Plumpton v Terry

[2019] NZHC 3450

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2015-404-000562

[2019] NZHC 3450

BETWEEN

KEVIN IAN PLUMPTON

First Plaintiff

AND

UCFX LIMITED

Second Plaintiff

AND

JAMES TERRY

First Defendant

AND

BRENT DAVID COLBERT

Second Defendant

AND

SCOTT MAYNARD

Third Defendant

Hearing:

17 September to 5 October 2018 and

29 October 2018 and
17 December 2018

Appearances:

B P Henry & L Player-Bishop for the Plaintiffs T J P Bowler for the Defendants

Judgment:

19 December 2019

JUDGMENT OF VAN BOHEMEN J

This judgment was delivered by me on 19 December 2019 at 3.00pm Pursuant to Rule 11.5 of the High Court Rules

…………………………

Registrar/Deputy Registrar

Solicitors/Counsel:

B P Henry, Barrister, Auckland Anthony Harper, Auckland Neilsons Lawyers, Auckland

PLUMPTON v TERRY [2019] NZHC 3450 [19 December 2019]

TABLE OF CONTENTS

Introduction  1

The parties  3

Relevant background  5

The plaintiffs’ claim  24

Alleged unlawful disclosures  29

Disclosure to Westpac  30

Telstra disclosure  32

Area 3 disclosure  36
O’Neill disclosure  41

Westcon disclosure  47

What was happening around the times of the unauthorised disclosures?          52

Discussions on 2 and 3 March 2015  53
Conversation on 6 March 2015  61
Skype meeting on 7 March 2015  65
Meeting with Mr O’Neill on 8 March 2015  68

Mr Colbert’s resignation as a director  72
Meetings with Mr Plumpton on 12 and 13 March 2015  73
Further discussions among defendants  82
Aftermath to Westcon disclosure  84

Subsequent events  86

Discussion of alleged disclosures and associated events  90

Westpac disclosure  90

Telstra, Area 3, O’Neill and Westcon disclosures  91

Were Mr Terry and Mr Maynard directors of UCFX?  101
Defendants’ objection to UCFX as plaintiff  118
Have the defendants made out their causes of action?  124

First cause of action: breach of directors’ duties  126
Second cause of action: breach of fiduciary duties to UCFX  136
Third cause of action: intentional interference in contractual relations              140

Fourth cause of action: causing affairs of UCFX to be conducted in a manner oppressive, unfairly discriminatory and unfairly prejudicial to Mr Plumpton  151

Fifth cause of action: breach of confidence  156

Sixth cause of action: injurious falsehood  161

Seventh cause of action: conspiracy to cause harm by unlawful means              178
Eighth cause of action: breach of obligations of good faith and fidelity              190

Conclusions from discussion of causes of action  195

Causation of the damages claimed  196

Have the plaintiffs’ proved that the alleged actions caused the losses claimed? 199 Acting in a conflict of interest situation  199

Disseminating confidential UCFX information to third parties  201
Diverting effort from the business of UCFX  204

Making false statements to UCFX employees that UCFX was about to close down

207

Making false statements to Telstra et al that UCFX’s staff, clients and business opportunities could be acquired by NewCo  211

Conspiring to steal the business of UCFX by unlawful means  212

Proof of damage  220

Assumptions used by Mr Graham  224

Loss of profits  227

Net costs in re-establishing the business  228
Loss of opportunities during the re-establishment phase  238

Diminution of value  250

Result  258

Order  259

Costs  260

Postscript  262

Introduction

[1]                 The parties are in dispute over a telecommunications and software technology business that the first plaintiff and the defendants set up together, forming the second plaintiff as the vehicle for the enterprise. The plaintiffs say the defendants planned to steal the business and would have proceeded with that plan if the plaintiffs had not intervened before the plan was executed. The plaintiffs say that as a consequence of the steps they had to take to protect and restore their business after the defendants’ plan had been discovered, they incurred costs and were unable to achieve the profits that the business would have made had it been able to continue on its previous trajectory, and that these costs and the loss of profits were caused by the defendants’ unlawful actions for which they seek damages of $1,500,000.

[2]                 The defendants say they had no plan to steal the business and that the dispute was a disagreement among shareholders about the direction of the business. The defendants say the plaintiffs have misinterpreted documents which were prepared and circulated to various third parties for the purposes of analysing future business opportunities and have misunderstood related internal communications among the defendants and principal software architects in the company. The defendants say those documents and communications relate to precautionary measures taken in the context of a toxic environment created by the first plaintiff, whose control of the company and propensity to regard it as an adjunct to his other business in which the defendants had no financial interest, led the defendants to believe that the first plaintiff intended to wind up the business without consulting them. The defendants say the business was not earning a profit at the time they left and would never have made profits of the order claimed by the plaintiffs and that, in any event, the losses claimed by the plaintiffs were not caused by their actions.

The parties

[3]The plaintiffs are:

(a)Kevin Plumpton, a director, shareholder and the Chief Executive officer (CEO) of the second plaintiff, UCFX Ltd (UCFX). In the period to which this proceeding relates, Mr Plumpton held 10 per cent of the

shares in UCFX personally and held an interest in a further 50 per cent of the shares in UCFX through his interests in ICFX International Trustee Company Ltd (ICFX International) and Subsidiaryfx Ltd (Subsidiaryfx).1

Mr Plumpton is also:

(i)The CEO of IPFX Ltd (IPFX), a computer software company established in 1995 which specialises in telecommunications and which provides integrated communications solutions to businesses using products and services provided by Cisco and other providers;

(ii)A director of Subsidiaryfx, which holds 50 per cent of the shares in UCFX; and

(iii)A director and 34 per cent shareholder in IPFX International, which wholly owns IPFX and Subsidiaryfx.

(b)UCFX, the company established in early 2014 by Mr Plumpton, the defendants and others with the aim of providing communications services to businesses using Microsoft Lync products and services.

[4]The defendants are:

(a)James Terry, a person who has specialised in employment relations and was an original shareholder of UCFX. While not formally employed by UCFX, Mr Terry took an active part in the work of UCFX and says he was appointed to or filled, de facto, the role of Chief Operating Officer (COO) of UCFX. Whether Mr Terry was also a director of UCFX as alleged by the plaintiffs is an issue in the proceeding.

1      As reflected in the only documentary evidence of Mr Plumpton’s shareholding; Exhibit KIP1 to affidavit affirmed by Mr Plumpton on 19 March 2015.

(b)Brent Colbert, a specialist in business development opportunities, who was  an  original  shareholder,  director  and  employee  of  UCFX.  Mr Colbert had responsibility for managing the pipeline of prospective customers from whom UCFX hoped to secure firm contracts.

(c)Scott Maynard, a computer software designer and engineer who was an original shareholder of UCFX. Mr Maynard was the senior software architect in UCFX and led the team of software specialists employed by UCFX. Whether he was a director of UCFX as alleged by the plaintiffs is also an issue in the proceeding.

Relevant background

[5]                 In late 2013, Deane Jessup, a friend of Mr Plumpton and an acquaintance of the defendants, introduced Mr Plumpton to Mr Terry and Mr Colbert. Mr Terry and Mr Colbert were looking to develop a unified communications business based around the opportunities expected to arise from the release onto the market of new Microsoft Lync products and services that had been developed following Microsoft’s acquisition of Skype, a web-based communications system. Mr Plumpton says he also had it in mind to set up a business based around Microsoft products.

[6]                 The meeting led to an agreement that Mr Plumpton, Mr Terry and Mr Colbert would join with Mr Jessup and others in starting up a new business providing a unified communications service (voicemail, email, instant messaging) as a single package based on the new Microsoft Lync products and services, and to be a market leader in providing those services. As was later stated in the submission supporting UCFX’s nomination for the 2014 Microsoft Partner Awards:

UCFX was created with the very simple vision of being the go-to Microsoft Lync specialists in the markets that we enter.

[7]                 Key to achieving this vision was securing high calibre and experienced Lync systems specialists.

[8]                 On 31 October 2013, Mr Plumpton, Mr Terry, Mr Colbert, Mr Maynard, and Mr Jessup, as well as Jackie Diep, Mr Plumpton’s wife, and Paul Dolley signed a

Heads of Agreement recording their agreement to establish UCFX which would be launched on 1 February 2014 “or sooner”. The Heads of Agreement stated that it was non-binding except for certain specified terms and would be followed by a formal agreement.

[9]                 Despite the largely non-binding nature of the Heads of Agreement, the parties operated generally in accordance with its terms, subject to variations discussed below.

[10]The Heads of Agreement recorded the following understandings:

(a)Each of the seven signatories would hold 10 per cent of the shares in UCFX, with the remaining 30 per cent of the shares to be held by IPFX International, and with 10 per cent of that 30 per cent to be allocated at some future point to future employees of UCFX;

(b)IPFX International would provide initial funding of $200,000 to UCFX by way of a loan which was to be repaid by UCFX when it was financially viable to do so;

(c)Shares could not be sold within the first two years of UCFX’s operation and existing shareholders would have first rights to purchase the shares if a shareholder exited the business.

[11]              The Heads of Agreement also recorded the intended contributions of the signatories in the early days of UCFX’s operations. It stated that in the “next four months” Mr Plumpton, Ms Diep and Mr Terry would each work for a half a day per week with no provision made for any salary, and that Mr Colbert and Mr Jessup would each take “a reduced salary of $100,000 p.a. … and work on the business 40 hours per week”. Other arrangements were recorded for Mr Dolley and Mr Maynard, both of whom had continuing obligations to other employers at the time the Heads of Agreement was signed.

[12]              The arrangements for Mr Plumpton and Ms Diep appear to have reflected a common expectation among the signatories to the Heads of Agreement that

Mr Plumpton and Ms Diep would not play a significant part in the business of UCFX in the early days of its operations but would continue to devote their energies principally to Mr Plumpton’s other company, IPFX. The arrangements for Mr Terry reflected the fact he was subject to a restraint of trade under his previous contract of employment, but the expectation was that he would become a full-time and fully paid employee of UCFX after the restraint of trade had expired.

[13]              In late 2013/ early 2014, UCFX was established, IPFX International advanced the $200,000 contemplated in the Heads of Agreement, and Mr Colbert, Mr Maynard and Mr Terry started working for UCFX – Mr Terry on an occasional and unremunerated basis. Mr Colbert and Mr Maynard each signed employment contracts with the company in which they agreed, among other things, that for a period of three months following termination of their employment, they would not attempt to encourage UCFX’s resellers, suppliers and customers to terminate or restrict their trade relationship with UCFX or be directly or indirectly engaged in a business where UCFX was operating or actively bidding.2

[14]              Over the course of 2014, the company recruited a number of software architects and engineers with recognised expertise in Microsoft communications systems. The key technical team comprised Keith Copeland, Nick Eriksen, Michael Wells and Stefan Schulz (“the software architects”) as well as Mr Maynard, who led the team. UCFX also employed a number of supporting engineers. The company’s marketing material to potential clients stated that UCFX had been able to attract “arguably the best Microsoft Lync expertise in New Zealand” and had the highest number of certified Microsoft Lync professionals in New Zealand.

[15]              The arrangements put in place after UCFX was established diverged from those envisaged in the Heads of Agreement in a number of respects:

(a)No formal agreement was concluded as contemplated by the Heads of Agreement.

2      A copy of the agreement Mr Maynard signed on 5 January 2014 was produced in evidence. I do not consider the fact the agreement, which had been prepared by UCFX and each page of which had been initialled by Mr Plumpton on behalf of UCFX, was not signed by UCFX to be of significance.

(b)Notwithstanding the minor role apparently envisaged for Mr Plumpton in the early days of the new company, Mr Plumpton in fact played a major and continuing role from the outset to the point that in early 2015 he took on the role of CEO.

(c)Mr Dolley did not follow through on his intention to join UCFX and did not take up his 10 per cent shareholding which was initially transferred, apparently on trust, to Mr Jessup against the possibility that Mr Dolley might join the company further down the track.

(d)UCFX was unable to generate sufficient income to meet the salaries of the staff that had been taken on in the early days of its operations so IPFX International advanced a further loan of $200,000 to the company to meet payroll expenses.

