Plumpton v Terry

[2015] NZHC 1089

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-562 [2015] NZHC 1089

BETWEEN

KEVIN IAN PLUMPTON

First Plaintiff/Applicant

UCFX LTD
Second Plaintiff/Applicant

AND

JAMES TERRY
First Defendant/Respondent

BRENT DAVID COLBERT Second Defendant/Respondent

SCOTT MAYNARD

Third Defendant/Respondent

Hearing:	24 April 2015
Counsel:	D M Hughes and J V R James for Applicants S O McAnally for Respondents
Judgment:	20 May 2015

JUDGMENT OF BREWER J

This judgment was delivered by me on 20 May 2015 at 4:30 pm pursuant to Rule 11.5 High Court Rules.

Registrar/Deputy Registrar

Solicitors:      Anthony Harper (Auckland) for Applicants

Keegan Alexander (Auckland) for Respondent

PLUMPTON v TERRY [2015] NZHC 1089 [20 May 2015]

Introduction

[1]      The plaintiffs seek interim injunctions.

[2]      The statement of claim has four causes of action:

(a)      Breach of ss 131 and 145 of the Companies Act 1993.  The pleading is that the defendants, as de facto directors of the second plaintiff (UCFX), when exercising powers or performing duties, failed to act in good faith and in what they believed to be the best interests of UCFX. Additionally, it is pleaded that the defendants disclosed information belonging to UCFX which they obtained in their capacity as a director or an employee.

(b)Breach  of  fiduciary  duties.     It  is  pleaded  that  the  defendants breached fiduciary obligations to UCFX not to profit from their position as de facto directors of UCFX and not to take personal advantage of UCFX’s business opportunities at the expense of UCFX.

(c)      Intentional interference with contractual relations.  The plaintiffs allege that the defendants have intentionally interfered with various contractual arrangements between UCFX and specified parties.

(d)Breach of s 174 of the Companies Act 1993.  The pleaded allegation is that the defendants, as agents of UCFX, have caused it to conduct its  business  in  a manner which  is  unfairly prejudicial  to  the first plaintiff in his capacity as a shareholder of UCFX.

[3]      With regard to the first and second causes of action, the plaintiffs seek injunctions permanently stopping the defendants from contacting present clients and from making use of confidential information owned by UCFX.   They also seek monetary compensation.   The third and fourth causes of action are essentially monetary claims.

[4]      On 19 March 2015, on the urgent ex parte application of the plaintiffs, I made the following order against the defendants:1

The respondents will not, directly or indirectly, canvass, solicit, or attempt to solicit, serve or act for any present client of UCFX including, but not limited to, those set out in the schedule filed by the applicants.

[5]      The order was limited as to time.  It was stated to be an interim response to the application for interim injunctions.   The order remains current and whether it continues in effect is decided by this judgment.

[6]      The orders by way of interim injunction sought by the plaintiffs now are as follows:

(a)       That the first to third respondents, James Terry, Brent David Colbert and Scott Maynard (together the ‘Respondents’) cease directly or indirectly canvassing, soliciting or attempting to solicit, serve or act for any present client of UCFX including, but not limited to, those set out in Schedule A attached (“Business”).

(b)      The Respondents cease contacting all present clients of UCFX, including but not limited to, those set out in Schedule A attached.

(c)       The Respondents cease to use any and all confidential information belonging to UCFX.

(d)       The Respondents deliver up all confidential information of UCFX in their possession pending resolution of the substantive proceeding.

(e)       The Respondents be suspended from acting as directors of UCFX

pending further order of the Court.

(f)       The  Respondents  be  restrained  from  holding  themselves  out  as directors of UCFX pending further order of the Court.

(g)       The Respondents provide a sworn affidavit setting out details of: (i)         The identity of UCFX clients they have met with.

(ii)      What details have been disclosed to those UCFX clients.

(iii)     All and any documents which have been provided to UCFX

clients.

[7]      The defendants do not oppose orders as per (c), (d), (e) and (f).

1      Plumpton v Terry [2015] NZHC 527 at [9].

The law

[8]      Rule 7.53 of the High Court Rules confers upon me the discretionary power to grant interlocutory injunctive relief both before and after a proceeding is commenced.

