Rodgers v Advanced Creative Technologies Limited

[2013] NZHC 577

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV2011-404-005863 [2013] NZHC 577

BETWEEN  WAYNE CHARLES RODGERS AND FISHER LAMBERG TRUSTEE SERVICES LIMITED

Plaintiffs

ANDADVANCED CREATIVE TECHNOLOGIES LIMITED First Defendant

ANDMICHAEL JOHN LUST AND DAVID ROBERT PEACH AND WOLFGANG WRIGHT

Second Defendants

ANDJAMES FISHER AND SVETLANA FISHER Third Defendants

Hearing:         4, 5 and 7 February 2013

Defendants' closing submissions filed 22 February 2013
Plaintiffs' closing submissions filed 8 March 2013

Counsel:         A Waalkens QC and V J Knell for the Plaintiffs

First Defendant appeared through the Second Defendants
Second Defendants in Person
Third Defendants in Person

Judgment:      25 March 2013

[RESERVED] JUDGMENT OF WYLIE J

This judgment was delivered by Justice Wylie on 25 March 2013 at 3.00 pm

Pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

RODGERS & ANOR V ADVANCED CREATIVE TECHNOLOGIES LIMITED & ORS HC AK CIV 2011-404-

005863 [25 March 2013]

Introduction

[1]      This case involves a dispute in relation to the transfer of shares in the first defendant company, Advanced Creative Technologies Limited (“ACTL”).

[2]      The plaintiffs, Mr Rodgers and Fisher Lamberg Trustee Services Limited, are trustees of the Rodgers Investment Trust.  They claim that a Mr Graemme Brown, and his wife, Debra Brown, as trustees of a trust known as the Kaiiwi Trust, transferred 360,000 shares in ACTL to them in December 2010 and January 2011. They say that they presented signed share transfers for these shares to the company in late January 2011 and complain that the second defendant directors failed to promptly  register  those  transfers.    Rather,  the  directors  registered  a  later  share transfer from the Browns to the third defendants, Mr and Mrs Fisher, as trustees of the JS Fisher trust, in respect of 81,860 shares.  The plaintiffs seek that ACTL’s share register should be rectified.

[3]      The second defendants are, and were at all material times, the directors of ACTL.  They represented themselves at the hearing.  They also represented ACTL. Although as a general rule, a company can only present a case in Court through legal counsel, there is a residual discretion to allow lay representation.1   I raised the issue with counsel for the plaintiffs and the defendants at the commencement of the trial. There was no objection to ACTL being represented by the second defendants. ACTL

is in a poor financial position.  The claims made by the plaintiffs are aimed primarily at the second defendant directors, and not ACTL.   It is necessarily a party to the proceedings, but there are no specific allegations against it.   I was satisfied that it was appropriate to allow the company to be represented by its directors.

[4]      There is one other preliminary issue that must be addressed.  Shortly after the hearing concluded, the plaintiffs endeavoured to file a second amended statement of claim.  I sent a minute to the defendants asking if they objected to the late filing of the document.  The first and second defendants did object.  There was no response from the third defendants.  That is understandable because the proposed amendments

do not affect them.   I do not consider that the objection by the first and second

1      Re CJ Mannix Limited [1984] 1 NZLR 309 (CA).

defendants was properly made.  The proposed second amended statement of claim endeavours to recast one of the plaintiff ’s causes of action to reflect the evidence given and to allow for additional documents which were filed in a supplementary bundle  by  the  first  and  second  defendants.    The  first  and  second  defendants conducted their defence in part by referring to these documents. They also addressed the matters raised in the proposed amended pleadings through their evidence.  They are not be prejudiced if the statement of claim is belatedly amended.  Accordingly, I grant the plaintiffs leave to file the amended pleading.

[5]      The plaintiffs’ claim raises three causes of action:

a)       First,  it  was  asserted  that  Mr  and  Mrs  Brown,  as  trustees  of  the Kaiiwi Family Trust, were shareholders in ACTL and that they were entitled to transfer their shares to the plaintiffs.  It was asserted that share transfers were presented to the company for 360,000 shares, that they were signed by the parties as required by law, and that ACTL, in breach of its obligation to do so, refused to give effect to the transfer of the shares to the plaintiffs.

b)As a second cause of action, it was alleged that the second defendant directors were under a duty to act in the best interests of ACTL, and to act only for a proper purpose.  It was asserted that they were obliged not to refuse or decline the registration of a transfer of shares, other than as set out in the company’s constitution, or in s 84 of the Companies Act  1993.    It  was  asserted  that  the  second  defendant directors acted in breach of these obligations, and that their reasons for refusing to register the transfers were without any foundation.  In addition, it was alleged that the second defendant directors breached duties  owed  by  them  when  they  registered  the  share  transfers  in favour of Mr and Mrs Fisher on 20 April 2011.

c)       Finally,  it  was  asserted  that  an  agreement  has  been  entered  into whereby ACTL agreed to issue 360,000 shares to the plaintiffs, and

the  plaintiffs  agreed  to  pay  $10,000  to  ACTL  as  a  contribution towards its costs. Accord and satisfaction is pleaded.

