Robcke v Metz
[2015] NZHC 1724
•27 July 2015
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
CIV-2015-463-000031 [2015] NZHC 1724
UNDER the Companies Act 1993 BETWEEN
GEOFFREY IAN ROBCKE Applicant
AND
ROBERT METZ Respondent
Hearing: 8 July 2015 Appearances:
P F Dalkie for Applicant
T Grimwood for RespondentJudgment:
27 July 2015
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
This judgment was delivered by me at 12.30 pm on 27 July 2015 pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
MacDonald Lewis Law, Auckland.
Lance Lawson, Rotorua.
GEOFFREY IAN ROBCKE v ROBERT METZ [2015] NZHC 1724 [27 July 2015]
Introduction
[1] This is an originating application by Mr Robcke for leave to bring proceedings in the name of a company, Qspear Limited (“Qspear”), against the respondent, Mr Metz, and another company, Roam Industries Limited (“Roam”).
[2] Mr Robcke and Mr Metz are the directors of Qspear. Each owns one share, and 999 shares are owned by each of their respective family trusts. The company was incorporated in April 2004, but it has not traded since 2011. It was a supplier of bike racks to retailers and wholesalers of bikes in New Zealand and Australia. Initially, Mr Metz designed a rack and he and Mr Robcke set up in business together in around 2001 to have the bike racks manufactured and to market them. The copyright in the racks is now owned by Qspear.
[3] In September 2010 Mr Metz and Mr Robcke parted company. In October
2010 Mr Metz incorporated Roam Industries Limited, and became a director of that company.
[4] The principal supplier of bike racks to Qspear was a manufacturing company called Yeong Ton Industrial Company Limited (“Yeong Ton”), based in Taiwan. In November 2010 Yeong-Ton declined to provide further product to Qspear. Mr Robcke maintains that Mr Metz contrived to have Yeong Ton refuse supply to Qspear. Mr Metz says that Yeong Ton declined to supply product to Qspear because of Qspear’s poor payment history, responsibility for which lies at the feet of Mr Robcke.
[5] Mr Robcke says that Mr Metz held all the contacts Qspear had for sales of its products and Qspear stopped trading when he used these to promote products sold by Roam. In particular, he says that a bike rack system is now marketed by Roam which is “extremely similar in size, configuration, shape and appearance to the Qspear racking system”.
[6] In the proceeding Mr Robcke wishes Qspear to bring against Mr Metz, Qspear would allege breach by Mr Metz of his duties to Qspear as a director, breach
by Mr Metz of fiduciary duties owed to Qspear, unauthorised use of confidential information, and a claim in relation to monies said to have been taken from Qspear by Mr Metz. As well, Qspear would bring a cause of action against Roam for knowingly making profits as a result of Mr Metz’s actions.
The principles of law to be applied
[7] The application is brought in reliance on s 165 of the Companies Act 1993, which provides:
165 Derivative actions
(1) Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to –
(a) bring proceedings in the name and on behalf of the company or any related company; or
(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.
(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to –
(a) the likelihood of the proceedings succeeding:
(b) the costs of the proceedings in relation to the relief likely to be obtained:
(c) any action already taken by the company or related company to obtain relief:
(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either –
(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
(4) Notice of the application must be served on the company or related company.
(5) The company or related company –
(a) may appear and be heard; and
(b) must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.
(6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.
[8] The approach of the Court to an application under s 165 is summarised by
Fisher J in Vrij v Boyle:1
Applying those criteria, the first requirement is that the Court have regard to “the likelihood of the proceedings succeeding”. I adopt in that regard the useful test suggested in a slightly different context in Smith v Croft [1986] 1
WLR 580. It is not for me to conduct an interim trial on the merits. The appropriate test is that which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the amount at stake, the apparent strength of the claim, likely costs, and the prospect of executing any judgment.
[9] In He v Chen, the Court of Appeal said:2
While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.
[10] The Court also said that even if an applicant satisfies the Court that there is an arguable case for leave to be granted, the Court retains a broad discretion on whether or not to grant leave.
Facts not in dispute
[11] The business of Qspear arose from a longstanding friendship between Mr Robcke and Mr Metz who shared a mutual interest in mountain biking. Mr Metz designed a range of bike racks and Mr Robcke organised their manufacture. As the business developed they incorporated Qspear to market the racks, which they arranged to have made by Yeong Ton. Mr Robcke, who lived in Auckland, was responsible for the day to day running of the business, including dispatching and arranging freight for deliveries, taking care of the finances of the business including
control of the “Mind Your Own Business” (MYOB) accounting system, and
1 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.