[9]      The law relating to granting an interlocutory injunction is well settled.  The purpose of such injunctions is to protect applicants against injury by violation of their rights for which they could not be adequately compensated in damages recoverable in the action if the case were resolved in their favour at the trial.2   An applicant’s need for such protection must be weighed against a respondent’s need to be protected against injury resulting from being prevented from exercising legal rights for which the respondent could not be adequately compensated under the applicant’s undertaking in damages if the case were resolved in the respondent’s

favour at the trial.  To determine where the balance of convenience lies, the Court must weigh one need against another.3

[10]     A two-stage approach is required.  I must decide whether there is a serious question to be tried in the proceeding and, if there is, where the balance of convenience lies.4   Within the latter examination will be a focus on the adequacy of

damages as a remedy available to the applicant.5

[11]     Finally, the decision whether to grant an interim injunction must (of course)

be taken in the context of the overall justice of the case.6

Issues

[12]     Given the nature of this case (it involves, at one level, a conflict between the right of UCFX to be protected from betrayal and the rights of three individuals to

earn a living), I see the following issues:

2      Andrew Beck and others McGechan on Procedure (online looseleaf ed, Thompson Reuters, updated 20 April 2015) at [HR7.53.2].

3      American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 408 (per Lord Diplock).

4      Above.

5      At 408-409.

6      Harvest Bakeries Ltd v Klissers Farmhouse Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.

(a)       Is there a serious question to be tried in the proceeding? (b)    If there is, where is the balance of convenience?

(c)       If the plaintiffs are entitled to injunctive relief on an interim basis, what should that relief be?

Is there a serious question to be tried in the proceeding?

[13]     The first plaintiff and the three defendants are all shareholders (directly or through vehicles) in UCFX.  UCFX provides telecommunications software services specialising in Microsoft Lync software.   It was established by the parties as a business vehicle.  It was accepted in submissions before me that the parties operated the business relatively informally and without too much regard to the status of UCFX as an entity with its own legal identity.

[14]     The business relationship between the parties began to sour last year.  There are various reasons for that, but I do not need to go into them.  The plaintiffs’ case is that the defendants decided to establish a new company to compete with UCFX and to use their positions as directors and employees to poach its clients, and prospective clients, and to attract to its employment key employees.

[15]     As to the roles of the defendants, it is accepted that Mr Colbert and Mr Terry were at material times directors of UCFX, either de jure or de facto.   It is also accepted that  Mr Colbert and Mr Maynard were at material times  employees of UCFX and had written employment contracts containing three month restraint of trade periods.  Mr Maynard disputes that he was ever a director of UCFX.

[16]     The plaintiffs’ case is based largely on documents which they argue show that the defendants, from as early as December 2014, began to conspire with each other to set up a new company to poach UCFX’s clients and key employees.   In March

2015, an approach was made to a company, Westcon, with which the second plaintiff had fraternal business dealings.    A document entitled “NewCo – Unified Communication Consultancy – Investment Opportunity” dated Monday, 16 March

2015 and marked “Commercial in Confidence” was provided to Westcon.7   It is well arguable that this document contains confidential information belonging to UCFX and that it contains material supportive of the plaintiffs’ argument that there was a conspiracy of the defendants to take over customers and employees of UCFX.

[17]     I have  been  provided,  also,  with  copies  of  communications  between  the various defendants which support the plaintiffs’ case.   They point, in addition, to approaches (using UCFX confidential information) to two potential clients of UCFX.

[18]     Mr McAnally for the defendants submits that if the evidence does point to a conspiracy,  it  was  a  naïve  one,  and  although  the  approach  to  Westcon  was misguided, it was not particularly serious.

[19]     I made the point to counsel that it is not part of my task to make findings of fact or to reach a concluded view of the merits.   This is not an application for summary judgment.  That does not mean that I should not consider the factual and legal merits of the plaintiff’s claim.  But the threshold of serious question to be tried is not a particularly high one.  The plaintiffs need only to point to a legally arguable

position and the damage that they will suffer if their rights continue to be infringed.8

I find that on the material before me, the threshold has been well and truly crossed with respect to Mr Terry and Mr Colbert.

[20]     So far as Mr Maynard is concerned, Mr McAnally’s submission is that there is no arguable case against him because there is no evidence that Mr Maynard was a director of the company.

[21]     I disagree.   His business card referred to him as a director.  He referred to himself on his Linked In profile as a director and as a principal consultant.   He signed-off as “director” in messages sent from his tablet.  It is clear that he was not a de jure director and I accept that his evidence in his affidavit that he did not act in any respect as a director is unchallenged.   However, he did participate in some

directors’ meetings.   It is said that he was invited to those meetings and that if he

7      Plaintiffs/Applicants bundle of relevant documents volume 1 at 67.

8      See, for example, Harvest Bakeries Ltd v Klissers Farmhouse Bakeries Ltd, above n 6. See also

Andrew Beck Principles of Civil Procedure (2012, Brookers Ltd, Wellington) at 164.

were actually a director he would have attended as of right.  So, there are arguments either way.