[6]      The proceedings raise six broad issues:

a)        Was an agreement reached at ACTL’s annual general meeting held on

6 December 2012 or subsequently to issue the plaintiffs with 360,000 new shares to settle this dispute?;

b)Did the second defendant directors have the right to delay or refuse to register the share transfers presented to them by the plaintiffs and if so, were they entitled to exercise that right on 9 February 2011?;

c)       Did the second defendant directors act in good faith and properly in continuing, after 9 February 2011, to delay indefinitely registration of the share transfers presented to them by the plaintiffs?;

d)Did the Fishers have notice of the prior transactions between Mr and Mrs Brown and the plaintiffs when they concluded an agreement with the  Browns  on  15  April  2011  pursuant  to  which,  the  Browns transferred 81,860 shares in ACTL to them and when they presented the transfer for registration to the first and second defendants?;

e)       Should the Court exercise its power to rectify ACTL’s share register to permit the plaintiffs’ share transfers to now be registered and if so, how far should any rectification extend?; and

f)        Should compensation be ordered under s 91(2)(b) of the Companies Act 1993,  and if so,  by whom should it be payable and in  what amount?

Factual Background

[7]      ACTL was incorporated in 1998 by one of the second defendants, Mr Lust, and by a Mr Scott Wilson.   The company was established to fund and facilitate research work that was then being undertaken by Mr Brown.

[8]      Mr Brown claims to have invented computer-based technology known as codex  technology.    It  is  supposed  to  provide  for  the  lossless  compression  of electronic data.

[9]      The initial shareholders in ACTL were Mr Lust and Mr Wilson.  They were also the initial directors, along with Mr Brown.

[10]     To  raise  capital  to  fund Mr Brown’s  ongoing  development  of the  codex technology, Mr Lust and Mr Wilson sold a number of their shares to new investors. In 1999, the plaintiffs, as trustees of the Rodgers Investment Trust, purchased a number of shares in ACTL for $400,000.  At the time, Mr Rodgers understood that the codex technology was close to completion and that thereafter it would be marketed for sale.   He understood that the value of the technology “was in the billions”.

[11]     The funds raised from the sale of shares by Messrs Lust and Wilson were reinvested in ACTL and then paid out to fund the ongoing development of the codex technology by Mr Brown.   An agreement was put in place whereby Mr Brown granted ACTL a worldwide licence to commercialise and market the codex technology.

[12]     Unfortunately,  the  codex  technology  was  not  completed.     Mr  Brown continued to work on it and to receive ongoing funding from ACTL for this purpose.

[13]     In 2001, ACTL and Mr Brown entered into an agreement whereby Mr Brown agreed to transfer all rights to and ownership of the technology, along with any intellectual property, hardware, and software relating to it, and all other spinoff technologies, to the company.   In exchange, Messrs Wilson and Lust agreed to

transfer a third of the shares in the company to Mr and Mrs Brown as trustees of the Kaiiwi Trust.  The transfer of the shares proceeded.  The detail is not clear from the evidence, but as I understand it, Mr and Mrs Brown acquired some 360,000 shares in ACTL at this point.

[14]     Over the ensuing years, Mr Brown continued to seek and obtain funding, either from ACTL or direct from its shareholders.  However, he repeatedly failed to deliver the completed codex technology to the company.

[15]     Mr Brown was trading through a number of companies, one of which was known as GBR Research Limited.  Mr Brown and/or GBR Research Limited were borrowing money not only from shareholders in ACTL, but also from shareholders in GBR Research Limited.   Various promises were made by Mr Brown to repay these shareholders.  The underlying premise was that GBR Research Limited was on the verge of a major marketing breakthrough with the codex technology, and that those that had advanced funding to him, or his companies, would be paid promptly when  commercial  success  was  achieved.     The  difficulty  of  course  was  that Mr Brown had already agreed to transfer the technology to ACTL.

[16]     In  September  2009,  Abridge  Finance  Limited  loaned  monies  to  one  of Mr Brown’s  companies  following  a  request  from  Mr  Brown.    Abridge  Finance Limited took a general security agreement over the borrowing company and various related entities, and obtained Mr Brown’s personal guarantee.

[17]     Mr and Mrs Fisher are the shareholders in Abridge Finance Limited and Mr Fisher is a director of the company.  Mr Fisher was concerned about Mr Brown from the outset and he made various enquiries about him.  As a result, he came to question Mr Browns business integrity.  Mr Brown and his associated entities soon defaulted on their obligations to Abridge Finance Limited and Mr Fisher started to implement steps to appoint receivers of Mr Brown’s companies.

[18]     Any receivership and the resulting impact on Mr Brown was a matter of concern to ACTL.  It was dependant on him to provide it with the codex technology. Mr  Brown  appealed  to ACTL to  help  “bail  him  out”,  and  the  company,  in  an

endeavour to secure delivery of the promised technology, agreed to assist him to try and facilitate a favourable outcome with his creditors.