(e)One consequence of the shortfall in income was that UCFX was unable to meet the expectations in the Heads of Agreement that, after the initial four-month period, the salaries of Mr Colbert and Mr Jessup would increase, and that Mr Terry would become a paid employee of UCFX. A further consequence was that the company was  not  able  to  pay Mr Plumpton for the hours he was working for UCFX over those contemplated in the Heads of Agreement, although he regarded his additional work as building up “sweat equity” in the company.

(f)In late 2014, Mr Jessup stood down from his roles as shareholder and employee of UCFX because of issues that had arisen over his performance and because he considered the reduced salary he was receiving from UCFX was inadequate to meet his needs. However, under an arrangement negotiated with Mr Plumpton, Mr Jessup continued to provide services to UCFX as a contractor.

(g)Mr Plumpton directed that IPFX International’s shares in UCFX, including those to be allocated to future employees, should be held by Subsidiaryfx. This appears to have been largely for internal group

management reasons and did not alter the fact that IPFX International controlled the shares held by its wholly-owned subsidiary.3

(h)When it became apparent Mr Dolley would not be joining UCFX, the shares Mr Jessup had been holding on trust for Mr Dolley were transferred to Subsidiaryfx, apparently on the understanding that they were to be added to the pool of shares available for allocation to UCFX employees.

(i)Following Mr Jessup’s standing down as a shareholder and employee of UCFX, it appears Mr Jessup’s own shares in UCFX were also transferred to Subsidiaryfx4 even though Mr Plumpton says in evidence that he acquired the shares personally after paying Mr Jessup sufficient funds to clear a credit card liability owed by Mr Jessup.

(j)As a consequence of the above transfers, by March 2015 Mr Plumpton, Ms Diep and Subsidiaryfx together held interests in 70 per cent of the shares in UCFX, but Mr Plumpton held only 10 per cent of the shares in his own name.5

[16]              The  parties  disagree  on  how  well  UCFX  was   doing  by  early  2015.   Mr Plumpton says that even though he, via IPFX International, had to contribute extra funds to enable UCFX to pay the salaries of the engineers and he had to devote much more time to the company than envisaged in the Heads of Agreement and for which he was not remunerated, the company was on an upward trajectory and that the prospects for future growth were very positive. UCFX had secured the services of the Lync specialist architects and engineers it had sought and was building up contacts and attracting business. Mr Plumpton points to the fact that UCFX won the award for Best Unified Communications Partner at the Microsoft Partner of the Year awards in

3      See affidavit sworn on 14 April 2015 by Gerald Clarke, the former Chief Financial Officer of UCFX and IPFX.

4      See Mr Clarke’s affidavit of 14 April 2015 and Exhibit KIP1 to Mr Plumpton’s affidavit of    19 March 2019.

5      In evidence, Mr Plumpton said he effectively held 77 per cent of the shares in UCFX. However, in the period to which this proceeding relates, the documentary evidence is that he and his wife together held an interest in 70 per cent of the shares in UCFX; see Exhibit KIP 1 to Mr Plumpton’s affidavit of 19 March 2015.

March 2015 and to the opportunities identified in the sales pipeline that Mr Colbert had developed and maintained, which indicated that UCFX could secure contracts worth almost $2.5 million if all opportunities were converted into sales.

[17]              The defendants give a much more downbeat assessment of UCFX’s prospects and say the company was not doing as well as it should have been  in  early 2015.  Mr Colbert points to the lack of  sales  enterprise  expertise  in  the  company after Mr Dolley failed to join the new venture and to a slowness in converting prospects into sales. Mr Colbert and Mr Terry also say Mr Plumpton diverted some of UCFX’s energies by setting up UCFX Australia without consulting them and by allocating effort and staff resources to pursuing opportunities in Australia, through UCFX Australia and IPFX, both being companies in which they had no shareholding or other interest.

[18]              Whatever the truth of those assessments, by late 2014 or early 2015, it was apparent that there was disharmony among key players in UCFX, although there were conflicts in the evidence about the precise causes. Contributing factors to the disharmony appear to have been:

(a)Unhappiness on the part of Mr Terry at Mr Plumpton’s refusal to:

(i)Pay Mr Terry a salary notwithstanding the expiry of the restraint of trade to which Mr Terry had been subject and notwithstanding the work that Mr Terry had put in on behalf of the company as, in Mr Terry’s view, de facto COO;

(ii)Appoint  Mr  Terry  formally  as  COO  as   Mr  Terry   says Mr Plumpton had agreed;

(b)Disappointment on the part of Mr Colbert and Mr Jessup that their salaries had not increased after the initial four-month period because, in Mr Plumpton’s view, the company had not generated sufficient revenue to pay the increased salaries;

(c)Discontent on the part of Mr Colbert and Mr Terry over Mr Jessup’s performance and over the way Mr Plumpton managed Mr Jessup’s situation and at what they regarded as Mr Plumpton’s effective acquisition of Mr Jessup’s shares in the company, contrary to their expectation that all original shareholders had a right to share in that acquisition;

(d)Unhappiness on the part of Mr Plumpton, Mr Colbert and Mr Terry at the pace of confirmed orders – although they had differing views on the reasons for that;

(e)Indications from Mr Plumpton to Mr Terry that he wanted Mr Colbert managed out of UPFX and was prepared to acquire Mr Colbert’s shares if a price could be agreed;

(f)A perception on the part of Mr Colbert and Mr Terry and others in the company that Mr Plumpton was sacrificing UCFX’s development in pursuit of opportunities in Australia for IPFX and for UCFX Australia;

(g)Unhappiness on the part of the defendants at the way a contract in Australia with Service First had been managed and at the fact that UCFX had been unable to charge for a significant part of the time its people had spent on the contract;

(h)Dissatisfaction with Mr Plumpton’s management style which was seen by others as non-collaborative and, according  to  Mr  Colbert  and  Mr Terry and some of the software architects, created a toxic working environment, although the technical team was largely happy within itself and was keen to stay together;

(i)A concern on the part of Mr Terry and Mr Colbert that Mr Plumpton was controlling the direction of UCFX and may be looking to push them out.

[19]              It is not necessary to make findings about the veracity of most of these allegations or the extent to which any of them contributed to the events that followed. For present purposes it is enough to note that by mid-March 2015, Mr Plumpton had formed the view that the defendants, with the assistance of a new investor, were on the point of executing a plan to set up a new company to which almost all of UCFX’s principal software architects and engineers would move and which would take over the business opportunity that UCFX had been established to meet.

[20]              On 19 March 2015, the plaintiffs filed this proceeding and applied ex parte for a number of orders, including orders preventing the defendants from engaging with UCFX clients and using confidential information belonging to UCFX. On the same day, Brewer J made a limited interim order directing the defendants not to canvas, solicit or attempt to solicit, serve or act for any present client of UCFX.6 An attempt was made to serve the order on Mr Terry and Mr Maynard that evening as they and other UCFX personnel attended the Microsoft Partner of the Year Awards dinner at which UCFX was presented with the award for Best Unified Communications Partner. The order was initially for seven days but was subsequently extended with the consent of the parties.

[21]              Following a hearing on 24 April 2015, by judgment dated 20 May 2015, Brewer J discharged the order made on 19 March 2019 and made orders directing the defendants not to canvas, solicit or attempt to solicit, serve or act for any present client of UCFX, or to contact any present client of UCFX. Those orders were of two months’ duration, to 20 July 2015. Brewer J also made orders of indefinite duration requiring the defendants not to use and to deliver up all confidential information of UCFX in their possession and not to act or to hold themselves out as directors of UCFX.7

[22]              Three of the software architects left UCFX shortly after service of the interim order of 19 March 2015. Mr Schulz tendered his resignation by letter dated 20 March 2015, with his last day of employment being 17 April 2015. Mr Eriksen tendered his resignation by letter dated 4 May 2015, with his last day of employment being 1 June 2015. Mr Wells tendered his resignation by undated letter sent to Mr Plumpton in

6      Plumpton v Terry [2015] NZHC 527.

7      Plumpton v Terry [2015] NZHC 1089.

early May 2015, with his last day of employment being 5 June 2015. Mr Copeland did not resign and continues to be employed by UCFX.

[23]              Mr Colbert and Mr Maynard formally resigned as employees of UCFX on 22 and 23 March 2015 respectively.

The plaintiffs’ claim

[24]              The plaintiffs say that the defendants developed a plan to find an alternative investor to take the place of Mr Plumpton and to set up a new company to take over the business opportunity that UCFX had been established to meet. They say the defendants’ plan was that the new company would be owned by the new investor and by Mr Terry, Mr Colbert and Mr Maynard, and UCFX’s four principal software architects, provided Mr Copeland could be persuaded to join the new venture. The plan envisaged that the new company would also employ the other Microsoft Lync software engineers employed by UCFX and would take over UCFX’s existing clients and contacts as well as the business opportunities identified in UCFX’s pipeline document.

[25]              The plaintiffs say that Mr Colbert and Mr Terry, with Mr Maynard’s knowledge and agreement but without any discussion with or authority from Mr Plumpton, disclosed confidential information about UCFX to various potential investors and embarked upon a scheme to persuade the principal architects and software engineers to leave UCFX and to come over to the new company they proposed to establish with the assistance of a new investor. They also say that the defendants diverted their time and energy into setting up the new company and diverted UCFX business opportunities to the proposed new company and conveyed inaccurate and false information to third parties, including UCFX employees and the wider market.

[26]              The plaintiffs allege five instances of unauthorised disclosure of UCFX information in support of a number of their claims.

[27]              The plaintiffs have pleaded eight causes of action, alleging that in making the unauthorised disclosures, in seeking to persuade the principal architects and software

engineers to leave UCFX and to come over to the new company, and in subsequent interactions with UCFX clients, partners and others in the industry, the defendants:

(a)Breached their duties as directors of UCFX;

(b)Breached their fiduciary obligations as directors of UCFX;

(c)Intentionally interfered in the contractual relations between UCFX and some of its clients and between UCFX and its key employees:

(d)Caused the affairs of UCFX to be conducted in a manner that was oppressive,  unfairly  discriminatory  and   unfairly   prejudicial   to Mr Plumpton in his capacity as a shareholder of UCFX;

(e)Breached obligations of confidence owed to UCFX;

(f)Made false representations to third parties about UCFX and about   Mr Plumpton’s intentions which caused pecuniary loss to UCFX and to Mr Plumpton;

(g)Engaged in a conspiracy to use unlawful means to take over the business of UCFX and to cause damage to UCFX and Mr Plumpton; and

(h)In respect of Mr Colbert and Mr Maynard, breached obligations of good faith and fidelity that they owed to UCFX as employees.

[28]The plaintiffs seek damages of $1,500,000.

Alleged unlawful disclosures

[29]              The plaintiffs point to the following five alleged instances of unauthorised disclosure of UCFX information:

(a)Disclosure to Westpac by Mr Colbert in December 2014;

(b)Disclosure to Telstra by Mr Colbert in March 2015;

(c)Disclosure to Area 3 by Mr Terry in March 2015;

(d)Disclosure to Steven O’Neill by Mr Terry in March 2015;

(e)Disclosure to Westcon Group Pty Ltd (Westcon) by Mr Colbert and Mr Terry in March 2015.

Disclosure to Westpac

[30]              On 22 December 2014, Mr Colbert sent Simon Parr at Westpac an email enclosing profit and loss statements for UCFX, UCFX’s balance sheet as at October 2014 and other documents concerning UCFX’s financial position. These documents were clearly labelled as UCFX documents. Mr Colbert said in evidence that he knew Mr Parr only from occasional social interactions but that Mr Terry had a trusted relationship with Mr Parr.

[31]              Westpac were not UCFX’s bankers and Mr Plumpton was unaware of Mr Colbert sending the documents to Mr Parr. Mr Colbert says that Mr Parr did not reply to his email and nothing further came of that communication.

Telstra disclosure

[32]              On 4 March 2015, Mr Colbert sent an email headed “Newco Info” to Derek Buckley at Telstra attaching what the email described as “high level numbers” for  Mr Buckley’s consideration. Included with the email was an attachment headed “Telstra – NewCo Investment Opportunity”. The attachment contained information concerning:

(a)The 2014 engagements of an unnamed company designated “NewCo”;

(b)NewCo’s billings from February 2014 to February 2015;

(c)The hourly rates and levels of utilisation of key staff of NewCo;

(d)The estimated value of NewCo’s current sales pipeline, plus an analysis of market opportunities and a list of current partners in the market; and

(e)A description of the experience of NewCo’s five principal software architects under the heading “Key Talent”.

