Network Cabling Solutions v Ice Group (NZ) Limited HC Wellington CIV 2008-485-1360
[2010] NZHC 1956
•28 October 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2008-485-1360
BETWEEN NETWORK CABLING SOLUTIONS LIMITED
First Plaintiff
ANDM G STILWELL Second Plaintiff
AND N B SWAN Third Plaintiff
ANDICE GROUP (NZ) LIMITED First Defendant
ANDE THOMPSON Second Defendant
ANDNEW ZEALAND DATA LIMITED Third Defendant
Hearing: 18 - 20 October 2010
Counsel: D Smyth for Plaintiffs
T G Stapleton and J A Langford for Defendants
Judgment: 28 October 2010
JUDGMENT OF RONALD YOUNG J
NETWORK CABLING SOLUTIONS LIMITED AND ORS V ICE GROUP (NZ) LIMITED AND ORS HC WN CIV 2008-485-1360 28 October 2010
[1] Mr Stilwell, Mr Swan and Mr Thompson are now all shareholders in ICE Group (NZ) Limited (ICE (NZ)). They all agree that the company is now no longer functioning. Because of a dispute about the running of the company Mr Stilwell and Mr Swan say Mr Thompson should buy their shares in the company. In the alternative they say he should compensate them for money which they say Mr Thompson has wrongly taken from the company.
[2] The plaintiffs seek to invoke this Court’s jurisdiction under s 174 of the Companies Act 1993. The problem between the shareholders arises from a contract for the data cabling of a new building in Wellington for the New Zealand Defence Force (NZDF) through the head contractor Datacraft New Zealand Limited (Datacraft). The plaintiffs’ case is that ICE (NZ) should have completed a subcontract for Datacraft for the provision of cabling services related to the NZDF building. They say Mr Thompson, through his company New Zealand Data Limited (NZ Data), (he and his wife are the sole shareholders) wrongly took over ICE (NZ)’s subcontract, took money from ICE (NZ) for the contract that he was not entitled to and wrongly completed the contract to ICE (NZ)’s detriment.
[3] The plaintiffs’ claim that if Mr Thompson had not undertaken these wrongful acts it would have received further payment from the Datacraft/NZDF contract and the shares of ICE (NZ) would thus have increased in value. Mr Stilwell and Mr Swan, therefore, as 25% shareholders (each) in the company, want Mr Thompson to buy their shares based on a valuation which assumes NZ Data’s value is really the value of ICE (NZ). In the alternative they say they should be directly compensated by Mr Thompson for the money he wrongfully took from ICE (NZ) and for the lost profit for the 31 March 2007 year.
[4] Mr Thompson’s case is that ICE (NZ) had no continuing contract with Datacraft for the NZDF work and that the work he and NZ Data did for NZDF through Datacraft was in an entirely different category than anything ICE (NZ) was doing; and any money he took from ICE (NZ) he was entitled to.
[5] Initially these proceedings revealed a dispute about the actual shareholding of ICE (NZ). Considerable material pre-trial was provided to establish the shareholding. This aspect of the case is no longer in dispute. It is common ground that of the four ICE (NZ) shares Mr Thompson owns two, Mr Swan one and Mr Stilwell one.
[6] All three parties, Mr Stilwell, Mr Swan and Mr Thompson have a background either in the management of, or on the technical side of data cabling. In
2001 when ICE (NZ) was incorporated Mr Stilwell and Mr Thompson worked for Datacraft. Mr Stilwell was the general manager of the cabling section, Mr Thompson a cabling solutions sales specialist. Mr Swan had met Mr Thompson in England and also had knowledge of network cabling. The three men had set up a company called Network Cabling Solutions Limited (Network) which specialised in installing cabling as a subcontractor, typically for Datacraft.
[7] The three shareholders of Network agreed that Mr Swan would site manage the installations and install the cable, and Mr Stilwell would set the company up and carry out the accountancy and administrative tasks and oversee the business. Mr Thompson was to get the contracts, primarily labour only as a subcontractor to Datacraft, and, in turn he would manage the quality control of the installations. Mr Swan was the only direct employee of the company and earnt a wage. Mr Stilwell and Mr Thompson worked for Network outside of their fulltime employment for Datacraft.
[8] In 2001 Mr Thompson met Mr Robinson, a representative of ICE Group Holdings Pty Australia Limited (ICE (Australia)). Mr Robinson was in New Zealand seeking possible business partners. I accept Mr Thompson’s evidence that ICE (Australia) was looking for a New Zealand partner to sell two particular products, CCTV and a Beonic people counting system. The particular market for the CCTV products was small store owners who could not afford a large security camera system. As to the Beonic people counting product this was an infrared beam installed on the entry and exit doors of businesses. The device counts how many
people come in and out of the business. This information is used to assist in the management of the business.
