Mike Pero Mortgages Ltd v Pero
[2017] NZHC 2486
•10 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 2486
BETWEEN MIKE PERO MORTGAGES LIM ITED
Plaintiff
AND
MIKE PERO First Defendant
MIKE PERO MARKETING LIMITED Second Defendant
MPRE LTD Third Defendant
MP REAL ESTATE LTD Fourth Defendant
Hearing: 30 June 2017 (final submissions received 10 July 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:
10 October 2017
Reissued:
12 December 2017
JUDGMENT OF KATZ J
This judgment was delivered by me on 10 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 Bigio QC, Auckland
MIKE PERO MORTGAGES LIM ITED v MIKE PERO & ORS [2017] NZHC 2486 [10 October 2017]
Introduction1
[1] On 21 December 2016 I delivered an interim judgment (“Judgment”) in these proceedings.2 I found that various company resolutions passed by Mike Pero (as sole director) on behalf of MPRE Ltd (“MPRE”) and MP Real Estate Ltd (“MP Real Estate”) were invalid. In particular, I found that Mr Pero’s attempts to unilaterally increase his remuneration as Chief Executive Officer of MPRE and MP Real Estate (together, “the MPRE Companies”) were unlawful. The relevant resolutions contravened provisions of MPRE’s constitution and also the Shareholders’ Agreement between Mike Pero Mortgages Ltd (“MP Mortgages”) and Mike Pero Marketing Ltd (“MP Marketing”).
[2] I ordered Mr Pero and MP Marketing to repay (together with interest) all amounts received by them or their related entities in excess of $200,000 per annum for services provided by them in relation to the businesses of MPRE and MP Real Estate and their related entities. I also made various ancillary orders, including an order for disclosure of documentation to enable quantification of the relevant sum.
[3] The parties have been able to agree, based on the disclosure that has been provided to date, that the amount that must be repaid is at least $2,381,725.45. MP Mortgages believes, however, that the disclosure provided by Mr Pero and MP Marketing has been inadequate, and that further disclosure may well reveal that additional sums are owing.
[4] Against this background, the issues currently before me for determination are:
(a) whether the order set out in the Judgment (“Order”) has been
adequately complied with; and
1 This judgment was reissued on 12 December 2017, pursuant to the “slip” rule, to correct the sum
referred to at [35].
2 Mike Pero Mortgages Ltd v Mike Pero [2016] NZHC 3185.
(b)whether the interest payable by Mr Pero and MP Marketing on the sums owing to the MPRE Companies should properly be calculated on a GST-inclusive or GST-exclusive basis.
Background
The declarations and orders
[5] The Judgment provided as follows:
[62] The Court declares that:
(a) [Mr Pero’s] decision to increase his remuneration by [MPRE] and/or [MP Real Estate] above $200,000 prior to the 31 March 2014 financial year was invalid and was not (and never has been) binding on [MPRE and MP Real Estate];
(b) the seven resolutions of [MPRE] and/or [MP Real Estate]
which [Mr Pero] purported to pass as sole signatory dated
17 October 2012, 7 and 18 February 2013, 12 and 16 May
2013, 18 February 2014, and 8 April 2014 were invalid and are not (and never have been) binding on [MPRE and MP Real Estate].
[63] The Court orders that:
(a) [Mr Pero and MP Marketing] must pay to [MPRE and MP Real Estate] all amounts received by them or their related entities in excess of $200,000 per annum for services provided by [Mr Pero] and/or [MP Marketing] in relation to the businesses of [MPRE and MP Real Estate] and their related entities.
(b) From the date of this order [Mr Pero and MP Marketing] and their related entities must be paid no more than $200,000 per annum ($16,666 per month) for services provided by them in relation to the businesses of [MPRE and MP Real Estate] and their related entities. For the avoidance of doubt, this order does not prevent the amounts to be paid to [Mr Pero and MP Marketing] and their related entities being increased above $200,000 per annum if the increase is made in accordance with the Companies Act 1993 and the constitutions of [MPRE and MP Real Estate], as modified by the shareholders’ agreement between [MP Mortgages] and [MP Marketing and MPRE] dated 3 February 2011, an agreement by [MP Mortgages] and [MP Marketing and MPRE] to vary clause 2.3 of the shareholders’ agreement, and the services agreement.
