Nobilo v Nobilo
[2015] NZCA 54
•10 March 2015 at 11:00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA198/2014 [2015] NZCA 54 |
| BETWEEN | JOHN SAMUEL NOBILO |
| AND | DEBORAH KATHLEEN NOBILO |
| Hearing: | 18 February 2015 |
Court: | Randerson, Winkelmann and Venning JJ |
Counsel: | G L Harrison and A V Shinkarenko for Appellant |
Judgment: | 10 March 2015 at 11:00 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant is to pay the respondent costs for a standard appeal on a Band A basis with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Venning J)
The appellant, Mr Nobilo, sought leave to bring a derivative action in the name of Nobilo and Co Ltd (NCL) against the respondent, Mrs Nobilo. In a decision delivered on 7 March 2014 Associate Judge Abbott declined the application.[1]
Background
[1]Nobilo v Nobilo [2014] NZHC 401.
Mr and Mrs Nobilo are married but separated. They separated on 18 September 2012. They are also both accountants and directors of NCL. Before separation they ran an accountancy practice through NCL.
After their separation Mrs Nobilo set up a separate accountancy practice, Nesti & Associates Limited (Nesti). While still a director of NCL she wrote to the clients for whom she was the principal point of contact and invited them to complete an authority if they wanted her to continue to undertake their work at Nesti. Most, if not all, of the clients she wrote to have transferred their work to Nesti. Mr Nobilo says some 70 per cent of NCL’s clients have transferred their work to Nesti. He says Mrs Nobilo has breached the fiduciary duty she owed NCL as a director. As NCL is deadlocked (the shareholding is held or controlled equally by the parties and they are the only two directors) Mr Nobilo applied for leave to bring an action in NCL’s name to recover the losses he contends it has suffered because of Mrs Nobilo’s breach.[2]
The High Court judgment
[2]Mr and Mrs Nobilo hold one share each. The remaining 98 shares are held by a family trust of which Mr and Mrs Nobilo are two of the three trustees. The remaining trustee is the family lawyer.
Associate Judge Abbott considered that as NCL was in danger of collapsing due to the tensions between Mr and Mrs Nobilo, what otherwise might be seen to have been a reasonably strong case for breach of duty became a marginal one at best. The Judge next considered that the losses Mr Nobilo projected (the draft statement of claim referred to a sum of $400,000) were excessively optimistic and that any loss would be modest at best. He then noted that costs of at least $50,000 and perhaps more would be incurred in the proceedings. He considered there was at most a marginal benefit to NCL in the proceeding. Finally, the Judge considered that, given the former relationship between the parties and the relationship property proceedings between them, (and the possibility of an application under s 182 of the Family Proceedings Act 1980) it was preferable the parties endeavour to resolve their issues within those proceedings. For those reasons the Judge did not consider the case an appropriate one to exercise the discretion to grant leave.
The appeal
Mr Harrison submits that there is, at the least, an arguable case of breach of fiduciary duty by Mrs Nobilo as a director given the contents of the letters she sent to existing clients of NCL in November 2012. Unless Mrs Nobilo agreed to all matters, including the company’s loss, being dealt with in proceedings in the Family Court, he submitted that NCL would be left without redress with no ability to pursue a claim for NCL’s losses as a consequence of Mrs Nobilo’s actions.
Decision
The starting point is s 165 of the Companies Act 1993. The relevant portions of that section for present purposes are:
165 Derivative actions
(1)Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—
(a)bring proceedings in the name and on behalf of the company or any related company; …
(2)Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—
(a) the likelihood of the proceedings succeeding:
(b)the costs of the proceedings in relation to the relief likely to be obtained:
(c)any action already taken by the company or related company to obtain relief:
(d)the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3)Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—
(a)The company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; …
Mr Nobilo has standing as a director and shareholder to bring the application.[3] Like the Associate Judge we are satisfied that NCL does not intend to bring and pursue proceedings given the impasse in its management and control. Section 165(3)(a) is satisfied.