2 He v Chen [2015] NZAR 437, [2014] NZCA 153 at [30].
payments to suppliers. Mr Metz, who lived in Rotorua, was responsible for design of products, sales and dealing with service warranties. He also dealt with the company’s suppliers, as Qspear also sold a limited range of other cycle-related products.
[12] Initially sales grew, rising from $446,480 in 2007 to $645,645 in 2008, but in
2009 sales dropped to $445,799 and in 2010 to $330,857. In 2011, the financial year in which Mr Robcke and Mr Metz fell out, sales dropped to $284,510. In 2007 the pre-tax profit of Qspear was approximately $20,000, as it was in 2009 and 2011. In
2008, consistent with the substantial rise in sales, the pre-tax profit was $83,000, but in 2010, the company recorded a loss of $2,300. Mr Robcke and Mr Metz drew shareholder payments averaging approximately $80,000 in each year, between them.
[13] By September 2009 it was apparent that sales were well down on the previous financial year. Qspear was operating in an increasingly competitive market. Mr Robcke suggested selling the business and Mr Metz made inquiries with a business broker about the prospect of doing so. Nothing came of this and the company continued to trade throughout 2010.
[14] In August 2010, however, when Mr Metz suggested a way in which Qspear might work through its declining fortunes, Mr Robcke did not respond. The evidence shows that he ceased all contact with Mr Metz from August 2010. Mr Robcke also stopped communications with the company’s accountant, its suppliers and with its customers. Mr Metz decided that he would no longer be involved with Qspear, because it had effectively ceased trading by September. In October he set up Roam Industries Limited. Roam began to sell bicycle products early in 2011 and by late 2011 was selling bicycle racks.
The factors in s 165(2)
[15] There are four factors to which the Court is required to have regard.
The likelihood of the proceeding succeeding
[16] I have summarised the causes of action in the draft statement of claim at [6] above. At first sight it may appear that the uncontested actions of Mr Metz may fall foul of the duties he owed to Qspear as a director. Qspear was a two man company in which each of the directors was actively engaged and Mr Metz ceased working in the interests of Qspear and set up another business which, on its face, might be seen to be in opposition. Both Mr Robcke and Mr Metz filed extensive affidavits setting out their perspectives on what occurred.
[17] On this application, it is not for the Court to reach conclusions on whether in fact there was any breach of duty by Mr Metz, but rather to broadly assess the evidence in terms of the test enunciated in Vrij v Boyle3 and He v Chen.4 In essence, Mr Robcke’s view is that Mr Metz was not justified in pulling out of Qspear; rather, he did so for his own ends, orchestrating a refusal by Yeong Ton to supply product to Qspear, effectively crippling its business, setting up a new business including
incorporating a company to run it, having bike racks manufactured which Roam would then sell, all of which were very similar to those manufactured for and sold by Qspear, and using the customer base of Qspear for marketing of Roam products. He also says that Mr Metz withdrew $20,000 from the company just before he stopped working for it and diverted a $16,000 payment which was due to the company from a customer, into his own solicitor’s trust account.
[18] Mr Metz, however, places his actions into a more detailed context. First, he says that Mr Robcke was a very difficult business partner to work with. He says that Mr Robcke did not have a businesslike attitude to the company’s customers. An example was his refusal to put any contact details or even bank details (for payments) onto invoices, for the convenience of customers, who complained of difficulties getting in touch with him. Mr Robcke says that this was because
Mr Metz was to be the first point of contact, not him.
3 Vrij v Boyle, above n 1.
4 He v Chen, above n 2.
[19] Secondly, Mr Metz complains that Mr Robcke was late in supplying products to customers, but Mr Robcke says he stopped or delayed supply because customers were late in making payments for stock already delivered.
[20] Thirdly, Mr Metz says that Mr Robcke was very slow in making payments to Yeong Ton, and it was this that led to Yeong Ton refusing to supply product to Qspear any longer, not any action on his part. Again, Mr Robcke has a different perspective. He says he did not know that Yeong Ton was upset about late payments and, if Mr Metz did know, he could and should have organised payment to Yeong Ton himself.
[21] Fourthly, Mr Metz says that, when they agreed to look into selling the business in 2009, he arranged a business broker to act, but Mr Robcke did not provide the broker with the information that he required in order to be able to market the business.
[22] Fifthly, Mr Metz says that Mr Robcke failed to arrange the supply of bungee cords to Yeong Ton in 2010, which it needed to incorporate into bike racks it was manufacturing. He says that Mr Robcke failed to communicate with Yeong Ton about this between July and September 2010.
