Pero v Mike Pero Mortgages Limited
[2018] NZHC 2176
•23 August 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2017-404-1035
[2018] NZHC 2176
BETWEEN MICHAEL PERO
Plaintiff
AND
MPZ ONE LIMITED
Second Plaintiff
MIKE PERO MORTGAGES LIMITED
Defendant
Hearing: 13 & 15 August 2018 Counsel:
N Till QC & M E Gall for Mike Pero Mortgages Ltd & MPZ One Ltd
G Blanchard QC & J Lethbridge for Michael Pero
Judgment:
23 August 2018
JUDGMENT OF DUFFY J
This judgment was delivered by me on 23 August 2018 at 3.00 pm pursuant to
Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Solicitors/Counsel:
Young Hunter, Christchurch Lowndes Ltd, Auckland
G P Blanchard QC, Auckland Nicholas Till QC, Christchurch
PERO v MPZ ONE LIMITED & MIKE PERO MORTGAGES LTD [2018] NZHC 2176 [23 August 2018]
[1] The substantive trial of this proceeding is due to commence on 3 September 2018 for five days. The plaintiffs seek orders pursuant to s 174 of the Companies Act 1993 (the Act) in relation to MPRE Limited (MPRE) and Mike Pero Real Estate Limited (MP Real Estate), which will be referred to collectively as the Real Estate companies. The second plaintiff and the defendant each hold fifty percent of the shares in MPRE, and this company in turn owns all the shares in MP Real Estate.
[2] The plaintiff Mike Pero is the chief executive of MP Real Estate and a director of MPRE. He and his trust each own fifty percent of the shares in the second plaintiff.
[3] MPRE is operated as a joint venture company and there is a shareholders’ agreement in place to cover this operation. The plaintiffs allege the defendant has breached the shareholders’ agreement and for other reasons s 174 is engaged.
[4] The defendant opposes the orders being granted for the reasons the plaintiffs give and on the terms sought by the plaintiff. However, the defendant also brings a counterclaim in which, for different reasons, it seeks its own orders under s 174 of the Act in relation to the Real Estate Companies.
[5] The defendant now makes three interlocutory applications. First, the defendant seeks the trial be adjourned. Secondly, the defendant seeks orders: (a) requiring the plaintiffs to provide further and better discovery; and (b) permitting the amendment of its counterclaim.
[6] The adjournment is sought on multiple bases: (a) the defendant contends the urgency on which the present trial date was obtained was essentially an abuse of process as the grounds for urgency did not exist; (b) the plaintiffs have failed to provide adequate discovery, which has meant the defendant cannot properly prepare for the trial on 3 September 2018; and (c) the estimated hearing time of five days is inadequate, particularly if leave to amend the defendant’s counterclaim is granted.
[7] The applications are interlinked as obviously if the trial is adjourned there will then be sufficient time to deal with the other interlocutory matters. Indeed, because a new trial date is not available now until August 2019 a new setting down date can be
allocated, which will mean that the defendant can then proceed to prepare for trial without the need for leave to pursue any interlocutory matters. On the other hand, if an adjournment is not granted the defendant will require leave to pursue its interlocutory applications as the setting down date has passed.
[8]I propose to deal with the adjournment application first.
Adjournment
Was the fixture improperly obtained?
[9] Some understanding of the background to the pressures the defendant now faces is required. The initial trial date was to be in April 2019. However, given the presence at the time of certain pressures on the plaintiffs (which no longer exist) the parties jointly sought an urgent priority fixture on 4 May 2018. The 3 September fixture was allocated on 8 May 2018. At the time, the defendant had authority to enforce a judgment debt of approximately $2.5m against the plaintiffs1 and had obtained a charging order against their personal property to secure this debt.2 A stay of execution to prevent recovery of the judgment debt was in force but was due to expire on 29 September 2018.3 As at 4 May 2018 the judgment sum secured by the charging order remained outstanding.
[10] Relief sought in this proceeding would enable the plaintiffs to repay the judgment debt. Accordingly, the plaintiffs wanted this proceeding heard and determined before the stay of execution expired on 29 September 2018. Hence their desire for an urgent fixture.