[22]     My conclusion is that the case against Mr Maynard on causes of action which rely upon his status as a director is not as strong as it is against Mr Terry and Mr Colbert.  However, the common law courts have found a person to be a de facto director where he is part of the corporate governing structure9  and has voluntarily assumed the role of director.10   So, it is hard to say that a person who holds himself out as a director of a company, with the knowledge and approval of that company, is

not, arguably, in the position of a director.   I bear in mind that UCFX is a small company.  Mr Maynard is a founding shareholder, and the lines between corporate officers do not seem to have been distinct.

[23]     I  conclude  that  there  is  a  serious  question  to  be  tried  for  each  of  the defendants that they breached duties owed to UCFX by disclosing information confidential to it, acted prejudicially towards the first plaintiff as a shareholder and, while directors, acted against UCFX’s interests for personal gain.11

[24]     Counsel  for  the  defendants  submits  that  before  making  interim  orders  I should look at what the plaintiffs are seeking as final orders.   He relies on the principle of law that the “serious question” to be tried criterion must also be met in relation to the relief sought.12    The plaintiffs seek permanent injunctive relief as a remedy under the first and second causes of action.  So, Mr McAnally argues, the plaintiffs must show not simply that there is a serious question in relation to the alleged breach of fiduciary duties and use of confidential information, but also that it is seriously arguable that a permanent injunction would be an appropriate remedy.  In

his submission, the plaintiffs patently cannot gain the substantive relief they seek.

That should limit, or govern, what I do on an interim basis.

9      Secretary of State for Trade and Industry v Tjolle [1998] 1 BCLC 333 (EWHC).

10     Holland v Commissioners for Revenue and Customs, Re Paycheck Ltd [2010] UKSC 51, [2010]

1 WLR 2793.

11     The defendants argue that insofar as claims against them rest on their status as employees of

UCFX, they cannot be advanced in this Court. The Employment Relations Authority has sole jurisdiction over employment disputes. The point is not without complexity – see BDM Grange Ltd v Parker [2006] 1 NZLR 353. However, I do not need to look beyond the defendants’ arguable status of director.

12     See, for example, Quattro Trustees Ltd v Marjo [2015] NZAR 186 at [9]-[12]; Ezypay NZ Ltd v

YKC Ltd HC Wellington CIV-2007-485-1496, 23 July 2007 at [7].

[25]     I  agree  that  the  substantive  relief  sought  by  the  plaintiffs  aimed  at permanently corralling the present clients of UCFX is probably not attainable. There would have to be proved a tangible link between the need for such relief and the unlawful actions of the defendants.  On the evidence before me, that link would be difficult to find.

[26]     However, there is a claim for damages under each cause of action.  Interim relief is available, where grounds are made out, to preserve the status quo so as to prevent further loss or damage.13

Where is the balance of convenience?

[27]     Counsel for the plaintiffs focuses more on why the interim orders sought will not hurt the defendants rather than on how they will protect the plaintiffs.

[28]     On the evidence before me, the defendants arguably intended to form a new company to compete with UCFX.  To that end, and using confidential information, they made an approach to Westcon and tentative approaches to two potential clients of UCFX.  However, that was nipped in the bud by the plaintiffs issuing proceedings and by the ex parte order I made on 19 March 2015.  The competitor company was not incorporated before the plaintiffs took action, and the defendants are no longer directors or employees of UCFX.

[29]     So, the plaintiffs argue that the interim relief sought will have little impact on the defendants, and any unjustified harm can be treated with damages in accordance with the plaintiffs’ undertaking.

[30]     On the other hand, if the defendants are not stopped from going after UCFX’s clients, and potential clients, in the manner illustrated by the approach to Westcon, then, the plaintiffs submit, UCFX will be damaged, and the damage will be very difficult to quantify.  The availability of damages is not an adequate remedy in these

circumstances.

13     American Cyanamid Co v Ethicon Ltd, above n 3, at 408 (per Lord Diplock)

[31]     Counsel for the defendants submits that there is no connection between what the defendants are alleged to have done and the “blanket restrictions” sought by the plaintiffs in relation to contacting or acting for all the clients of UCFX in all facets of their business:14

The orders sought go beyond preserving the status quo for, putting aside UCFX’s residual rights in its confidential information, it cannot prevent former employees or directors competing with it (subject to the restraints that arise in the normal course).

[32]     In support of this submission, it is argued that the defendants have not come together and set up a competing product or a competing market commodity, whether using confidential information or not.  Their individual expertise is in the recruiting, marketing and software engineering fields. They each have to make a living.

Discussion

[33]     In my view, the balance of convenience favours the plaintiffs.   They have established that there is a serious question to be tried that the defendants, acting as a group, tried to cause UCFX harm through the misuse of UCFX’s confidential information and in breach of fiduciary duties owed to UCFX.   Damages is a notoriously tricky remedy for such a situation, if proved.  The overall justice of these circumstances goes to providing some form of interim relief to preserve the status quo and thus limit potential further damage.