[3]Companies Act 1993, s 165(1)(a).
We turn to the mandatory considerations under s 165(2). In assessing those considerations the Court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding to bring a claim”.[4]
The likelihood of the proceedings succeeding
[4]Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765 and He v Chen [2014] NZCA 153 at [30].
The Judge expressed some reservation as to the merits of NCL’s claim against Mrs Nobilo. However, Mrs Nobilo’s actions in writing to clients of NCL, effectively inviting them to provide an authority to her to continue to act as their accountant with the services to be performed by her new company rather than by NCL, is, on its face, a clear breach of the fiduciary duty Mrs Nobilo owed to NCL as a director.[5] We accept Mr Harrison’s submission that a claim for a breach of fiduciary duty is clearly arguable.
The costs of the proceedings in relation to the relief likely to be obtained
[5]Companies Act, s 131(1).
The Associate Judge considered that the costs would be in the region of $50,000, perhaps more. Mr Cameron submits it will be more. Given the likely costs, the value of the potential claim and relief likely to be obtained from the proceedings is a particularly important consideration in this case. The draft statement of claim pleads that NCL has lost approximately 70 per cent of its existing client base. The loss to the company is claimed to be $400,000 in terms of net loss of future revenue. No particulars are provided as to how the $400,000 is made up. Mr Harrison sought to support the figure by arguing that it was “obvious” NCL would sustain a significant loss of future revenue if it lost 70 per cent of its client base. He also referred to the evidence of Mr Nobilo. Mr Nobilo says that the draft accounts to 31 March 2013 show fees were down by approximately $140,000 and he expects the reduction in fees to March 2014 to be more, as much as $200,000.
We are not satisfied that Mr Nobilo’s evidence and NCL’s accounts support a loss of anything approaching the $400,000 claimed in the draft statement of claim.
There are a number of factors to consider in quantifying NCL’s loss. The accounts before the Court disclose that for the full year ending 31 March 2012 (before the parties separated) NCL’s net surplus before taxation was $138,457. Accepting for present purposes that the draft accounts to March 2013 are correct in showing a reduction in fees of approximately $140,000 the net impact (when the $70,000 shareholder’s salary paid to Mrs Nobilo is deducted) is a claimable loss of approximately $70,000. The salary must be deducted because the fees would not be earned without Mrs Nobilo’s efforts. Some allowance must be provided for that. Even accepting Mr Nobilo’s evidence that he expects the lost fee revenue to be close to $200,000 for the next year, again deducting the $70,000 shareholder’s salary would leave a claim of, at most, $130,000.
The claimable losses would thus appear to be somewhere between $70,000 and $130,000 a year.
The next issue is the length of time that the damages could be claimed for. As the Judge observed, the reality of the situation was that NCL would have imploded in a very short time after the parties separated in any event. The two working principals of the firm were Mr and Mrs Nobilo. They could not continue to work together. Mrs Nobilo could have resigned as a director and then established her own practice. Clients would have followed her. Alternatively, as NCL’s management was clearly at a deadlock, the company could have been liquidated on just and equitable grounds. It is unrealistic to suggest that NCL would have continued in its existing form for any length of time given the breakdown in the relationship between the parties, and given their critical role within the company.
Any recoverable damages would have to be limited by such considerations. If the company’s claim for damages was limited to six months then it would be between $35,000 and $65,000. Even if the company was able to claim damages for a year it would be between $70,000 and $130,000 at most. Given the uncertainties associated with litigation of this nature (including the possibility of further costs on appeal) we do not consider a reasonable businessperson would bring proceedings with an associated cost of in excess of $50,000 against such possible returns.
Any action already taken by the company
NCL has not taken any action.