[23] Sixthly, he says that Mr Robcke did not communicate with Qspear’s Australian agent, Jet Black, about dispatch of products. This led to loss of customers.
[24] Seventhly, he says that from around July 2010 onwards, Mr Robcke did not reply to texts, telephone calls or emails to him or to the company accountant. He did not respond to an email in which Mr Metz offered to sell Mr Robcke his shares, and he could not get a response from Mr Robcke, even when Yeong-Ton decided to cease to be a supplier.
[25] Finally, Mr Metz says that Mr Robcke was secretive about the company’s
finances and would not discuss them. Although Mr Robcke says that Mr Metz had
access to the accounts, it seemed he did not have access to the MYOB accounting system, so he was unable to assess Qspear’s financial position.
[26] The picture which emerges from the evidence given by way of affidavit, and of course without cross-examination, is that from July 2010, Mr Robcke entirely failed to communicate with Mr Metz, with customers, with the company’s principal supplier, and he failed to pay the company’s debts in a timely way. It is also clear that, since then, Mr Robcke has not arranged for annual accounts to be completed. The last accounts prepared were to the end of the 2011 financial year; tax returns have not been completed either. The company is plainly in breach of its obligations in relation to its taxation affairs. Whilst responsibility for this lies at the feet of both directors, it was Mr Robcke who was, internally, responsible for these tasks with sole access to its MYOB system.
[27] The evidence shows a complete breakdown in communication between the directors. An impasse had plainly been reached by July 2010, if not earlier. The accusations levelled at Mr Robcke suggest that he may be in breach of his duties to the company, as a director.
[28] A prudent businessperson assessing the evidence available to the Court in order to form a view on whether or not to bring this proceeding would, in my view, have real reservations about whether the proceeding would succeed. In my view, an experienced and prudent businessperson would take the view that Mr Metz’s actions were an unacceptable departure from the standard of conduct to be expected of him as a director, but that on the face of the evidence as it presently stands, so too were the actions of Mr Robcke. A prudent business person would, in my view, take the view that the actions of Mr Metz which are called into question in the proposed proceeding, did not necessarily lead to the downfall of the Qspear business and, in particular, the loss of its supplier and many of its customers.
[29] A more detailed examination of the evidence would be required to reach a firm view, but in terms of assessing whether to bring a proceeding, a prudent businessperson would, in my view, recognise that there are evidentiary weaknesses in Qspear’s case. Whilst its proposed claims would not be regarded as speculative,
neither would they be regarded as strong. Breaches of duty might be established, as Mr Metz effectively gave up acting in the interests of the company and set up in opposition, but there is evidence that, by the time this occurred, the damage which led to the downfall of the company had already been inflicted by Mr Robcke. I acknowledge that Mr Robcke says that is not so, but a prospective assessment of the likelihood of this case succeeding must take due account of all the evidence presently before the Court.
The cost of proceeding, relative to the relief likely to be obtained
[30] Both counsel agree that costs in the order of $70,000 to $90,000, and probably at the upper end of that bracket, would be incurred in commencing the intended proceeding and taking it through to trial. For present purposes, I accept that estimate, though in my view, based on the complexity of causes of action of the type proposed, the materially differing perspectives on what occurred which are already known, the fact that it would be necessary to call evidence from a representative of Yeong Ton in Taiwan, the likely need for expert evidence on accounting matters, and the likelihood of at least a three day trial, the estimate is conservative.
[31] The question, therefore, is whether a prudent businessperson would look to spending $90,000 to bring this case. In my view, there would be two principal considerations in making this decision. The first is the likelihood of success, which I have already discussed. The second is the sum which the company might recover should it succeed.
[32] In the draft statement of claim presented for Qspear, the principal relief claimed against both Mr Metz and Roam is an account of profits, or alternatively, equitable damages. There is no information before the Court on how much this might be. Mr Dalkie therefore presented his argument on this point by reference to the profits made by Qspear since its inception. At best, that can only be a very rough estimate, as there is little evidence on Roam’s activities, let alone its financial returns. Further, it is not apparent how Mr Metz could be required to give an account of profits when he does not trade. For all that, Mr Robcke presented his case that way, so I will analyse it accordingly.
[33] I have already referred to the pre-tax profit of the company. Leaving aside the 2008 financial year, the company has recorded a profit of around $20,000 each year, apart from the 2010 year when it recorded a small loss. Even if the loss is also disregarded, and an average profit is realistically assessed at around $20,000 before tax, the amount which might be recovered in the proposed action is relatively small. It will depend on how far into the future the Court might consider this profit to have been sustainable. Mr Dalkie, for the applicant, realistically put this at a maximum of five years. Given that there is evidence of increasing competition in the market, and
the company had already suffered a poor year in 2010 as a result,5 that would, in my
view, be a particularly advantageous outcome. Even accepting that, however, this would suggest an award for loss of profits of around $100,000.