[9] Mr Thompson’s evidence was that he told Mr Robinson that Datacraft would not be an appropriate fit for the ICE (Australia) products. Datacraft was a large global company and sold to Government departments and large corporate customers. He told Mr Robinson that he and his partners in Network may be interested in creating a new company to sell ICE (Australia) products in New Zealand. This idea was discussed by Mr Thompson with Mr Stilwell and Mr Swan. I am satisfied they agreed that the business would be complimentary to the work that Network was doing, and Network labour could be contracted to install the equipment. ICE (NZ) was incorporated with four shares, with Network owning two shares and ICE (Australia) two shares.
[10] I accept Mr Thompson’s evidence that what was being set up with ICE (NZ) was not a cable installation company. That would have made no sense. Mr Stilwell, Mr Swan and Mr Thompson were already shareholders in Network which had been specifically set up to subcontract to Datacraft to provide data cabling installation.
[11] I also accept Mr Thompson’s evidence that Datacraft allowed ICE (NZ) to stay rent free and power free in their Wellington office for some years because ICE (NZ) was not a competing data cabling company. The installation of some of ICE (NZ)’s products involved cabling. However, it was on a modest scale compared with the data cabling of Datacraft and was of no obvious interest to Datacraft.
[12] If Mr Thompson’s employer, Datacraft, had thought he was starting up a data cabling solutions company in ICE (NZ) he would have lost his job at Datacraft. Such a company would have competed with Datacraft and therefore would be in conflict with his employment.
[13] I accept Mr Thompson’s evidence that initially ICE (NZ) was to operate so that Mr Stilwell looked after the administrative side; Mr Thompson was responsible for selling the units and Mr Swan for installing them. In the year to 31 March 2002
ICE (NZ) had a turnover of some $38,000 which was essentially the sale and
installation of a CCTV system at The Warehouse in Petone. As at the year ended
31 March 2003 ICE (NZ)’s turnover was about $90,000 primarily from the sale of products from ICE (Australia). The primary income for ICE (NZ) during the March 2003 year was from a Southland Health contract. Mr Thompson had won the Southland contract for Datacraft. Datacraft had no cabling labour and so Mr Thompson had to subcontract the cabling and the MATV work (also part of the Southland contract). He gave the labour component of the cabling to Network and the MATV work to ICE (NZ)
[14] During 2002 Mr Thompson met Mr Duncan Banks who had particular expertise in Master Antenna Television (MATV). This system is used where there is a high concentration of television outlets in a building. Instead of installing hundreds of antenna one is installed which amplifies the signals to all outlets. Mr Banks was hired by ICE (NZ) to sell its existing CCTV and people counting products as well as MATV.
[15] In May 2002 Network sold its two shares in ICE (NZ) to Mr Thompson and Mr Swan. In July 2003 ICE (Australia) went into liquidation. It was then a 50% shareholder of ICE (NZ) with two shares. An arrangement was entered into with the receivers of ICE (Australia). ICE (NZ) returned some of ICE (Australia)’s stock in exchange for the two shares owned by ICE (Australia). One share in ICE (NZ) was transferred to Mr Stilwell and one to Mr Thompson. Mr Thompson then had two shares, Mr Stilwell one and Mr Swan one, the current shareholding.
[16] In the meantime there had been what was described by Mr Stilwell and Mr Swan as a merger between Network and a company called Q Limited (Q). There was no merger in any legal sense. Both companies continued to have separate shareholdings but it seems they functioned on a day to day basis as if one company. Mr Thompson was unhappy with this arrangement. He did not consider Q, as a property maintenance company, had any commonality with Network. Eventually he sold his shares in Q for $20,000 to the other Q shareholders. They included Mr Stilwell and Mr Swan. Mr Thompson then ended his involvement with Network. In the absence of any cabling work coming to Network, it ceased to function.
[17] By September 2004 Mr Stilwell had decided he no longer wished to be a director of ICE (NZ) and advised the other shareholders he would resign as a director. Mr Swan also purported to resign as a director at this time but he had never been a director of ICE (NZ). Mr Banks continued to work for ICE (NZ) selling CCTV and MATV products. However his work generated little more income than his own wages plus covering most overheads for ICE (NZ).
[18] In January 2005 when Mr Stilwell confirmed his resignation as a director he also noted that there had been an agreement to sell his share in ICE (NZ) to Mr Thompson and Mr Banks. Nothing however came of this “sale”.
[19] From September 2004 onwards therefore Mr Stilwell and Mr Swan had little or nothing to do with the functioning of ICE (NZ). The turnover for the
31 March 2005 year for ICE (NZ) was $282,000, down from the 2004 high of
$341,000. The company lost $1,150 in that March 2005 year. By that stage the company’s equity was less than $20,000.
[20] For the 31 March 2006 year the company’s financial position deteriorated further. Revenue dropped to $217,000. There was a loss of over $15,000 and ICE (NZ)’s equity was reduced to less than $2,000.
