Pero v Mike Pero Mortgages Limited
[2018] NZHC 253
•28 February 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-001035
[2018] NZHC 253
BETWEEN MIKE PERO
Plaintiff
AND
MPZ ONE LIMITED
Second Plaintiff
AND
MIKE PERO MORTGAGES LIMITED
Defendant
Hearing: 15 November 2017 Appearances:
D Bigio QC and A Malone for the Plaintiffs
G Blanchard QC and J E M Lethbridge for the Defendant
Judgment:
28 February 2018
JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 28 February 2018 at 11.30 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
Lowndes, Auckland
Whitfield Braun, Auckland G Blanchard QC, Auckland
PERO & Anor v MPZ ONE LIMITED [2018] NZHC 253 [28 February 2018]
Introduction
[1] At issue is an application for summary judgment brought by Mike Pero and MPZ One Ltd (MPZ), a company owned by Mr Pero.1 The application is opposed by the defendant, Mike Pero Mortgages Ltd (MP Mortgages), a company ultimately owned by the Liberty Financial Group.
[2] MPZ and MP Mortgages are the two 50 percent shareholding companies in a joint venture company, MPRE Ltd (MPRE). Their relationship is governed by the terms of the Shareholders Agreement dated 3 February 2011. MPRE and its wholly owned subsidiary, MP Real Estate Ltd, operate a nationwide real estate agency network.2 The business is flourishing. But all is not well behind the scenes.
[3] In 2016 Mr Pero was found liable for unlawfully passing directors’ resolutions resulting in him improperly receiving in excess of $2 million from MPRE. He was ordered to repay these sums. The judgment debt remains unpaid.
[4] Disputes have arisen over the method of repayment. Mr Pero wants to set off the judgment debt against his share of a shareholders’ dividends pay-out. MP Mortgages considers a dividends pay-out is not in the best interests of MPRE. It has instead sought and obtained leave to bring proceedings against Mr Pero on behalf of MPRE to enforce repayment of the debt. So the shareholders remain at an impasse.
[5] Mr Pero seeks to rely on a dispute resolution provision (clause 3.10) in the Shareholders Agreement which requires the shareholders or directors to submit to mediation in the event they arrive at a “deadlock on a fundamental issue”. He seeks a declaration that this clause has been triggered, and an order requiring specific performance of that clause. He says his claim is entirely appropriate for summary judgment.
[6] I am not persuaded, however, that summary judgment should be granted, for the reasons that follow.
1 Formerly called Mike Pero Marketing Ltd. Note that unless otherwise stated, for simplicity I refer to the two plaintiffs collectively as simply “Mr Pero”.
2 I refer to the two entities collectively as “MPRE”.
Background
Events before commencement of present proceedings
[7] In 2014, MP Mortgages commenced proceedings against Mr Pero alleging various breaches of the Shareholders Agreement and MPRE’s Constitution. Mr Pero counterclaimed that there was a deadlock on a fundamental issue under cl 3.10. He sought relief under s 174 of the Companies Act 1993 including for an order that MPRE’s business be sold or MP Mortgages sell its shares to MPZ.
[8] The full trial took place before Justice Katz in April 2016. Her Honour released an interim decision on 27 October 2017.3 She found that Mr Pero, in his capacity as a director of MRPE, had unlawfully passed various directors’ resolutions, including resolutions increasing his own director’s salary. His actions were described as self-interested and high-handed.4 Katz J ordered Mr Pero to repay all the amounts unlawfully taken, and made ancillary directions requiring the disclosure of documentation relevant to calculating the quantum of the overpayments.5
[9]Mr Pero subsequently calculated he had been overpaid in the sum of
$2,179,370 plus interest, and judgment was sealed in that amount, pending final resolution of the total quantum. The parties were unable to agree on that final quantum due to issues relating to interest.
[10] Meanwhile, and more pertinently, the parties have butted heads over the appropriate method for repaying the judgment debt already sealed in this court. Mr Pero put forward a resolution to the effect that a shareholders’ dividend of
$4.8 million be declared and that his portion be used to repay the judgment debt. MP Mortgages rejected the resolution (and opposes that course of action to this day).