The interests of NCL in the proceedings being commenced
Mr Harrison submitted that if NCL was unable to bring the s 165 action then NCL would be left with no ability to pursue its otherwise valid claim. We record Mr Harrison noted during submissions that he had invited the respondent, through counsel, to enter what he referred as a jurisdictional waiver under s 3(1) of the Inferior Courts Procedure Act 1909 to acknowledge that the Family Court, whether under s 2G and/or 18C of the Property (Relationships) Act 1976 or s 182 of the Family Proceedings Act had complete jurisdiction to determine all post-separation issues, including claimed losses by NCL resulting from the post-separation actions of either party and the impact of those actions on the value of NCL as a result.
Although it is unnecessary for us to resolve the matter in order to determine this appeal, we doubt whether s 3 of the Inferior Courts Procedure Act 1909 can be used in the way that Mr Harrison suggested. The section enables a party to proceedings to waive or acquiesce in any error, irregularity, omission or defect, whether it relates to the jurisdiction of the Court, the procedure therein or any other matter.[6] However, the wording of the section does not, on its plain reading, enable the parties, by consent, to prospectively extend to the Court a jurisdiction that otherwise does not exist. Kilkelly v Nikoloff provides an example of the application of s 3.[7] The Court applied the section to validate a consent order where, if the documents had been properly executed, the Court would have had jurisdiction. That is quite a different thing to extending jurisdiction where none would otherwise exist in the first place.
[6]Inferior Courts Procedure Act 1909, s 3(1).
[7]Kilkelly v Nikoloff [1969] NZLR 842 (SC).
We note that s 3(3) of the Inferior Courts Procedure Act specifically states that “Nothing in this section shall apply so as to make valid any judgment or order which on the face thereof is of such a nature that the Court giving or making the same could not under any circumstances have jurisdiction to give or make it.” There is authority for the proposition that a waiver under s 3(1) cannot confer jurisdiction where the court could not have had jurisdiction to determine the matter at issue.[8]
[8]Nash v Nelson District Court [2000] 3 NZLR 702 (HC) at [45] and Siola'a v Wellington District Court [2008] NZCA 483, [2009] NZAR 23 at [30]).
NCL is not left without an avenue of redress as Mr Harrison submitted. On its behalf, Mr Nobilo has brought this application to the Court seeking leave under s 165 of the Act. If the Court does not consider that leave ought to be granted that would be the result of an objective consideration of the practical merits of NCL’s proposed claim.
Other relevant considerations
The Court has discretion under s 165 of the Act to consider factors other than the mandatory factors in s 165(2).[9] The list in s 165(2) was not intended to be comprehensive; it begins by expressly stating “[w]ithout limiting subsection (1)”. Section 165(1) is itself framed in discretionary terms.
[9]Catley v Waipa Corporation Ltd [2010] NZCCLR 24 (HC) at [14].
In the circumstances of the present case a further relevant factor is to consider the practical implications if leave is granted. It is relevant to consider who the ultimate beneficiaries of the proceeding may be.
From NCL’s point of view, the outcome of the proposed proceedings (if successful) would be a judgment in its favour against Mrs Nobilo. However the party ultimately entitled to the benefit of that judgment, NCL’s principal shareholder, is the family trust which holds 98 per cent of the shares in NCL. Both Mr and Mrs Nobilo (and their adult children) are beneficiaries of that trust. To that extent, save for any adjustment by reason of the application of ss 2G or 18C of the Property (Relationships) Act or an order varying the terms of the existing trust under s 182 of the Family Proceedings Act, Mrs Nobilo would herself be potentially interested in any funds recovered by NCL. That is a relevant factor which any reasonable businessperson would take into account when determining whether to initiate and pursue these proceedings.
Given the cost, the limited nature of the likely return on the proceeding, and the interests of both parties as beneficiaries of the principal shareholder, we are not satisfied it is in the interests of NCL for leave to be granted.
Result
For the above reasons the appeal is dismissed.
Costs
The appellant is to pay the respondent costs for a standard appeal on a Band A basis with usual disbursements.
Solicitors:
Langdon & Co, Auckland for Appellant
Donnell & Associates, Auckland for Respondent
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