(c) [Mr Pero and MP Marketing] must, by 27 January 2017:
(i) provide [MP Mortgages] with a statement of all amounts received by them or their related entities in excess of $200,000 per annum for services provided by [Mr Pero and MP Marketing] in relation to the businesses of [MPRE and MP Real Estate] and their related entities.
(ii) disclose to [MP Mortgages] all documents in their control relevant to quantification of the amount in subparagraph (a) above.
(d) The parties will have 15 working days from the date of receipt by [MP Mortgages] of the information and documents in paragraph (c) above, to agree on the precise amount that is payable under subparagraph (a) above.
(e) If the parties are able to reach agreement on the amount payable under subparagraph (a) above, they should file a joint memorandum advising the amount agreed on, and the Court will issue a final judgment requiring that amount to be paid by [Mr Pero and MP Marketing] to [MPRE and MP Real Estate].
(f) [Mr Pero and MP Marketing] must pay interest under the Judicature Act 1908 to [MPRE and MP Real Estate] on all amounts payable under subparagraph (a) from the date of receipt by [Mr Pero and MP Marketing] or their related entities of each payment in excess of $200,000 in any financial year.
(g) If the parties are unable to reach agreement on the amount payable under subparagraph (a) above, they should file a joint memorandum advising the amount [Mr Pero and MP Marketing] accept is payable, and the Court will:
(i) issue a further interim judgment requiring that amount, together with interest on that amount in accordance with subparagraph (f) above, to be paid by [Mr Pero and MP Marketing] to [MPRE and MP Real Estate];
(ii) make directions for a further hearing to determine the further amount, if any, that is payable by [Mr Pero and MP Marketing] to [MPRE and MP Real Estate].
Developments following the Judgment
[6] On 26 January 2017, Mr Pero took steps to comply with [63](c) of the Judgment, which required disclosure sufficient to enable quantification of the overpayments that Mr Pero and MP Marketing were required to reimburse to the
MPRE Companies. Mr Pero and MP Marketing provided disclosure of bank account statements of the MPRE Companies and invoices evidencing the payments they have received over and above the permitted $200,000. Although not accepted by them as being relevant to this proceeding, Mr Pero and MP Marketing and their staff also provided particulars of credit card expenditures dating back up to five years. The position of Mr Pero and MP Marketing is that the provided disclosure fully complies with their obligations under [63](c)(ii) of the Judgment.
[7] MP Mortgages was not satisfied with the level of disclosure provided. In its view, Mr Pero may well have received additional financial benefits from the MPRE Companies which do not fall within the category of “CEO fees, ambassador payments, car allowances and bonuses”. MP Mortgages seeks access to a wide range of further documentation in order to investigate any possible further payments that may have been made. It argues that such disclosure is required by the Order. MP Mortgages’ solicitor (Ms Lethbridge) wrote to Mr Pero’s lawyers seeking further documentation and setting out MP Mortgages’ position as follows:
4.Firstly, we note that your client has identified ‘Unapproved’ payments totalling $2,208,640.01 as only those payments subject of the invalid resolutions (e.g., increased remuneration and bonuses, car allowance, ambassadorship fees). However, there is a payment in the bank statement that refers to a single transaction of $19,806.08 simply as a “Bonus”. There are also recurring credit card payments of $10,000, totalling $170,000. Our client will understandably need further documentation to substantiate that such irregular payments were not for the benefit of your clients or their related parties. More importantly, your clients have an obligation to identify “all amounts received by them or their related entities in excess of $200,000 per annum” irrespective of their relationship to the invalid resolutions.
5.Secondly, we note that only bank statements for certain accounts of Mike Pero Real Estate Ltd have been provided, in addition to invoices issued by Mike Pero Marketing Ltd. It is unclear whether this subset of information captures all of the payments received by Mr Pero, Mike Pero Marketing Ltd or their related entities, as specifically directed by paragraph 3(c)(i) of the Court Orders. It also does not capture any payments made on behalf of your clients or their related entities. … We consider that all bank statements should be disclosed from each party so that any relevant payments can be identified.
6.Thirdly, we specifically note that your clients have not disclosed any payments made by related parties of Mike Pero Real Estate Ltd. … Documents identifying such payments are required to substantiate
the amounts received by Mike Pero and Mike Pero Marketing Ltd or their related entities.
7.Fourthly, our client’s review of the information indicates that your clients may have received other amounts by way of the payment of personal expenditure. … Our clients will require bank statements from wider time periods in order to validate the completeness of your clients’ accounting of inappropriate payments.
