MyVirtualHome International Limited (in rec and in liq) v Ngati Tama Custodian Trustee Limited HC Auckland CIV-2009-443-000548
[2011] NZHC 1351
•3 August 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2009-443-000548
CIV-2010-404-002197
BETWEEN MYVIRTUALHOME INTERNATIONAL LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION)
First Plaintiff
ANDOPEN GROUP LTD Second Plaintiff
ANDDAVID WILLIAM PHILLIPS Third Plaintiff
ANDMVH GROUP LIMITED Fourth Plaintiff
ANDNGATI TAMA CUSTODIAN TRUSTEE LIMITED
First Defendant
ANDRODNEY IVAN MARTIN Second Defendant
ANDGREGORY LLOYD WHITE Third Defendant
ANDTE RUNANGA O NGATI TAMA Fourth Defendant
ANDTHE CUSTODIANS AND ELDERS AND TRUSTEES OF THE NGATI TAMA IWI Fifth Defendant
ANDHOMESOFT GROUP PTY LTD (PREVIOUSLY CALLED BRISBANE SOFTWARE PTY LTD)
Sixth Defendant
Hearing: 28, 29, 30, 31 March 2011, 1 April 2011
Further submissions 4 and 11 April by Mr Phillips and 20 May by
First, Third, Fourth, Fifth and Sixth Defendants
Appearances: E Orlov for First, Second and Fourth Plaintiffs
Third Plaintiff in Person
MYVIRTUALHOME INTERNATIONAL LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) V NGATI TAMA CUSTODIAN TRUSTEE LIMITED HC AK CIV-2009-443-000548 3 August 2011
D M Hughes and K A Van Houtte for First, Third, Fourth, Fifth and
Sixth Defendants
J P Nolen for Second Defendant
Judgment: 3 August 2011
JUDGMENT OF VENNING J
This judgment was delivered by me on 3 August 2011 at 4.30 pm, pursuant to Rule 11.5 of the High
Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
Equity Law, PO Box 8333, Symonds Street, Auckland 1150
Kensington Swan, Private Bag 92101, Victoria Street West, Auckland 1142Lowndes Associates, PO Box 7311, Wellesley Street, Auckland 1141 (J P Nolen) Wilson Harle, PO Box 4539, Shortland Street, Auckland 1140
Copy to:
Mr D W Phillips, 219 State Highway 2, Pokeno 2471
Introduction
[1] These proceedings arise out of a dispute as to the rights to a computer software program, the My Virtual Home software. The dispute is primarily between the first plaintiff MyVirtualHome International Ltd (MVHI) and the first defendant Ngati Tama Custodian Trustee Ltd (Ngati Tama) and parties associated with each of them. Amongst other things it raises issues of priority and validity of charges held by the parties over the undertaking of Creative Designer and Software Pty Ltd (CDS).
[2] At an early stage of the proceedings MVHI applied for and obtained an interim injunction against Ngati Tama, and any receiver appointed by it to CDS from dealing with the assets of CDS. Following a defended hearing in December 2009
Allan J discharged the interim injunction and allowed the receiver of CDS to sell that company‟s assets for the best reasonably available price. Allan J directed that the proceeds of sale be paid into Court to be held by the Registrar pending resolution of the proceeding.
[3] The file was then assigned to Heath J. After a series of interlocutory hearings the Judge directed that under r 10.15(a) of the High Court Rules the following questions were to be determined separately from other issues arising in the proceeding:
(a) What entity owned the Auran Jet engine source code, as at 24
December 2008?
(b)Were the two debentures, deed of subordination of debt and guarantee entered into lawfully on 24 December 2008? In other words, are they valid documents?
(c) If receivers of CDS were validly appointed by Ngati Tama, pursuant to the debenture in favour of the latter company, was CDS entitled to terminate the licence (on the basis of notice given on 7 July 2009) to
use (non Auran) software of MVHI and/or Open Group Ltd on 28
October 2009?
[4] The parties agreed to a no appeal provision in relation to the above three questions.
[5] During the interlocutory stages before Heath J, the proceedings between MVHI and Ngati Tama were consolidated with CIV-2010-404-002197 and the other parties were joined.
[6] Subsequently a number of undertakings were given. The third defendant Mr White, a representative of Ngati Tama and director of the sixth defendant Brisbane Software Group Pty Ltd (now Homesoft Group Pty Ltd) undertook on behalf of that company that it would not transfer assets in dispute out of that company. The third plaintiff Mr Phillips, as a director of the fourth plaintiff MVH Group Ltd and the second plaintiff Open Group Ltd, and Mr Stewart as the then receiver of MVHI, undertook not to transfer assets in dispute out of any those companies, in all instances until determination of the questions by the Court.
[7] MVH Group Ltd is a company to which MVHI, through its receiver Mr Stewart, purported to transfer assets including the My Virtual Home software. Homesoft Group Pty Ltd is a company to which CDS transferred assets to, including the My Virtual Home software.
[8] Unfortunately, despite Heath J‟s assignment, the questions were allocated a hearing during a period the Judge was otherwise committed to a long running trial. The questions proceeded to a hearing occupying five days. The parties had to manage their time to conclude the hearing within the five days. Considerable latitude was granted to the plaintiffs, particularly Mr Phillips as he represented himself. As a result, the plaintiffs took up more than one half of the time with presentation of their case and cross-examination. Unfortunately much of the cross- examination was not focused on the issues.
[9] Further, at Mr Orlov‟s request, a solicitor, Mr Rutherford was called under subpoena. Mr Orlov submitted his evidence was “crucial” and would show he was retained by Ngati Tama and that he refused to continue acting for MVHI and/or Ngati Tama because he was concerned at Mr Martin (a director of MVHI at the relevant time) and Ngati Tama‟s actions. However, when called, Mr Rutherford said that he was acting for MVHI and that Ngati Tama had their own solicitors. He also said the main reason he did not want to continue acting was because he had not been paid, combined with the fact he felt Mr Martin and MVHI lacked confidence in his advice.
[10] Following the hearing Mr Phillips sought to adduce further evidence. I reserved that issue to deal with it in the course of this decision. Mr Phillips also sought and was granted leave to make further submissions. The defendants then made further submissions in response.
Background/parties
[11] In summarising the background I draw in part from the summary in Allan J‟s judgment on the injunction. At material times MVHI owned 100 per cent of the shares in CDS. CDS was incorporated in Queensland. It developed software known as “My Virtual Home” which enables a user who wishes to build or renovate a home to create and vary on the computer a three dimensional image of the proposed design. The program also provides for information to be obtained about product services and prices relevant to a project. To enable the My Virtual Home software to run requires technology known as the Auran Jet source code (Auran Jet). The issue of the ownership of Auran Jet is raised by the first question.
[12] MVHI has been primarily responsible for the marketing and distribution of the My Virtual Home software. CDS granted an exclusive licence to MVHI to market and distribute the software for all countries except Russia, CIS countries (being countries or territories forming part of the former Soviet Union) and Australia. The licence for Australia was held by a related Australian company, My Virtual Home Australia Pty Ltd (MVHA). For Russia and CIS countries the licence was granted to Open Group Ltd, a New Zealand company.
[13] Open Group is the major shareholder of MVHI. It also holds a general security agreement (GSA) over MVHI. It appointed a receiver, Mr Stewart, to MVHI under that GSA.
[14] The sole director of Open Group at material times was Mr Phillips. Mr
Phillips also effectively controls MVH Group Ltd (formerly KGB Limited).