[19]     On 5 July 2010, an agreement was entered into between ACTL, Mr Brown and GBR Research Limited.  Mr Brown and GBR Research Limited acknowledged that ACTL was the owner of the codex technology, and all intellectual property rights relating to it.  He agreed to provide ACTL with a full working version of the codex technology by a specified date, and to hold all materials, documents and records pertaining to the technology for and on behalf of ACTL.   Invoices which GBR Research Limited had issued to ACTL were withdrawn, and both Mr Brown and GBR Research Limited agreed that they would not make any further claim against ACTL for any remuneration in respect of development work carried out on the codex technology.  The agreement also recorded that Mr Brown, GBR Research Limited and certain related parties were indebted to a number of creditors, including Abridge Finance Limited.  ACTL, Mr Brown and GBR Research Limited agreed to work together to endeavour to defer any legal action being taken by those creditors. To  this  end,  Mr  Brown  and  GBR Research  Limited  agreed  to  procure  the Kaiiwi Trust to provide a mortgage or mortgages of such number of shares in ACTL as might be required to provide further security to the creditors.

[20]     In the event, ACTL, through its directors, negotiated a six-month stand down period with Mr Fisher.  Abridge Finance Limited agreed not to place Mr Brown’s various corporate entities into receivership over this period.   It did not, however, request a mortgage over any of the Brown’s shares in ACTL.  Rather, as part of the moratorium, Mr Brown agreed to transfer 20,000 of Kaiiwi Trust’s shares in ACTL to Abridge Finance Limited.  Because there was by this stage a distinct lack of trust between Mr Fisher and Mr Brown, it was agreed that ACTL would issue the shares direct  to Abridge,  and  that  Mr  Brown  would  concurrently  transfer  back  to  the company a corresponding number of the Kaiiwi Trust’s shares.

[21]     ACTL did issue 20,000 shares to Abridge Finance Limited in August 2010 pursuant to an agreement dated 20 August 2010.  The consideration for the issue of the shares was stated to be $1.   Mr Brown however defaulted on his collateral obligation to procure the transfer of the shares from the Kaiiwi Trust to ACTL.  He

has not subsequently done so, and as a consequence, ACTL considers that it remains entitled to 20,000 of the Brown’s shares.

[22]     Mr Brown was still desperate for money.   ACTL was not in a position to provide him with any further funding.  Mr Rodgers was the largest shareholder in the company and he was approached by Mr Wright who, by this stage, was a director of ACTL.   Mr Wright asked Mr Rodgers if he would agree to provide $100,000 to Mr Brown  to  cover  him,  and  to  enable  him  to  complete  the  codex  technology. Mr Wright told Mr Rodgers that Mr Brown had no income, and that he was in debt.

[23]     Mr Rodgers spoke direct to Mr Brown and Mr Brown told him that he needed five  months  to  complete  the  codex  technology.     Mr  Brown  agreed  to  sell Mr Rodgers’ trust 200,040 shares in ACTL from the Kaiiwi Trust, in exchange for

$100,000.

[24]     Mr Rodgers spoke to Mr Wright to ensure that no security was held over the shares owned by the Browns on behalf of the Kaiiwi Trust.  Mr Wright advised him that there had been a dispute with Abridge Finance Limited, but that it had been resolved, and that in any event, the dispute involved Mr Brown and GBR Research Limited, and not Mr Brown and his wife as trustees of the Kaiiwi Trust.

[25]     Mr Rodgers proceeded to make the advance to Mr Brown, by payments of

$20,000 per month over a five-month period.  On 4 November 2010, a share transfer in favour of the Rodgers’ Investment Trust was registered.   So was another share transfer in respect of a further 4,000 shares transferred by Mr and Mrs Brown as trustees of the Kaiiwi Trust to the plaintiffs as trustees of the Rogers’ Investment Trust in consideration for a loan Mr Rodgers had made to Mr Brown in January

2010.

[26]     As a result, the trustees of the Rodgers’ Investment Trust then held 522,066 shares in ACTL.

[27]     In late 2010, Mr Rodgers advanced a further $35,000 to ACTL, so that one of his fellow investors in the company could travel to the United States, to promote the

codex technology on behalf of the company.   To secure this lending, a document

called an “Advancement of Funds Agreement” was entered into on 16 November

2010.

[28]     Mr Brown was still short of money and he again appealed to ACTL for assistance.

[29]     In early December 2010, Mr Brown asked ACTL to issue him with a number of new shares in the company, equivalent to the value of an “end agreement payout” that he was entitled to receive once the codex technology handover had been completed to the satisfaction of the company.  The directors agreed to issue 200,000 new shares to Mr Brown and his wife, but only if he handed over the technology which he assured the directors was full and complete.  Mr Brown said that he would do so, and in the event, 200,000 shares were issued to Mr and Mrs Brown as trustees of the Kaiiwi Trust on 2 December 2010 and the codex technology was handed over.

[30]     At much the same time, the second defendant directors became aware that Mr Brown had a number of other debts, and in particular, that he owed money to some of the individual shareholders in ACTL.

[31]     The  directors  tested  the  technology in  late  December  2010.    They soon discovered that it was not complete, and that it did not meet the specifications that had been claimed for it by Mr Brown.

[32]     The directors discussed the position, and agreed to treat the 200,000 shares which had been issued to Mr Brown as unpaid, and subject to forfeiture, unless all the terms and conditions attaching to the agreement for their issue were met within seven days.   However, the company could not relay this decision to Mr Brown. They were not initially able to contact him.  They endeavoured to do so, but it seems that he had left his Auckland address.  They spoke to his then current solicitors, but they declined to accept service of any documents on his behalf.