[8] Mr Pero’s lawyers resisted the request for further disclosure, on the basis (amongst other things) that many of the documents requested by Ms Lethbridge fell outside the scope of the Order. They set out their position as follows:
2. At paragraph 4 you refer to certain “irregular payments” …:
a.Mike Pero Real Estate Limited has a credit card that is used on a regular basis for online purchases … office expenses, agent rewards, staff travel and accommodation and miscellaneous business expenses. The credit card is reconciled monthly by the company accounts administrator. The monthly automatic payment … was set up to ensure that the company would not exceed its credit card limit.
b. The $19,806.08 payment relates to a bonus paid to the
company’s General Manager, …
3.The various payments referred to by you in paragraph 5 are outside of the terms of the order. They have nothing to do with remuneration received by our clients pursuant to the Shareholders’ Agreement or the Contract for Services.
4.We do not understand your comments at paragraph 6. Who are the related parties of Mike Pero Real Estate Ltd that you are referring to here? Franchise fees are not payments received for services provided by our clients. …
5.The payments referred to by you at paragraph 7 do not fall within the terms of the Order.
[9] Separately, Mr Collins and Mr Ma of MP Mortgages called Mr Pero to discuss access to the company bank accounts. Mr Pero took steps to facilitate such access. Mr Collins appears to have been particularly concerned that a large number of credit card payments appeared to relate to personal expenses. The company’s accountant provided particulars of some of the credit card payments in response to Mr Collins’ concerns.
[10] Ultimately, however, the parties were unable to reach agreement on the final amount payable under [63](a) of the Judgment. Accordingly, as required by [63](g) of the Judgment, the parties filed a joint memorandum on 5 April 2017 advising that they agreed at least $2,381,725.45 is payable by Mr Pero and MP Marketing. That agreed amount comprises:
(a) a principal sum of $2,179,370.34, which includes GST; and
(b)interest under the Judicature Act 1908 on the GST-exclusive amounts of each payment from the date of the payment to 5 April 2017 in the sum of $202,355.11.
[11] MP Mortgages remains of the view that there are likely to be additional amounts owing under the Judgment. It says, however, that it is not able to identify and quantify any such further amounts, as the disclosure provided by Mr Pero and MP Marketing to date is inadequate. Mr Pero and MP Marketing, on the other hand, say they have met their disclosure obligations under the Order.
[12] The parties are also in dispute as to the GST payable on the interest component of the agreed judgment sum. MP Mortgages contends that interest should be calculated on the GST-inclusive amounts payable, whilst Mr Pero and MP Marketing say that interest should properly be calculated on the GST-exclusive sum.
Have Mr Pero and MP Marketing complied with their disclosure obligations?
Further disclosure sought
[13] At the conclusion of the substantive hearing I directed MP Mortgages to file a memorandum clarifying precisely what it was seeking in terms of further disclosure. In its memorandum of 3 July 2017, MP Mortgages advised that it seeks the following disclosure from Mr Pero and MP Marketing (subject to confidentiality protocols first being agreed):
(a) all of their bank statements from 1 January 2012 to 30 June 2017;
(b)all bank statements in their control of any companies or trusts related to them from 1 January 2012 to 30 June 2017;
(c) all documents in their control related to payments or benefits received
by Mr Pero’s relatives from the MPRE Companies; and
(d)all documents in their control related to payments made by the MPRE Companies to or for the benefit of Mr Pero, MP Marketing, any trusts or companies they control, and Mr Pero’s relatives to determine whether such payments were for a personal purpose or a business purpose.
[14] I will address each category in turn, after first addressing the correct interpretation of the Order.
Scope of the Order
[15] The Order requires the disclosure to MP Mortgages of “all documents in [Mr Pero’s and MP Marketing’s] control relevant to quantification of the amount in subparagraph (a) above”. That is, all amounts received by Mr Pero or MP Marketing or their related entities in excess of $200,000 per annum for services provided by Mr Pero and/or MP Marketing in relation to the businesses of MPRE and MP Real Estate and their related entities.
[16] The parties differ as to the interpretation of the Order. Mr Pero and MP Marketing have taken the position that they are only required to repay and make disclosure in relation to payments made by the MPRE Companies that were received by Mr Pero and MP Marketing and relate to remuneration pursuant to the Shareholders’ Agreement or Mr Pero’s Contract for Services.