[21] In 2006 Mr Thompson, on behalf of Datacraft, won a $2.7 million contract for the design and supply of network infrastructure and cabling for a new building for the NZDF in Wellington. I accept that Mr Thompson was understandably concerned at that time with ICE (NZ)’s financial health. The company had slowly deteriorating sales and no obvious prospect of improvement. Mr Thompson identified about $70,000 worth of ICE (NZ) debts. It was within Mr Thompson’s discretion as manager of the Datacraft/NZDF contract to decide which companies would be awarded subcontracts for the provision of labour only cabling. Mr Thompson assigned some of the subcontract work to ICE (NZ).
[22] I accept Mr Thompson’s evidence that this was an attempt by him to improve ICE (NZ)’s turnover and to pay any of ICE (NZ)’s debts. It certainly had the effect of improving ICE (NZ)’s turnover which for the year ended March 2007 was
$680,000 – almost double its previous best year.
[23] When ICE (NZ) was awarded the subcontract to Datacraft for NZDF it did not have any employees capable of doing this work. Its only employee was Mr Banks and this work was not within his area of expertise. ICE (NZ) therefore hired and trained four workers for the cabling work.
[24] ICE (NZ) workers were involved in the “main” contract between Datacraft and NZDF (worth approximately $2.7 million). There was no written contract between ICE (NZ) and Datacraft. Datacraft would issue a purchase order to ICE (NZ) for it to undertake particular work. ICE (NZ) employees would do the work and then invoice Datacraft who, if satisfied with the work, would pay ICE (NZ).
[25] There was no evidence at trial of any long term contractual commitment by Datacraft to ICE (NZ). ICE (NZ)’s “entitlement” to work for Datacraft was therefore limited to each purchase order. ICE (NZ)’s employees were contract workers who could have been dismissed at any time. Neither ICE (NZ)’s nor Datacraft’s obligations therefore extended beyond each individual Datacraft purchase order and its acceptance by ICE (NZ) by undertaking the work identified in the particular purchase order. Datacraft’s purchase orders typically (but with exceptions) did not extend beyond a month’s work. When the order involved work beyond a month then monthly progress payments could be made by Datacraft to ICE(NZ).
[26] Mr Simon Gillespie, the national sales manager for Datacraft in 2006 gave evidence that in May 2006 Datacraft decided “to exit the cabling business”. Datacraft had ongoing contractual obligations pursuant to its contract with NZDF. Mr Gillespie said in his brief of evidence:
14I met with Mr Thompson again in September 2006 and discussed completion of the Defence House contract. I told him that I would like him to complete the Defence House installation. I suggested that he should start a cabling company of his own (I was very specific on this, as we only wanted to deal with Mr Thompson), and supply all materials and labour to complete this installation.
15There was no possibility of Datacraft passing the business to any newcomer in the market, or to any company which we considered could not deliver cabling solutions to our business clients We also talked over payment terms (paying Mr Thompson’s company within
30 days to help with his cash flow). I wanted Mr Thompson, or his new company, to start on the Defence project immediately, and to
supply both labour and materials. The only cabling personnel left were Eric Thompson and Arthur Anderson. We wanted to be out of
cabling as quick as possible.
16I was aware that ICE had been paid in total, pursuant to purchase orders during the main installation, but that there were still tasks for the main contract and some variations to be completed. I was fully aware of this. I left it up to Mr Thompson to work out processes for the tasks that were yet to be completed between his new company and ICE. It was of no concern to Datacraft, so long as the work was properly completed.
[27] As to the NZDF side of these arrangements and the potential change, Mr Richard Hitchcock who was the NZDF project manager at the relevant time, said in his brief of evidence:
27.Sometime late 2006 NZDF was notified Datacraft intended to exit the cabling sector. Datacraft confirmed they would see the Headquarters building project through to completion as they had a contractual commitment to do so. NZDF had also learned Mr Thompson was to be made redundant as a result. This concerned NZDF and requested Datacraft retain Mr Thompson until the end of the contract to ensure the project did not lose momentum and sensitive project knowledge. This was a significant risk to NZDF.
28.NZDF was also made aware Mr Thompson was to form his own company and become a sub contractor to Datacraft in late 2007. As already stated, Datacraft could use whatever subcontractor they wished. NZDF concern was that Mr Thompson remained involved as Project Manager to ensure the timely completion of the project and this he did. There was no apparent change as far as the project was concerned.
[28] Mr Gillespie said that as part of Datacraft’s desire to have a “clean break” from its cabling business, he instructed Mr Thompson to make sure that Datacraft received all the invoices to the end of the main contract. Datacraft told Mr Thompson that he was to ensure that it was “billed in advance for the remainder
of the main contract as we dissolved our cabling business”. Datacraft’s intention therefore was effectively to pre-pay its contractual obligations. Mr Gillespie said he therefore authorised an advance payment to ICE (NZ) of about $200,000 (he could not now recall the exact amount) in September 2006 to complete the labour cabling portion of the main contract.
[29] It is not possible to now accurately identify what Datacraft paid ICE (NZ) as an advance on contractual performance or precisely what each payment made by Datacraft to ICE (NZ) during this time is for. Many of ICE (NZ)’s records are said to have been lost when their computer malfunctioned in late 2006. The plaintiffs did not seek any third party discovery from Datacraft which presumably could have accurately identified all payments to ICE (NZ) and their purpose during the important time between September and December 2006.