[11] The defendant now contends the urgent fixture was obtained without proper disclosure being made to it or to the Court. This is the stated ground on which the adjournment is sought. Seemingly, at the time the plaintiffs were seeking an urgent fixture they were also involved in negotiations to secure a loan that would enable them
1 See amended order of this Court dated 4 December 2017 in Mike Pero Mortgages Ltd v Mike Pero
CIV 2014-404-2193.
2 See sealed order of this Court dated 22 December 2017 in Mike Pero Mortgages Ltd v Mike Pero
CIV 2014-404-2193.
3 Mike Pero Mortgages Ltd v Mike Pero [2018] NZHC 528 at [36].
to repay the judgment debt. The defendant contends the plaintiffs were aware the loan was available at the time they executed the joint memorandum seeking a priority fixture and were therefore obliged to inform the Court and the defendant of this fact. The plaintiffs deny this is so. Their solicitor has provided an affidavit in which she deposes that the loan did not become unconditional until 13 June 2018.
[12] I am in no position to determine if the plaintiffs acted improperly in obtaining the priority fixture. When the joint memorandum was filed, they were not in receipt of the loan money. The same firm of solicitors acted for the plaintiffs in the loan transaction as act for them in this proceeding. A solicitor employed by that firm has provided an explanation for the plaintiffs’ actions. Any finding I might make regarding improper conduct in obtaining the priority fixture would necessarily extend to their legal team. Ordinarily cross-examination is not permitted in interlocutory hearings. However, when findings of improper conduct are sought against a party and by inference its legal team on the basis of disputed facts I consider that to be one of the rare occasions when leave to cross-examine should be sought. The defendant’s allegation is tantamount to an allegation that the plaintiffs and their legal team have misled the Court. This is a serious allegation to make and one which cannot be resolved on the basis of unchallenged affidavit evidence. I am not prepared to make the findings the defendant seeks in the absence of cross-examination. Furthermore, I find it is unnecessary for me to determine this issue. There is a separate factor which reflects badly on both parties regarding their acquisition of the priority fixture.
[13] In June 2018, the loan money became available to the plaintiffs. They offered to pay those funds to the defendant in payment of the judgment debt. The defendant refused to accept payment. Then on 15 June 2018 the judgment sum and other moneys secured by the charging order were paid directly to the account of the judgment creditor (MP Real Estate), which necessarily removed the pressure on the plaintiffs to have the trial heard before the stay of execution expired. There was admittedly a new pressure in the form of onerous loan terms which they had assumed in order to obtain the loan money. However, this was a different pressure from the threat of execution
of the judgment, which may have unalterably changed the second plaintiff’s shareholding in Mike Pero Real Estate Limited.4
[14] After 15 June 2018, it should have been obvious to both parties that the circumstances for which the urgent fixture was obtained had changed. This fixture was conditional on the plaintiffs confirming the availability of their senior counsel by 21 June 2018. The April 2019 fixture stood in the interim. The defendant knew this. Accordingly, the payment of the judgment debt on 15 June 2018 provided both the plaintiffs and the defendant with an opportunity to re-visit whether the priority fixture of 3 September 2018 was still required, and if not to advise the Court of this change of circumstance. No-one did. Seemingly, both parties wanted the trial on 3 September 2018 to proceed. At any time between 15 June 2018 and 21 June 2018 either of the parties could have advised the Court of the change in circumstance and sought to revert to the April 2019 fixture. Neither did so.
[15] In such circumstances, I consider the parties are in no position now to complain about the difficulties of proceeding to trial on 3 September 2018. The plaintiffs are not complaining and advise they can proceed on that date. Whilst the defendant does now want to delay the trial, I am satisfied it cannot do so on the ground the priority fixture was improperly obtained. It was well within the defendant’s knowledge and power to power to seek to avoid the urgent trial date and to rely instead on the April 2019 trial date. The defendant’s failure to secure this later trial date is largely of its own making.
Has any failure on the part of the plaintiffs to give discovery contributed to the need for an adjournment?