[17] MP Mortgages’ position, on the other hand, is that the scope of the Order is significantly broader than that. In particular, it is concerned that, in addition to receiving executive remuneration in excess of $200,000 per annum, Mr Pero and/or MP Marketing may have also received other undisclosed benefits from the MPRE Companies. For example, Mr Pero may have used company credit cards to pay for
personal expenses, accepted “back-handers” or other benefits from franchisees, employed family members on non-commercial terms, or met their personal expenses from corporate bank accounts. MP Mortgages argues that any such benefits fall within the broad scope of “amounts received by Mr Pero and/or MP Marketing for services provided by them in relation to the business of the MPRE companies”. On that basis, MP Mortgages says that disclosure of the various documents it seeks is required to enable it to identify and quantify any improper or unauthorised payments.
[18] Mr Blanchard QC, for MP Mortgages, acknowledged that taking such an approach requires a fairly broad interpretation of the Order, but argued that such an interpretation is supported by the wider context. In particular, he submitted that Mr Pero’s history of self-interested and high-handed behaviour (as more fully outlined in the Judgment) are relevant. Given that history, he submitted that there must now be “full disclosure” so that there can be a proper investigation of potentially improper or unauthorised payments to Mr Pero and his (broadly) associated entities. Mr Blanchard considers that the intention of the Order is to “cast the net as widely as possible”, in order to capture all improper or unauthorised benefits (of whatever type) Mr Pero and MP Marketing have received from the MPRE Companies in excess of $200,000.
[19] In my view the interpretation advanced by Mr Blanchard casts the net too wide. I accept Mr Bigio QC’s submission that the requirements of the Order can be broken down as follows:
(a) Mr Pero and MP Marketing must pay to the MPRE Companies;
(b) all amounts received by them or their related entities in excess of
$200,000;
(c) for services by them; and
(d)in relation to the business of the MPRE Companies and their related entities.
[20] The key components of the Order are that the amounts that are to be repaid relate to amounts received by Mr Pero and MP Marketing for services provided by them that relate to the business of the MPRE Companies. In other words, Mr Pero and MP Marketing are not entitled to payments beyond the remuneration provided for in the terms of their engagement under the Contract for Services and Shareholders’ Agreement. That was the key issue before the Court at the substantive hearing (and which was determined in MP Mortgages’ favour).
[21] The focus of the substantive hearing, and accordingly the Judgment, was Mr Pero’s conduct in passing various resolutions of the MPRE Companies that (amongst other things) purported to increase his executive remuneration package above the agreed $200,000. I found the relevant resolutions to be unlawful. As a result, any “overpayments” that Mr Pero and/or MP Marketing have received pursuant to those resolutions must now be disgorged. The disclosure order is aimed at facilitating the identification and verification of those overpayments.
[22] Whether or not Mr Pero has “feathered his nest” in other ways, such as using company credit cards for personal expenses, was not in issue at the substantive hearing. There was no evidence before me relating to such issues and it was not a focus of the parties’ submissions. I understand, however, that guidelines as to expenditure on company credit cards are set out in a Delegated Authorities Manual. If MP Mortgages is of the view that Mr Pero and MP Marketing have exceeded their authority in this regard, then that is an issue that may be able to be resolved through the dispute resolution mechanism in the Shareholders’ Agreement. Alternatively, it could be the subject of fresh proceedings, involving separate discovery obligations, evidence and factual findings. It is not, however, within the scope of the Order. Rather, the focus of the Order is on identifying and “unwinding” remuneration overpayments that were made pursuant to the invalid resolutions, so that they can be quantified and reimbursed to the MPRE Companies.
[23] Against this background, I now turn to consider each specific category of further disclosure sought by MP Mortgages.
Disclosure of bank statements
[24] First, MP Mortgages seeks disclosure of all of Mr Pero and MP Marketing’s bank statements from 1 January 2012 to 30 June 2017. Given my views as to the correct scope of the disclosure order, such documents are only required to be disclosed (in the present context) to the extent that they are relevant to the quantification of the amounts received by Mr Pero or MP Marketing in excess of
$200,000 per annum for, in essence, Mr Pero’s services as Chief Executive Officer of the MPRE Companies.