[15] Through Open Group Mr Phillips bought a controlling interest in CDS in mid
2005. At the same time he incorporated MVHI. Mr Phillips then acted as consultant to both CDS and MVHI with authority to, inter alia, contract on their behalf. He intended to assign CDS‟ assets to MVHI and intended to list MVHI publicly.
[16] Ngati Tama is also a shareholder of MVHI. It is a custodian trustee for the Ngati Tama iwi in Taranaki. It invested in the My Virtual Home software through MVHI and Open Group. Ngati Tama also owns about nine per cent of the shares in Open Group.
[17] Mr White, the third defendant, was a principal negotiator on behalf of and a representative of Ngati Tama and, as noted, is also a director of Homesoft Group Pty Ltd.
[18] On 31 May 2007 the second defendant Mr Rodney Martin was appointed sole director of CDS. On 4 June 2008 he was also appointed a director of MVHI. At the time the other directors of MVHI were Mr Greg Lane and Ms Hermione Olsen. Mr Lane resigned on 18 June 2008 and Ms Olsen resigned on 12 August 2008. In February 2009 Mr Paul Condon and Ms Olsen were reappointed as directors of MVHI. Mr Condon was also involved with CDS as its chief executive officer at material times. Between August 2008 and 9 February 2009 Mr Martin was the sole director of both MVHI and CDS.
[19] MVHI advanced a substantial sum (in excess of $10 million) to CDS to fund its development of the My Virtual Home software. It secured that sum by a charge over CDS‟s assets. There is a dispute between the parties as to the amount secured
by that charge. The initial advance was $200,000 but MVHI says the charge secured moneys subsequently advanced as well.
[20] Ngati Tama, however, argues MVHI‟s security over CDS was limited to the amount of the initial advance. The issue does not need to be determined to resolve the three questions before the Court. As at 30 June 2008 the plaintiffs combined debt and equity investment in CDS was in excess of $15 million.
[21] By October 2007 Ngati Tama had also invested heavily in the My Virtual Home project. They had paid AUD$3.5 million for shares in MVHI. Ngati Tama also had an equity investment in Open Group on the understanding that the capital contributed by it to Open Group would in turn be advanced by that company to MVHI and that Open Group would obtain security for that advance. Ngati Tama had acquired 900,000 shares in Open Group in October 2007 for AUD$1 million on that basis.
[22] The development of the My Virtual Home software program required ongoing funding. MVHI sought further funding from Ngati Tama. In July 2008 a document was prepared for the purpose of recording an arrangement to be entered into between Ngati Tama and Open Group whereby Ngati Tama was to advance a further AUD$1 million to Open Group to provide further funds to MVHI. It was intended MVHI would in turn apply the funds for the benefit of CDS. The effect of that document is in issue.
[23] Although the Court is hampered by inadequate pleading on behalf of the plaintiffs, I understand that the plaintiffs allege Mr Martin aligned himself with Ngati Tama and that Ngati Tama set out to obtain the rights to the My Virtual Home software to the exclusion of the plaintiffs. The plaintiffs say Ngati Tama persuaded Mr Martin to cause MVHI to co-operate with the defendants to that end.
[24] At issue in relation to the second question in particular are Mr Martin‟s
actions during the time he was the sole director of both MVHI and CDS. On 24
August 2008 when MVHI‟s sole director he passed a resolution terminating the consulting arrangements between MVHI and Mr Phillips. He also passed a number
of other resolutions, effectively distancing Mr Phillips from the operation of MVHI and creating a management team comprising inter alia Mr Greg Lane, Mr Paul Condon and himself.
[25] By this time, Mr White had instructed Ngati Tama‟s solicitors, Govett Quilliam. They suggested the simplest way to provide security for further advances would be for CDS to grant a first security (MVHI ceding priority) and MVHI to grant security (Open Group ceding priority). Mr Martin agreed on behalf of MVHI and CDS.
[26] As a sign of good faith Ngati Tama made an interim payment to CDS on 27
August, and a number of payments thereafter.
[27] On 27 September 2008 Mr Martin passed a further resolution appointing Mr
Condon the chief executive officer of MVHI.
[28] With Mr Phillips‟ role terminated and in reliance on the agreement relating to the securities Ngati Tama then made further significant advances to CDS to allow its continued development of the My Virtual Home software.
[29] On 24 December 2008 MVHI and CDS (acting in each case through and by
Mr Martin) and Ngati Tama executed documents, the effect of which was, (in accordance with earlier agreements) that:
CDS gave a fixed and floating charge over its assets to Ngati Tama;
MVHI guaranteed the obligations of CDS under the charge to Ngati Tama; MVHI acknowledged that the Ngati Tama charge had priority.
[30] Mr Martin says that he took the steps he did because, as the director of MVHI, he felt the only option he had to maintain the business of the company was to secure further funding to advance the development of the software program to version 2.0. The only source of funding at the relevant time was Ngati Tama. But
Ngati Tama had lost confidence in Mr Phillips and would not make any further advances unless Mr Phillips was removed and their position was secured.
[31] Mr Martin was dismissed from his position of director of MVHI by resolution of shareholders on 9 February 2009.
[32] On 11 June 2009 Open Group appointed a receiver to MVHI‟s assets pursuant to its GSA. On 25 June 2009 Ngati Tama appointed receivers to CDS. Both CDS and MVHI have been placed into liquidation subsequent to the issue of these proceedings.
[33] Mr Morton, the receiver of CDS, cancelled the licences CDS had granted to MVHI and Open Group and has sold the My Virtual Home software program to Homesoft Group. The validity of those actions are in issue in the third question.
[34] Against that rather convoluted background I turn to deal with the three questions for determination.
What entity owned the Auran Jet engine source code, as at 24 December 2008?
[35] The plaintiffs‟ case is that, as at 24 December 2008, MVHI was the exclusive owner of Auran Jet. The defendants‟ position is that CDS owns its own copy of Auran Jet.
[36] The principal witnesses on this issue were Mr Phillips and Mr Lane.
[37] Auran Jet is important because it enables the My Virtual Home software program to run in its present form. It is an application development engine that enables software, in the present case the My Virtual Home software, to run. It “sits on top of” the operating system and the software program then sits on top of Auran Jet.
[38] Auran Jet was developed by the Auran group of companies: Auran Holdings
Ltd, Auran Technologies Pty Ltd and Auran Developments Pty Ltd. At all material
times Mr Lane was the chief executive officer of Auran Holdings. In 1997, well before any involvement with MVHI or Mr Phillips, Auran Technologies developed a successful 3-D computer game. Auran Holdings then developed Auran Jet to facilitate its 3-D computer programs and games. Mr Lane decided to explore the possibility of other 3-D design products and came across CDS and its My Virtual Home software. The parties recognised Auran Jet could enhance the My Virtual Home software. Auran Technologies and CDS entered a license agreement in November 2002. There were subsequent iterations of that agreement. In December
2005 a revised license agreement was completed between Auran Technologies and CDS. By this stage Mr Phillips had become involved with CDS. He executed the agreement on its behalf.
[39] The revised license agreement dated 8 December 2005 recorded that in exchange for $AUD220,000 paid to Auran Technologies by CDS:
2.2 Grant of License
... Auran grants [CDS] a perpetual, personal, non-transferable and non-exclusive license to:
(a) use Auran Jet in the creation of the current and future versions of the Product or any Plug In Modules;
(b) include Auran Jet in the Product whether it be sold, leased, licensed or otherwise given to a third party provided always that in such case, Auran Jet is in a compiled form that is not usable for any further development or recompilation;
(c) install Auran Jet on those machines under its control which will be used to create the Product; and
(d) have its Representatives use Auran Jet to create the Product.