[16] Before determining the adjournment application, I need to consider the plaintiff’s alleged failure to provide adequate discovery. If the plaintiffs have failed to provide adequate discovery, I consider this is also relevant to whether the trial should proceed or not.
4 Mike Pero Mortgages Ltd v Mike Pero [2018] NZHC 528 at [34].
[17] The first point is that the Real Estate companies are not party to this proceeding. Much of the information the defendant contends has not been discovered is the information of those companies. The defendant contends that Mr Pero has control of those companies through his role as a director of MPRE and chief-executive of the MP Real Estate. That may be. However, he is not engaged in those roles in this proceeding. His involvement in this proceeding is in his own right and indirectly through his shareholding and directorship of the second plaintiff.
[18] The Real Estate companies should have been joined as parties to this proceeding. The failure to do so has led to an outcome where the primary source of financial and other information of those companies is not so readily amenable to discovery.5 Indeed, I note that as both parties seek relief solely under the Act, r 18.1(b) of the High Court Rules is engaged. Under r 18.4 the plaintiffs should have applied for directions as to service pursuant to r 18.7. No such application was brought, and the question of whether the Real Estate companies should have been included in the proceeding was seemingly never addressed by either party. Consequently, information of those companies that could have readily been sought from them by way of discovery must now be obtained either by non-party discovery or by piercing the corporate veil and imposing this obligation on the plaintiffs. The defendant has failed to pursue the former and insofar as it relies upon the latter it finds itself met with the response from the plaintiffs that the defendant (which is in a similar legal position to the Real Estate companies as are the plaintiffs) has as much control over information of the Real Estate companies as do the plaintiffs. Accordingly, the plaintiffs have not considered themselves obliged to discover the information of the real estate companies.
[19] Whilst the plaintiffs as the parties initiating the proceeding bear responsibility for not involving the Real Estate companies and not putting the Court on notice as to the need for their involvement (through making application for directions as to service) the defendant could have taken its own steps to ensure the Real Estate companies were involved. Indeed, its own counterclaim has the same deficiency when it comes to omission to include the Real Estate companies.
5 Under r 8.21 of the High Court Rules 2016 an application to the Court is required for the obtaining of non-party discovery.
[20] Discovery was addressed in this Court in a case conference minute of Bell AJ dated 11 April 2018. This minute records that an affidavit of documents was to be provided by 10 May 2018. Further, the parties were to confer and agree on terms of tailored discovery. The parties were agreed that discovery made in earlier proceedings would count as discovery in this proceeding. Interlocutory applications were to be filed and served by 18 May 2018. The close of pleadings date was 1 June 2018. The plaintiffs were to serve their evidence and lists of documents for the bundle by 22 June 2018. The defendant was to serve its evidence by 27 July 2018. The plaintiffs were to serve their defence evidence to the plaintiffs’ counterclaim by 3 August 2018. No mention is made of who will be responsible for discovering the information of the Real Estate companies and how.
[21] No meeting to discuss tailored discovery eventuated. No affidavit of documents was served by the timetable date. Indeed, until 21 August 2018 when the plaintiffs provided a sworn affidavit of documents, none had ever been served by either side. The defendants took no action to bring this state of affairs to the Court’s attention until 19 July 2018, which is when it filed the application for adjournment and discovery orders. I consider it is too late now for the defendant to complain about inadequate discovery. Had this been of real concern to its trial preparation I would have expected the defendant to have contacted the case officer much earlier and sought an urgent telephone conference. As it is the defendant has left its complaint until late in the day.
[22] Further, I have concerns about the merits of the defendant’s complaints, some of which appear to seek information that extends beyond the bounds of the current pleading. Discovery is not a fishing exercise. Nor is it a means by which the defendant can enforce disclosure obligations one or other of the plaintiffs may owe to the defendant outside of this proceeding. As matters stand I am not satisfied the defendant’s complaints about discovery warrant granting it the adjournment. It is largely responsible for allowing the discovery process to drift until it has become too late for the Court to act without jeopardising the fixture. Parties must take responsibility for ensuring that the discovery they expect to receive is provided to them.
Should the fixture proceed?