[30] There is some evidence of payments received in an ICE (NZ) cheque reconciliation report which is accompanied by a cleared deposit report of payments made by Datacraft to ICE (NZ) during this time. Neither of these reports contains original information. From August to December 2006 the cleared deposit report
notes four payments by Datacraft to ICE (NZ) as follows:
24 August 2006 $64,641.36, 26 September 2006 $84,089.12, 26 October 2006 $113,097.41, 26 November 2006 $67,333.92.
[31] It is not possible on the evidence presented to relate these payments to any ICE (NZ) invoices. As I have observed it no longer has invoice records and the plaintiffs did not seek discovery from Datacraft who would have received invoices from ICE (NZ) on which it made these payments. It seems unlikely, however, that the 24 August cheque for $64,641.36 was a pre-payment by Datacraft given it was prior to 1 September. It seems probable that the other three deposits received in September, October and November were pre-payments by Datacraft for the completion of ICE (NZ)’s work on the main contract. Datacraft expected that the cable installation work would last until June 2007 and the pre-payment was intended to pay for the work to be finished.
[32] At the instigation of Datacraft and NZDF Mr Thompson started his own company, NZ Data in early October 2006. By November 2006 NZ Data had sent three accounts (all GST inclusive) to ICE (NZ) for $27,000, $146,250 and $50,625 for the Datacraft/NZDF contract. The three accounts were described as being for consultancy and project management. These accounts were paid immediately by ICE (NZ) to NZ Data. In January 2007 NZ Data sent a fourth and final account to ICE (NZ) for $28,125 which ICE (NZ) paid. The total amount of the four invoices was $252,000.
[33] From 1 September 2006 through until late December 2006 the four employees of ICE (NZ) continued to work on the NZDF site and were paid by ICE (NZ). From 1 September 2006 Mr Thompson effectively took over the main contract between Datacraft and NZDF. This included the completion of the
$2.7 million main contract, with which ICE (NZ) employees had been concerned, plus the substantial further additions and amendments bringing the total value of the work to about $8 million.
[34] From early January 2007 NZ Data with Mr Thompson’s expertise as well as contract labour completed the main contract and the substantial additional contractual requirements for the NZDF building.
[35] The plaintiffs say that the $252,000 (by virtue of the four accounts at [32]) Mr Thompson transferred from ICE (NZ) to NZ Data between September 2006 and January 2007 was ICE (NZ)’s money. They say this was for payment of the work ICE (NZ) did, through its employees, on the NZDF contract between September and December 2006.
[36] In response Mr Thompson said in his evidence:
140.By about September 2006, ICE had many purchase orders where works had begun, but had not been completed. It was pretty clear by then that ICE had no long-term future, and that the tasks might not be completed in a timely fashion, or at all. I decided to keep ICE operating on the project until the end of December 2006, and that all outstanding tasks as at that date, would be completed by NZ Data. Any new work from October 2006 would be done in full (materials and labour) by NZ Data, as per Mr Gillespie’s requirement.
...
145.At the end of 2006, NZ Data then hired all former ICE cabling staff for the purpose of creating more new business outside the NZD project, which only had about six months to run, to make NZ Data viable long term. All of the staff (James Taylor, Jason Astley, Jason Terry and Alapati Tuiala) were given permanent contracts (unlike the contracts they had with ICE which were for the Defence House project only. By this time, Mr Banks had gone (or was going), taking all the MATV/CCTV clients with him. Messrs Swan and Sitwell were long gone, and I felt no sense of obligation to them. ICE had no data cabling business of its own and could not have survived. It had no working directors left, and no business left.
[37] In December 2008 ICE (NZ) employees were made redundant. From then on ICE (NZ) had no involvement in the Datacraft/NZDF contract. NZ Data completed the contract.
The pleadings
[38] Section 174 of the Companies Act 1993 provides:
Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the Court for an order under this section.
(2)If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)Requiring the company or any other person to acquire the shareholder's shares; or
(b)Requiring the company or any other person to pay compensation to a person; or
(c) Regulating the future conduct of the company's affairs; or
(d) Altering or adding to the company's constitution; or
(e) Appointing a receiver of the company; or
(f) Directing the rectification of the records of the company; or
(g) Putting the company into liquidation; or
(h)Setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) of this section unless the company or that person is a party to the proceedings in which the application is made.
[39] As to the application of s 174(1) in this case there is no real dispute that if the plaintiffs establish that Mr Thompson/NZ Data deliberately took money or work which was properly ICE (NZ)’s then this would constitute oppressive or unfairly prejudicial conduct toward Mr Stilwell and Mr Swan.
[40] The plaintiffs seek orders under s 174 that Mr Thompson and/or NZ Data buy Mr Stilwell and Mr Swan’s shares in ICE (NZ) based on a valuation of ICE (NZ) at somewhere between $800,000 and $1.2 million. This approach is as I have identified based on the proposition that Datacraft, Mr Thompson and NZ Data took over what was ICE (NZ)’s entitlement in the Datacraft/NZDF contract. Thus the plaintiff argues that NZ Data’s profit from its inception in 2007 through the following two years is effectively the profit ICE (NZ) would and should have made.