[33]     In the event, the directors did manage to discuss matters with Mr Brown a little later, but by then, they had decided not to forfeit the shares.   According to

Mr Lust, this decision was made “in good faith to try and assist Mr Brown in settling up with its creditors”.

[34]     As  I understand  it,  at  this  stage,  Mr  and  Mrs  Brown  as  trustees  of  the Kaiiwi Trust had 368,089 shares in ACTL.  The total shareholding in the company was 2,592,920 shares.  The largest shareholders were the plaintiffs as trustees of the Rodgers’ Investment Trust.

[35]     In  early  December  2010,  Mr  Brown  contacted  Mr  Rodgers.    He  asked whether or not Mr Rodgers would like to purchase further shares from his family trust, as he had debts which he had to meet urgently.  Mr Rodgers on behalf of his investment trust agreed to purchase 80,040 shares for $40,000, on the proviso that he would not pay the monies until the share transfer forms had been registered.  The number of shares was subsequently revised, and on 16 December 2010, Mr Rodgers met with Mr Brown, and all parties signed a share transfer form in respect of 80,000 shares in ACTL. The transfer was dated 16 December 2010.

[36]     When the parties met to sign the share transfer, Mr Brown asked Mr Rodgers whether or not he would like to purchase yet a further 140,000 ACTL shares from his family trust.  The matter was discussed, and Mr Rodgers on behalf of his investment trust agreed to a price of $40,000 for the further shares, again on the basis that payment would not be made until after the shares had been transferred into the name of his family trust.  Mr Brown was very anxious to receive cash.  He discussed this with Mr Rodgers.  As noted above, Mr Rodgers had taken a security from ACTL for the $35,000 that he had advanced to it for his fellow investor’s promotional trip to the United States.  The loan was recorded in the Advancement of Funds Agreement. He suggested to Mr Brown that he would assign the agreement to him, and also pay him $5,000 cash, without waiting for the shares to be registered.  Mr Brown agreed to this and an agreement was prepared and signed dated 27 December 2010 to this end.  The share transfer form for the further 140,000 ACTL shares was signed on

30 December 2010, by both Mr and Mrs Brown as trustees of the Kaiiwi Family

Trust, and by the plaintiffs.  Mr Rodgers paid Mr Brown $5,000.

[37]     Mr Brown then asked Mr Rodgers whether he would like to buy the final parcel of 140,000 shares in ACTL which his family trust held.  He said that he would sell them to Mr Rodgers for $20,000.  Mr Rodgers agreed, but again on condition that he would not be required to make any payment until the share transfer forms were registered.  Mr Brown agreed to this condition, and the share transfer form for this transaction was signed on 18 January 2011 by both Mr and Mrs Brown as trustees of the trust, and by the plaintiffs.

[38]     Mr Rodgers sent the three share transfer forms, for a total of 360,000 shares, to ACTL on 24 January 2011.

[39]     On  9  February  2011,  the  directors  by  resolution  in  writing,  resolved  as follows:

The  Company  having  been  advised  of  a  share  transaction  between Graemme Brown et al and/or the Kaiiwi Trust and Wayne Rodgers and being in receipt of the share transfer documents, and given,

The Company having received formal advice that there are existing claims over the same or a portion of the shares held by Graemme Brown et al and/or the Kaiiwi Trust; and

That the Company considers it has its own set of claims in respect of at least a portion of such shares, these having been issued on condition of specified services to be provided by Graemme Brown to the Company, and which to this date have not been performed.

It was resolved:

That under the provisions of the Companies Act 1993, and clause 14.8.1 of the Constitution of the Company, the Board is affecting its right to delay any transfer of the shares.

[40]     On 15 February 2011, the directors of ACTL sent a letter to Mr Brown.  It read as follows:

Dear Graemme

This letter is to advise that on 9th  February, 2011 the Board of Advanced Creative Technologies Limited resolved to refuse to complete the transfer and registration of the shares detailed in your December 20th, 2010 and subsequent share transfer request.

This resolution is made in accord with the provision of the Company’s Act

1993 and clause 14.8.1 of the Constitution of the Company and is made on advice that there are existing and prior claims over the same or a significant

portion of the same shares held by you and or others and/or the Kai Iwi

Trust.

A copy of the signed Board Resolution is attached for your reference.

[41]     A letter was also sent to Mr Rodgers on 15 February 2011 in substantially similar terms, and also annexing a copy of the resolution.

[42]     Mr Brown telephoned Mr Rodgers and discussed with him the fact that the transfers  of  the  shares  had  not  been  registered.    Mr  Rodgers  in  turn  spoke  to Mr Wright and Mr Lust about the matter.

[43]     On 20 February 2011, Mr Brown telephoned Mr Rodgers again, and said that if he paid $20,000 by 22 February 2011, the Kaiiwi Trust would accept that payment for the two final parcels of shares (280,000 shares in total), and that he would liaise with the directors of ACTL to have the share transfers registered.   Mr Rodgers agreed, and he met with Mr Brown.  The parties signed an agreement recording the reduction in price.  The agreement in its terms related only to the 220,000 shares the subject of the two share transfers dated 16 December 2010 and 30 December 2010 respectively.    Mr Rodgers  paid  the  $20,000  on  21 February  2011  by  way  of electronic transfer into Mr Brown’s account.  Mr Brown sent an email to Mr Lust on

23 February 2011 to try and secure the registration of the transfers.  Further, it seems that he signed each of the share transfers recording that payment for the shares had been received in accordance with the arrangements detailed above.    The acknowledgement, on each of the transfer forms, including the share transfer form dated 18 January 2011, is dated 21 February 2011.