Product was defined to mean:
the My VirtualHome software designed as an interior and exterior building and landscape/gardening conceptualisation and design program. This program includes functionality that relates to building, renovation, gardening, landscaping, environmental, energy efficiency, teaching, online shopping (solely to allow end users to purchase products from within the Product) and decoration. Included are elements of computer games, technology, online communications and “CAD” type features and may include any Plug In Modules.
The license agreement recorded that the rights were not deemed to be a sale, transfer, assignment or any other conveyance in Auran‟s trademarks or the intellectual property rights held in Auran Jet by Auran Technologies.
[40] So, as at December 2005, Auran retained ownership of Auran Jet but CDS was able to use it under license in its development and sale of the My Virtual Home software.
[41] Mr Phillips said that he ultimately intended CDS would be 100 per cent owned by MVHI with MVHI having all rights to the My Virtual Home software. To that end, Mr Phillips wanted to secure Auran Jet for MVHI. CDS‟ right to use Auran Jet under licence was not enough, because Mr Phillips wanted to list MVHI and he considered that if MVHI owned Auran Jet that would add value to MVHI. He also wanted MVHI to have the security of Auran Jet without relying on CDS‟s licence.
[42] To achieve that end Mr Phillips prepared a heads of agreement. Although Mr Phillips was directly involved in negotiating and preparing the heads of agreement the final form and execution of it was left to his son, Mr Robert Phillips, as Mr Phillips had left to pursue marketing ventures in China.
[43] The heads of agreement ultimately concluded was between MVHI, CDS, Auran Holdings and Auran Technologies. Under the heads of agreement Auran Technologies agreed to cease to develop the My Virtual Home software for CDS (which it had been involved in) and the core development staff at Auran Technologies were encouraged to leave that employment for employment at CDS. As well, MVHI or CDS would buy back, for AUD$237,500, the one per cent share parcel that Auran Technologies had taken in MVHI. Auran Holdings was also to purchase Mr Lane‟s shares in Auran. In exchange Auran was to sell a copy of Auran Jet to MVHI.
[44] The particularly relevant terms of the heads of agreement which was finally completed on 11 April 2006 record:
Heads of Agreement between My VirtualHome International Ltd
( ‘ MVH I’ )/ Creati ve Des igner Sof tw are P t y Lt d (‘ CD S’) and Auran
H ol di ngs Lt d ( ‘ Auran’ ) /Auran Tec hnol ogi es Pty Li mi t ed (‘ AT’ )
...
6.MVHI or CDS is to buy back from AT the AT 1% share parcel in MVHI. The actual buy back price is to be irrevocably fixed at a discounted figure totaling [sic] $a237,500. Payment for these shares is to be made immediately on the signing of this agreement and the completion of all matters in this agreement, whichever action is the latter.
...
8.Auran and AT will agree to sell and supply at no further charge to MVHI a full, complete and up to date copy of the Auran Jet software games engine („Auran Jet‟ or „Jet‟) on receipt of the cash referred to in (6) above or on the effective date referred to in (1) above, whichever is the latter. This complete copy of Jet will transfer to MVHI and CDS with no licensing restrictions whatsoever: for the purposes of clarity CDS/MVHI can deal with this „bought‟ copy of Auran Jet as it sees fit at any time, as this transaction shall constitute a sale by Auran and AT and a purchase by MVHI and/or CDS of a full copy of Auran Jet. In addition no updates made to Jet by either AT or MVHI/CDS after the effective date referred to in (1) above will required to be made available to the other party. ... Auran and AT both agree that they while they will retain one copy of Jet they will never try to sell this copy or any additional copies of Jet to any more than one party and that any such intended sale of Jet shall be subject to clause 12 herein.
[45] Clause 12 provided for a right of refusal in favour of CDS/MVHI. The directors of Auran Technologies agreed that were they ever to sell Auran Technologies or the controlling interest in the shares issued in Auran Technologies or Auran Jet they would give CDS/MVHI the right of last refusal to equal any offer to purchase.
[46] The effect of the heads of agreement was to transfer a complete copy of Auran Jet to MVHI and CDS with no licensing restrictions whatsoever. MVHI and CDS could deal with the copy as they saw fit, in other words, to develop it further themselves in conjunction with the My Virtual Home software. Auran retained its rights in Auran Jet as well, subject only to the constraint of the right of refusal in MVHI/CDS‟s favour in the event of a later sale. In short, the agreement had the effect that Auran still owned Auran Jet but MVHI and CDS also jointly owned a
copy which they were free to deal with and develop as they saw fit without any licensing constraints.
[47] Mr Lane said that after execution of the heads of agreement CDS made substantial changes and developments to the copy of Auran Jet in its possession.
[48] It is the plaintiffs‟ case that, despite the provisions of the heads of agreement, only MVHI owned Auran Jet. Mr Phillips says that he can confirm that because he was in effective control of both MVHI and CDS at the relevant time. He referred, inter alia, to directions to the accountants to that effect, and to the fact MVHI paid the $237,500 due to Auran Technologies under the agreement.
[49] It is convenient at this stage to deal with the issue of Mr Phillips‟ position in relation to MVHI and CDS and his authority to act on behalf of those entities. By a director‟s resolution dated 1 July 2006 prepared by Mr Phillips but signed by Ms Olsen as director of MVHI, it was resolved that:
1.... David W. Phillips is appointed as a paid consultant and is authorized to act on behalf of MVHI Ltd in all matters. This resolution also reaffirms this has been the approved position since 10-
9-2005. Matters he is authorised to complete, include but are not limited to:
1.1 Contracts, including negotiations with future shareholders and/or joint venture partners.
1.2 Employment and remuneration of staff for MVHI.
1.3 Exercise and appointment of a manager on any company which MVHI has a debenture or fixed or floating charge over, if this action is ever considered appropriate in David W. Phillip‟s [sic] sole discretion.
1.4 Sale of shares in MVHI to other parties, including sale of existing shareholders shares, including shares controlled by him self and is [sic] associated parties, where those MVHI shareholders have so agreed in writing to such sales. It is understood such sales will not all be at the same price levels.
1.5 1.5 [sic] Approval of cost recoveries from MVHI for himself and parties associated with him and for Open Group Limited. It is understood some of these costs would be for meals and other matters which may in some cases normally be considered to be personal costs, but are accepted in the case of this development
stage of MVHI (and while David W Phillips is working extended hours for MVHI) to be business costs.
2.In regard to the 100% shareholding MVHI holds in [CDS] and the approximate 71% it holds in MyVirtualHome Pty Ltd David W. Phillips has up to 30-6-2007 vested in him the sole authority to represent MVHI in all matters which are specifically referred to in this resolution relating to CDS including appointing or removing Bank signatories, cash controls and use and staff appointments (including CEO and senior people in MyVirtualHome Australia Ltd) and replacements, sourcing and approving new shareholders, I.D., audit matters, contracts and legal appointments, software development, franchise matters and any CDS/MyVirtualHome Pty Ltd operational matters which MVHI or David W. Phillips consider needs to be addressed. However this does not mean David W Phillips is a director of these subsidiary companies. He is not. The directorial functions will be undertaken by the person appointed to this/these roles.
3.0Notwithstanding any matter resolved in point 2 above, David W Phillips is not to be titled as CEO in any of his MVH Group roles, as he is neither an officer nor a Director of any of the companies in this MVH Group. He reports solely to the MVHI Board of Directors and operates in line with the authority and responsibilities given to him in this resolution ...