[41] Mr Goodall is a Chartered Accountant and has experience in valuing small companies. He gave valuation evidence on behalf of the plaintiffs. The factual assumption that underlies his valuation is that NZ Data was the alter ego of ICE (NZ). Thus he assumed the profitability of NZ Data appropriately adjusted to reflect what he considered to be its true profit was ICE (NZ)’s profit. He concluded the value of 100% of the shares in ICE (NZ) in late 2006 was in the range of
$800,000 to $1.2m. An alternative methodology showed a figure of $913,000 as the value of ICE (NZ) shares.
[42] Thus the plaintiffs’ case alleges:
a) there has been illegal and oppressive conduct by Mr Thompson and NZ Data in wrongly taking ICE (NZ)’s money and entitlement under the Datacraft/NZDF contract (s 174(1)); and
b)the appropriate relief (s 174(2)(a)) is to order Mr Thompson and/or NZ Data to buy Mr Stilwell and Mr Swan’s shares in ICE (NZ) based on the assumption that the value of ICE (NZ) is effectively the combined value of ICE (NZ) and NZ Data as at late 2006.
[43] At trial I allowed the addition of an alternative prayer for relief based on s 174(2)(b) as follows:
Orders under s 174(2)(b) that the first, second or third defendant pay compensation to the second and third plaintiffs at not less than $200,000 being the half share of the net maintainable earnings of ICE (NZ) for the period to 31 March 2007.
[44] The plaintiffs rely upon the same allegations of wrongdoing (under s 174(1)) to also justify this relief. This prayer is based on a more limited claim of loss. As I understand the relief sought it asserts that ICE (NZ) was entitled to complete the cabling work at least through until 31 March 2007 from the Datacraft/NZDF contract. In fact NZ Data completed the contract at least from January 2007 to June 2007. The plaintiffs claim that the profit made by NZ Data for this work was
$400,000. The plaintiffs’ case is that ICE (NZ) was entitled to this “profit” and therefore Mr Stilwell and Mr Swan as 50% shareholders in ICE (NZ) are entitled to
$200,000 for a half share of this profit from Mr Thompson and NZ Data.
[45] Finally, in the plaintiffs’ closing submissions counsel suggested that I could order relief based on “a valuation undertaken on a notional liquidation basis where the $252,000 taken from ICE (NZ) and excess labour charges are restored to it”. I note that this claim for relief was not pleaded.
Discussion
[46] The essence of the plaintiffs’ case to establish unlawful conduct which was oppressive and unfairly prejudicial to them (s 174(1)) is really twofold. Firstly it claims the $252,000 paid by ICE (NZ) to NZ Data was ICE (NZ)’s money for work its employees had done. Thus Mr Thompson’s actions in taking the money from ICE (NZ) were unjustified and unlawful and came within the concept of oppressive conduct under subs (1).
[47] Secondly, the plaintiffs’ case is that the work undertaken by NZ Data on the Datacraft/NZDF contract really belonged to ICE (NZ). ICE (NZ) was entitled to the work from Datacraft and Mr Thompson. NZ Data wrongfully took the contract and its benefits (which belonged to ICE (NZ)) from September 2006 onwards. This claim is also the rationale for Mr Goodall’s evidence that NZ Data should be treated as the alter ego of ICE (NZ) (at [41]). Thus NZ Data’s income and profit for the
2007, 2008 and 2009 years should be treated as ICE (NZ)’s income and profit. And so the true value of ICE (NZ) was its value together with NZ Data’s value. This assertion is the basis for the s 174(2)(a) claim by the plaintiffs that ICE (NZ) is valued at $800,000 to $1.2 million and the plaintiffs’ shares are valued accordingly.
[48] The plaintiffs claim that Mr Thompson actively concealed his and NZ Data’s actions. His intent, they say, was to disguise what was happening as between ICE (NZ), himself and NZ Data to advantage himself at ICE (NZ)’s expense.
[49] In particular the plaintiffs point to:
a) Mr Thompson’s comments in 2006 that ICE (NZ) had no work and was closing down. As to this there is disagreement as to when these comments were made. On balance I prefer the recollection of Mr Walker who said the conversation was in late 2007. Mr Walker was present when Mr Swan and Mr Thompson met. Mr Walker was certain it was 2007. He had previously been a police officer and had likely had some training in accurate recollection of events. At that time there could be no doubt that the observation was true. As I have noted without Mr Thompson’s efforts in arranging for work for ICE (NZ) on the Datacraft contract, ICE (NZ) had little or no work. Mr Stilwell and Mr Swan had effectively washed their hands of the company in 2004. From then on they effectively left the running of the company to Mr Thompson. He worked without pay. Other than Mr Thompson’s efforts with the NZDF contract ICE (NZ) seemed to have no real future.