3 Mike Pero Mortgages Ltd v Mike Pero [2016] NZHC 3185.
4 At [5], [21], [33], [37], and [41].
5 At [63].
Events leading up to 3 August hearing
[11] On 5 May 2017, Mr Pero gave notice to MP Mortgages that there was a deadlock on a fundamental issue and clause 3.10 was therefore engaged. When MP Mortgages declined to submit to meditation, he filed the statement of claim for the present proceedings on 23 May 2017. The application for summary judgment was filed on the same day.
[12] On 14 July 2017, MP Mortgages filed in response a notice of opposition, with an accompanying affidavit, and an interlocutory application for stay of the summary judgment application. Mr Pero replied with a notice of opposition to the stay application, along with an accompanying affidavit, on 24 July 2017.
[13] The matter came before me on 3 August 2017. The time estimate was inadequate, and it was necessary to adjourn the matter for a further fixture on 15 November 2017.
Events leading up to 15 November hearing
[14] There have been three noteworthy developments in the interregnum period between the 3 August hearing and the 15 November hearing.
[15] First, at the 3 August hearing counsel for MP Mortgages relied extensively on s 174 of the Companies Act, so I gave leave for MP Mortgages to file a counterclaim for relief under s 174; it did so on 25 August 2017. Mr Pero filed a defence to that counterclaim on 11 September 2017.
[16] Secondly, the parties came back to Court after continuing disagreement over quantum. On 10 October 2017, Katz J directed Mr Pero and MPZ to disclose their personal bank statements,6 and MP Mortgages set about investigating that disclosure. It appears the issues are now limited to GST related matters.
6 Mike Pero Mortgages Ltd v Pero [2017] NZHC 2486.
[17] Finally, MP Mortgages applied under s 165 of the Companies Act for an order to allow it to enforce the judgment debt on behalf of MPRE. Katz J released her judgment on 27 October 2017 granting MP Mortgages leave to bring enforcement proceedings.7 The import of that decision is discussed later. Mr Pero has given notice to MP Mortgages of his intention to appeal that decision.
[18] In advance of the 15 November hearing, MP Mortgages and Mr Pero filed supplementary submissions on 14 and 15 November respectively.
Approach to case
[19] I do not consider it necessary to consider MP Mortgages’ application for stay. As Associate Judge Bell noted in a pre-hearing minute, it really amounts to a ground of opposition rather than a separate application. My finding that summary judgment should be declined makes the stay application redundant in any respect.
[20] The legal principles on plaintiff summary judgment are well settled, and adequately summarised in Krukziener v Hanover Finance limited:8
The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
[21] There is also considerable discussion in Mr Pero’s submissions about the legal principles pertinent to the remedy of specific performance in the context of summary
7 Mike Pero Mortgages Ltd v Pero [2017] NZHC 2647.
8 Krukziener v Hanover Finance limited [2008] NZCA 187, [2010] NZAR 307 at [26].
judgment. It is unnecessary to address issues of remedy given my decision to decline summary judgment.
Mr Pero’s case for summary judgment
[22] Mr Pero attempts to frame his summary judgment application as a straightforward matter of interpreting and applying clear contractual terms — in other words, a matter appropriately resolved by the summary judgment mechanism. As Mr Pero would put it, he is simply asking the court to declare upon the plain meaning of the relevant contractual provision (cl 3.10), and its application to undisputed facts. He then asks the court to require specific performance of that provision.
[23] Pursuant to cl 1.2 of the Shareholders Agreement, all Board decisions (with one limited exception not relevant here) are to be decided upon by simple majority resolution. In the event of a deadlock, the dispute resolution procedure in cl 3.10 is engaged.
[24] Specifically, cl 3.10 stipulates the process to be followed if there is a “deadlock on a fundamental issue relating to the Company and/or its operations and/or prospects at either director a shareholder level”. In simple terms, if the parties remain in deadlock after 5 days they are required to submit to mediation. Then, if the dispute remains unresolved, each party becomes entitled to serve a termination notice on the other party, in which event there is a competitive sale process for the Company, with either shareholder being entitled to bid for the business and assets.
[25] Mr Pero contends there is a “deadlock”, with the “fundamental issues” boiling down to two. On each, Mr Pero is not asking the court to ‘prefer’ his position over that of MP Mortgages. Rather, he is merely asking the court to recognise that the dispute falls within the scope of cl 3.10. These supposedly “fundamental issues” are as follows:
(a)The dividends payment issue: Mr Pero has made a proposal for repayment by way of dividends set-off, which MP Mortgages has refused to accept.