[23] This proceeding follows on from earlier proceedings that the defendant brought against the plaintiffs and other related parties. In the first of those proceedings Katz J made orders pursuant to s 174 of the Act in relation to payments which she found to have been illegally invalid.6 Those orders formed the basis of the judgment debt, repayment of which was later stayed by Peters J.7 To pursue payment of the judgment debt the defendant was obliged to bring a separate derivative proceeding to enable it to pursue payment on behalf of the judgment creditor.8
[24] Earlier in this proceeding the plaintiffs unsuccessfully sought summary judgment on the basis the parties were deadlocked in a way that engaged the arbitration provisions of the shareholders agreement (the deadlock/arbitration issue).9 This is the first cause of action in the plaintiffs’ amended statement of claim.
[25] At the core of the parties’ dispute lies an ongoing issue, which has been around for some time and has not been resolved despite the earlier litigation between these parties: namely MPRE’s failure to declare a dividend. Despite the general benefit dividends provide for shareholders and despite the substantial cash sums the Real Estate companies have available to them, the shareholders of MPRE have been unable to agree on whether a distribution should be made or not. This issue is well summarised by Peters J:10
[18] It seems clear that MPRE is solvent and has the financial means to declare a dividend sufficient to enable payment of the judgment debt. This appears from expert evidence filed in advance of the 165 application. For Mr Pero and MPZ, Mr John Hagen’s evidence was that MPRE had retained earnings of at least $7.4 million as at 31 March 2017; that the jv companies’ “earnings before tax” are approximately $3 million per annum; that there is no requirement for material capital expenditure; and that, MPRE could “clearly afford to pay” a “substantial dividend”. Mr Hagen’s evidence as to a lack of any impediment was supported by Mr Mark Hucklesby, a senior audit partner at Grant Thornton, Auckland. In his affidavit of 26 January 2018, Mr Pero says that cash reserves then on hand were $6.12 million. He proposes that MPRE declare a dividend of $5 million; MPZ will repay to MPRE the
$2.5 million it receives, plus whatever else is required to pay the judgment
6 See Mike Pero Mortgages Ltd v Mike Pero [2016] NZHC 3185 per Katz J.
7 See Mike Pero Mortgages Ltd v Mike Pero [2018] NZHC 528 per Peters J.
8 See Mike Pero Mortgages Ltd v Mike Pero [2017] NZHC 2647 per Katz J.
9 See Mike Pero Mortgages Ltd v Mike Pero [2018] NZHC 253 per Sargisson AJ.
10 Mike Pero Mortgages Ltd v Mike Pero [2018] NZHC 528.
debt and interest in full; and the net result will be that the debt has been repaid and MPRE will have at least $3.5 million in cash.
[19] On the other hand, the evidence of Mr Grant Graham for MP Mortgages was that there remained outstanding issues as to the audit of MPRE’s financial statements to 31 March 2013 and that these may have “flow on” effects for the financial statements for subsequent years. Mr Graham’s view was that the board would be “totally justified in determining that no dividend be declared until such time as the board could sign a balance sheet”,
i.e. the audit was completed.
[20] Before me, each party relied on more recent correspondence from the auditors as to whether or not they can complete the audit which Mr Collins considers a pre-requisite to the declaration of a dividend. There is no suggestion, however, that completion of the audit would evidence a deterioration in MPRE’s financial position – on the contrary, the jv companies appear to have been very successful. Moreover, completion of an audit is not a pre-requisite to the lawful declaration of a dividend. The only pre-requisite in the Companies Act 1993 is solvency.
[26] Peters J delivered her judgment on 13 March 2018. Since then nothing has changed. The road block to a dividend is still in place, hence this proceeding. The plaintiffs want MPRE to declare a dividend and if not, for shares in MPRE to be sold. The plaintiffs are happy either to divest their shareholding or to acquire the defendant’s shareholding. The defendant contends it is not against payment of a dividend in principle, but until audited financial accounts are available it will not agree to payment of a dividend. Rather than have shares in MPRE sold the defendant contends that if through this proceeding Mr Pero and the companies he controls can be “brought into line” in terms of their compliance with the relevant shareholders’ agreement, the requirements of good corporate governance and company law then MPRE can continue without the need for the sale of any shares. It is only as a last resort that the defendant seeks the sale of its shares in MPRE. Putting aside the question of whether the plaintiffs’ conduct presently requires bringing into line, the separate questions of whether this is realistically achievable through Court process and if so, the duration of this process, bear on the relief the defendant seeks in its counterclaim.