A similar resolution was completed on 1 November 2006 to extend Mr Phillips‟
authority to 1 November 2007. Then, at the annual general meeting of MVHI on 4
October 2007 chaired by Ms Olsen, the following was resolved:
14.That the contract with David W. Phillips as consultant to MVHI and CDS and as set out in the MVHI Directors‟ resolution which was included within the June 2006 MVHI Annual Report, be confirmed and ratified and approved by all MVHI shareholders and that thanks be formally conveyed to David W. Phillips for his considerable contribution to the restructure of MVHI as a consultant, noting his formal consulting role was first contracted by all CDS founder shareholders in the Restructure Agreement date 26.9.2005.
[50] Mr Phillips‟ position as consultant was again addressed at the general meeting of MVHI on 4 June 2008. Again Ms Olsen chaired the meeting. The minutes record the following resolution was carried:
The contract with David W. Phillips, as consultant to MVHI and CDS, be confirmed and approved by all MVHI shareholders to be renewed to continue through to November 2009. The contract renewal, aside from the monthly dollar quantum, to otherwise be on the terms as presently exist and as was set out in the MVHI 2007 Directors resolution which was included within the June 2006 MVHI Annual Report. The monthly quantum to remain at the same level as in 2005, with a 15% increase to apply after new cash for My Virtual Home has been secured.
[51] The effect of these various resolutions (prepared by Mr Phillips) was to give Mr Phillips authority to act on behalf of MVHI and CDS but without him holding the position of director of either of the companies. The resolutions may raise issues as to whether or not Mr Phillips was in fact acting as a deemed director for certain purposes: s 126(1) of the Companies Act 1993. That however is not a matter that needs to be determined at this stage. The position is that Mr Phillips was authorised to act as consultant to both MVHI and CDS and to make contracts etc. on their behalf. However the companies retained their own separate legal personalities.
[52] Section 128(1) of the Companies Act confirms the business and affairs of a company must be managed by or under the direction or supervision of the board of the company. Where there is only one director then that director is the board. Section 128(2) confirms the board of a company has all the powers necessary for managing and for directing and supervising the management of the business and affairs of the company. The only exception is if there are any modifications, exceptions or limitations contained in the Companies Act or the constitution: s 128(3). Even though Mr Phillips‟ consultancy role was confirmed at annual general meetings there was no change in the constitution of the companies as such. The resolutions recorded he was not a director. So while Mr Phillips had authority to contract and otherwise act on behalf of MVHI and CDS, the director(s) maintained their rights and authority under s 128 to direct and control the companies. Mr Phillips may have intended MVHI to exclusively own Auran Jet but his intention did not make that the legal position. Mr Phillips could contract on behalf of both MVHI and CDS, but absent evidence of such a contract or agreement altering the position in relation to Auran Jet, Mr Phillips‟ intention could not alter the legal relationships between MVHI and CDS which were separate legal entities. It is not enough for Mr Phillips to now say what he intended the position to be. Despite the numerous documents Mr Phillips referred to none of them actually have the effect or result of confirming that MVHI had the exclusive ownership of Auran Jet.
[53] Mr Orlov submitted that because the later accounts of MVHI recorded Auran Jet as an asset of that company it was owned solely by MVHI. He submitted “The only relevant part of the financial report which carries any legal weight is the balance sheet which is the evidence of title to any asset”. Mr Orlov went on to submit that
under s 129(1) of the Evidence Act 2006 it was clearly the case that public documents were evidence for what they attest and that the accounts were public documents in this case.
[54] Mr Orlov‟s reliance on s 129 of the Evidence Act is misconceived. Section
129 allows the admission of otherwise hearsay and opinion evidence without the need to satisfy the admissibility rules in s 18 and ss 24 or 25. It is, however, permissive, not mandatory. In the present case I am not able to accept the proposition by Mr Orlov that the accounts of MVHI carry the quality of public documents to enable the Court to rely on them as conclusive evidence of exclusive ownership of Auran Jet by MVHI. The accounts are no more than one item of evidence on the issue. In fact, when read as a whole, the published accounts (including the reports to the accounts) are somewhat contradictory as to the issue of ownership of Auran Jet.
[55] For example, in her report as director of MVHI for the year ended 30 June
2006 (to which the accounts are attached) Ms Olsen records the main assets as at
February 2007 as including:
MVHI/CDS owns jointly with Auran Technologies Ltd a full unrestricted copy of the Auran Jet Games Engine.
In his report as Chief Technical Officer for MVHI and CDS in the same report, Mr
Lane said:
... CDS now solely owns the I.P. and copyright to all of the MVH technology and has since expanded „Jet‟ so that even the technology base is now uniquely ours.
[56] It is, however, correct that Auran Jet was not listed as an asset in the CDS
accounts.
[57] I also accept the evidence supports the conclusion that MVHI paid the
$237,500 due under the heads of agreement. But cl 6 of the agreement provided that either MVHI or CDS would pay that sum. It does not follow that MVHI had exclusive ownership of Auran Jet because it paid the AUD$237,500 referred to in the agreement. Clause 8 of the agreement provided otherwise.
[58] Of relevance to this issue is the amended intellectual property licence between MVHI and CDS dated 27 November 2006 that Mr Phillips sought to rely on for other purposes. The November 2006 agreement was signed by Mr Phillips on behalf of both MVHI and CDS. The agreement is particularly relevant to the third question. But for present purposes, its significance is that on his evidence, Mr Phillips executed it in November 2006, well after the heads of agreement, and after the settlement with Auran Technologies. Nevertheless the agreement records at cl 11 that:
“MVHI acknowledges and agrees that all Intellectual Property Rights in and
to Auran Jet remain the property of Auran Technologies ...”
which is contrary to Mr Phillips‟ position that MVHI owned Auran Jet exclusively. And earlier, cl 3.1 recorded that it was CDS that granted MVHI a licence to commercialise the My Virtual Home software which included Auran Jet. So the November 2006 document executed by Mr Phillips seven months after the heads of agreement in April 2006 recorded Auran Technologies owned Auran Jet and that MVHI was dependent on CDS for the right to use Auran Jet as part of the My Virtual Home software.
[59] That CDS had rights to a copy of Auran Jet is also consistent with the structure of MVHI and CDS. Under the April 2006 heads of agreement Auran Technologies staff were to transfer to CDS. The inference is that CDS was to use and further develop Auran Jet in conjunction with the development of the My Virtual Home software. CDS had previously, in September 2005, licensed MVHI to commercialise its software. Pursuant to that license agreement CDS retained ownership of the My Virtual Home software. CDS and MVHI had separate roles. CDS was the software developer that needed Auran Jet. MVHI was the marketing or commercialisation arm for the My Virtual Home software. There is no document in existence that records MVHI authorised CDS to use its, MVHI‟s, assets, such as Auran Jet.
[60] Next, there was good reason for the inclusion of CDS, an Australian company, as a transferee of Auran Jet. Auran Technologies had received government grants from AusIndustry. Any transfer of assets away from an Australian entity
could have breached the condition the grants were made under. That issue was of concern as recorded in the notes of a meeting held in July 2005, and attended by the companies‟ legal advisers.
[61] Following the completion of the heads of agreement in April 2006 a number of disputes arose between the parties. Auran Technologies issued notices of default under various agreements between it and CDS. Mr Phillips‟ evidence is that those issues were resolved and the settlement recorded in an agreement. The plaintiffs were, however, unable to produce a signed copy of the settlement agreement to the Court.