[34] In addition to that, Qspeare could also be awarded costs on its successful outcome. Assuming costs would be approximately two-thirds of the actual costs incurred, in accordance with the principle upon which the High Court cost scales are founded,6 the most the company could expect to be awarded would be around
$60,000, making a total judgment of $160,000. In my view a prudent
businessperson would not find the spending of $90,000 in order to recover $160,000 particularly attractive, but definitely much less so when put in context of the likelihood of success which I have discussed above.
[35] I have not overlooked the additional claims for $20,000 and $16,000 said to have been received by Mr Metz. He says the latter was intercepted and paid to his solicitor, to hold for Qspear, as Mr Robcke was not paying creditors and he was concerned to have funds to do so. He says the former was agreed to by Mr Robcke. Mr Metz accepts that the $16,000 sum is a company asset, to be taken into account. The proceeding is not required to recover that sum. The $20,000 payment is disputed. I note that drawings by the directors remained reasonably constant during
the time it traded. This claim adds nothing to the cost effectiveness of the case.
5 It was in September 2009 that Mr Robcke and Mr Metz discussed selling the business because of the downturn in profitability, due to increased competition.
6 High Court Rules, r 14.2(d).
Has the company already taken action to obtain relief?
[36] The company has taken no steps to obtain the relief it now wishes to pursue. Indeed, on the evidence, it has taken no steps whatsoever for at least the last four years. I have already referred to the fact that no annual accounts or tax returns have been prepared since the 2011 financial year. As well, Mr Metz says that it appears that the company is still owed monies by some of its customers, so it seems that steps may not even have been taken to recover all of Qspear’s book debts. Whilst responsibility for this might lie at the feet of both directors, it must be remembered that only Mr Robcke had access to the MYOB software, so only he would know the position with debtors and only he would be able to activate the provision of materials required for the preparation of accounts and tax returns.
The interests of Qspear in the proceeding being commenced
[37] Qspear has not traded for at least four years. It has a dysfunctional board of directors. The cost it would incur in bringing the proceeding would diminish the return to the company, leaving a net sum estimated to be in the order of $70,000 at most. Even if the costs were underwritten by Mr Robcke, as he suggests, but he received in return the amount awarded by way of costs, the maximum amount that might be recovered by Qspear is in the order of $100,000. There is no evidence before the Court on whether this may be recoverable should the claim succeed, so I assume it would be.
[38] In my view, a prudent businessperson involved in a comparatively small operation such as that undertaken by Qspear may see a recovery of a net sum of
$70,000 to $100,000 as a goal worth pursuing, but equally that businessperson would take into account a number of other factors, as identified. It is not in the interests of Qspear to put any remaining assets it may have at risk of being lost.
Overall assessment
[39] In my view, a prudent businessperson in charge of the affairs of Qspear would not bring the action proposed by Mr Robcke. The principal reason for my conclusion is that the maximum prospective return to the company would involve
expenditure of a significant sum in circumstances where the risks in relation to succeeding in obtaining judgment are readily identified and are significant. I need not repeat the conclusions I have reached when dealing with this issue earlier. Suffice it to say that quite apart from the risk that the costs may come close to, or even exceed, the estimated return to Qspear, there is a significant risk that the Court could find that the actions of Mr Metz were not the cause of the company ceasing to trade, or not the sole cause.
Liquidation?
[40] Counsel for Mr Metz says that the appropriate course is for the company to be placed into liquidation. This was the course which the Court found to be appropriate in He v Chen.7 In that case, the company already faced an application for liquidation. That is not the position here. For this reason I think it preferable not to express a firm view on whether liquidation is appropriate. It is certainly clear that the company is no longer trading and at least under its present directorship and
shareholding, it has no prospect of doing so. Whether the directors are able to put aside their differences to a sufficient extent to allow accounts to date and tax returns to be prepared, agreed and filed is a matter for them, but there are plain imperatives in favour of that course. Equally, they may decide to resolve to place the company into liquidation, putting such issues out of their own hands. The third option of continuing to do nothing about the company’s affairs carries self-evident risks upon which the directors will no doubt take advice.
Outcome
[41] The application is dismissed.
7 He v Chen, above n 2.
[42] As discussed with counsel, costs should follow the event. The applicant will
pay costs on a 2B basis with disbursements fixed by the Registrar.
J G Matthews
Associate Judge
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