforcement action will be low, relative to the significant sum at stake. MPRE is not currently in a position to pursue enforcement action itself, due to Mr Pero (who opposes such a course) being a director. All of these factors favour granting MP Mortgages’ application.
[30] The critical factor, however, is whether enforcement action is likely to be in MPRE’s best interests. There are risks in taking enforcement action. In the event that liquidation or bankruptcy proceedings are pursued (and that is not inevitable) damage to MPRE’s brand could result. On the other hand, as Mr Blanchard noted, the public is already well-aware of the dispute between the shareholders and the content of the Interim Judgment, which made serious adverse findings regarding Mr Pero’s conduct. The Interim Judgment was released publicly and received considerable media coverage.
[31] Taking all of these matters into account, it is my view that enforcement proceedings against Mr Pero and MPZ are not likely to have such a negative impact on MPRE’s brand that the option should be taken off the table altogether. It is far from inevitable that Mr Pero will be bankrupted, or MPZ liquidated. Indeed if Mr Pero engages in constructive negotiations (as judgment debtors commonly do) such an outcome seems relatively unlikely. Enforcement proceedings will likely bring some further negative attention to MPRE. Any impact, however, is likely to be incremental, given that there has already been significant public ventilation of the adverse findings set out in the Interim Judgment.
[32] Due to the current impasse between shareholders, there is effectively only one option for payment of the judgment debt, namely that MPRE declares a dividend. Mr Pero, who has a conflict of interest, is in a position to block any enforcement action by MPRE against him. This distorts the usual creditor/debtor dynamic and empowers Mr Pero to effectively dictate the course that must be taken by MPRE if it wishes to recover the very significant debt owing to it.
[33] Given this context, it is my view that it is not in MPRE’s interests for the conduct of the proceedings to be left to the directors or to the determination of the shareholders as a whole. MP Mortgages’ interests are much more closely aligned to the interests of MPRE than Mr Pero. MP Mortgages, as a 50 per cent shareholder, is incentivised to take appropriate steps to ensure that the sums owing to MPRE are repaid. It is also incentivised to achieve such an outcome in the manner that will cause the least possible damage to MPRE and its brand. It is not in MP Mortgages’ interests to erode shareholder value in MPRE. Although there is currently significant
tension between the shareholders, there is nothing in Mr Ma’s affidavit, or MP Mortgages’ correspondence (which is professional and temperate in tone) that leads me to believe that MP Mortgages will not act responsibly and in the overall best interests of MPRE, in its conduct of enforcement proceedings.
[34] Granting the Enforcement Application will restore the usual creditor/debtor dynamic that would exist if Mr Pero was not on the MPRE board. Any discussions regarding recovery of the judgment sum can take place against the background that if a reasonable resolution cannot be reached, MPRE is in a position to take or continue with enforcement action. It is in MPRE’s interests that the full range of recovery options are available to it, including enforcement action against Mr Pero and MPZ.
Should MPRE be required to meet the reasonable costs of enforcement proceedings?
[35] The starting position under s 166 of the Act is that the Court shall order that the company (in this case, MPRE) must pay the reasonable costs of the proceedings. Only if it would be unjust or inequitable for the company to bear those costs will the Court decline to make such an order. There is nothing to suggest that it would be unjust or inequitable for MPRE to bear the costs of bringing enforcement action in this case. Obviously, if successful, it will be entitled to seek an award of costs from Mr Pero and MPZ.
Should MP Mortgages’ application for enforcement orders as part of the final relief in the substantive proceedings be granted?
[36] MP Mortgages seeks, in the alternative, an enforcement order as part of the final relief in the substantive proceedings, pursuant to s 174 of the Act. Mr Bigio submitted that the Court does not have jurisdiction under s 174 to grant leave to a party to bring derivative proceedings in the name of a company. He submitted that derivative proceedings are governed by s 165. It is not necessary for me to determine this issue, however, given that I have already concluded that leave should be granted under s 165.
Result
[37] I order that:
(a) Mike Pero Mortgages Ltd is granted leave pursuant to s 165 of the Companies Act 1993 to enforce the judgments and orders of this Court in proceeding CIV-2014-404-2193 in the name and on behalf of MPRE Ltd and Mike Pero Real Estate Ltd, against Mike Pero and MPZ One Ltd.
(b)MPRE Ltd and Mike Pero Real Estate Ltd are to pay the costs of the enforcement proceedings.
[38] The parties are encouraged to resolve any costs issues between counsel. In the event of disagreement, leave is reserved to file memoranda. Any memorandum on behalf of MP Mortgages is to be filed by 10 November 2017. Any response from
Mr Pero and MPZ is to be filed by 17 November 2017.
Katz J
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