[44]     Mr Wright responded to Mr Brown’s email on 23 February 2011 advising that the board’s position remained “in effect until the matters raised are fully resolved and to the satisfaction of the Board”.  He recorded that he had requested meetings, that  Mr  Brown  had  avoided  any meeting,  and  that  he  remained  ready  to  meet Mr Brown if Mr Brown wanted to do so.

[45]     In the event, matters between Mr Brown and Abridge Finance Limited were not resolved.  After the six-month moratorium had expired, Abridge proceeded to place various of Mr Brown’s corporate entities into receivership.  The receiverships commenced on 15 March 2011.

[46]     Mr Brown was anxious to bring the receiverships to an end so that he could regain access to the various technologies he had been working on.   In early April

2011, he and his wife agreed to settle the debt owing to Abridge Finance Limited by transferring a number of the Kaiiwi Trust’s shares in ACTL to Abridge.   An agreement was drawn up, and it was signed on 15 April 2011.   Pursuant to the agreement, Mr and Mrs Brown agreed to transfer 81,860 shares in ACTL to Mr and Mrs Fisher as trustees of the JS Fisher Trust.  The Browns warranted that they were the legal and beneficial owners of the shares, and that on the date of execution, the shares held by them were free of any other interests or charges.   GBR Research Limited also paid $20,000 to Abridge Finance Limited, and Abridge Finance Limited released Mr Brown and his companies from any further liability owing to it.  The agreement was signed by all parties.  Mr and Mrs Brown were advised by solicitors based in New Plymouth at the time.  A share transfer form was signed on the same day in respect of the 81,860 shares.   Again, it was signed by both Mr and Mrs Brown.    Mr  Fisher  also  insisted  that  the  Browns  sign  a  statutory  declaration recording that the Kaiiwi Trust had no interest in the 81,860 shares, and that the shares were fully paid up and unencumbered.

[47]     The share transfer form was presented to ACTL and, on 20 April 2011, the directors registered the transfer from Mr and Mrs Brown direct to Mr and Mrs Fisher, in their capacity as trustees of their family trust.

[48]     As at this point, the company’s share register recorded that the plaintiffs as trustees of the Rodgers’ Investment Trust had 528,066 shares in ACTL, that Mr and Mrs Brown as trustees of the Kaiiwi Trust had 286,229 shares and that Mr and Mrs Fisher as trustees of the JS Fisher Trust had 101,860 shares.  There were a number of other shareholders. This remained the position as at the date of the Court hearing.

[49]     On 9  March  2011,  a  Mr  Lamberg,  who  was  the solicitor acting  for  the plaintiffs, wrote to the directors.   He referred to the board’s letter of 15 February

2011 and sought urgent advice about any specific information the directors had relied upon and the identity of the person or persons who had provided the information.  He went on to threaten proceedings.

[50]     On 30 March 2011, Mr Wright responded for ACTL.  He acknowledged that the board regarded the matter as very serious, and indicated that it was therefore responding with “appropriate reserve and process until all aspects pertaining to it are properly investigated and acted upon”.  He went on to record that no fewer than four parties had made prior claims to all or a portion of the shares held by the Browns. He also asserted that the bulk of the Brown’s shares had been put up as security for various loans made to Mr Brown or to companies directly associated with him.  He advised that the loans were in default, and that the lenders were claiming the shares. The letter indicated that the prior claims were still subject to investigation.  It then advised as follows:

Until all parties and matters pertaining to these investigations are properly determined and acted upon there will be no disclosure of any material that may be regarded or required as evidence.

You may be assured that the board is acting in the best interests of the company and its shareholders.  Equally, you can be assured that the board will advise you and your client of the outcome of the investigations that are now taking place.

[51]     On  29  April  2011,  Mr  Lamberg  wrote  to  the  directors  of ACTL  again querying the directors’ resolution declining to register the share transfers which had been presented on 24 January 2011.   On 9 May 2011, Mr Lamberg also wrote to Mr and Mrs Fisher advising them of the signed share transfers in favour of the Rodgers’ Investment Trust.  Mr Lamberg asked Mr Fisher how he had received the

81,860 shares transferred to him and his wife.  Mr Fisher replied relatively briefly by email to Mr Lamberg.   Mr Lamberg then threatened proceedings, and as a result, Mr Fisher declined  to  provide any of the documentation  held  by him  until  any proceedings were issued and discovery attended to.  Mr Lamberg also corresponded with Mr Brown’s solicitors.  He was unable to advance matters and the proceedings were issued in September 2011.

[52]     On  6  December  2012,  ACTL  held  its  annual  general  meeting.     The proceedings were discussed.  I deal with the detail of that meeting shortly.