[33]              The email was sent from Mr Colbert’s UCFX account and was signed off by Mr  Colbert  as  Marketing  and  Channel  Development  Manager,  followed  by   Mr Colbert’s UCFX contact details. However, with one exception, which is likely the result of an oversight, the document itself made no reference to UCFX.

[34]A page headed “Confidentiality” included the following:

All information received will be for the sole purpose of assessing the viability, financial details and business affairs of the Business and that the Interested Party has requested such confidential information as it has a possible interest to acquire by purchase that business.

[35]              It is not disputed that the statements in the document regarding NewCo were based on UCFX’s capabilities, including its software architects.

Area 3 disclosure

[36]              On 5 March 2015, Mr Terry sent an email headed “document please treat as Confidential” to Franc Coles at Australian company, Area 3 attaching a document with the cover page headed:

NewCo – Unified Communication Consultancy – Investment Opportunity.

[37]              The following page contained the following information about the document and its preparation:

Organisation name      NewCo Limited Document Type  Proposal

Author  NewCo Limited Commercial Approver Brent Colbert

Final Approver           James Terry

[38]              Mr Terry sent the email from his UCFX account, concluding the email with “James Terry, Director”. There were a number of references to UCFX in the document itself which are likely to have been the result of cutting and pasting material from UCFX documents.

[39]The document included the following statements:

12 months ago a highly talented team of experts was assembled with the intention of forming a high performing Unified Communications consultancy organisation focused on the delivery of tailored unified communications solutions. In the period, the team has:

·   Established a proven track record delivering outstanding solutions on the Microsoft platform …

·   Been awarded the Communications Gold Competency for Microsoft’s Unified Communications, the highest level of qualification available.

·   …

The team has decided to reform and as a result there is an opportunity for forward thinking organisations and individuals to invest in and benefit from this exceptional team.

[40]              The document also contained information about projects in which NewCo was said to have been engaged, identified the qualifications and experience of the company’s principal software architects and other senior staff, and named a number of existing clients that the team was currently working with. It is not disputed that the information about NewCo was in fact information about UCFX.

O’Neill disclosure

[41]              On 5 March 2015, Mr Terry sent Mr O’Neill an email headed “UCFX and Steve NDA” to which was attached a draft Mutual Confidentiality Agreement between UCFX and an unnamed company. The email stated:

To keep everything above board and protect all I have attached a NDA [non- disclosure agreement] for signature.

Can you please fill this out and I will then sign also and send over a detailed project report with all our projects and pipeline.

I will also drop a note with the current salaries and shareholding.

[42]              Mr Terry, Mr Colbert and Mr O’Neill signed the agreement on 6 March 2015. The opening recital to the agreement recorded that:

The parties are engaged in discussions concerning a possible business relationship involving all named.

[43]              The following day, 7 March 2015, Mr Terry sent Mr O’Neill an email attaching a document entitled “Project ID’s” which listed approximately 190 projects in which UCFX was then engaged. The document identified clients and projects by name, with estimates of value and progress achieved. The document identified by first name various UCFX personnel including Mr Plumpton, Ms Diep, Mr Colbert, Mr Maynard, Mr Jessup, Mr Copeland, Mr Schulz, Mr Eriksen and Mr Wells. In cross examination, Mr Terry acknowledged that the document was a UCFX document.

[44]              On 14 March 2015, Mr Colbert sent Mr O’Neill an email, copied to Mr Terry’s personal email address, to which was attached a document entitled “Summary Assessment Statement”. The email stated:

Numbers attached, any questions let me know.

[45]              The Summary Assessment Statement contained information about the operating costs of an unidentified company but included salaries and charge out rates for Mr Terry, Mr Colbert, Mr Maynard, and the four software architects, although the entry for Mr Copeland were in a different colour and there was a notation indicating that Mr Copeland’s participation was not certain. At the top of the document was the notation “Assumes Apr 20th Start”

[46]              Mr Colbert agreed in cross-examination that the Summary Assessment Statement set out the financial details of UCFX.

Westcon disclosure

[47]              On 13 March 2015, Mr Terry and Mr Colbert met with Darryl Grauman of Westcon, a supplier of hardware and software to UCFX, apparently at the initiative of Mr Terry and Mr Colbert. At that meeting, Mr Terry, Mr Colbert and Mr Grauman

signed a non-disclosure agreement between Mr Terry and Mr Colbert and Westcon. It would seem that this document was prepared by Westcon and was different from a draft non-disclosure agreement Mr Colbert had sent to Mr Grauman some days earlier.

[48]              On 15 March 2015, Mr Colbert sent  to  Mr Grauman an  email,  copied  to Mr Terry’s personal email address, which was headed “NewCo–UC Consulting Opportunity” and attached a document headed:

NewCo – Unified Communication Consultancy – Investment Opportunity

[49]The email included the following statements:

Thanks for your time last Friday. Please find attached a document detailing more of the detail in terms of our performance over the last 12-14 months.

Happy to send a weighted view of costs/revenues going forward as a new entity as well once you have digested the information and want to go deeper into the numbers.

[50]              The Investment Opportunity document was a more elaborated version of the document Mr Terry had sent to Area 3 on 5 March 2015. Like that document, it identified NewCo as the author of the document, Mr Colbert as the Commercial Approver and Mr Terry as the final approver. Unlike the document sent to Area 3, however, the document sent to Westcon made no direct reference to UCFX or to UCFX customers; where the earlier document had referred to UCFX and UCFX customers, the later document referred to NewCo and NewCo customers.

[51]              Like the document sent to Area 3, the document sent to Westcon stated that a highly talented team of experts assembled with the intention of forming a high performing Unified Communications consultancy organisation had decided to reform, and there was an opportunity for forward thinking organisations and individuals to invest in and benefit from this exceptional team. Like the document sent to Area 3, the document also contained information about projects in which NewCo was said to have been engaged, identified the qualifications and experience of the company’s software architects and other senior staff, and named a number of existing clients that the team was currently working with. As with the document sent to Area 3, the information about NewCo was in fact information about UCFX.

What was happening around the times of the unauthorised disclosures?

[52]              When considering the disclosures, it is necessary to have regard to the evidence of other developments and discussions taking place at the time among the defendants and with other UCFX employees.

Discussions on 2 and 3 March 2015

[53]              The defendants say that the background to the disclosures were rumours circulating in UCFX and in the market place regarding UCFX and Mr Plumpton’s plans for the company.   Mr Terry ties those rumours to a conversation he had on   3 March 2015 with Gerald Clarke, Chief Financial Officer (CFO) of UCFX and IPFX and other IPFX-group companies in 2015. It is apparent, however, that, quite apart from the alleged rumours, Mr Terry had unresolved issues with Mr Plumpton about the nature of his role with UCFX and his wish to be remunerated for his work, and that Mr Colbert had issues about the quantum of his remuneration.

[54]              On 2 March 2015, Mr Terry sent Mr Plumpton an email saying that with his approval, he intended to start paying himself a salary of $100,000 per annum and to put in place incentive arrangements for himself and Mr Colbert. Mr Terry ended the message “James Terry, Director”. Mr Plumpton replied on 3 March 2015 that he did not think any responsible CEO could support the proposal and that as a business they needed to employ the right people for the right jobs independent of shareholder status.

[55]              Also on 3 March 2015, Mr Terry met with Mr Clarke who advised him that Mr Plumpton was out to get “us” and would not stop until he had total control of the company and that “we” should make alternative arrangements. Mr Terry produced an email dated 4 March 2015 which he had sent to himself and which recorded his conversation with Mr Clarke that day. In the email, Mr Terry says that Mr Clarke had made it very clear that Mr Plumpton and Ms Diep wanted “us” out and would stop at nothing to achieve that result. Mr Terry ended the email “James Terry, Director.”

[56]              In his evidence, Mr Clarke recalled meeting with Mr Terry in March 2015 and said he could vouch for some of the  conversation as set out  in Mr Terry’s  email of  4 March 2015. Mr Clarke agreed that he had warned Mr Terry when UCFX was first

established about Mr Plumpton taking on the role of Managing Director but was equivocal about whether he had warned Mr Terry in March that Mr Plumpton was out to get Mr Terry and others and to take control of UCFX.

[57]              Whether before or after his meeting with Mr Clarke on 3 March 2015, Mr Terry exchanged a series of electronic instant messages with Mr Colbert and Mr Maynard. In the first exchange, Mr Terry said he was “pretty much ... out from today” because Mr Plumpton was not going to sign a pay increase “for Brent or us” as he believed they were not doing good jobs and UCFX needed to employ other people to do them. Mr Colbert’s response was “20th it is then”.  Mr Terry then said, “today for me mate. I cannot go on working for him for nothing”. Mr Maynard then said, “Let’s get to work on the exit strategy.”

[58]              In a later message exchange that day, Mr Terry asked Mr Colbert what he should do around invoicing as “they are chasing me”. Mr Colbert replied that he should defer “them” as he needed to focus on NewCo.

[59]              Later again on 3 March 2015,  Mr  Colbert  sent  an  email  to Mr  Eriksen, Mr Maynard, Mr Terry and Mr Wells in which he reported on a conversation he had had that evening with Mr Schulz about Skype for Business content “coming through” and how they could best assimilate it into their business plans. He said he was going to arrange for Mr Schulz and Mr Copeland to come up on 19/20 March for a Skype for Business planning workshop, that they could “have a few quiets” at the Partner Awards dinner, perhaps pick up an award and “…then plan on the 20th (half day) how we execute in 2015 against the new product release.”

[60]              The Telstra disclosure took place the following day, on 4 March 2015. The Area 3 disclosure took place a further day later, 5 March 2015. The first part of the O’Neill disclosure also took place on 5 March 2015.

Conversation on 6 March 2015

[61]              Mr Copeland, who worked in UCFX’s Wellington offices, says that on 6 March 2015 he had a conversation with Mr Colbert in Wellington after the two of them had been at a meeting with a client. Mr Copeland says that in that discussion Mr Colbert

told him that things were happening at UCFX in Auckland and that UCFX was at risk because of steps being taken by Mr Plumpton and Ms Diep to prefer the interests of IPFX over those of UCFX. Mr Copeland also says that Mr Colbert told him that he had heard that UCFX would be gone in three months and that Mr Plumpton was “out to get” employees of UCFX. Mr Copeland says that Mr Colbert also said that “the guys” – whom Mr Copeland understood to be Mr Colbert, Mr Terry and Mr Maynard

– were working on a way to salvage the situation and keep UCFX’s team of Lync consultants together.

[62]              Mr Copeland says that during his meeting with Mr Colbert, Mr Maynard called Mr Colbert who handed his phone to Mr Copeland. Mr Copeland says Mr Maynard asked him if he was “on board” and that, without giving the question a great deal of thought, agreed he was. He also says that Mr Colbert told him that potential new investors had been lined up for a new company where the team could stay together and that one investor in particular was very promising.

[63]              In cross-examination, Mr Colbert confirmed aspects of Mr Copeland’s account but took issue with Mr Copeland’s statement that he had told Mr Copeland that they had lined up potential investors for a new company. Mr  Colbert  said  he had told  Mr Copeland that “we” had been talking to a potential person who “could provide some advice in terms of the situation”.

[64]              Mr  Maynard  confirmed  in  cross-examination  that  he  had  spoken   to   Mr Copeland during his call  to  Mr  Colbert  on  6  March  2015  and  had  asked  Mr Copeland if he was on board in the sense of Mr Copeland being comfortable with where things  were at.  Mr Maynard said that reference was intended  to reassure   Mr Copeland that if UCFX was going to get rolled up, “… then you know we’ve got options and see what we can do.”

Skype meeting on 7 March 2015

[65]              On Saturday 7 March 2016, Mr Colbert, Mr Terry, Mr Maynard, Mr Wells, Mr Eriksen and Mr Copeland had a Skype meeting. Mr Copeland says that the meeting traversed many of the same issues that Mr Colbert had raised with him the previous day and was an opportunity for the UCFX employees to ask questions. He

says his questions concerned the legality of what was being proposed and whether it would breach the “non-compete” clauses in his employment contract with UCFX. Mr Copeland says that Mr Terry gave information at that meeting about an investor called Steve O’Neill.