[25] To the extent that MP Mortgages seeks the personal bank statements of Mr Pero and MP Marketing for general “investigative” purposes – namely to attempt to identify whether Mr Pero may have been “feathering his nest” in other ways, such a purpose falls outside the scope of the Order, for the reasons previously outlined. MP Mortgages is, however, entitled to copies of any entries in the bank statements of Mr Pero or MP Marketing that record executive remuneration payments in excess of
$200,000 being paid into those accounts. I would expect that such payments are likely to mirror the outgoing payments from the MPRE bank statements. MP Mortgages is, however, entitled to copies of the relevant bank statements for cross-checking purposes. Details on the relevant bank statements relating to payments unrelated to the Order may be redacted.
Disclosure of bank statements of related entities
[26] MP Mortgages seeks disclosure of any bank statements of entities “related” to Mr Pero or MP Marketing (including trusts and companies) that are within the control of either Mr Pero or MP Marketing, for the period from 1 January 2012 to
30 June 2017.
[27] As I have already noted, Mr Pero and MP Marketing have already provided disclosure of bank account statements of the MPRE Companies and invoices evidencing the payments or executive remuneration they have received over and above the permitted $200,000. If any of those payments were made into bank accounts of entities related to Mr Pero or MP Marketing, and the relevant documentation is in the control of Mr Pero or MP Marketing, then the relevant
entries must be disclosed. Otherwise, this request is too broad in its ambit and the disclosure sought is not required by the Order.
Disclosure of other documents
[28] MP Mortgages additionally seeks disclosure of:
(a) documents relating to payments or benefits received by Mr Pero’s
relatives from the MPRE Companies; and
(b)documents related to payments made by the MPRE Companies to or for the benefit of Mr Pero, MP Marketing, any trusts or companies they control, and Mr Pero’s relatives.
[29] For the reasons outlined above, these categories of documents fall outside the scope of the Order and their disclosure would need to be sought in separate proceedings.
Is the interest payable by Mr Pero and MP Marketing calculated on a
GST-inclusive or GST-exclusive basis?
[30] The final issue requiring clarification is whether the interest payable by Mr Pero and MP Marketing is to be calculated on a GST-inclusive or GST-exclusive basis.
[31] As previously noted, Mr Pero and MP Marketing agree that at least
$2,381,725.45 is payable pursuant to the Order. Of that, $2,179,370.34 is the principal sum, which includes GST. The Order requires Mr Pero and MP Marketing to pay interest on the agreed principal sum payable. Mr Bigio submitted, however, that the Order only requires interest to be paid on the GST-exclusive principal, because only that amount reflects true “out-of-pocket” loss. His submissions on the issue were brief:
With respect to the interest component, however, it is submitted that this should properly be calculated on a GST exclusive basis. The company paid GST on invoices rendered by the second defendant. That give rise [sic] to an immediate in the company’s hands for any GST which it would be required to remit to the IRD. The company was not “out of pocket” this amount in the sense that it needs to be compensated by way of an interest calculation.
[32] Mr Bigio’s submission is essentially that an input tax credit was available following the payments to Mr Pero and/or MP Marketing, which means there is no “time value” in relation to the monies lost.
[33] The Order clearly states that interest is payable on the sum payable under [63](a). The relevant amount has been agreed between the parties to be inclusive of GST. Mr Pero now argues for a GST-inclusive principal but with interest only applied to the GST-exclusive figure. That is not, however, how the Order is framed. While there may (or may not) be substantive merit to Mr Bigio’s contention, it amounts to an attempted relitigation of a point that should have been raised prior to the Order being made. The Order is based on a draft prepared by MP Mortgages, which Mr Pero and MP Marketing had an opportunity to comment on at the substantive hearing. The issue before me is simply one of interpretation of the Order. The issue is not open for “renegotiation”.
[34] The parties have already agreed that [63](a) is GST-inclusive, which means there is simply no scope for argument that [63](f) should be treated on a GST-exclusive basis. The meaning of [63](f) is clear: interest is payable on all amounts payable under [63](a).
Conclusion and result
[35] The further documentation sought by MP Mortgages is not required to be disclosed pursuant to the Order, other than as set out at [25] and [27] above. As for the GST issue, Mr Pero and MP Marketing are required by the Order to pay interest on the GST-inclusive sum of $2,179,370.34
[36] If the parties are unable to agree the issue of costs, then any memorandum on behalf of Mr Pero and MP Marketing is to be filed by 20 October 2017, with any
response on behalf of MP Mortgages to be filed by 27 October 2017.
Katz J
4