[53]     Against this rather convoluted background, I now proceed to address the various questions posed by the proceedings.

a)     Was agreement reached at ACTL’s annual general meeting held on 6 December

2012 or subsequently to issue the plaintiffs with 360,000 new shares to settle this dispute?

[54]     I deal with this issue first because, if the plaintiffs are correct, no further enquiry is necessary.

[55]     The dispute the subject of these proceedings was raised in the course of the company’s annual general meeting held on 6 December 2012.   The meeting was recorded,  and  the plaintiffs arranged  for that  recording to  be transcribed.    It  is common  ground  that  the transcription  is  accurate, insofar as  can  be reasonably achieved at this stage.

[56]     The meeting was chaired by Mr Lust.   As might be expected, during the course of the meeting there was much discussion about the state of the codex technology and when and if it could be marketed.   An unidentified shareholder queried whether or not these proceedings were affecting the marketing and sale of the technology.  Mr Rodgers was asked by the unidentified shareholder, whether, if the shares were released to him, the Court case would “evaporate”.   Another shareholder, a Mr Blackwell, then asked the directors why they did not simply issue new shares to the plaintiffs to “get rid of the proceedings”.   Mr Wright told the meeting that the plaintiffs’ share transfer agreements were with the Browns and not with the company.  The discussion progressed and it was suggested that the rest of the shareholders should simply support “the deal”, and move forward.   After this discussion, the directors left the room for a private discussion.  They returned a short time later,  and  Mr McElroy asked  the directors  what  they had  been  discussing. Mr Lust replied that it had been mooted by the shareholders that the company should issue new shares to the plaintiffs to resolve the proceedings.  Mr Rodgers indicated that he was happy with this proposal.  Mr McElroy indicated that he was prepared to

second the proposal.  Mr Peach said that the proposal needed to be checked out from a legal perspective.  Ms Speedy asked whether or not the proposal would dilute the shareholdings of other shareholders.  She was told that it would.  Mr Peach made it clear that the issue of further shares was not a matter for the directors, but rather that it was for the shareholders.  There was a further inconclusive discussion, and in the event,  Mr McElroy  moved  that  the  proposal  should  be  advanced  by  way  of  a settlement.  At this point, there had been no clear articulation of any motion.  This position was clarified by Mr Lust.  It was proposed that a resolution be put forward by the shareholders to have the board of directors “check out the legalities of issuing shares to Mr Rodgers in lieu of the Court case”.  A resolution in these terms was seconded by Mr Blackwell.

[57]     There  is  a  dispute  as  to  whether  or  not  this  resolution  was  passed. Mr Rodgers in evidence said that it was passed.  He said that there was a vote, and that shareholders put their hands up to confirm whether or not they agreed with the resolution.  Ms Speedy also recalled that there was a show of hands.  However, she said that the vote occurred after the meeting had been going for just over 39 minutes. The second defendant directors denied that there was any vote, and said that no resolution was passed at the meeting.

[58]     The motion as explained by Mr Lust was put and seconded approximately

24 and a half minutes into the meeting.  It does not seem that there was any vote on it at that point of time.   Rather, there were further inconclusive discussions, canvassing a number of issues.   After the meeting had been going for just over

35 minutes, Mr Lust suggested that it had gone well over time, and that it should be brought to a head. There was then a brief discussion primarily about financial issues. At a point in the transcript, 39 minutes and 12 seconds into the meeting, Mr Wright said:

Can I get an indicated response on yes, if the share issue can be achieved, it can go ahead but we still need the question – everybody wants commercial activity going forward.   Is there also a desire to support the company financially going forward?

An  unidentified  person  replied  “absolutely”,  and  Mr  Wright  then  said  that  he

appreciated that, but that he would like a strong indication.  Ms Speedy’s evidence

suggested that there was a show of hands at this point of time, but it is far from clear that that show of hands related back to the resolution which had been proposed and seconded approximately 15 minutes earlier.

[59]     I am not persuaded that there was a firm resolution to settle the proceedings on the terms alleged by the plaintiffs.  The onus of proof was on them in that regard, but the evidence is inconclusive.

[60]     Even if there was a vote on the motion, the motion before the meeting did not settle the agreement.  Rather, it required the directors to investigate the legality of issuing shares to the plaintiffs to settle the proceedings.

[61]     Mr Rodgers gave evidence that he shook hands with each of the directors after the meeting, that there was a general discussion between them and that all were pleased to have matters resolved.  Ms Speedy said that she heard and observed this taking place.  Be this as it may, this further evidence does not establish that there was any concluded agreement.

[62]     In the event, the directors did not take any or certainly any detailed legal advice on the legality of issuing new shares to the plaintiffs to settle the proceedings. Rather, on 11 December 2012, they sent out a notice to each shareholder.  The notice recorded the resolution which had been discussed at the meeting on 6 December

2012.   It stated that the directors had sought legal advice regarding the potential implications of the resolution, but that there had not been time to obtain a full legal opinion on the matter.   It recorded that the indications were that the resolution presented “a range of potential liabilities and claims against the company and directors going forward”, and that “there would have to be put in place a number of warranties” from all parties, including all shareholders, before it could be acted upon.  Two options were proposed.  The first option was that the company should issue an additional 100,000 shares at $1 each, for the purposes of defending the proceedings.   The second option was that the company should issue 360,000 new shares to the plaintiffs, to settle the claim.  It was noted that this second option would require certain warranties and waivers to be put in place, and it briefly outlined those warranties and waivers.