[66]              Mr Colbert said in cross-examination that Mr O’Neill was referred to as a person on whom the UCFX personnel could rely for advice. Mr Terry agrees that some of the matters mentioned by Mr Copeland may have been discussed but says that UCFX employees were not encouraged to move to NewCo because there was no new company and no thought had been given at that time to such a new company or who might work for it.

[67]              The second exchange in the O’Neill disclosure, when Mr Terry sent Mr O’Neill the “Project IDs”, took place the same day.

Meeting with Mr O’Neill on 8 March 2015

[68]              On Sunday 8 March 2015, Mr Colbert, Mr Terry, Mr Maynard, Mr Eriksen and Mr Wells met with Mr O’Neill at his offices in Auckland. Mr Copeland and Mr Schulz dialled into the meeting via Skype. Mr Copeland says the meeting lasted for at least three hours and that the UCFX employees shared their background stories, asked questions and listened to Mr O’Neill’s background and how he could help them.

[69]              Mr Copeland says that after the meeting ended it was clear that the intention of Mr Terry, Mr Colbert and Mr Maynard was to get all of the UCFX team to leave UCFX and set up another business. Mr Terry says the purpose of the meeting was not to put a new company in place secretly but to address the difficulties that UCFX faced and how these could be rectified. When that interpretation of the meeting was put to Mr Copeland in cross-examination he said that there was definitely a plan to look at starting a company with Mr O’Neill as the primary investor, although he accepted that Mr O’Neill had also said that Plan A should be to fix the problem inside UCFX but that Mr O’Neill would be there and would be an investor if things did not work out with UCFX.

[70]              Mr Maynard said in cross-examination that Mr O’Neill had offered advice at the meeting on how to handle the situation at UCFX and in particular how to handle Mr Plumpton and what the options might be. Mr Maynard said that Mr O’Neill had talked about Plans A, B and C. He said Plan A was to fix the current situation, Plan B was for the UCFX employees to move on together if the rumours about what was going on in the company were true, and Plan C was for each of the employees to go their own ways.

[71]              When asked by Mr Henry for his understanding of Plan A, Mr Terry said everyone had different ideas about Plans A, B and C but that for him, Plan A was for him to set himself back up in a business and to get back into recruitment which was the area he knew best. However, Mr Terry also said that Plan A would have been to keep UCFX going and that had it not been for the rumours and what Mr Clarke had told him, he believed UCFX would still be together.

Mr Colbert’s resignation as a director

[72]              By letter dated 11 March 2015, Mr Colbert advised Mr Plumpton that he wished to resign as director of UCFX with immediate effect. The letter did not address Mr Colbert’s status as an employee of UCFX.

Meetings with Mr Plumpton on 12 and 13 March 2015

[73]              Mr Plumpton learned of the discussions that had been taking place between the defendants and UCFX’s senior software personnel from Mr Copeland whom he met in Wellington on 10 March 2015.

[74]              On 12 and 13 March 2015, Mr Plumpton convened meetings in Auckland with the defendants, Mr Wells, Mr Eriksen, Mr  Copeland,  Mr  Clarke,  and  Ms  Diep. Mr Plumpton said the purpose of the 12 March meeting, which was held by videoconference, was to get all issues about UCFX out onto the table and that the purpose of the 13 March meeting, which was attended by all participants in person, was to make decisions on the path forward for UCFX. Records of the discussions were prepared by Mr Plumpton’s personal assistant.

[75]              The record of the meeting of 12 March 2015 shows that Mr Plumpton raised the rumours about his intentions regarding IPFX and UCFX and said he wanted to clear up any misconceptions. The record also shows that it took some time for the other participants to engage on the main issue that Mr Plumpton had put up for discussion. Once the issue was engaged, however, Mr Plumpton gave a number of assurances  that  he  had  no  intention  of  “shafting”  or  closing  down  UCFX.    Mr Plumpton then offered the other participants the opportunity to raise any concerns or questions either at that meeting or by email. The meeting ended on the understanding that they would all meet again in person the following afternoon.

[76]              According to the record of the meeting for 13 March 2015, the meeting began with a discussion of the possibility that three of the engineers might leave UCFX because of unhappiness at the “politics” in the company. This led to a discussion about infighting at the company, a lack of communication on matters such as the Service First contract and other projects in which UCFX had been involved, the possible appointment of a project manager and the strategy the company should be pursuing, with differences of view expressed about the strategy that had been pursued to date. Mr Plumpton is recorded as saying he considered Mr Colbert had spent too much time pursuing smaller projects and that the focus should be on the big accounts and to add value. The culture of the company was raised with Mr Colbert expressing unhappiness at criticisms Mr Plumpton had made about the performance of various UCFX personnel and Mr Terry then referred to the possibility of four UCFX personnel wishing to resign because of issues over IPFX.

[77]              According to the record, Mr Plumpton said he had been told that a management buy-out was going on and Mr Terry said that as a group they had talked about splitting away from Mr Plumpton as a method of self-preservation, so they could be in charge of their own destiny. There was no further discussion of a possible management buy- out.

[78]              When Mr Plumpton asked how it would be if he and his team refrained from negative comments and a project manager was appointed, Mr Terry said he needed time to “digest some stuff”. In response to Mr Maynard’s  question about  whether Mr Plumpton saw roles for Mr Terry and Mr Colbert, Mr Plumpton said UCFX should

only employ the right people for the right jobs and should not be giving shareholders jobs.

[79]              A question was asked about who the directors of UCFX were, to which      Mr Plumpton replied that he and Ms Diep were directors. Mr Terry is recorded as saying:

It was agreed I have Directors votes and input, but am not listed on the company’s records.

[80]              Mr Clarke explained the different roles of shareholders, directors and a management team. Mr Plumpton said he thought there should be at least one engineer as a director. He went on to say it would be good to have representation from different groups of people and said that anyone who wanted to be involved in the management team or as a director  should  send  him  an  email.  The  meeting  concluded  with Mr Eriksen acknowledging that the meeting had helped and Mr Plumpton proposing that the next meeting be held in a month.

[81]              Mr Terry and Mr Colbert met with Mr Grauman of Westcon on the same day as meeting of 13 March 2015. The third exchange in the O’Neill disclosure, when Mr Colbert sent Mr O’Neill the Summary Assessment Statement, took place the following day, 14 March 2015. Mr Colbert sent Mr Grauman the Investment Opportunity document the next day, 15 March 2015.

Further discussions among defendants

[82]              On 16 March 2015, Mr Colbert and Mr Schulz had an exchange of instant messages in which Mr Colbert told Mr Schulz that it looked like “Steve” was on board and that Mr Terry was confirming “share splits etc”.

[83]              On 19 March 2015, Mr Terry and Mr Colbert had an exchange of instant messages in which he said, “everyone is go by the look of things just waiting on Steve”, and agreed that “Steve” had confirmed for “100k”. On the same day, the three defendants had another exchange of  instant  messages  in  which  Mr Terry  asked Mr Maynard to get “everyones trust  names  for  the shareholders agreement” and  Mr Maynard agreed to obtain a copy of a shareholders’ agreement from “Callum”. In

cross-examination, Mr Colbert said that “Callum” was Mr Maynard’s accountant and that the shareholders’ agreement referred to in that exchange was for NewCo.

Aftermath to Westcon disclosure

[84]              On 17 March 2015, after talking to Mr Plumpton by telephone, Mr Grauman sent Mr Plumpton an email attaching various documents, including the Investment Opportunity document that Mr Colbert had sent to Mr Grauman on 15 March 2015 and a copy of the non-disclosure agreement signed by Mr Colbert, Mr Terry  and   Mr Grauman.

[85]              Late in the evening of 17 March 2015, following receipt of an email from   Mr Grauman advising that Westcon had decided not to proceed at that moment in time, Mr Colbert sent instant messages to Mr Terry and Mr Maynard advising that Westcon had “came back with a no”.

Subsequent events

[86]                On 8 April 2015, Mr Colbert sent 10 emails to contacts he had in Microsoft. The emails were headed “Lync Opps in Asia” or just “Lync Opportunities” and told the recipients that he had recently finished up at UCFX after picking up the Best Unified Communications Partner Award. All but one of the emails contained the following sentence:

Not only did I leave, but all bar one of the engineers resigned as well after a falling out with two of the Directors.

[87]              The emails stated that Mr Colbert had a qualified and award-winning Lync team that were under a three-month restraint of trade in New Zealand and was looking for offshore work, with a focus on Asia or, in some emails, Asia/Europe, and asked if the recipients were across any Lync opportunities that could use some Kiwi ingenuity.

[88]As at 8 April 2015, Mr Eriksen and Mr Wells were still working at UCFX.

[89]              There is no evidence of any reply to these messages or of any the UCFX software architects taking up work opportunities in Asia or Asia / Europe.

Discussion of alleged disclosures and associated events

Westpac disclosure

[90]              Mr Colbert says he had sent the documents to Mr Parr to obtain advice on the valuation of the company but said that he did not receive a reply from  Mr Parr.     Mr Colbert was not asked directly why he had wanted to obtain a valuation of the company. Mr Henry submits that the obvious intention was to put in place a plan to set up a new business. However, that proposition was not put to Mr Colbert in cross- examination. It is also possible that Mr Colbert was seeking Mr Parr’s advice as a prelude to a discussion about selling his shares to Mr Plumpton. In addition, there is a considerable time gap between the email to Mr Parr and the more significant events that took place in March 2015 and there is no evidence to suggest that anything flowed from the Westpac disclosure. For these reasons, I do not consider that I have a sufficient basis upon which to reach any firm conclusions about this disclosure.

Telstra, Area 3, O’Neill and Westcon disclosures

[91]              The above summary of events shows that the Telstra, Area 3, O’Neill and Westcon disclosures all took place over the period that the defendants were having discussions among themselves and with the software architects about a plan to keep the group together and before and after the meetings that Mr Plumpton convened to try to clear the air within the company. The records of those meetings show that neither Mr Terry  nor Mr Colbert raised with Mr Plumpton their discussions with   Mr O’Neill or with Westcon despite Mr Plumpton stating that he had been told that a management buy-out was going on. Their failure to raise those discussions, neither at the meetings on 12 and 13 March nor in private with Mr Plumpton, stands in marked contrast to their evidence  that  their  primary  purpose  in  their  discussions  with  Mr O’Neill was to sort out the issues in UCFX.

[92]              I am satisfied from the nature of the disclosures and their timing and sequence that the disclosures were part of an effort by Mr Colbert and Mr Terry, with the knowledge and support of Mr Maynard, to persuade a new investor to invest in a new company which would take on UCFX’s specialist personnel and try to secure UCFX’s existing clients and future business opportunities. The documents sent by Mr Colbert

and Mr Terry to Telstra, Area 3, Mr O’Neill and Westcon explicitly stated that a team of unified communication experts was looking to reform and that this resulted in an “investment opportunity”. The information describing the opportunity was UCFX information – in particular its clients and partners, its key personnel and its future work prospects. In the case of the O’Neill and Westcon disclosures, the documents also showed the proposed shareholding for the new company based on a new investor and principal UCFX personnel.

[93]              I am satisfied that the evidence establishes that Mr Terry and Mr Colbert had embarked upon a plan to find an investor to fund a new company that would take over UCFX’s employees, in particular the software architects and Mr Maynard, UCFX’s clients and contacts, and the business opportunities identified in the UCFX pipeline. That is that the only sensible  explanation  for  the  disclosures  to Telstra, Area  3, Mr O’Neill and Westcon; Mr Colbert’s discussions with Mr Copeland; the meetings involving the defendants, the software architects and Mr O’Neill; the discussions with Mr O’Neill over share splits for NewCo; and the discussions over preparation of a shareholders’ agreement.

[94]              While Mr Maynard denies any knowledge of the documents sent to Telstra and Westcon, the exchange of messages that he had with Mr Terry and Mr Colbert 3 March 2015, his phone conversation with Mr Copeland on 6 March 2015, and the exchanges of messages he had with Mr Terry and Mr Colbert on 19 March 2015, satisfy me that Mr Maynard was actively engaged in the plan  being pursued  by Mr  Colbert  and Mr Terry to find an investor to enable NewCo to take over the staff, clients and business opportunities of UCFX.