[27] The parties are clearly at an impasse. Each seeks recourse to s 174, except for different purposes. At the heart of this impasse is seemingly an inability on their part to agree on a way forward.
[28] The defendant has filed evidence from its expert witness who deposes that, given the information discovered to date, he cannot value the shares in MPRE. Tellingly he says nothing about whether on the state of the available information a dividend can be paid in this regard.
[29] Whilst there may be inadequate information to allow valuation of the shares in MPRE, I am satisfied there is enough known to all parties for them to be able to adequately argue whether the deadlock provision in the shareholders’ agreement is engaged or not.
[30] The plaintiffs’ position is that MPRE’s shareholders are deadlocked. Accordingly, they want to engage the arbitration provisions of the shareholders’ agreement (the deadlock/arbitration issue). They have also sought orders under s 174 for the sale of shares and are willing to sell shares in which they have an interest to the defendant. They have also offered to buy the defendant’s shares. And they seek an order for a dividend. The relief is necessarily in the alternative and so exclusionary. If the parties are deadlocked and their conduct engages the arbitration provisions of the shareholders’ agreement they should go to arbitration. What next happens will then be determined by the arbitrator. If the parties are not deadlocked, but there are issues regarding payment of a dividend, once it is paid they might be able to work together. If matters have been reached where the better outcome is for either the plaintiffs to sell the MPRE shares in which they have an interest or buy the shares in which the defendant has an interest that will bring their entire working relationship to an end.
[31] On the other hand, the defendant contends there is no deadlock and therefore the arbitration provisions of the shareholders’ agreement are not engaged. The defendant also sees no need for any sale of shares. Further, it considers payment of a dividend to be premature given the state of the financial accounts of MPRE. Instead, by way of counterclaim it seeks orders under s 174 to compel the plaintiffs to perform their obligations under the shareholders’ agreement. Only as a final resort does the defendant seek the dissolution of their business relationship through the sale of shares.
[32] I consider some resolution of the present impasse is required, and that this can be achieved in the trial for 3 September 2018. It may now be too late and, in the time allocated, not possible to deal with all the parties’ complaints against each other in their respective proceedings. However, I can see no reason why the parties cannot argue the question of whether they are deadlocked in a way that the arbitration provisions in the shareholders’ agreement are triggered. This seems to me to be a discrete issue that is capable of resolution within the five-day fixture time. Further, it is an issue that must be resolved before the Court can consider the remaining claims raised by either of the opposing parties. The Court’s jurisdiction to determine those other matters hinges on whether the arbitral process has been engaged or not. I acknowledge that Sargisson AJ refused to deal with the deadlock issue by way of summary judgment. However, in the trial time available the parties can now deal with this issue substantively. The disputed facts that may have led to Sargisson AJ refusing summary judgment will not impede resolution by way of a substantive trial. Moreover, the concerns which Sargisson AJ expressed regarding the outstanding judgment debt and the appropriateness of Mr Pero seeking a dividend to enable repayment of the judgment debt are no longer live, given the repayment of this debt.11
[33] Further, resolution of whether the arbitration provisions of the shareholders’ agreement are triggered or not will leave the parties better informed. If the Court finds there is a factual basis for the arbitration provision to be engaged the parties will then know they face an arbitral hearing. If the Court finds the factual basis to engage those provisions is not established the parties will be better informed about which other aspect of the relief they should then should focus on.