[63]     Eighty seven percent of the shareholders (in terms of the number of shares held) voted in favour of the second option.  On 14 December 2012, Mr Lust prepared a brief paper noting the voting for and against and recording that the motion to settle with Mr Rodgers was carried and accepted by the board.  This paper was sent out to shareholders.  It also recorded that appropriate agreements were being prepared by the plaintiffs’ lawyers to settle the dispute, and that once signed by the parties, the new shares would be registered in the plaintiffs’ names.

[64]     It cannot in my judgment be said that at this stage, that there was a binding agreement between the parties to settle the proceedings.   Rather, the directors had resolved to settle the proceedings, but only on condition that various warranties and waivers were put in place.   Those warranties and waivers had been set out in the notice to shareholders dated 11 December 2012.  Moreover, the settlement still had to be documented.

[65]     Mr Lamberg prepared an agreement in draft, and sent it to the directors.  That draft agreement was sent to Mr Lust on 20 December 2012.   On the same day, Mr Lust replied thanking Mr Lamberg for the document.  His email went on to say as follows:

Just one issue.  On talking to Wayne this morning he acknowledged that in the event that James and Svetlana Fisher refused to sign this agreement which is a distinct possibility, as long as three directors signed it then the case would still be withdrawn.   The agreement does not reflect that.   We would feel more secure if you would include it.

Mr Lamberg replied a few minutes later, indicating that he was happy if Mr Rodgers added  a  clause  to  this  effect.    Mr  Lust  replied  a  few  minutes  later,  thanking Mr Lamberg for his email, and stating, “acknowledged and accepted”.

[66]     When  it  was  put  to  Mr  Lust  in  cross-examination  that  he  was  thereby accepting the agreement on behalf of the directors, he denied that.  He said the email was  his,  and  he  was  simply accepting  a  response  which  he  had  received  from Mr Lamberg that he was happy for Mr Rodgers to handwrite the particular clause into the contract.

[67]     I do not consider that Mr Lust bound the directors to any agreement by his use of the words “acknowledged and accepted”.  His explanation for that comment seems to me to be sensible and credible.

[68]     In the event, the directors went back to Mr Lamberg on 22 December 2012, suggesting  that  the  draft  agreement  was  too  narrow.     The  agreement  was substantially redrafted, and a number of additional points were added in by the directors.   In particular, the directors proposed that rather than issue 360,000 new shares to the plaintiffs, they would only issue 50,000 new shares to the plaintiffs in full and final settlement of their claim.

[69]     Again, I am not persuaded that any binding agreement was concluded.  The draft prepared by Mr Lamberg did not include all of the warranties and waivers which the directors had set out in the notice to shareholders dated 11 December

2012.  The proposed settlement had not been finally documented.  The directors and the plaintiffs were still discussing the final wording of any settlement agreement.

[70]     Accordingly, I find against the plaintiffs in this regard.  The dispute was not finally settled, and there was no accord and satisfaction.

b)     Did the second defendant directors have the right to delay or refuse to register the share transfers presented to them by the plaintiffs, and if so, were they entitled to exercise that right on 9 February 2011?

[71]     A share in a company is personal property,2  and subject to any limitation or restriction on the transfer of shares in a company’s constitution, a share in a company is transferrable.3   A share cannot be transferred by delivery from the transferor to the transferee; rather, a share is transferred by entry in the share register of the company in accordance with s 84 of the Act.4

[72]     Relevantly, s 84 of the Companies Act 1993 provides as follows:

84       Transfer of shares

2      Companies Act 1993, s 35.

3      Section 39(1).

4      Section 39(2).

(1)      Subject to the constitution of the company, shares in a company may be transferred by entry of the name of the transferee on the share register.

(2)       For the purpose of transferring shares, a form of transfer signed by the present holder of the shares or by his or her personal representative must be delivered to—

(a)      the company; or

(b)       an agent of the company who maintains the share register under section 87(3).

(3)       The form of transfer must be signed by the transferee if registration as holder of the shares imposes a liability to the company on the transferee.

(4)       On receipt of a form of transfer in accordance with subsection (2) and, if applicable, subsection (3), the company must forthwith enter or cause to be entered the name of the transferee on the share register as holder of the shares, unless—

(a)       the board resolves within 30 working days of receipt of the transfer to refuse or delay the registration of the transfer, and the resolution sets out in full the reasons for doing so; and

(b)       notice of the resolution, including those reasons, is sent to the transferor and to the transferee within 5 working days of the resolution being passed by the board; and

(c)       the Act or the constitution expressly permits the board to refuse or delay registration for the reasons stated.

…

[73]     As can be seen, s 84(1) permits the transfer of shares by entry of the name of the transferee in the company’s share register.   Any share transfer form must be delivered to the company, or its agent.  It must be signed by the holder of the shares as transferor, and by the transferee if registration as holder of the shares imposes a liability to the company on the transferee.