[95]              By contrast, I find the defendants’ alternative explanations of the disclosures and surrounding events unconvincing. I do not accept Mr Colbert’s evidence that he sent the document to Telstra because Mr Terry had heard from someone at Microsoft that there was  an  opportunity  in  Indonesia  that  Telstra  could  not  service.  As  Mr Colbert acknowledged in cross-examination, there was nothing in the document that referred to Indonesia or about how an operation in Indonesia could be serviced.

[96]              Nor do I accept Mr Colbert’s statements when being cross-examined that he did not know why he had sent the Investment Opportunity document to Westcon or that he did not have a conversation about a new venture with Mr Grauman when they met on 13 March 2015, despite the fact he sent Mr Grauman the Investment Opportunity document a few days after the meeting under an email that referred specifically to their discussions at the meeting.

[97]I do not accept Mr Terry’s evidence that:

(a)His exchanges with Mr Colbert on 3 March 2015 were referring to discussions about setting up a new business in Asia following decisions that he and Mr Colbert had each separately taken to leave UCFX;

(b)He must have sent the document to Area 3 in error because Area 3 was not a unified communications company;

(c)He had consulted Mr O’Neill to secure support for a recruitment company Mr Terry wanted to establish and that the shareholders’ agreement referred to in the exchange of messages on 19 March 2015 was related to that purpose;8 and

(d)He had no knowledge of and no involvement in sending the documents that were emailed to Westcon two days after he and Mr Colbert had met with Mr Grauman, and that he had not seen the document prior to the hearing, despite the fact that Mr Colbert copied Mr Terry into the email forwarding the document to Mr Grauman.

[98]              I find aspects of Mr Maynard’s evidence unconvincing, notably his answers in cross-examination that:

8      Whether or not Mr Terry may also have discussed a recruitment company venture for himself with Mr O’Neill, the documents sent to Mr O’Neill and the discussions among the defendants and with other UCFX employees are not consistent with such a limited purpose.

(a)His reference to an “exit strategy” in the exchange of messages on     3 March 2015 was “more about the rumours” and what they would do if UCFX were to close, rather than a plan to set up a new company.

(b)The shareholders’ agreement that his accountant was to provide, as referred to in the exchange of messages of 19 March 2015, was to assist Mr Terry to set up a recruitment company. Mr Maynard’s evidence on this point was contradicted by Mr Colbert who accepted the shareholders’ agreement was for NewCo.

(c)He had no knowledge of the fact that Mr Colbert had included his salary and proposed shareholding in NewCo in the documents sent to Westcon.

(d)The instant message sent to him by Mr Colbert late in the evening of 17 March 2015 did not mean Westcon had turned down the proposal in the documents that Mr Colbert had sent to Mr Grauman.

[99]              For all of the above reasons, I am satisfied that all three defendants collaborated in a plan to find a new investor who would provide the finance necessary for them to set up a new company that would take over the business of UCFX and UCFX’s key staff, and that the disclosures to Telstra, Area 3, Mr O’Neill and Westcon were made as part of that plan. I am also satisfied that those disclosures where made without the knowledge or consent of Mr Plumpton and Ms Diep, the two registered directors of UCFX (together with Mr Colbert until his resignation as a director on 11 March 2015).

[100]          Before considering whether plaintiffs have made out their causes of action based on the above findings, it is necessary to consider:

(a)Whether Mr Terry and Mr Maynard were directors of UCFX because a number of the causes of action are premised on their having that position; and

(b)Whether UCFX is properly a plaintiff to the proceeding – which the defendants dispute.

Were Mr Terry and Mr Maynard directors of UCFX?

[101]          Mr Terry and Mr Maynard were never formally appointed as directors or named as directors in UCFX’s registration with the Companies Office. Mr Colbert does not dispute that he was a director up until his resignation from that position on 11 March 2015.

[102]Section 126(1) of the Companies Act 1993 provides that a director is:

(a)a person occupying the position of director of the company by whatever name called; and

(b)for the purposes of sections 131 to 141, 145 to 149 …

(i)a person in accordance with whose directions or instructions a person referred to in paragraph (a) may be required or is accustomed to act; and

(ii)a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; and

(iii)a person who exercises or who is entitled to exercise or who controls or is entitled to control the exercise of powers which, apart from the constitution of the company, would fall to be exercised by the board; and

…

[103]          The plaintiffs do not say that either Mr Terry or Mr Maynard were shadow directors in accordance with sub-paragraphs (i) – (iii) of s 126(1). Their case is based solely on the proposition that Mr Terry and Mr Maynard held themselves out as directors and so were de facto directors in accordance with s 126(1)(a).

[104]          In Re Hydrodam (Corby) Ltd,9 a decision noted by Woolford J in Delegat v Norman,10 Millet J made the following observations about the position of de facto directors under the equivalent English provision:

9      Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180; [1994] BCC 161 at 183.

10     Delegat v Norman [2012] NZHC 2358 at [28].

A de facto director is a person who assumes to act as a director. He is held out as a director by the company, and claims and purports to be a director, although never actually or validly appointed as such. To establish that a person was a de facto director of a company it is necessary to plead and to prove that he undertook functions in relation to the company which could properly only properly be discharged by a director. It is not sufficient to show that he was concerned in the management of the company’s affairs or undertook tasks in relation to its business which can properly be performed by a manager below board level. A de facto director … is one who claims to act and who purports to act as a director, although not validly appointed as such.

[105]Also relevant are the following passages in Delegat v Norman:11

[31]   … The concept of de facto director is confined to those who willingly or voluntarily take upon themselves the role, either by usurping the office or by continuing to act once their formal role has ceased. It does not extend to a person who does not willingly adopt the role of director.

[32]   … in order to establish that a person is a de facto director of a company, it is necessary to plead and prove that he or she undertook functions in relation to the company that could properly be discharged only by a director. There needs to be clear evidence that the person was either the sole person directing the affairs of the company or if there were others who were true directors that he or she was acting on an equal footing with the others in directing the affairs of the company. If it is unclear whether the acts of the person are referable to an assumed directorship or to some other capacity, such as shareholder or consultant, the person must be entitled to the benefit of the doubt.

[106]          Mr Maynard agreed in cross-examination that when UCFX was first formed it was agreed that all the original shareholders would be directors of the company. However, only Mr Plumpton, Ms Diep, Mr Jessup and Mr Colbert were named as directors in the registration of UCFX with the Companies Office. Mr Plumpton says this was because Mr Terry considered that to be named as a director at the outset would have conflicted with Mr Terry’s then continuing employment and because it was thought that the company would “look small” if everyone from UCFX who dealt with customers was called a director. Mr Plumpton says this meant only that there was a delay in “officially” registering Mr Terry and Mr Maynard as directors and that both acted and represented themselves as directors.

[107]          Mr Plumpton says that Mr Terry asked to be listed as a director prior to the signing of the Heads of Agreement, attended most directors’ meetings, was recorded as such in the minutes when they were kept, described himself as Director – UCFX on

11 At [32].

his LinkedIn profile and on his business cards, and signed the Non-Disclosure Agreement with Westcon  as a Director of UCFX.   Mr Plumpton says that while    Mr Maynard was employed as a Principal Consultant to UCFX, he attended directors’ meetings and, like Mr Terry and Mr Colbert, described himself as Director - UCFX on his LinkedIn profile and on his business cards.

[108]          Mr Terry acknowledges that he had asked to be a director but said this was before Mr Plumpton asked him to “fly under the radar” and that because it was never intended that he work full time at UCFX, he was never going to be registered as a director. Mr Terry disclaims any responsibility for his business card, which was arranged by Mr Colbert, and says that his designation as a director on his LinkedIn account was for reasons of self-promotion.

[109]          Mr Maynard says that his LinkedIn profile showing him as a director dates back to the discussions at the time UCFX was originally formed and that he neglected to update the profile once it became apparent he was not going to be a director. He says Mr Colbert was responsible for his business cards showing him as a director, that he queried this when he received the cards, and accepted it would be an unnecessary cost to get new cards made. He says he rarely used the cards and that he never attended directors’ meetings or took part in financial discussions. Mr Eriksen and Mr Wells both say Mr Maynard did not hold himself out as being a director of UCFX.

[110]          The evidence concerning Mr Terry’s position as a director is considerably stronger than that concerning Mr Maynard. First, unlike Mr Maynard, Mr Terry was never an employee of UCFX. Whether or not he filled the role of de facto COO, he was never appointed to that position or remunerated for it. Accordingly, his only ostensible reasons for being at UCFX were as a shareholder or as a director. While the minutes of only one directors meeting – that of a meeting on 8 October 2014 – were put in  evidence, the minutes show the attendees of that  meeting as being     Mr Jessup, Mr Colbert, Mr Terry, Mr Plumpton, Ms Diep and Mr Clarke. It can be assumed that Mr Clarke was present in his capacity as CFO. Apart from Mr Terry, the other attendees were all formally appointed as directors at the time. The obvious inference is that Mr Terry was present as a director.

[111]            Secondly, while Mr Terry says he did not pursue his initial wish to be named as a director after Mr Plumpton asked him to “fly under the radar”, the evidence shows that on four occasions in March 2015 Mr Terry styled himself as a director or asserted that he was a director: in signing off his email to Mr Plumpton of 2 March 2015, in his email of 4 March 2015 recording his conversation with Gerald Clarke, in his email to Franc Coles on 5 March 2015 and at the meeting of UCFX personnel held on 13 March 2015 where Mr Terry said he had “Directors votes and input”, even though he was not listed as a director with the Companies Office.

[112]          Thirdly, in cross-examination, Mr Terry said that the Non-Disclosure Agreement he and Mr Colbert signed with Mr Grauman of Westcon was between UCFX and Westcon and not between Mr Terry and Mr Colbert in their personal capacities and Westcon. Whether or not Mr Terry and Mr Colbert were in fact representing UCFX in signing the agreement, it appears that Mr Grauman understood that they were approaching him as representatives of UCFX. There is also no doubt that when signing the Non-Disclosure Agreement, they each described themselves as “Director”. On his own evidence, therefore, Mr Terry was holding himself out as a director of UCFX when he signed the agreement.

[113]          On the other side of the ledger, having regard to the observations of Woolford J in Delegat v Norman  noted above, it is apparent that Mr Plumpton did not treat  Mr Terry as if he were on an equal footing in directing the affairs of the company.  Mr Plumpton’s response to Mr Terry’s proposal in early March 2015 that he pay himself a salary and put in place incentive arrangements for himself and Mr Colbert was directive and conclusive and showed no indication that Mr Plumpton thought he was dealing with one  of  the  company’s  directors.  Mr  Plumpton’s  response  to Mr Maynard’s question at the meeting on 13 March 2015 about whether Mr Plumpton saw roles for Mr Terry and Mr Colbert was similarly directive.

[114]          However, it is also apparent that Mr Plumpton was similarly directive in his dealings  with  other  directors,  notably  Mr  Jessup  and  Mr  Colbert.   Perhaps    Mr Plumpton saw that as his right as the effective funder of UCFX. In any event, I do not consider that Mr Plumpton’s manner in dealing with Mr Terry is sufficient to offset the conclusion to which the evidence otherwise leads; namely, that by his own actions

Mr Terry purported to act as a director and, particularly when signing the Non- Disclosure Agreement with Westcon, he was undertaking a role that could properly only be undertaken by a director or CEO. Accordingly, I find that Mr Terry was a deemed director of UCFX.

[115]          By contrast, there is little evidence to show that Mr Maynard either took on the role of a director himself or undertook roles that could properly only be undertaken by a director. Other than his business card and LinkedIn profile, there is no evidence to show that Mr Maynard either held himself out as a director or was held out by the company as being a director. While Mr Plumpton asserts that Mr Maynard attended directors’ meetings, that is denied by Mr Maynard.  Mr Jessup also considers that  Mr Maynard was a director but acknowledges that the meetings Mr Maynard attended were largely technical meetings rather than the director meetings that took place in the evenings.   Mr Maynard  is not listed as an attendee at the directors’ meeting of        8 October 2014 and is  not  recorded  as  being  absent.  There  is  no  evidence  of Mr Maynard attending any external meetings as a director or of him signing documents on behalf of UCFX in any capacity.

[116]          Mr Plumpton says that the reason he considered Mr Maynard a director from the outset was that he wanted someone else to manage the engineering and marketing aspects of the business and that was to be Mr Maynard and Mr Colbert respectively. That statement is not consistent, however, with the comment Mr Plumpton made at the meeting of UCFX staff on 13 March 2015 that he thought there should be at least one engineer as a director. That comment was made in the context of a discussion about possible future arrangements and does not suggest that Mr Plumpton considered at that time that Mr Maynard was already a director.