(b)The governance issue: Mr Pero proposed a resolution relating to governance that the MPRE board meet not less than ten times per year and follow a prescribed protocol for those meetings. Again, MP Mortgages declined to support that resolution.
[26] There has been notable variation in the way the “fundamental issues” have been articulated by Mr Pero. At times, he speaks of issues concerning shareholder dividends and governance more generally — for instance, the board cannot agree even on an overall dividends policy, or the board is dysfunctional and lacking in proper governance.
[27] I consider these generic formulations of the “fundamental issues” out of step with Mr Pero’s statement of claim and notice of application for summary judgment. More pointedly, they are too vague in my view for this Court to declare that cl 3.10 has been engaged.
[28] I turn now to consider whether MP Mortgages has any arguable defence to Mr Pero’s claim.
Does MP Mortgages have an arguable defence?
[29]I begin with the dividends payment issue.
[30] Here MP Mortgages relies on three key lines of defence. First, it relies on its counterclaim under s 174. Second, it presents a range of submissions to the effect that the dispute between the parties is not caught by cl 3.10 upon a proper construction of that provision. Third, it relies on Katz J’s judgment in the enforcement proceedings to contend that the deadlock has now been resolved.
[31] I address briefly that first line of defence. MP Mortgages contends it has been prejudiced as a shareholder under s 174 for a combination of reasons. It points to a longer narrative stretching from the initial unauthorised payments, through to Mr Pero’s first attempt in 2015 before Katz J to force MP Mortgages’ hand by invoking cl 3.10, and finally to his present attempt to do the same again.
[32] MP Mortgages submits that this proposed counterclaim is so closely linked to Mr Pero’s claim that it would be unfair and wrong for Mr Pero’s claim to get summary judgment before the counterclaim could be heard at trial. I am inclined to agree, but ultimately refrain from making any determinations on this ground of defence. Only one arguable defence is required, and it is the second line of defence which occupied the lion’s share of the oral and written submissions.
Interpreting clause 3.10
[33] There is no question the parties cannot agree on the two issues identified above, and I am satisfied, at least for present purposes, that a deadlock for the purposes of cl 3.10 occurs when the votes for and against a motion are split.9
[34] The question is whether the deadlocks are over “fundamental issues”. That phrase is not defined in the Shareholders Agreement. Nor do I find the cases cited by Mr Pero very helpful in interpreting the phrase; as he himself recognises, each case must be decided on its own facts and on the specific wording of the relevant agreement.
[35] However the phrase is precisely interpreted, I find considerable force in MP Mortgages’ submission that the phrase implies a good faith requirement. That is, as a matter of construction, something can only qualify as a “fundamental issue” if the position of the party seeking to rely on the clause is taken with reasonable justification and in good faith.
[36] MP Mortgages contends this submission must be correct. Otherwise, a party could manufacture a dispute through their own bad faith to suit their own purposes, using the threat of a forced sale to pressure the other shareholder into changing their position. Such an interpretation is commercially unworkable and cannot sensibly be taken to reflect the actual intentions of the contacting parties.
[37] The submission is further supported by reading cl 3.10 in the context of the entire Shareholders Agreement. Two other provisions are especially germane.
9 Grant v Commissioner of Inland Revenue [2011] NZCA 390, [2012] 1 NZLR 235.
Clause 5.3 requires each shareholder to act in good faith at all times in relation to the other shareholder with respect to all matters relating to MPRE. Clause 1.9 requires that directors act in good faith and in the best interests of MPRE.
[38] Of course, the question remains: is it arguable in the circumstances that Mr Pero has invoked cl 3.10 in bad faith?
The question of good faith
[39] Mr Pero concedes that the dividends proposal is to an extent self-interested — it is the most convenient way for him to meet his obligations to repay the debt. But he insists that this self-interest is not at the expense of MPRE’s best interests. Indeed, he goes so far as to suggest it may be in the MPRE’s best interests: it ensures the judgment debt is satisfied whilst maintaining the relationship between shareholders and ensuring that the MPRE parties are not required to squabble further in the court through enforcement proceedings.