[34] There is already plenty of evidence regarding the interactions between the parties that have led to this proceeding. Whether against that background the parties can be said to be deadlocked is an issue which is capable of judicial determination. The parties’ stance on the dividend issue is clear. Whilst MPRE seemingly has cash funds of more than $6m the defendant does not want to agree on payment of a dividend until audited accounts signed by all directors are completed. This cannot happen until information which the defendant contends is under the control of the plaintiffs is made
11 See Mike Pero Mortgages Ltd v Mike Pero [2018] NZHC 253 at [41]-[42].
available. The plaintiffs dispute being responsible for this state of affairs. Whether the defendant’s stance is reasonable or an act that has at the least contributed to a deadlock is an issue readily capable of judicial determination. Whether the plaintiffs have unreasonably refused to disclose relevant information that would enable audited and signed accounts to be prepared is also capable of judicial determination.
[35] The parties’ counsel, who have acted for them in other related proceedings and who are familiar with the history and circumstances of the parties’ interactions, should be able to ensure the deadlock/arbitration issue is ready for hearing by 3 September 2018. The plaintiffs have already served their evidence, which should cover the deadlock/arbitration issue as it forms one of the plaintiffs’ causes of action and prayers for relief in the amended statement of claim. The defendant should have been preparing itself to meet this aspect of the plaintiffs’ claim as it is clearly notified in the amended statement of claim. Little by way of discovery should be needed for this matter. I consider, therefore, that the defendant should be able to serve its evidence on this narrow topic by no later than 29 August 2018. The bundle of documents relevant to this narrow issue should be able to be served by no later than Friday 31 August 2018.
[36] Resolution of the deadlock/arbitration issue can be dealt with on 3 September 2018 either as a separate preliminary issue, or by the trial Judge hearing from the parties on that discrete issue and then adjourning the hearing part heard. If the latter option is followed it leaves open the prospect of a resumed hearing on the balance of the respective claims at a later date. Whichever approach is taken is something that I consider is best left to the trial Judge.
[37] The parties filed extensive case law on the application of s 174 of the Act. The decision I have reached means there is no need for me to deal at any depth with the substantive law on this provision.
Defendant’s application for further discovery
[38] The use of the trial time for 3 September 2018 to resolve the deadlock/arbitration issue dispenses with the need at this time to direct further and
better discovery as sought by the defendant. Leave is required to bring this application. At this time leave is not warranted.
Amendment of defendant’s counterclaim
[39] The defendant seeks to amend its counterclaim. The plaintiffs oppose the amendment at this late stage and contend the proposed amendment does no more than add additional particulars relevant to the defendant’s claim under s 174 of the Act.
[40] The application to amend the counterclaim was first made on 6 July 2018, however this amendment is no longer pursued. The current application to amend the counterclaim was filed on 9 August 2018. Ancillary to this application is a further application for discovery relevant to the new complaints and costs. It is a feature of the parties’ relationship that there are ongoing complaints against the other.
[41] I see no bar to the defendant referring to the matters that form the new complaints in the counterclaim by way of adducing them as evidence in the narrowed hearing on the deadlock/arbitration issue. The complaints are relevant in the sense that if established they throw light on the parties’ continuing inability to work together. In this regard I accept the plaintiffs’ contention that these new complaints serve as further particulars of the conduct the defendant relies upon to support its own s 174 claim. Insofar as the complaints are relevant to proof of the deadlock/arbitration issue they can be addressed in evidence. The defendant can pursue them in its cross- examination of the plaintiffs’ witnesses, particularly Mr Pero. Thus, at the present time, there is no need for the amendment to the counterclaim. Accordingly, it is not in the interests of justice to permit this amendment now. It, together with further discovery, are matters that are better addressed once the deadlock/arbitration issue has been determined.
Result
[42] The application for an adjournment is dismissed. The trial will proceed on 3 September 2018.
[43]The defendant is to serve its evidence by 4.00 pm, 29 August 2018.
[44] The common bundle of documents is to be filed in Court by 4.00 pm, 31 August 2018.
[45] Leave to bring the applications for further discovery and to amend the defendant’s counterclaim is refused, which disposes of those applications.
[46] The parties have leave to file memoranda on costs. I observe that given the adjournment application was brought so close to the trial, it may be better if costs on that application were reserved until after the trial on 3 September 2018 and dealt with by the trial Judge.
Duffy J
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