b)Mr Thompson’s denial that they were shareholders. When this dispute arose there was no accurate record of the shareholding of ICE (NZ). However I cannot imagine Mr Thompson did not know who the shareholders were despite changes in and discussion about sales of shareholdings. His denial of Mr Stilwell and Mr Swan’s shareholding during the initial discussions did not reflect well on him. However I do not see this as illustrating an attempt to disguise what he and NZ Data had done.
c) ICE (NZ)’s server crash. I have no reason to doubt the evidence that
ICE (NZ)’s server malfunctioned.
d)Failure to discover documents. There has been considerable dispute between the parties about the proper extent of discovery but by itself this dispute does not support dishonest motive by Mr Thompson.
e) Failing to comply with Companies Act regarding information as to shareholders and filing documentation required by law. Mr Thompson accepted he had not complied with a number of Companies Act requirements regarding filing of returns and other such documents. He failed in his duty as a director when he failed to complete this documentation. However it is difficult for Mr Stilwell and Mr Swan to take the high moral ground on this. When Mr Stilwell was director and expected, as part of his duties, to complete this documentation his performance was not ideal. Further, Mr Stilwell and Mr Swan abandoned their responsibilities in 2004 with respect to ICE (NZ). They did not uphold their end of the original shareholder bargain as to division of responsibilities. They left Mr Thompson with all the company responsibilities.
[50] None of these failures convince me Mr Thompson’s purpose was to deceive or to fraudulently deprive ICE (NZ), Mr Stilwell or Mr Swan of anything they were entitled to.
[51] I will deal first with the plaintiffs’ second proposition that the work undertaken by Mr Thompson and NZ Data was really ICE (NZ)’s work. This claim and the plaintiffs’ analysis of the facts misunderstands or ignores important differences between ICE (NZ) and Mr Thompson’s (and NZ Data’s) involvement in the Datacraft/NZDF contract.
[52] Until the Datacraft/NZDF contract began ICE (NZ) had not provided cabling services other than those coincidental to the installation of CCTV, MATV and people counting devices. The business generated by Mr Banks, the only paid employee of ICE (NZ), turned over sufficient cash to pay Mr Banks a wage but nothing more prior to 2006. Mr Swan, Mr Stilwell and Mr Thompson had set up Network to provide cabling services for work that came their way. When the Datacraft/NZDF contract began (in about April 2006) Datacraft through Mr Thompson gave ICE (NZ) significant network cabling work.
[53] Mr Thompson gave ICE (NZ) this subcontract (being labour only cabling) in an attempt to help ICE (NZ) financially ([21]). Prior to the Datacraft/NZDF contract ICE (NZ) was struggling financially. To the March 2006 year, the fifth year of its operation, it had done little better than break even. Ordinarily, labour only cabling contract work which became available through Mr Stilwell, Mr Swan or Mr Thompson would have been contracted to Network or other experienced subcontractors. The fact that on this occasion this cabling work was given to ICE (NZ), at Mr Thompson’s choice, supports his claim that it was designed to help out ICE (NZ) financially. This is emphasised when it is considered ICE (NZ) had no experienced installers when Mr Thompson arranged for the work on the NZDF contract.
[54] At the commencement of the work on the NZDF building Datacraft held the head contract for the design and provision of cabling in the building. Mr Thompson was the employee of Datacraft who was responsible for obtaining the contract with NZDF and for running the contract on Datacraft’s behalf. ICE (NZ) had an arrangement with Datacraft, through Mr Thompson, to provide labour only subcontract services for data cabling installation. There were a number of other subcontractors providing similar subcontract services. The arrangement with
ICE (NZ) related only to the main contract. There was no formal contractual document. The work that ICE (NZ) was to perform for Datacraft depended upon Datacraft providing a purchase order to ICE (NZ). If no purchase order came ICE (NZ) had no work.
[55] Mr Thompson would ensure that the cable installation subcontract services provided by the ICE (NZ) workers were completed to a proper standard. He had an interest in ensuring that this was so both from his perspective as Datacraft’s employee, supervising the whole contract with NZDF, and as a director and shareholder of ICE (NZ) which was providing the contract labourers for the job.
[56] On 1 September 2006 this arrangement changed. Datacraft had continuing contractual obligations to complete the job at the NZDF building. However they wished to pull out of any involvement in data cabling as at that date. NZDF accepted Datacraft’s removal from active involvement in the contract as long as Mr Thompson was to take over and complete the main contract and the variations ([26]-[27]).
[57] Mr Thompson’s job on 1 September 2006 therefore changed. He was no longer an employee of Datacraft. He was now working for himself. He was responsible for completing the main contract as well as the additions to the contract. This was obviously a job of considerable responsibility and well beyond simply the supervision of subcontract data cable installers.
[58] ICE (NZ) has never had an interest in Mr Thompson’s employment on the Datacraft/NZDF contract and certainly not when he effectively took over the contract between Datacraft and NZDF. This aspect of the Datacraft/NZDF contract had no relevance to ICE (NZ). ICE (NZ)’s only relationship was the provision of labour for cabling as a sub-contractor to Datacraft. Further, ICE (NZ) had no long term contractual entitlement to work from Datacraft or Mr Thompson ([54]). It was only one of a number of businesses providing cablers.