[62] The unsigned and apparently draft copy of the settlement agreement records a settlement between Auran Technologies, Auran Holdings, Mr Hilliam (a director of Auran), Mr Phillips, Open Ltd, Open Group, MVHI, My Virtual Home Pty Ltd and CDS. It provides for a payment by Auran to MVHI of AUD$12,590. It then provides for mutual releases between the parties. Importantly, as to the heads of agreement dated 11 April 2006 the settlement document produced to the Court records:
3.2 Heads of Agreement
Auran, OG, OPEN, Phillips, MVHI, MVH and CDS acknowledge and agree that the April 2006 Heads of Agreement („HOA‟) ... has been reinstated, but it is agreed that all clauses of this Heads of Agreement (except those specifically referred to in 3.2.1 and 3.2.2 below) have already been fulfilled by the Parties to that Heads of Agreement, such fulfillment [sic] being hereby confirmed, such that the required actions arising therefore have been discharged.
Neither cl 3.2.1 nor cl 3.2.2 referred to or dealt with clauses impacting on the ownership of Auran Jet.
[63] Clause 3.1 provided for the termination of the My Virtual Home agreement dated 8 December 2005 “the Distribution Agreement” and went on to record that Auran Technologies assigned its interest in any distribution agreement to MVHI. Clause 3.4 then confirmed that any remaining agreements not specifically terminated by the deed remained in force. It is not clear what cl 3.1 referred to. The only agreement before the Court dated 8 December 2005 is the agreement between Auran
Technologies and CDS, not MVHI. Further, it was a license agreement enabling CDS to use Auran Jet in creating My Virtual Home software, not enabling Auran Technologies to distribute the finished product. It certainly did not provide for Auran Technologies to have any distribution rights. It seems that “the Distribution Agreement” must be a reference to another agreement other than the license agreement between Auran and CDS. The CDS license agreement therefore remained in effect under cl 3.4. The unsigned settlement agreement did not purport to deal with ownership of Auran Jet. The position remains that the last operative document executed by the parties dealing with that issue is the April 2006 heads of agreement.
[64] The plaintiffs submit that Mr Morton, the CDS receiver, accepted CDS did not own Auran Jet. Mr Morton did understand the matter was covered by the licence from Auran which enabled CDS to use a copy. Mr Morton‟s understanding of the position is, however, not conclusive. It was not part of his brief to consider the heads of agreement executed in April 2006 which provided for CDS and MVHI‟s rights to Auran Jet.
[65] On balance, I conclude that the answer to the first question is that as at 24
December 2008 the Auran Jet engine source code was not owned by one entity. There were various copies of Auran Jet in existence. Auran retained its own copy of Auran Jet. But both MVHI and CDS, pursuant to the heads of agreement, also jointly owned a copy.
Were the two debentures, deed of subordination of debt and guarantee entered into lawfully on 24 December 2008? – Are they valid?
[66] This question really only addresses the validity of two documents: the debenture granted by CDS to Ngati Tama (including a guarantee by MVHI) and the deed of priority pursuant to which MVHI ceded priority to Ngati Tama.
[67] At an interlocutory hearing prior to trial it was directed that the question in relation to the validity of the documents executed on 24 December 2008 was to be broken down to include consideration of:
the negative pledge issue;
the alleged breach of the fiduciary duty Mr Martin owed MVHI:
– due to his intention to benefit a third party (Ngati Tami) not MVHI;
–as he had no authority to execute the documents or exceeded his authority in doing so;
–because Mr Martin knew MVHI was either insolvent or in severe financial problems and could not repay the guarantee it gave on 24
December 2008;
Whether Ngati Tama knew of Mr Martin‟s alleged breaches of fiduciary duty
and were beneficiaries of the breach.
[68] The principal witnesses on this issue were Mr Martin, Mr White for Ngati Tama, Mr Phillips and Mr Tye, a shareholder of Open Group called by the plaintiffs to support Mr Phillips.
[69] The background to Mr Martin‟s involvement as a director of MVHI and his execution of the documents lies in MVHI and CDS‟s need for further substantial funding in 2008 to cover CDS‟s expenses related to the ongoing development of the My Virtual Home software to version 2.0.
[70] Ngati Tama funded MVHI through 2008. For example Ms Olsen acknowledged receipt of advances of $300,000 on 7 May 2008, AUD$100,000 on 12
June 2008, $50,000 on 1 August 2008 and $17,000 on 4 August 2008.
[71] Mr Orlov submitted the documents could not be relied on as they had obviously been prepared in August and after the date on them. However, I do not consider there is anything sinister about the documentation as suggested by Mr Orlov. The documents were prepared after the date of the actual advances as Mr Olsen accepted, but they are dated as at the date of the advances. They are phrased in past tense to record the loans as having been made.
[72] The evidence confirms that at all material times in 2008 the principal source of funding for the development of the My Virtual Home software was Ngati Tama. Mr Phillips turned to Ngati Tama when funding was required. For example, in an email dated 18 May 2008 to Mr White, Mr Phillips said inter alia:
1. MVHI/CDS does not have til mid/15 June 2008 as I mentioned on the phone the other day...the nzd when converted to aud, did not see CDS through to mid June, only just until 7/6....plus we have some Annual Report expenses on MVHI side to clear soon as well. So 7/6 is run out time, not
15/6. We need aud$150 k by 7 June 2008.
[73] Mr White gave evidence he received a number of phone calls from Mr Phillips requesting further advances but, even putting the evidence of those calls to one side, there are further email communications from Mr Phillips which confirm MVHI‟s need for funding in mid-2008 was becoming desperate. In an email of 29
June to Mr White, Mr Phillips said amongst other things:
This week, I/we do need to make some tough decisions on MVHI, as we cannot pay all the programmers, nor is there anything to pay myself. I will need to find alternative income, as my own mortgage on the farm will not accept many more late payments of interest. Hermione is also at the end of her tether, as her partner is asking her to not to continue working under such pressure and stress. Many CDS programmers/staff will very soon leave if they remain unpaid, and then we have no chance of progressing to version
2.00 by October 2008, nor maximizing the value of an outright sale if that becomes your preferred option. ... So time is of the essence. By end next
week I will have to fly to Brisbane and advise staff there that only those who
are prepared to continue working with no cash pay, need stay. My guess is we may retain about 3 to 5 from the present 18. This will be a disastrous
step back for MVHI, and in reality will sadly be the beginning of the overall
discounted sale of MVHI to some big brother group.
[74] Shortly after, on 2 July 2008 Mr Phillips again emailed Mr White stating inter alia:
Greg, I can only blame myself for this present position and decision. There is no blame whatsoever towards you Greg. Your support towards both myself and MVHI has been huge. Also I see from below that you have been chasing up with others this week, as we have here. But it seems none will not come in quickly enough. ...
It looks like the CDS programming team will begin to be broken up starting next Monday, if nothing is able to be forthcoming from IWI or NT by this Friday morning. All my other avenues are exhausted for such a short term cash need. Even if I could get two month‟s breathing space I could soldier on, AND the code lock for the ever important MVH version 2.00 is due in 6 weeks form [sic] now.....so IF CDS staff leave before this code lock we are
literally stuffed....all of us.....as we do not then have any system to sell....as we are sitting right now in between the old and the revolutionary new MVH system.... can you arrange even 8 weeks life for CDS, and this could give me time to go sell OG property in St Pete.... ???? Once the CDS team starts leaving then I think the only responsible course is to try to sell MVHI to the highest bidder ASAP, and this will be so much harder given we are in between 2 systems and given we may have no on-going programming team to support such a sale.