[117]          For these reasons, the evidence does not satisfy me that, on the balance of probabilities, Mr Maynard was a de facto director of UCFX in March 2015. That finding does not lessen Mr Maynard’s involvement in the plan which the three defendants had put together to take over the business of UCFX.   But it excludes    Mr Maynard from potential liability under causes of action pleaded on the basis of breach of directors’ duties.

Defendants’ objection to UCFX as plaintiff

[118]          In his closing submissions, Mr Bowler, counsel for the defendants, referred to a minute of 17 September 2015 by Bell AJ in which the Associate Judge recorded the parties’ agreement at that time to a number of pre-trial issues then outstanding and, in particular, whether UCFX had been properly joined to the proceeding. Mr Bowler submits that the joinder of UCFX as a party remains alive and that it is the defendants’ submission that UCFX was never properly joined as a party.

[119]          It is unsatisfactory that Mr Bowler should raise such an important matter only in closing submissions after a lengthy hearing and without an adequate explanation of the defendants’ position. As a consequence, the Court was left to sift through three years of pleadings, memoranda and minutes in order to understand the defendants’ position.

[120]          The issue was raised in Bell AJ’s Minute because the defendants had said in their statement of defence and counterclaim dated 6 August 2015 that UCFX had not been properly joined as a party with the consent of its Board of Directors. Over the next three years the position of the defendants changed as they responded to amended statements of claim filed by the plaintiffs. In their joint amended statement of defence dated 25 September 2018, the defendants no longer said that UCFX did not have the consent of its Board. They did say, however, that leave had not been sought pursuant to s 165 of the Companies Act 1993 to issue pleadings on behalf of UCFX.

[121]          I accept that in raising s 165 of the Companies Act, the defendants are effectively raising the question of whether UCFX had the consent of its board to bring the proceeding because Mr Plumpton would not need, and indeed could not obtain, the leave of the Court to bring a derivative action on behalf of UCFX under s 165 if UCFX was properly a party to the proceeding in its own right.12

[122]          While the plaintiffs have not produced any resolution of the UCFX board showing that a formal resolution was made authorising the proceeding, I am satisfied

12 In accordance with s 165(3)(a) of the Companies Act 1993, the Court may not grant leave to a director or shareholder to bring a derivative action on behalf of a company if the company intends to bring the proceeding in its own name.

that Mr Plumpton and Ms Diep had the authority to commence the proceeding on behalf of UCFX on 19 March 2015. As at that date, only Mr Plumpton and Ms Diep were listed as directors because Mr Colbert had resigned as a director on 11 March 2015. Accordingly, Mr Colbert could have no role in the decision to commence the proceeding, even leaving aside the obvious conflict of interest he would have had in voting on such a decision. Mr Terry would have had a similar conflict of interest but again, leaving that issue aside, it is clear that Mr Plumpton and Ms Diep together had the requisite majority to authorise UCFX to bring the proceeding, either in the absence of Mr Terry or over his opposition if he had been present, having regard to Schedule 3 of the Companies Act.13

[123]          For these reasons, I see no  need  to  question  the  ostensible  authority  of Mr Plumpton and Ms Diep to bring the proceeding. This also disposes of the need for leave to bring the proceeding as a derivative action.

Have the defendants made out their causes of action?

[124]          It is axiomatic that the plaintiffs must prove that the defendants’ conduct came within the causes of action pleaded and that that conduct caused the losses claimed by the plaintiffs. If those elements are proved, the plaintiffs must prove the losses claimed, at which point questions of quantification of damage arise.

[125]          While all three elements must be proved before the defendants can be liable under any of the causes of action, in the following discussion I deal only with the first element of whether the defendants’ conduct gives rise to the causes of action pleaded. Causation and proof of damage are considered subsequently because they are common to all causes of action.

First cause of action: breach of directors’ duties

[126]          The plaintiffs say Mr Terry and Mr Colbert breached their duties as directors by:

13     In accordance with s 160 of the Companies Act 1993, Schedule 3 of the Act applies to meetings of the UCFX board, subject to the company’s constitution – of which no evidence has been offered.

(a)Failing to act in good faith and what they believed to be in the best interests of UCFX as required by s 131 of the Companies Act, by using UCFX’s confidential information to set up NewCo to take over the business of UCFX and by diverting attention from their responsibilities at UCFX by focusing on the establishment of NewCo;

(b)Disclosing information that they had in their capacities as directors or employees of UCFX in circumstances not permitted under s 145 of the Companies Act;

(c)In the period between 21 March and December 2015, spreading rumours to various UCFX clients, partners and prospective clients, as well as to prospective employees that UCFX was looking to recruit that UCFX was bankrupt or was going bankrupt and that UCFX did not have any resources.

[127]          The plaintiffs say that these breaches caused loss and damage to the business greater than $1,500,000 and seek an order for damages for that amount.14

[128]          Section 169(3) of the Companies Act provides that the duties owed under     ss 131 and 145 are duties owed to the company and not to shareholders. It follows that any claim for compensation for a breach of those duties can be brought only by UCFX and not by Mr Plumpton.

(a)Acting in a conflict of interest situation in seeking out investors to take over the business of UCFX; disseminating confidential UCFX information to third parties; diverting effort from the business of UCFX;35

(b)Making false statements to UCFX employees that UCFX was about to close down; making false statements to Telstra, Area 3, Mr O’Neill and Westcon that the staff, clients and business opportunities of UCFX could be acquired by taking up the NewCo investment opportunity;36

(c)Conspiring to steal the business of UCFX by the breaches of directors’ duties, the breach of the obligation of confidence and the injurious false statements.37

34     McElroy Milne v Commercial Electronic Ltd [1993] 1 NZLR 39 (CA) at 43.

35     First, second, and fifth causes of action.

36     Sixth cause of action.

37     Seventh cause of action.

Have the plaintiffs’ proved that the alleged actions caused the losses claimed?

Acting in a conflict of interest situation

[199]          There is no evidence that the defendants’ actions in seeking out investment from Mr O’Neill and others led to actions by those parties that had consequences for the plaintiffs. Westcon specifically declined to be involved; there is no evidence of any response by Telstra or Area 3 or, indeed by Ms Brown and Mr McCall, two other parties said to have received confidential information from the defendants. Whatever interest Mr O’Neill may have had in the proposed investment must have ended with the service of the interim orders on 19 March 2015. It follows that the plaintiffs suffered no consequences and thus no damages as a result of actions by third parties approached by Mr Colbert and Mr Terry in breach of their fiduciary duties to UCFX.

[200]          It can fairly be said, however, that actions taken by UCFX to protect its business would not have been taken “but for” the breaches committed by Mr Colbert and Mr Terry and that the defendants can be held liable for the costs associated with those actions. Those costs must include remedial steps taken within the company and with existing clients and the loss of business opportunities that can be fairly attributed to the defendants’ actions and to the defendant’s abrupt departure from the company.

Disseminating confidential UCFX information to third parties

[201]          As with the conflict of interest breach, there is no evidence that any of the third parties who received confidential UCFX information did anything with that information that had consequences for UCFX. The only consequences for UCFX of this breach of fiduciary duties by Mr Colbert and Mr Terry were those taken by UCFX to protect its business as a consequence of the defendants’ breach as discussed above.

[202]          The same analysis holds for the defendants’ breach of their duty of confidence under the fifth cause of action. I accept, as Mr Plumpton says, that disclosure of UCFX’s client information would have caused significant damage to UCFX’s professional reputation if the information had been disclosed. However, there is no evidence to show that the information went beyond its original recipients and no evidence they did anything with it that had consequences for UCFX.

[203]          Mr Henry submits that UCFX suffered detriment from the fact of the disclosure of its information and that is sufficient. However, that submission does not square with the guidance of the Court of Appeal in Karum Group that a plaintiff in a commercial case must normally point to detriment, by which the Court clearly meant actual detriment, if it is to get relief in equity. I see nothing in the facts of this case that would justify a departure from that guidance and no submissions were made to that effect.

Diverting effort from the business of UCFX

[204]          Mr Plumpton and Ms Diep say that Mr Colbert in particular deliberately did not progress or slowed down work with existing and potential clients because he prioritised development of the NewCo proposal and because he wished to ensure that NewCo rather than UCFX would benefit from future work. By way of example, they say Mr Colbert failed to progress a proposal to Weltec-Support that should have been sent to the client in January 2015 and which  had a potential value of $20,600.      Mr Henry refers to a comment in a document sent to Westcon which records against an entry for Weltec-Support, “Awaiting proposal, slow down to move to the new entity.” Mr Plumpton and Ms Diep also say UCFX lost an opportunity worth $35,000 with Foodstuffs South Island because of inaction by Mr Colbert. Mr Henry also refers to the response by Mr Colbert to Mr Terry in  their instant message exchange of       3 March 2015 that he should defer invoicing as Mr Colbert needed to focus on NewCo, as well as Mr Maynard’s remark in an earlier exchange that day that they should get to work on the exit strategy.

[205]          The above evidence shows that in some respects the defendants may have been prioritising NewCo over their UCFX work in March 2015 and, at least in the case of Weltec-Support, may have been deliberately going slow on that work in order to bring it over to NewCo. The evidence is far from conclusive, however. Mr Colbert’s evidence is that the slow-down of Weltec had been at the client’s request – which is consistent with the notation on the document that there was only a 10 per cent chance of the Weltec work transitioning to NewCo. In addition, the examples cited are few and, if they are examples of delay, their consequences would have been relatively small. There is no independent evidence of what motivated Weltec not to continue

with UCFX. Moreover, Ms Diep attributes the loss of Weltec, Foodstuffs and Air New Zealand to a wider set of circumstances – “the Defendants’ actions and the drama associated with it”.

[206]          For these reasons, notwithstanding the views of Mr Plumpton, Ms Diep and Mr Jessup that the plaintiffs had been deliberately stalling work, I do not have sufficient evidence to be satisfied on the balance of probabilities that the defendants engaged in a deliberate diversion of effort which contributed to the losses claimed by the plaintiffs.

Making false statements to UCFX employees that UCFX was about to close down

[207]          The plaintiffs say the defendants’ false representations about UCFX caused actual damage because key staff members, namely Mr Schulz, Mr Eriksen and Mr Wells, left UCFX. Mr Plumpton says that it was clear to him that the resignations of Mr Schulz, Mr Eriksen and Mr Wells came as a result of the defendants’ actions preceding their departure from UCFX and that the internal unrest caused by the defendants played a part in the employees’ departure.

[208]          There is no doubt that Mr Schulz’s departure was directly connected to the defendants’ actions in relation to NewCo. His letter of resignation was tendered the day after Brewer J’s interim order of 19 March 2015. The letter refers to a wish to distance himself “from the current situation including court orders”. In an email exchange with Mr Plumpton in the days after he tendered his resignation Mr Schulz said he did not want to be involved in the mess or to have to take sides. In his evidence, Mr Schulz also refers to the court orders and says he realised that it would not be easy to solve the issues within the UCFX leadership and that it was time to move on. He also says the decision to leave was his own.

[209]          None of the above reasons given by Mr Schulz for leaving relates to the statements the defendants made to him and to the other software architects that UCFX was closing down – which is the action on which the sixth cause of action is based. By the time Mr Schulz submitted his resignation, he knew that NewCo was not proceeding and he knew that UCFX was not closing down. In his email of 22 March 2015 to Mr Schulz, Mr Plumpton urged Mr Schulz to look past the events of NewCo

and to focus on the future. He also asked Mr Schulz to stay at UCFX, to give him time to fix the rot and find a way to get Mr Schulz and the other architects what they wanted. It is plain, therefore, that whatever motivated Mr Schulz’s decision to resign, it cannot have been the defendants’ earlier false representations that UCFX was closing down.

[210]          The same holds for the resignations of Mr Wells and Mr Eriksen who stayed with UCFX for a month longer than Mr Schulz and would have been well aware of Mr Plumpton’s activities in support of keeping the company going. Accordingly, the plaintiffs have not proven that the damages caused by the resignation of Mr Schulz, Mr Eriksen and Mr Wells were caused by the false statements that UCFX was closing down.