[40] I accept there is a factual dispute, and disagreement between experts, as to whether it is presently in MPRE’s best interests to declare a dividends payment. Mr Pero contends that MPRE is in a strong financial position to release funds by way of dividends, as it is obligated to do under the Shareholders Agreement. MP Mortgages argues a dividends pay-out should not be declared at least until the judgment sum has been paid back in full.
[41] That debate need not detain us here. It may or may not be commercially sensible for MPRE to declare a dividend at this time; but that is not the same as saying it must, or that Mr Pero is entitled to push MP Mortgages into a corner by dint of cl 3.10 to ensure he gets what he wants. In other words, the two ‘fundamental issues’ must be situated in the wider context of Mr Pero’s dealings with MP Mortgages.
[42] We must recall that the genesis of Mr Pero’s dividends proposal springs from his own illegal actions and the ensuing judgment debt. Mr Pero is legally obligated to repay that debt. He is not, on the other hand, entitled as debtor to dictate the most convenient method of recompensing for his illegality.
[43] Mr Pero therefore finds himself in a deep conflict of interest between his two roles as debtor and a director of one of the shareholding companies. This conflict in the context of debt repayment was fully ventilated before Katz J at the hearing, and succinctly canvassed in her judgment. As Her Honour reasoned, this conflict:10
… distorts the usual creditor/debtor dynamic and empowers Mr Pero to effectively dictate the course that must be taken by MPRE if it wishes to recover the very significant debt owing to it.
[44] Mr Pero has effectively frustrated recovery of the debt by using his director powers to prevent enforcement action, and now seeks to force MP Mortgages’ hand by invoking the sceptre of termination notice.
[45] In these circumstances, it is most certainly arguable that it smacks of bad faith for Mr Pero to invoke the dispute resolution procedure in cl 3.10.
Has the dispute dissolved?
[46]A further arguable defence arises out of Katz J’s judgment.
[47] Her Honour ultimately found it was in MPRE’s interests that the debt repayment question should be taken out of MPRE’s hands — hands which are tied by the Mr Pero interests — and into the hands of MP Mortgages. Granting MP Mortgages leave in the enforcement proceeding promised to “restore the usual creditor/debtor dynamic that would exist if Mr Pero was not on the MPRE board”.11
[48] In granting leave, an argument can be made that Katz J effectively dissolved the dividends dispute, at least to the extent that it can no longer qualify as a “fundamental issue”. Counsel for Mr Pero is right to point out that Her Honour’s findings may not amount to a “ruling” in favour of enforcement action as against the repayment proposal. But as Katz J noted at [34]:
Any discussions regarding recovery of the judgment sum can take place against the background that if a reasonable resolution cannot be reached, MPRE is in a position to take or continue with enforcement action. It is in
10 Mike Pero Mortgages Ltd v Pero [2017] NZHC 2647 at [32].
11 Mike Pero Mortgages Ltd v Pero [2017] NZHC 2647 at [34].
MPRE's interests that the full range of recovery options are available to it, including enforcement action against Mr Pero and MPZ.
[49] It is arguable in my view that because MP Mortgages can now enforce the debt on behalf MPRE, it cannot sensibly be said there is still a deadlock over the method of repayment. A deadlock connotes an impasse, and yet Katz J has opened up a perfectly acceptable route for resolving that dispute.
Governance
[50] My analysis so far has focussed on the issue of the dividends repayment rather than the governance issue (which is the remaining, and very much lesser argument in Mr Pero’s case).
[51] I do not consider the governance issue — whether MP Mortgages’ refusal to vote for the resolution requiring a certain number of meetings each year; or MP Mortgages’ supposed failure to attend certain board meetings — comes close to a “fundamental issue” for the purposes of cl 3.10.
[52] In any case, I consider the governance issue closely intertwined with the dividends repayment issue: the need for board meetings, and the supposed dysfunction of the board, largely owe to disagreements arising from Mr Pero’s ongoing indebtedness and the appropriate method of repayment. The two issues are so entangled that it is not safe to award summary judgment on the governance issue given my findings on the dividends repayment issue.
Result
[53]For the reasons discussed summary judgment is declined.
[54]Costs are reserved in accordance with the Court of Appeal’s decision in
NZI Bank Ltd v Philpott.12
12 NZI Bank Ltd v Philpott [1990] 2 NZLR 403, (1990) 3 PRNZ 695
[55] The Registrar is requested to confer with counsel about the allocation of a case management conference.
Associate Judge Sargisson
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