[75] On 3 July Mr Phillips emailed Mr White again. He sought a loan of between AUD$1.8 million and AUD$2 million. He suggested it be structured through Open Group. The security offered was complicated. Mr Phillips offered, on behalf of MVHI and OG, as security:
1.The part of the new Ngati Tama („NT‟) advance that comes through Open Group Limited will be treated as a debt (not shares) and will be secured against the 2 city CBD properties in St Petersburg, by way of a first mortgage charge over these 2 properties. Open Group Limited (OG) will then also agree not to pledge the balance of rooms it owns in the rest of the NP property to any third party (called a negative pledge). OG will then on-lend these new monies it receives from NT to MVHI, secured under the OG debenture with MVHI. These 2 properties under the first mortgage combine to have a registered market value of around $us 1million. The property under which the negative pledge is secured would have about another
$us 450,000 in registered value.
If no new monies have come into MVHI from other sources by end October 2008, which allows MVHI/OG to repay these new NT monies/loan in full, then NT can demand OG and DWP sell all of it‟s [sic] St Pete properties to realize cash to repay NT. It is expected to raise about $us 2 million in cash (more than the registered January
2008 valuations) if all OG St Pete properties are sold without pressure, including selling the Nevsky Prospect, which adjoins the Rubensteiner property which is now offered as security. ...
2.Any part of the new monies which go direct to MVHI from NT (NT choice), can be joined formerly into the OG debenture over MVHI, and can have the recent NT loans to MVHI included formerly (via our lawyers) into this OG debenture as well, ranking equally with all the prior and future OG advances to MVHI. There can be an agreement that these new NT monies are repaid first form [sic] any cash inflows form [sic] MVHI.
3.There could be some additional (numbers to be discussed/agreed) MVHI share options over some more MVHI shares to go with this new loan position.
Additional to the above, and as a separate matter, I remain available to also pledge the balance of the equity in my Heartland Farm and some of my MVHI shares to any party who can lend me about $nz2 to $nz2.2 mill. as per the note I sent yesterday. This cannot be combined with the above OG
security property matter, it needs to be treated separately. Some of this money would be new money into MVHI, while most of the rest would be assisting some existing MVHI s/h who seek urgently to sell some MVHI shares and have relied on me to achieve this for them ( e.g. Trevor Seib and his family). ...
[76] Mr White said that the Ngati Tama Board would agree to advance a further AUD$1 million to Open Group subject to securing a mortgage over the St Petersburg properties suggested by Mr Phillips as security and agreement on other appropriate terms and conditions.
[77] Mr Phillips then prepared a document dated 7 July 2008 which was signed by Mr White and later, by Mr Phillips for Open Group, recording Ngati Tama‟s agreement to advance money to Open Group.
[78] The 7 July 2008 document commenced by recording:
In recognition of NT providing urgently required new loan monies of
$aud1,000,000 to Open Group Ltd and for OG to agree to apply these new monies to [MVHI] under the existing debenture OG holds over MVHI assets
and also as a result of OG and David W Phillips further agreeing to make
available to NT specific OG property assets for NT security, the Parties agree as follows.
[79] Ms Olsen attended Mr White on his execution of the agreement. Although the document was dated 7 July 2008, Ms Olsen‟s recollection is that it was not signed by Mr White until 9 July, and by Mr Phillips some time after that. There had been various drafts of the document. She said the final draft was presented to Mr White for his signature after she had dropped Mr Phillips at the airport to fly to Australia on 9 July. Her recollection is that Mr White requested further changes to the document which he made by hand at the time. Her understanding was that it was a work in progress. She said that was confirmed in her mind by Mr Phillips‟ later advice to her that he still intended to discuss the additional AUD$200,000 with Mr White.
[80] Mr White said that although he signed the agreement he told Ms Olsen that he had no authority to bind Ngati Tama to it but he signed it to acknowledge it was effectively a work in progress. In the course of his evidence he produced a trustee‟s minute recording, inter alia, the loan was subject to the trustees‟ final approval. Mr
White suggested that he regarded the 7 July 2008 document as similar to documents signed as work in progress in the course of Waitangi Tribunal settlement negotiations. That is surprising. Waitangi Tribunal settlement negotiations are of a quite different nature to standard commercial negotiations. Waitangi Tribunal settlements must be concluded by legislation and formal sign-off. It is difficult to see why other commercial agreements might also be treated in that way.
[81] However, for their own reasons, Ngati Tama and Mr White did not consider that the document was a final and binding document. There is some evidence to support that view. The security of the St Petersburg properties offered by Mr Phillips was never satisfactorily resolved. After 7 July the parties continued to debate the securities and other matters referred to in the agreement. For example, on 13 July Mr Phillips emailed Mr White and advised:
if no settlement to the NT matters are completed by 31 July and/or if this agreement is not completed and signed in a form acceptable to all parties b4 then, then I reserve my/OG right to withdraw the 2 properties ... as security.
...
The new agreement attached now establishes the NT debt security direct via MVHI, pari parissu [sic] ( equal) with OG‟s MVHI security. This way they (NT) are not coming with new debt via OG ... .
[82] But the 7 July 2008 document is something of a red herring in any event. It is unnecessary to resolve the status of that document for the purposes of determining the preliminary questions. The short point is that if the plaintiffs‟ view is correct and the agreement was a binding agreement between Ngati Tama and Open Group for the benefit of MVHI then those parties retain their rights to sue Ngati Tama in relation to it. That is not, however, a matter that this Court needs to determine to answer the preliminary questions before it, and in particular the question as to the validity of the debenture executed by CDS in favour of Ngati Tama in December 2008.
[83] Mr Orlov‟s challenge to the documents focused on Mr Martin‟s position as a director of MVHI and the plaintiffs‟ submission that he breached his fiduciary duty to that company in executing the documents. To put that issue in context it is necessary to consider Mr Martin‟s involvement and position within the company as it developed in 2008.
[84] Mr Martin and Mr Phillips have known each other for approximately 25 years. They had a business relationship which began when Mr Martin was general manager of National Bloodstock Corporation between 1984 and 1986 at the time Mr Phillips was managing director of that entity. After Mr Phillips became involved in CDS and MVHI he asked Mr Martin if he would become the sole director of CDS. Mr Martin accepted that position in May 2007. In 2008 Mr Phillips asked Mr Martin to join the board of MVHI. At the time Ms Olsen was the sole director of MVHI. Mr Martin became a director of MVHI around April 2008. At about that time Mr Lane also became a director. However, Mr Lane resigned as a director on 18 June
2008. That left Mr Martin and Ms Olsen as the sole directors. On 12 August 2008
Ms Olsen resigned as a director leaving Mr Martin as the sole director. He remained the sole director of My Virtual Home and CDS from 12 August 2008 until he was dismissed as a director of MVHI on 9 February 2009.
[85] Ms Olsen said she resigned as a director because she felt unable to cope and felt out of her depth with the situation MVHI faced in August 2008, particularly the ongoing failure to conclude the funding arrangements with Ngati Tama. Her decision to resign followed a series of email exchanges between her, Mr White and Mr Phillips.
[86] Mr Martin said that on 12 August 2008 he found himself sole director of two companies, CDS and MVHI that had uncertain funding and difficult management issues as well. He was in a difficult position because the principal source of funding at the time, Ngati Tama, seemed to have lost confidence in Mr Phillips. Mr Martin was only involved in CDS and MVHI through his relationship with Mr Phillips. To compound matters Mr Phillips was, at the time, in Russia. Mr Martin sent an email on 13 August to Messrs Phillips, White, Lane and Condon recommending they consider their positions, discuss the matter with him and look to regroup with a plan to go forward. He copied Ms Olsen into the email on the basis of her former involvement with the company.