[59] Mr Thompson’s involvement in the Datacraft/NZDF contract from
1 September therefore had nothing to do with ICE (NZ). If the implication in the plaintiffs’ claim is that when Mr Thompson (and NZ Data) changed his position on
1 September and took over Datacraft’s obligations that he did so, somehow as an ICE (NZ) employee or as an ICE (NZ) shareholder/director, then I reject that claim. There was no history or any evidence of such an arrangement nor any obligation or reason for him to do so. ICE (NZ) had never been set up to provide the kind of services that Mr Thompson provided for the Datacraft/NZDF contract.
[60] Mr Thompson’s function for ICE (NZ) was to do his best to get appropriate work for ICE (NZ) and to supervise this work. ICE (NZ) had been set up for CCTV, MATV and people counting work. Mr Thompson extended that work in the NZDF contract to the provision of labour for data cabling. However this subcontract had nothing to do with the specialist expertise that Mr Thompson possessed and exercised from 1 September 2006 on.
[61] It therefore cannot be suggested that on 1 September, when Mr Thompson took over his new position, that somehow he was obligated to work through ICE (NZ) and bring the value of his new arrangements to ICE (NZ). Obviously a significant portion of the payment to Mr Thompson from 1 September through the Datacraft/NZDF contract was for the provision by Mr Thompson of his expertise. ICE (NZ) had no entitlement to any of these payments. Mr Thompson chose to channel his work on the Datacraft/NZDF contract through his company NZ Data.
[62] Further, there was no evidence whatsoever to suggest beyond the completion of the main contract that Datacraft or Mr Thompson had any obligation to ICE (NZ) to give them subcontracted labour only work. As I have noted the main contract was worth $2.7 million but the total work undertaken was somewhere near $8 million. The only work done by ICE (NZ) related to the main contract which had been completed by June 2007. The major work undertaken by Mr Thompson after
1 September was therefore work on the additions and amendments to the contract the value of which far exceeded the original contract price. A significant portion therefore of the money earned by NZ Data to the completion of the contract related
to the additions and alterations to the contract rather than the main contract on which
ICE (NZ) had worked.
[63] Given these conclusions there is no basis to suggest that NZ Data’s profit for the years ended 31 March 2007, 2008 and 2009 are somehow ICE (NZ)’s profits. The work done by Mr Thompson on the NZDF building was in a completely different category than work done by ICE (NZ) employees on the NZDF job. Further, some of the income earned by NZ Data in the 2008 and 2009 years related to completely different contracts than the main NZDF contract.
[64] To return to the plaintiffs’ claim under s 174(1) relating to this aspect of the case. The plaintiffs’ allegation is that Mr Thompson and NZ Data wrongly took ICE (NZ)’s work and profit for the Datacraft/NZDF contract, and that NZ Data was the alter ego of ICE (NZ). The removal of what were ICE (NZ)’s profits to NZ Data was a breach of s 174(1).
[65] For the reasons given I reject this claim. The income and profits of NZ Data (save the $252,000 which I consider next) were not ICE (NZ)’s income and profit. NZ Data and Mr Thompson properly earned its income independent of ICE (NZ). Mr Thompson did not conduct the affairs of ICE (NZ) as to this aspect of the claim in any way that was oppressive, unfairly discriminatory or unfairly prejudicial.
[66] To turn therefore to the first point – whose money was the $252,000? The factual dispute is simply expressed. The plaintiffs say the money in ICE (NZ)’s bank account between September and December 2006 was money earnt by ICE (NZ) as a subcontractor for Datacraft on the NZDF contract. Thus the $252,000 transferred by Mr Thompson from ICE (NZ) to NZ Data was ICE (NZ)’s money. It was not NZ Data’s or Mr Thompson’s.
[67] It is difficult to now be clear about the contractual and work arrangements on the NZDF contract between September and December 2006 as they affected Datacraft, ICE (NZ), NZ Data and Mr Thompson. The evidence established that:
a) there was a pre-payment by Datacraft to ICE (NZ) for the completion of the data cabling work on the main contract only. I accept Mr Gillespie and Mr Thompson’s evidence as to this;
b)ICE (NZ) received $281,520.95 (at least) from Datacraft during this time and paid $252,000 to NZ Data;
c) Mr Thompson took on the responsibility of the whole of the
Datacraft/NZDF contract from 1 September 2006;
d) in this capacity Mr Thompson worked (as relevant) from
1 September 2006 to December 2006;
e) ICE (NZ) employees also worked on the main contract from
September to December 2006;
f) as at the end of December 2006 there was still unfinished cabling work on the main contract which was completed by NZ Data employees;
g) as at 31 December 2006 ICE (NZ) employees were made redundant but some were rehired by NZ Data early in 2007. How many of the four were rehired is not clear;
h)NZ Data completed the required data cabling work on the main contract at NZDF from January to June 2007.