[34]     However, whatever interim relief is given must also take into account the defendants’ rights to earn their livings.  This is part of the assessment of the balance of convenience and must be done to determine where the overall interests of justice lie.

What should the interim relief be?

[35]     UCFX is a small company with five shareholders.  The parties to this case were the major components in its business.   It has a relatively specialised field of

endeavour.   Interim relief, based on the serious question to be tried which I have

14     Submissions of defendants in respect of interlocutory application for interim injunction orders, dated 22 April 2015, at [31(b)].

identified,  should  go  no further than to  restrain  the defendants  from  competing unfairly with UCFX.  In other words, they should not be permitted to “springboard” themselves into UCFX’s market using UCFX’s confidential information and their knowledge of UCFX’s business.

[36]     So-called “springboard” injunctions are designed to remove the advantage of a head start that a person has gained through unlawful activities.  Such injunctions are recognised in New Zealand.15   They arose out of a marked reluctance on the part of the courts to allow a party to get an unfair competitive advantage from a breach of a fiduciary relationship.16    The purpose of such injunctions is to ensure that where there is a breach of this type, the down-stream benefits do not flow to a party as a result of that party’s unlawfulness.17  These injunctions have the effect of levelling the playing field between the parties by placing a defendant in the position he would have been in if he had not breached that fiduciary relationship.18

[37]     I note:

(a)       UCFX’s standard restraint of trade period is three months.

(b)The   defendants   do   not   oppose   orders   relating   to   confidential information.

(c)       My initial interim order has been in place for two months.

(d)      Mr Colbert and Mr Maynard ceased to be employees of UCFX in late

April 2015.

15     See, for example, Watson v Dolmark Industries Ltd [1992] 3 NZLR 311 (CA) at 316 (per Cooke P); Bradford Trust Ltd v Roebeck (2006) 4 NZELR 635 (HC); BDM Grange Ltd v Parker HC Auckland CIV-2005-404-993, 31 March 2005; Pacifica Shipping Co Ltd v Anderson [1986]

2 NZLR 328 (HC).

16     BDM Grange Ltd v Parker, above n 15, at [34].

17 At [35].

18     For example, in Pacifica Shipping Co Ltd v Anderson, above n 15, the plaintiff company successfully sought an injunction restraining the defendant, a former director of the company,

from divulging confidential information that he had obtained as director of the company and from using that information to establish a competing business. The injunction was for nine months, which represented the length of time that the court believed it would have taken for the defendant to set up his new business, had he not been able to take advantage of the confidential information.

(e)       There is evidence that the respondents used the period of December

2014  to April  2015  for the process  which  would have led to  the incorporating of the competitor company.

(f)      No  market  is  static  and  client/service  provider  relationships  are inherently dynamic.

[38]     The above factors have led me to conclude that interim orders restraining the defendants from competing with UCFX in relation to its existing clients for a further two  months  will  be  sufficient  to  prevent  an  unfair  springboard  advantage. Particularly since orders in relation to confidential information will be made also.

[39]     I will not grant the mandatory interim injunction sought by the plaintiffs to the  effect  that  the  defendants  provide  affidavits  setting  out  the  details  of  their dealings with UCFX clients.  In my view, there is no urgent interlocutory need for such an injunction and the discovery process in the substantive proceeding provides the plaintiffs with mechanism for gaining relevant information in this area.

Decision

[40]     I make orders by way of interim injunction as follows:

(a)      The defendants will not, directly or indirectly, canvass, solicit, attempt to solicit, serve or act for any present client of UCFX including, but not limited to, those set out in Schedule A to the ex parte interlocutory application for interim injunction orders dated 19 March 2015.  This injunction will expire two calendar months from the date of this judgment.

(b)The defendants will not contact any present client of UCFX including, but  not  limited  to,  those  set  out  in  the  said  Schedule  A.    This injunction will expire two calendar months from the date of this judgment.

(c)       The defendants will cease to use any and all confidential information belonging to UCFX pending resolution of the substantive proceeding.

(d)      The defendants will deliver up all confidential information of UCFX

in their possession pending resolution of the substantive proceeding.

(e)       The defendants will not act as directors of UCFX pending further order of the Court.

(f)       The defendants will not hold themselves out as directors of UCFX

pending further order of the Court.

[41]     I do not make an order that the hearing of the substantive application be progressed on an urgent basis.  The orders restraining the activities of the defendants are limited as to time, and the substantive hearing could not be held within that time.

[42]     The interim order I made on 19 March 2015 is discharged.

[43]     The plaintiffs are entitled to costs.  I grant these on a 2B basis.  They may be calculated by the Registrar if the parties cannot agree on them.

Brewer J