[87] At the same time Mr Martin carried out his own investigation of the CDS and
MVHI‟s financial positions. His review disclosed:
CDS had accounts payable of around AUD$250,000 increasing on a weekly basis with operating costs of AUD$30,000 to AUD$50,000 per week with no
significant revenue or income;
CDS was indebted to the Australian tax office for approximately
AUD$150,000 for payroll and other taxes;
MVHI had accounts payable of around $90,000.
[88] Mr Martin said it became clear to him that there were real issues between Mr Phillips on the one hand and Ngati Tama and Mr White on the other as to the future funding and management of MVHI and CDS. Mr White said that when he had accompanied Mr Phillips to China in July it had become clear that Mr Phillips did not have the skills and experience to successfully explain the My Virtual Home software and to negotiate a commercial arrangement with the Chinese. Also, Mr Phillips spent a lot of time on his and Open Group‟s business. Mr Phillips also seemed to have a poor relationship with Mr Lane of CDS. For all those reasons, Mr White and Ngati Tama lost confidence in Mr Phillips.
[89] Mr Martin took independent advice. Matters were not able to be resolved. By 21 August 2008 Mr Martin considered the solvency of MVHI and CDS was critical. Mr Martin said that he considered the companies would have to cease trading unless further funds were available immediately. The only realistic source of funding remained Ngati Tama. But Ngati Tama would not advance further funds if Mr Phillips remained involved in the companies. On 23 August 2008 Mr Martin sent
an email to Mr Phillips. He summarised the position as follows:
MVHI and CDS will have accounts payable of NZD$75,000 and
AUD$110,000 (approx) as at 31 August 2008;
thegroup needs AUD$30,000 to protect and back up the key codes and progress patents;
his legal advice was to place MVHI and CDS in receivership on Monday 25
August should there not be a reasonable expectation of funds incoming to pay the accounts payable;
the only group that may be in a position to contribute NZD$200,000 around
August 25 to 26 was, to his knowledge, Ngati Tama;
Ngati Tama might be in a position to assist provided Mr Phillips agreed his consultancy agreement/contract and other contracts between MVHI, CDS and him and Open Group could be terminated and the arrangements between the parties be reshaped and restructured so that Mr Phillips discontinue his de
facto supreme manager chief executive officer role.
Mr Martin also identified a major issue as the adversarial relationship between Mr Lane and Mr Phillips, which also was of great concern to Greg White and Ngati Tama.
[90] Mr Phillips did not consider it necessary for him to resign. He declined to do so. On 24 August 2008 Mr Martin felt he had no alternative. He passed a resolution as sole director of MVHI terminating any consulting or other arrangement between MVHI and Mr Phillips, Open Group or other related entities. Mr Martin said he did
so for the reasons that:
Ngati Tama would not advance new capital if Mr Phillips remained as
consultant with authority to direct the companies.
Mr Phillips had been largely responsible for the financial crisis the
companies found themselves in.
Mr Phillips and Open Group appeared to be using money from MVHI and
CDS to fund unrelated business activities of Open Group.
While Mr Phillips advised he was on the verge of signing a license agreement with the Chinese, the draft agreement provided was complex and appeared to
have outcomes that benefited Open Group and Mr Phillips rather than MVHI.
CDS executives, Mr Lane in particular, had lost faith in Mr Phillips. They
held him responsible for late payment of wages and fees.
Mr Phillips was in Russia.
Mr Martin also passed a resolution changing MVHI‟s legal advisers and appointing an interim management team.
[91] Although Mr Martin met with Mr Phillips after Mr Phillips returned to New
Zealand no resolution was achieved.
[92] Mr Martin then continued to work with Ngati Tama to secure ongoing funding for MVHI. Ngati Tama‟s solicitors sought security over CDS and MVHI to secure the further funding. Mr White and Ngati Tama accepted it would take some time to finalise the security and made a number of further payments in the meantime. Mr Martin confirmed that Ngati Tama continued to provide funding and that by December 2008 Ngati Tama had advanced approximately AUD$850,000. Mr Phillips and Ngati Tama, through legal representatives, had the security documentation prepared to give effect to Ngati Tama‟s requirement for security. Mr Phillips executed the documents on behalf of CDS and MVHI on 24 December
2008. The documents were, as noted, a debenture granted by CDS in favour of Ngati Tama (containing a guarantee by MVHI) and a deed of priority pursuant to which MVHI ceded priority in favour of Ngati Tama.
[93] The first legal issue that arises is the effect of the negative pledges contained in the earlier security documents.
[94] On 2 August 2005 CDS had granted MVHI a fixed and floating charge to secure advances from MVHI to CDS. The advances were made at a time CDS was restructured and at a time when Mr Phillips, through Open Group, took a substantial
shareholding in CDS. It was recognised that CDS required funding to continue its development of the My Virtual Home software. Clause 3 of the charge provided for a negative pledge:
The Chargor must not:
(a) create, attempt to create or permit to exist any Security Interest other than a Permitted Security Interest in relation to the Secured Property (whether ranking ahead of, equally with or after, the Charge); ...
without the Financier‟s consent.
[95] The negative pledge contained in the charge granted by CDS in favour of MVHI prevents registration of a security interest without the financier‟s (in this case MVHI) consent. Mr Martin as director of MVHI consented. The issue remains whether Mr Martin‟s consent was valid or whether it can be impugned.
[96] MVHI had itself received funding from Open Group. On 30 November 2007
MVHI executed a general security agreement over its present and after acquired property in favour of Open Group. Clause 15(e) of the General Security Agreement in favour of Open Group provided:
Not allow another financing statement without consent: The party granting the security must not agree to allow any person to file a financing statement over any of the collateral security secured by this instrument without the prior written consent of the security holder; and must notify the security holder immediately if it becomes aware of any person taking any steps to file a financing statement against any of the party granting the security‟s asset which are secured by this instrument.
[97] By cl 15(e) of the GSA MVHI agreed not to allow any person to file a financing statement over any of MVHI‟s collateral security (without Open Group‟s written consent). The clause contemplates a situation where MVHI might allow another party to file a financing statement over its assets, which would have included the debenture it held over CDS‟s assets. As a matter of interpretation, the clause does not apply to MVHI‟s waiver of priority in favour of Ngati Tama.
number of particular concerns:
there was no evidence MVHI was continuing to trade;
there was no evidence that MVHI was employing staff, generating income, occupying premises or doing the things that one would expect a trading entity
to do;
there was no evidence to lead Mr Morton to believe MVHI was performing
or was capable of performing its obligations under the license agreement;
Mr Lane and Mr Condon, who had been employed by MVHI to commercialise the My Virtual Home software, had had their employment
terminated following the receivership.
[140] Because of his concerns, on 7 July 2009 Mr Morton gave 30 days‟ notice to Mr Stewart that he proposed to terminate the licence unless the breaches were remedied. I note Mr Morton did not rely on cl 17.2 of the license agreement. It may be that clause was satisfied. During the course of the hearing Mr Phillips referred to a schedule which he said showed that the funding requirement had been satisfied.
[141] On 4 August 2009 Mr Stewart forwarded a 57 page response attaching to it an amended MVHI license agreement dated 27 November 2006.
[142] This license agreement purported to be executed by Mr Phillips on behalf of both MVHI and CDS. The major change from the earlier licence that Mr Morton relied on was that in the November 2006 agreement any right for CDS to terminate the agreement had been removed. Instead of providing that MVHI was obliged to carry out the various obligations noted above the licence was amended to provide for best endeavours, taking heed of funds available and world market conditions. Further, the clauses providing for termination on default and CDS‟ right to terminate by giving 30 days‟ notice of breach or if MVHI had not raised $AUD4.5 million were deleted. MVHI‟s rights to terminate were, however, maintained.