[68] What is missing is the documentation regarding the work done during this period by ICE (NZ), what was authorised by Datacraft, what work was done by Mr Thompson and NZ Data, both before and after December 2006 and a forensic accounting analysis of the above.
[69] From the facts known it is impossible to know whether Mr Thompson has or has not taken money from ICE (NZ) to which he was not entitled (s 174(1)). And if he had, whether as a result ICE (NZ) or the plaintiffs have suffered any compensatable loss (s 174(2)).
[70] Both ICE (NZ) and Mr Thompson (and NZ Data) were entitled to be paid for the work they did from September to December 2006 on the NZDF contract. From
1 September Mr Thompson was providing a quite different service with respect to the contract than pre 1 September. He was responsible for the whole contract. ICE (NZ), which continued to pay the labour cablers was also entitled to payment for the work those labourers did during that time.
[71] There is no clear identification of the work done by ICE (NZ) and Mr Thompson from September to December nor how much of the main contract was completed then. There are no purchase orders from Datacraft for the work during this time nor any invoices from ICE (NZ). Further, NZ Data and Mr Thompson worked alone (without ICE (NZ)) from January to June 2007 to complete the main contract. How much work they did during this time in relation to the pre-payment of
$281,000 by Datacraft is unknown.
[72] There is some reason to be concerned that ICE (NZ) apparently received only about $30,000 from September to December for the work it did on the NZDF contract after NZ Data had taken payment of its invoices to ICE (NZ) during this time. The $30,000 results from deducting the $252,000 paid to NZ Data by ICE (NZ) from the $281,000 received by ICE (NZ) from Datacraft in September, October and November 2006. However it is difficult to be certain that ICE (NZ) only received $281,000 from Datacraft during this time. There may have been other payments.
[73] Further, without clear evidence as to the makeup of the work done, identification of who did the work, and therefore a credible calculation of who was entitled to what, it is impossible to conclude that Mr Thompson acted improperly.
[74] Even if it could be established that NZ Data and Mr Thompson were not entitled to all of the $252,000 (and possibly establish s 174(1) grounds) there is no satisfactory evidence as to how much ICE (NZ) is entitled to (s 174(2)), nor whether any such sum would affect the value of ICE (NZ). For example, I do not know how much (in value) of the work done to complete the main cabling contract from September 2006 to June 2007 was done by ICE (NZ) and how much by Mr Thompson/NZ Data. Thus it would not be possible to apportion the $252,000 between ICE (NZ) and NZ Data reflecting the work done by each.
[75] Counsel for the plaintiffs suggested that all of the $252,000 taken by NZ Data was in fact ICE (NZ) money and all should be refunded. That cannot be correct. Some, at least, of the $252,000 must relate to work done by Mr Thompson/NZ Data (which he rather than ICE (NZ) was entitled to) from September to December 2006 and from January to June 2007. Even if an apportionment was possible all ICE (NZ) would be entitled to would be the value of the contract payment less NZ Data’s applicable overheads. No effort has been made to assess this.
[76] The plaintiffs have been unable to establish either that Mr Thompson acted improperly thereby potentially bringing his actions within s 174(1) nor even if I assume the requirements of s 174(1) had been met is there any evidence as to whether and at what level any order for compensation under s 174(2) could be made.
[77] For the reasons given therefore I conclude that the plaintiffs have not established that the profits made by NZ Data are effectively the profits made by ICE (NZ). The “facts” on which Mr Goodall made his valuation of ICE (NZ) have not been established. Mr Goodall’s valuation can therefore be set to one side.
[78] As to the alternative compensation sought the amended prayer ([43]) presumes that the profit of NZ Data for the March 2007 year is the profit of ICE (NZ) for that year. For reasons I have given that cannot be correct.
[79] The third ground of relief sought in the plaintiffs’ final submission was not pleaded. ICE (NZ) and the other plaintiffs sought an order that the $252,000 be paid by Mr Thompson/NZ Data. For reasons I have given while there may be concern
that ICE (NZ) has not been fully paid for all of the work it did between September and December 2006 on the Datacraft/NZDF contract, what short payment there might be and whether in any event compensation is properly payable has simply not been established.
[80] I have not mentioned the defendants’ valuation of ICE (NZ) which ignores NZ Data’s position and assumes a notional liquidation of the company. Given my conclusions relating to the plaintiffs’ case there was no need to consider this evidence.
[81] For the reasons given the plaintiffs’ claim must fail. I refuse the orders under s 174(1) of the Companies Act 1993.
Costs
[82] These proceedings appear to me to be properly proceedings governed by 2B of the Costs Rules. I can see no reason why the defendants should not have costs. However, if counsel are unable to agree on appropriate costs the defendants should
file a memorandum within 14 days followed by the plaintiffs, in a further 14 days.
Ronald Young J
Solicitors:
D Smyth, Barrister, Wellington
T G Stapleton, Barrister, Wellington, email: [email protected]
J A Langford, Principal, Langford Law, Wellington, email: [email protected]
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