Making false statements to Telstra et al that UCFX’s staff, clients and business opportunities could be acquired by NewCo

[211]          As already discussed, none of the recipients of these false statements took any actions that had consequences for UCFX. It follows that UCFX suffered no losses as a result of those statements. However, as with the breaches of directors’ duties, the making of those false statements was a primary reason for the interim orders made by Brewer J and the defendants can properly be held liable for the losses suffered by UCFX as a consequence. These must include the remedial steps taken within the company and with existing and prospective clients, and the loss of business opportunities that can be fairly attributed to the defendants’ actions and to the defendants’ abrupt departure from the company.

Conspiring to steal the business of UCFX by unlawful means

[212]          Under this cause of action, it is necessary to consider whether losses claimed by the plaintiffs that are not recoverable under the other causes of action that have been made out may nonetheless be recoverable because they were the consequence of the defendants’ conspiracy to steal UCFX’s business, even if they were not caused by the particular unlawful means employed to give effect to the conspiracy. Having regard to Cooke P’s ultimate question in McElroy Milne v Commercial Electronic Ltd, the principal issue is whether losses suffered by UCFX from the departure of the software architects were sufficiently linked to the conspiracy to steal the business to

merit recovery in all the circumstances. The important question here is what caused the software architects to leave UCFX.

[213]               It is clear from the evidence that UCFX did not have a happy working environment. The defendants and some of the software architects said the company had a toxic environment, for which they ascribed responsibility to Mr  Plumpton.   Mr Schulz, Mr Eriksen and Mr Wells all refer to the toxic environment among their reasons for leaving UCFX.

[214]          Mr Henry submits that the defendants’ claim that Mr Plumpton generated a toxic environment at UCFX should not be taken into account or given little weight because this claim was not put to Mr Plumpton in cross-examination. However, the claims of toxicity were made in briefs of evidence to which Mr Plumpton had the opportunity to respond. Moreover, they are not the only evidence of the tensions within the company.

[215]          The notes of the UCFX staff meeting of 13 March 2015 show that Mr Eriksen was unhappy at being treated like an employee and at a lack of communication and direction within the company. In evidence, he says he was not made to feel welcome by Mr Plumpton and he felt uneasy and unvalued. Mr Wells says he was not 100 per cent happy at UCFX in late 2014 and had had a couple of discussions with management, including Ms Diep, and would have looked at another opportunity if it had come along. He also refers to the negativity around the company at the time. The evidence also shows that Mr Eriksen and Mr Wells attached importance to sticking together and were loyal to the technical team led by Mr Maynard. The notes of the meeting of 13 March 2015 record Mr Maynard identifying Mr Schulz, Mr Eriksen and Mr Wells as wanting to leave.

[216]          While Mr Plumpton says that Mr Wells told him at a meeting in January 2016, also attended by Ms Diep, that he would not have left UCFX but for the lies told to him by Mr Terry and Mr Colbert, those sentiments were not recorded in the notes of the meeting Ms Diep made afterwards. Nor are they consistent with Mr Wells’ evidence. Nor was it put to Mr Schulz, Mr Eriksen or Mr Wells in cross-examination

that their resignations from UCFX were caused by or were the consequence of the defendants' actions in looking to set up NewCo.

[217]          The balance of the evidence, therefore, is that UCFX was already an unhappy place to work and that a number of the software architects were considering leaving quite apart from any actions taken by the defendants. In these circumstances, I do not consider that it can be said that Mr Schulz, Mr Eriksen and Mr Wells would not have resigned “but for” the defendants’ conspiracy to steal the business. However, I also do not consider that it can be said that the resignations were not sufficiently linked to the conspiracy to merit making the defendants liable for losses incurred by UCFX as a consequence of the resignations.

[218]          In reaching this conclusion, I have given careful consideration to the Court of Appeal’s decision in Bank of New Zealand v NZ Guardian Trust Co Ltd where Tipping J confirmed that where a fiduciary has committed a breach of duty which involves an element of infidelity or disloyalty engaging the fiduciary’s conscience, once the plaintiff has shown a loss arising out of a transaction to which the breach was material, the plaintiff is entitled to recover unless the fiduciary can show that the loss would have occurred in any event, i.e. without any breach on the fiduciary’s part. Tipping J went on to observe that policy dictates that fiduciaries be allowed only a narrow escape route from liability based on proof of loss or damage that would have occurred even if there had been no breach.38 It follows that the burden of proof is on the fiduciary.

[219]          I am satisfied that in this case, the conspiracy was material to the resignations. It was the exposure of the conspiracy that led to Mr Schulz’s resignation the following day, and I am satisfied that the aftermath of that exposure contributed to the decisions of Mr Eriksen and then Mr Wells to resign. For that reason, the defendants have not established that Mr Schulz, Mr Eriksen and Mr Wells would have left UCFX regardless of the conspiracy. Accordingly, I am satisfied that the plaintiffs are entitled to damages for losses suffered by UCFX as a consequence of the resignations of the three software architects.

38     Bank of New Zealand v New Zealand Guardian Trust Co Ltd [1999] 1 NZLR 664 (CA) at 687.

Proof of damage

[220]The Court is faced with two very different calculations of damages:

(a)Grant Graham, the plaintiffs’ expert accounting witness, quantifies the plaintiffs’ losses on two bases:

(i)A loss of profits in a range of $1,056,800 (Low End) to (High End) $1,916,400;

(ii)A diminution of value, being the difference in value before the events giving rise to the proceeding and that after those events, in a range of $1,041,000 (Low End) to $1,977,000 (High End).

(b)Alan Dent, the defendants’ expert accounting witness, estimates the loss of profits for UCFX in a range of $106,500 (Low End) to $169,500 (High End). Mr Dent questions the usefulness of the diminution of value methodology used by Mr Graham in the circumstances of UCFX and challenges the validity of the assumptions underlying the valuation. Based on what he considers to  be  more  appropriate  assumptions, Mr Dent estimates the value of UCFX at 30 June 2015 as being in a range of $0 to $84,492.

[221]          Mr Henry submits that Mr Dent’s valuations and conclusions regarding the value of UCFX and the loss to the plaintiffs cannot be relied on because he was misinformed and misguided by assumptions that the defendants gave him and as a result the valuations have no basis. Mr Henry further submits that the assumptions with which Mr Graham was provided were upheld at trial and that the Court should therefore rely primarily on the numbers in Mr Graham’s brief when assessing the quantum of damages.

[222]          I do not accept either submission. While Mr Dent rightly acknowledged in cross examination that the defendants had not given him the full story of the events that gave rise to the  proceeding,  and  while  some  of  those  omissions,  such  as  Mr Colbert’s authorship of the pipeline, go to the accuracy and weight of some of

aspects of Mr Dent’s conclusions, they do not affect the validity of  questions that  Mr Dent raises about aspects of Mr Graham’s valuations. Furthermore, in the preceding discussion on causes of action and causation, I have rejected a number of the assumptions  on  which  Mr  Graham  prepared  his  valuations.  Furthermore,  Mr Graham himself acknowledged  that  he  had  used  assumptions  provided  by  Mr Plumpton that he was not able to validate and that he did not have enough information to enable him to produce a valuation that was compliant with Advisory Engagement Standard 2 of the Institute of Chartered Accountants of New Zealand.

[223]          In short, there was a significant question about the extent to which the accounting evidence could be relied upon, particularly where the evidence relied on assumptions prepared by one of the parties to the proceeding and which had not been validated by independent experts. In these circumstances, I have based my consideration of the valuation evidence on Mr Graham’s evidence but have made adjustments where I have not been satisfied about its probative value.

Assumptions used by Mr Graham

[224]          Mr Graham bases his calculations on the understanding that the plaintiffs’ suffered losses as a result of the following “Loss Events” attributable to the actions of the defendants:

(a)Not progressing UCFX client proposals in a timely manner;

(b)Providing confidential UCFX sales and client information to potential investors including Telstra, Westcon and Mr O’Neill;

(c)Making false statements to UCFX employees that UCFX was winding up, and actively encouraging employees to leave UCFX;

(d)Making false statements to prospective employees, who were being approached to replace the defendants and other employees, that UCFX was going bankrupt;

(e)Making false statements to clients and partners that UCFX was going bankrupt and had no resources.

[225]However, I have held that:

(a)The evidence on the defendants not progressing UCFX proposals in a timely manner is not persuasive;

(b)No losses were incurred as a consequence of confidential information given to Telstra, Mr O’Neill and Westcon;

(c)No losses were incurred as a consequence of the false statements made to UCFX employees that UCFX was winding up;

(d)The plaintiffs’ claims with respect to statements alleged to have been made between 20 March and December 2015 have not been made out.

[226]          Nonetheless, the fact that Mr Graham may have been incorrect in the above assumptions is relevant only to the extent that those assumptions had a bearing on his calculation of damages. Not all of them did.

Loss of profits

[227]Mr Graham’s loss of profits calculation has two components:

(a)The net cost incurred in re-establishing the business, calculated in a range of $307,000 (Low End) to $792,000 (High End);

(b)The loss of opportunities during the re-establishment phase, calculated in a range of $750,000 (Low End) to $1,124,100 (High End).

Net costs in re-establishing the business

[228]          These costs comprise the costs of 12 employees who were diverted from IPFX and UCFX Australia to:

(a)Repair the damage to the UCFX brand through increased account management activities conducted by senior managers from IPFX, including Mr Plumpton;

(b)Backfill the roles performed by Mr Colbert, Mr Maynard, Mr Schulz, Mr Eriksen and Mr Wells;

(c)Recruit and train new staff.

[229]          I am not in a position to determine whether the number of people and time spent was appropriate to carry out the above tasks but I accept in principle that such costs are properly attributable to the actions that UCFX had to take in response to the defendants’ efforts to take over the staff and business of UCFX.

[230]          The Low End figure of $307,000 represents the losses Mr Graham says would have occurred  to  30 July 2015,  a date he selected having regard to  the fact  that  Mr Colbert and Mr Maynard could have left UCFX after giving notice and set up a competing business after observing their three month contractual restraints of trade. Mr Graham extended the period to July 2015 to take account of the date of orders made by Brewer J on 20 May 2015 and to allow a period of training for the replacement staff who were hired in June 2015.

[231]          The High End figure of $792,000 represents the costs incurred by UCFX and UCFX related employees from March 2015 to June 2016 which Mr Graham justifies on the ground that UCFX had to respond to false statements made to the market by the defendants and to prospective employees, which required increased activities by UCFX managers and increased oversight of the more junior staff that UCFX was forced to recruit because of the impact the defendants’ false statements had on prospective employees. However, I have held that those allegations by the plaintiffs have not been proven. It follows that that justification for the High End figure cannot be sustained.

[232]          I am reinforced in my view that the High End figure should not be used by the Court of Appeal’s caution in Wagner v Gill that the encroachment of the common law

into areas of economic competition must be subject to limits.   If  Mr Colbert and   Mr Maynard could have left UCFX at any time and set up a competing business after observing their restraint of trade, the Court should not allow recovery of costs through action for conspiracy by unlawful means that would not have been available to UCFX if Mr Colbert and Mr Maynard had behaved lawfully.

[233]          Questions were also raised about the Low End figure. Mr Graham says he based his calculations on an instruction from UCFX’s solicitors and Mr Plumpton that the plaintiffs could claim for losses incurred by Mr Plumpton, Ms Diep, UCFX and IPFX. That is not correct. The plaintiffs can claim only for losses incurred by UCFX. The causes of action that have been made out all relate to liability to UCFX and not to Mr Plumpton in his personal capacity. Ms Diep and IPFX are not parties to the proceeding. Any costs they and Mr Plumpton incurred can only be passed on to the defendants in this proceeding if incurred by UCFX as part of remedial steps taken within the company and with existing and prospective clients.

[234]          The evidence on this point is contradictory, even from the plaintiffs’ witnesses. In cross-examination, Mr Graham said that the losses claimed were UCFX losses – which implies that UCFX has been charged for costs incurred by IPFX and UCFX Australia staff. On the other hand, William Aucamp, who was the CFO of IPFX and UCFX from December 2016 to March 2018 and who prepared the material used in Mr Graham’s calculations, says the costs incurred by the various employees within the IPFX / UCFX group remained within their own entities. However, I accept that is an accounting issue and that costs claimed in respect of IPFX and UCFX Australia staff under this heading are properly costs incurred by UCFX, however they were accounted for within the group.

