STEPHANIE BETH JEFFREYS AND TIMOTHY WILSON DOWNES Respondents
Hearing:
28 May 2014 (further submissions received 21 August 2014)
Court:
O’Regan P, Harrison and White JJ
Counsel:
C T Walker for Appellants M T Davies and K M Wakelin for Respondents
Judgment:
11 September 2014 at 11.00am
JUDGMENT OF THE COURT
AThe appeal and the cross-appeals are dismissed.
BThe first appellant is to pay 90 per cent of the costs of the respondents for a standard appeal on a band A basis with usual disbursements to be fixed by the Registrar. We certify for two counsel.
The St Lukes development [11] Mr Morgenstern’s overdrawn current account with MSE [18] Professional advice [20] The value of the shares in MS St Lukes [29] The interests of MSE [37] Mr Morgenstern’s financial position [41]
The High Court judgment [43] The “fair value” of the shares in MS St Lukes
The Judge’s approach [52] Submissions for Mr Morgenstern [53] Legal principles [55] Application here [64]
Reliance on professional advice
The Judge’s approach [72] Submissions for Mr Morgenstern [74] Legal principles [75] Application here [79]
The Judge’s approach [92] Submissions for Mr Morgenstern [93] Further submissions [94] Legal principles [98] Application here [101]
Costs appeal [105] Cross-appeals [108]
The s 298 cross-appeal [109] The carpark incentive fee cross-appeal [113]
Result [123]
Introduction
The appellants, Mr Morgenstern and his partner Ms Lavas, appeal against a judgment of the High Court finding Mr Morgenstern in breach of his duties as a director under ss 131, 135 and 137 of the Companies Act 1993 (the Act) and ordering him to pay the sum of $3,499,999 to Kingdon Undertaking Ltd, previously Morning Star Enterprises Ltd (in liq)) (MSE) under s 301 of the Act and costs.[1]
The respondents Ms Jeffreys and Mr Downes, are the liquidators of MSE, Kingdon Development Ltd (KDL) and Axon House Carparking Ltd (previously GS & LD Lease Ltd) (GLL), all of which were Auckland property development companies operated by Mr Morgenstern. They cross-appeal against the High Court’s dismissal of their alternative claim for the judgment sum based on s 298 of the Act (in law they seek to support the judgment on another ground) and their claim for an additional amount payable by GLL for a monthly carpark incentive fee ($100,000 annually) based on ss 135 and 136 of the Act.
Mr Morgenstern’s appeal appeal relates to the sale of his 99 shares in Morning Star (St Lukes Garden Apartments) Ltd (MS St Lukes) to MSE on 30 March 2007 for $3,465,000 and the sale of the remaining one share held by Ms Lavas to…
Grounds of appeal
[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.
[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.
[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.
Consideration
[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.
[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.
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AGLC
Morgenstern v Jeffreys [2014] NZCA 449
Case
[2014] NZCA 449
Decision Date
CaseChat Overview and Summary
The appeal and cross-appeals are dismissed. The first appellant is to pay 90 per cent of the costs of the respondents for a standard appeal on a band A basis with usual disbursements to be fixed by the Registrar. We certify for two counsel. Mr Morgenstern, a successful property developer, was the sole director of MSE, which was balance sheet insolvent and facing financial difficulties. He was also the sole director of MS St Lukes, a company developing the St Lukes property in Auckland. Mr Morgenstern was facing difficulties with MSE and had an overdrawn current account with MSE. He was advised by his accountant that he should repay his current account by selling his shares in MS St Lukes to MSE. He did so and MSE paid $3,465,000 for 99 of the shares and $35,000 for the remaining share. The liquidators of MSE and other companies operated by Mr Morgenstern brought proceedings against him under the Companies Act 1993 (the Act) for breach of his duties as a director of MSE. They also sought to recover the $3,500,000 paid by MSE for the shares in MS St Lukes on the basis that the shares were worthless and the consideration paid was excessive. Mr Morgenstern appealed against the judgment of the High Court that he was in breach of his duties under ss 131, 135 and 137 of the Act and that he should be ordered to pay $3,499,999 to MSE. The liquidators cross-appealed against the High Court’s dismissal of their claim for recovery of the $3,500,000 under s 298 of the Act and the Judge’s refusal to find that Mr Morgenstern was in breach of his duties under ss 135 and 136 of the Act in relation to an unpaid carpark incentive fee. The Court held that Mr Morgenstern’s principal grounds of appeal were without merit. Mr Morgenstern had failed to prove that the $3,465,000 paid by MSE for the shares in MS St Lukes represented the “fair value” of the shares. The feasibility study which he relied on to support the value of the shares was not a proper valuation of the shares. It was an internal assessment of the profitability of the St Lukes project, not a valuation of the shares. The study did not determine the value at which a willing but not anxious vendor would sell and a willing but not anxious purchaser would buy the shares. It was therefore not a proper basis for establishing fair value for a related-party transaction. Nor had Mr Morgenstern proved that he had acted in good faith and in the best interests of MSE. Mr Morgenstern had not adduced any evidence from his advisers at BDO Spicers who had given him the advice on which he claimed to rely. The absence of their evidence was sufficient to draw the adverse inference that their evidence would not have assisted Mr Morgenstern. The liquidators’ cross-appeals were also dismissed. The dismissal of the appeal and cross-appeals meant that Mr Morgenstern’s liability to pay $3,499,999 to MSE stood. The Court also dismissed the costs appeal brought by Mr Morgenstern. The liquidators had been successful in establishing liability and the bulk of the claim. The Court found no error in the Judge’s discretion in ordering costs in their favour.