[143] Mr Morton considered there were a number of factors about the November
2006 agreement which raised issues as to whether it was in fact a valid and operative agreement. The factors which caused him concern as to the validity of the
agreement were:
prior to Mr Stewart‟s response of 4 August, no mention had been made of the
November 2006 license agreement;
the records made available to Mr Morton at the time of his appointment as receiver of CDS did not contain a copy of the November 2006 agreement nor
did they refer to it;
the November 2006 agreement was a critical document because it
fundamentally changed the terms of the September 2005 license agreement.
[144] Mr Morton took the view that he could not rely on the November 2006 agreement. He terminated MVHI‟s licence to deal with the My Virtual Home software on the basis of MVHI‟s default. He did so on 29 October 2009, the breaches he had identified in his notice remaining unremedied as at that date, in particular the dismissal of crucial employees.
[145] The plaintiffs‟ first submission is that the November 2006 agreement was the operative agreement so that CDS and Mr Morton had no right to terminate the licence.
[146] There are a number of features of concern as to the validity of the November
2006 agreement. It was an important document. It is unusual that it was not provided to Mr Morton, the receiver, when other copies of the license agreements were provided to him and especially that it was only provided after Mr Morton had issued notice of intention to terminate the licence.
[147] Mr Phillips attempted to suggest that the licence was simply a clerical and administrative clarification of the original deal but that is patently incorrect. It fundamentally changed CDS‟ rights under the licence.
[148] There is a further curious feature. Mr Phillips gave evidence that when the settlement deed with Auran Technologies was signed on 28 November 2006 he was based in his Russian office. He said he couriered the signed copy of the deed back to Ms Olsen. The amended license agreement is dated 27 November 2006. Mr Phillips must have concluded it at the same time that he was in Russia, but he gives no explanation as to the process of its execution there, or why indeed he had it with him at that time.
[149] Next, Ms Olsen said she had never seen the amended license agreement before the issue of these proceedings even though she was a director of MVHI throughout the relevant period. Nor was the document presented to or referred to at a subsequent shareholders‟ meeting or annual general meeting like most other significant agreements executed by Mr Phillips were.
[150] I am left with severe reservations as to whether the November 2006 agreement was, in fact, a sham created after the event. However, I note that a number of the above issues were not put to Mr Phillips so he did not have the opportunity to respond to them.
[151] However, whatever the true position of the November 2006 agreement may be, it would in any event be unenforceable for want of consideration. The November
2006 licence was clearly a variation to an existing contract. Such a variation will only be valid if consideration is given by both parties: New Zealand Needle
Manufacturers Ltd v Taylor.7 In this case there is no evidence of any consideration provided to CDS for the removal of its rights to cancel. The variations were clearly all to the benefit of MVHI without any corresponding detriment to it or benefit to CDS. The operative license agreement remained the 26 September 2005 agreement.
[152] In the circumstances it is unnecessary to consider Mr Hughes‟ alternative submission that even if the November 2006 licence purported to grant a perpetual non-terminable licence, the Court could still imply a term empowering CDS to terminate it on reasonable notice: Paper Reclaim Ltd v Aotea International Ltd.8
[153] The underlying purpose of the 26 September 2005 license agreements was to enable MVHI and Open Group to market and commercialise the My Virtual Home software in the particular territories.
[154] In the present case the evidence supports the conclusion that, after the appointment of the receiver Mr Stewart to MVHI the company laid off leading staff and was not pursuing the commercialisation of the My Virtual Home software.
[155] Mr Phillips gave evidence that between September 2005 and August 2008 he had carried out substantial marketing and commercialisation of the My Virtual Home software on behalf of MVHI. He referred to sublicensing the software and the development of the retail boxed products of the My Virtual Home software in France, Spain and the United Kingdom.
[156] Mr Phillips also said that he had entered an exclusive joint venture and sub- license agreement with China as at July 2008. However, the draft agreement provided by Mr Phillips to support that is dated 20 July 2009, post receivership and was subsequent to the notice of intended termination of the agreement. Significantly the agreement is not signed by any of the Chinese parties.
[157] On balance I find that MVHI was not fulfilling its obligations under the license agreement at the time when Mr Morton gave notice of cancellation.
7 New Zealand Needle Manufacturers Ltd v Taylor [1975] 2 NZLR 33 (SC) at 40.
8 Paper Reclaim Ltd v Aotea International Ltd [2007] NZSC 26, [2007] 3 NZLR 169.
[158] Significantly, after the receivership of MVHI, despite the further time given after the expiry date of the notice of termination issued by Mr Morton, MVHI did not address Mr Morton‟s concerns. The only response was the 57 page reply by Mr Stewart. However, that was not accepted by Mr Morton and Mr Stewart did not give evidence to support what he set out in that response. Mr Morton remained of the view that MVHI could not demonstrate that it was trading and doing what it was required to do to satisfy the license requirements.
[159] The Open Group licence is in a similar position. The licence was for territories other than those covered by MVHI and My Virtual Home Australia Pty Ltd licences. The 10-year stand-down period was effectively waived by Open Group. On Mr Phillips‟ own evidence Open Group had commenced marketing the My Virtual Home software. While it had the right to postpone its obligations under the agreement, once it had engaged its obligations under the agreement it was not entitled to then seek to delay or suspend the balance of its obligations which had by then been triggered.
[160] Mr Morton said he terminated the Open Group licence because again he was not satisfied that Open Group was taking effective steps to meet its obligations under the license agreement to effectively commercialise the product. Mr Phillips disputes that by reference to a number of partially completed documents. I prefer Mr Morton‟s evidence and accept he was entitled to cancel the Open Group licence.
Result – answers
[161] The questions posed for the Court are answered as follows:
(a) What entity owned the Auran Jet engine source code as at 24
December 2008?
As at 24 December 2008 the Auran Jet engine source code was not owned by one entity. Copies of the Auran Jet engine source code were owned by Auran Technologies and by both MVHI and CDS jointly.
(b) Were the two debentures, deed of subordination of debt and guarantee entered into lawfully on 24 December 2008, in other words are they valid documents?
The debenture granted by CDS to Ngati Tama and containing the guarantee by MVHI was a valid document, as was the deed of priority executed by MVHI.
(c)If receivers of Creative Designer Software Pty Ltd (CDS) were validly appointed by Ngati Tama Custodian Trustee Ltd, pursuant to the debenture in favour of the latter company, was CDS entitled to terminate the licence (on the basis of notice given on 7 July 2009) to use (non Auran) software of My Virtual Home International Ltd and/or Open Group on 28 October 2009?
Yes.
[162] The above answers leave a number of unanswered questions such as whether the receiver obtained the best possible price for the My Virtual Home software, and whether the liquidators of MVHI may have claims against one or more parties/entities. Those matters are, however, not before the Court at this time.
[163] In the circumstances I have not found it necessary to consider the further evidence that Mr Phillips sought leave to refer to. The further evidence and Mr Phillips‟ interpretation of it are beyond the ambit of the questions this Court was required to answer. The further issues that Mr Phillips seeks to pursue are more appropriately considered in the substantive proceedings or in separate proceedings instituted for the purpose.
[164] For the avoidance of doubt I record that the parties are released from the undertakings given pending determination of the preliminary questions.
Costs
[165] Costs should follow the event. In the event the parties are unable to agree I
will fix costs following an exchange of memoranda. The defendants should file their memorandum by 19 August 2011 and the plaintiffs by 2 September 2011.
Venning J
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