[235]          Scott Allen, who was country manager for UCFX New Zealand and Australia from June 2015 to August 2017, gave evidence for the defendants questioning whether some of the UCFX Australia and IPFX employees whose time and expenses formed part of Mr Graham’s calculations in fact undertook UCFX recovery work. However, Mr Allen’s evidence was based on recollections and was unpersuasive. It was also refuted by material produced by Ms Diep in the course of the hearing. Mr Bowler objected to the late production of the considerable volume of material produced by

Ms Diep and to its disaggregated presentation which made analysis difficult. I am satisfied, however, that the material is relevant and should be admitted in evidence. It effectively substantiates this aspect of the plaintiffs’ claim.

[236]          The defendants also challenge the accuracy of the time-recording arrangements used for Mr Graham’s calculations and Mr Bowler notes that Mr Jessup says he spent a considerable amount of time producing material for use in this case which should not be included in the damages calculation. I am not persuaded, however, that the issues regarding time-recording were significant. Mr Jessup was referring to work taking place in 2016, which I have excluded from the calculation of UCFX’s losses.

[237]          On balance, therefore, I am satisfied that Mr Graham’s calculation for this aspect of the loss of profits claim is appropriate.

Loss of opportunities during the re-establishment phase

[238]          This is an area of considerable difficulty. As Mr Graham acknowledges, his estimate of lost profits depends on the views of Mr Plumpton as to the ability of UCFX to generate profits over time. As Mr Dent notes and Mr Graham also acknowledges, there is a lack of real evidence available from UCFX given its limited trading period prior to the events giving rise to this proceeding.

[239]          Mr Graham has calculated UCFX’s profits as between $750,425 (Low End) and $1,124,137 (High End). The difference between the Low End and the High End figures is whether provision should be made for additional future profits of $1 (Low End) or $2 (High End) for every $1 of profit lost to take account of future sales.

[240]          Thus, Mr Graham’s calculation of the Low End and High End figures has two components:

(a)A loss of profits of $374,212 arising from sales of $726,900 assumed to have been lost in the period March to July 2015, based on a comparison of the Win Rate of work identified in the Sales Pipeline of March 2015 ($2,500,000) with Win Rates in March 2014 and June 2014;

(b)A further loss of profits of $374,212 (Low End) or $749,425 (High End) on the assumption that UCFX could have expected to earn an extra $1 (Low End) or $2 (High End) in follow up sales to existing customers within an average of 180 days of the sale.

[241]          As Mr Dent says, the defendants dispute Mr Plumpton’s win rate comparison on the grounds that:

(a)The estimate of typical win rates is very subjective;

(b)The lower win rate in 2015 reflected better data collection rather than a change in the success rate;

(c)The March 2015 pipeline was overstated in a number of areas and once those overstatements are removed the pipeline is reduced from $2.5 million to $1.1 million;

(d)Many “lost” sales were for reasons beyond  the  control  of  UCFX, Mr Plumpton or the defendants;

(e)From July 2014, UCFX had no business development resources active in the NZ market.

[242]          Some of those objections do not stand scrutiny. In particular, the complaint that the pipeline was overstated overlooks the fact that the March 2015 figures used by Mr Graham were taken from the pipeline document that Mr Colbert had prepared and had shared with potential investors. It was apparent that Mr Dent had been unaware that Mr Colbert was the author of the pipeline when he prepared his evidence.

[243]          However, the greater challenge is that there is no independent information of sales actually lost as a result of Mr Colbert, Mr Maynard, Mr Schulz, Mr Eriksen and Mr Wells leaving UCFX. The only specific information before the Court on the impact of the departure of Mr Colbert and Mr Maynard on UCFX’s pipeline concerns the loss of the Weltec-Support and Foodstuffs South Island projects discussed earlier.

However, the value of each of those projects was of the order of $30,000 and so has little relationship to the losses claimed under the comparison of Win Rates.

[244]          Nonetheless, as Mr Dent acknowledges, the loss of key senior staff is likely to have had a potentially severe impact on a services business such as UCFX. Given that reality and given that the comparison of Win Rates is the only basis before me on which an assessment of loss of profits damages has been made, I accept Mr Graham’s estimate of a loss of profits based on the comparison of Win Rates as the best information available. I acknowledge the questions Mr Dent raises about the appropriateness of an assumption of gross profit of 52 per cent as a percentage of sales, which Mr Dent says was higher than actual performance achieved in the year ended 30 June 2014 (34.4 per cent) or 30 June 2015 (10.41 per cent). Mr Dent does not, however, challenge the basis on which Mr Graham reached that figure and which  Mr Graham cross checked with gross profit achieved as a percentage of sales by UCFX Australia.

[245]          I have more difficulty with the suggestion that the loss of profits calculation should include provision for a loss of future sales at an extra $1 or $2 for every $1 of profits lost. Mr Graham himself shows some diffidence at this suggestion, noting that “it could be argued that the loss to UCFX is greater than simply a reduction in Win rates of the sales pipeline as at 31 March 2015.” Mr Graham acknowledges that this suggestion is based on data analysis prepared by Mr Plumpton which shows that for every $1 of sales generated during the first 183 days, ongoing sales of approximately

$2 have been generated by UCFX.

[246]          Even assuming Mr Plumpton’s figures are correct, the Court has no basis for knowing whether this pattern that has developed in the first year of the company’s operation, if it is indeed a pattern, is a reliable basis for assessing loss of profits. While Mr Plumpton is understandably bullish on the prospects of UCFX using its initial sales as a foot in the door with clients that will lead to “stickiness” or long-term customer relationships, such confidence on the part of one of the key protagonists in this dispute provides no sound basis for the Court to impose an additional $374,000 let alone or

$749,500 in damages.

[247]          Furthermore, in his reply to Mr Dent’s questioning of this aspect of the claim, Mr Plumpton acknowledges that this expectation of on-going sales is based at least in part on potential sales of contact centres, consoles and video conferencing. Yet in the notes of the meeting of 13 March 2015, when issues were raised about UCFX branding of the “video stuff”, Mr Plumpton made it plain that he did not see value in “double branding”, by which I understand him to mean adding UCFX branding to a product that IPFX was already branding. Mr Plumpton went on to observe that UCFX branding of contact centres “would be hideously expensive to do”. These comments, which strongly suggest that video conferencing and contact centres were not part of UCFX’s existing or anticipated business, are starkly at odds with Mr Plumpton’s effort to use those activities to double or even triple this aspect of the UCFX’s damages claim.

[248]For these reasons, I do not accept any addition to the loss of profits figure of

$374,212.

[249]          Accordingly, I find that the compensation payable to UCFX by the defendants based on a loss of profits is:

Net cost in re-establishing the business:  $307,000 Loss of opportunities during re-establishment phase:                $374,212

Total:  $681.212

Diminution of value

[250]          Mr Graham prefers the diminution of value methodology because he says it is simpler and relies on less uncertain assumptions. The key parameters in the diminution of value approach are sales for the year ended 31 March 2015 and an appropriate multiple. However, Mr Graham also notes that the valuation of small telecommunications service providers such as UCFX has a very high level of uncertainty because:

(a)UCFX generated losses since its inception in January 2014 to the valuation date of 31 March 2015 and relied on support from its parent (IPFX) in the form of inter-company loans;

(b)UCFX was an early stage company and typically these types of company can be valued in a very broad range;

(c)The valuation of small telecommunications service providers such as UCFX is highly subjective.

[251]          For reasons very similar to those identified by Mr Graham, Mr Dent does not consider the diminution of value approach to be appropriate at all in this case because of the challenges inherent in valuing such early stage businesses and says that, given those challenges, it is not possible to apply conventional valuation techniques with confidence. Mr Dent says the validity of the diminution of value approach is dependent in large measure on the validity of the assumptions underlying the multiple chosen and he considers the revenue multiple applied by Mr Graham to be materially overstated because of a variety of factors. Mr Dent also challenges the appropriateness of using valuations of UCFX undertaken by Lyne Davis and PPB Advisory, which gave a nil value as at 31 March and 31 December 2015 respectively, in determining the loss of value in the company as a result of the events that gave rise to this proceeding.

[252]          Mr Graham in reply acknowledges that the differences between Mr Dent and himself come down to the interpretation as to an applicable multiple to apply to the UCFX business and says that:

… based on the information provided to me by Mr Plumpton and the growth prospects for the business, I am comfortable that the revenue multiple I have adopted.

[253]          On the basis of the evidence presented, I am not able to assess the validity or otherwise of the factors that were relied on by Mr Graham in reaching his multiple. As the above quotation makes clear, however, Mr Graham’s calculation is based on information provided to him by Mr Plumpton, including Mr Plumpton’s view on other companies whose circumstances he considered relevant to UCFX. While not intending any disrespect to Mr Plumpton, I am not satisfied that such an approach provides an appropriate basis for reaching a decision on this very important question. My concerns in this regard are underlined by one of the comments Mr Dent makes of the UCFX’s circumstances and Mr Plumpton’s response to it.

[254]At paragraph 116 of his brief of evidence Mr Dent says:

UCFX never made a profit prior to the Disputed Events in question and did not forecast doing so in the near future. Where a business is at an early stage in its development it is not unusual for it to be loss making. Typically, such businesses are funded by founders or related parties until such time as the underlying concept becomes proven. At that point, the business may be attractive to other investors / owners. Before that point, however, assessing value is extremely difficult and the application of the earnings based valuation techniques typically applied when valuing more established businesses is fraught. Value for businesses at a start-up stage is very much in the eye of the beholder and dependent on the degree of conviction/confidence the founders have in the underlying business concept.

[255]In response, Mr Plumpton says:

… UCFX was on the cusp of making a profit and, while the forecasts did not show it was going to make a profit in the near term, the commercial reality was that it was. The business was well funded by myself, [Ms Diep], and IPFX and we had proven the concept (based on IPFX) was working with the Microsoft products. The business plan was to develop the business considerably before we would be interested in selling it to other investors / owners. This was not a case of a start-up with value in the eye of the beholder but was the business application of a proven business plan utilising the Microsoft Skype product.

[256]          Despite the last sentence, what Mr Plumpton is really saying is that the Court should take his word that the company was going to make a profit even if the company’s own documents did not show this because he knows that to the be the case. Whether or not Mr Plumpton is correct in his assessment, unsupported assertions by one of the parties do not provide an adequate basis upon which I can quantify damages. I can take no comfort from the reference to a proven business plan when the only evidence of the business plan was a spreadsheet that Mr Plumpton produced during the hearing and which he said he had reconstructed from memory. For the same reason, I take no comfort from the discounted cash flow analysis that Mr Graham prepared based on Mr Plumpton’s reconstructed forecasts.

[257]          For these reasons, I do not consider that I have an adequate basis for assessing the damages to UCFX other than on the basis of loss of profits as already discussed.

Result

[258]I find that:

(a)Mr Terry and Mr Colbert breached their fiduciary duties as directors of UCFX not to act in a conflict of interest situation and not to divulge information confidential to UCFX in circumstances not provided for in s 145 of the Companies Act 1993;

(b)Mr Terry, Mr Colbert and Mr Maynard:

(i)Breached their obligations of confidence to UCFX not to disclose to third parties information confidential to UCFX;

(ii)Made false and malicious statements to employees of UCFX that UCFX was about to close down in order to persuade these employees to leave UCFX and join them in a new company knowing that this was likely to cause pecuniary damage to UCFX;

(iii)Conspired to appropriate the staff, clients and business opportunities of UCFX by unlawful means, namely the above breaches of directors’ duties, breach of obligation of confidence and false statements;

(c)Mr Terry, Mr Colbert and Mr Maynard are jointly liable to pay damages to UCFX in the sum of $681,212.00.

Order

[259]I order that Mr Terry, Mr Colbert and Mr Maynard pay UCFX the sum of

$681,212.00.

Costs

1. The parties may make submissions as to costs.

[261]          The plaintiffs shall file any memorandum, of no more than five pages, by 4 pm on 21 February 2020. The defendants shall file any memorandum, of no more than five pages, by 4 pm on 13 March 2020.

G J van Bohemen J

Postscript

[262]          I regret the length of time it has taken to produce this judgment and apologise to the parties and their counsel for the delay. It was due to a period of ill health which is now resolved.