[74]     Here, it is common ground that the share transfers from Mr and Mrs Brown, as trustees of the Kaiiwi Trust, to the plaintiffs were presented to the company on

24 January 2011.  Further, it is not disputed that the share transfer forms were validly signed by Mr and Mrs Brown as transferors, and by Mr Rodgers and directors of Lamberg Trustee  Services  Limited,  as  transferees.    It  follows  that  ACTL  was required to forthwith enter the names of the plaintiffs as transferees in its share

register.  It could only decline to do so if the circumstances detailed in s 84(4) were met.

[75]     The three requirements contained in s 84(4) are cumulative.

[76]     First, the board of the company must resolve within 30 working days of receipt of the transfer to refuse or delay the registration of the transfer, and the resolution must set out in full the reasons for doing so.   Here, the share transfers were received by the company on 24 January 2011.   The resolution to delay registration   of   the   transfers   was   passed   on   9   February   2011,   within   the

30 working-day period.   The reasons for the delay were set out.   The company advised that it had received advice that there were existing claims over the same or a proportion of the shares held by Mr Brown and his wife.  The company also advised that it considered that it had its own claims in respect of at least a portion of the shares.

[77]     Although the first  and  second defendants argued to the contrary in their closing submissions, it is noteworthy that the resolution purported only to delay the transfer of the shares from Mr and Mrs Brown to the plaintiffs.  It did not purport to refuse to register the transfer.

[78]     Secondly,  s  84(4)(b)  requires  that  notice  of  the  resolution,  including  the reasons, be sent to the transferor and the transferee within five working days of the resolution being passed by the board.  Here, notice was sent to both Mr Brown and to Mr Rodgers by letters dated 15 February 2011.  The letters were accompanied by copies of the resolution.  They were sent to the addresses given to the company by the shareholders.   In the event, Mr Rodgers no longer lived at the address he had given to  the  company.   The plaintiffs did  not  receive advice of the  company’s resolution  until  an  email  was  sent  to  Mr Rodgers  on  23  February  2011.    The company however is not responsible for the fact that Mr Rodgers had failed to advise the company of his change of address.  It seems that a copy of the letter was not sent to Fisher Lamberg Trustee Services Limited, but the plaintiffs did not suggest that anything turns on this.  I am satisfied that the requirement contained in s 84(4)(b) was met.

[79]     Thirdly, s 84(4)(c) requires either that the Act, or the company’s constitution, expressly permits the board to refuse or delay registration for the reasons stated.  It was not suggested that there is any provision in the Act which is relevant.  Rather, the directors relied on the company’s constitution.  It provided as follows:

9.        REFUSAL TO REGISTER TRANSFERS

9.1      Directors May Refuse to Register Transfers

Subject to compliance with the provisions of Section 84 of the Act, the Directors may refuse or delay the registration of any transfer of any Share to any person whether an existing Shareholder or not:

9.1.1    If so required by law;

9.1.2    If  registration  would  impose  on  the  transferee  a  liability  to  the

Company and the transferee has not signed the transfer;

9.1.3If a Holder of the Share has failed to pay any amount payable either in terms of the issue of the Share or in accordance with this Constitution (including a call);

9.1.4    If the transferee is an infant or a person of unsound mind;

9.1.5If the transfer is not accompanied by such proof as the Directors reasonably require of the right of the transferor to make the transfer;

9.1.6If the Directors acting in good faith decide in their sole discretion that registration of the transfer would not be in the best interests of the Company and/or any of its Shareholders.

The company and the second defendants relied upon cls 9.1.3, 9.1.5, and 9.1.6.

[80]     A company  in  its  constitution  can  restrict  the  transfer  of  its  shares,  for example,  by imposing  rights  of  pre-emption  on  existing  shareholders.    Further, restrictions can be placed on the transfer of shares in other circumstances.  However, any restrictions on transfer must be in clear and unambiguous terms, and the Courts

will construe such restrictions strictly.5

[81]     Here, there are difficulties for the directors in relying on either cl 9.1.3 or cl 9.1.5 of the company’s constitution.

a)       Section 84(4)(b) provides that any resolution must set out the reasons for a delay or refusal “in full”, and s 84(4)(c) provides that the constitution must expressly permit the board to refuse or delay registration “for the reasons stated”.   The company’s resolution relied on competing claims and an entitlement by the company to at least some of the shares.   The resolution did not refer to either of the matters detailed in cls 9.1.3 or 9.1.5 of the constitution.  I agree with Mr Waalkens QC for the plaintiffs that the wording of the Act does not allow directors to state reasons in their resolution, and then belatedly  seek   to   add   additional   reasons   by   reference   to   the constitution when they are challenged.

b)In any event, neither of the grounds contained in s 9.1.3 or 9.1.5 were made out on the evidence.  Clause 9.1.3 relates to a failure to pay any amount payable in terms of the issue of the shares.  There was nothing to suggest that there was anything payable in respect of the shares issued to Mr and Mrs Brown.  Nor can cl 9.1.5 be relied on, because there was nothing to suggest that the directors required Mr and Mrs Brown as transferors to provide proof of their right to transfer the shares to the plaintiffs.

[82]     The only ground in the constitution available to the directors is that contained in cl 9.1.6.  It conferred a broad discretion on the directors.

[83]     Mr Waalkens noted that s 84(4)(c) requires that the constitution “expressly” permits the board to refuse or delay registration for the reasons stated, and argued that the constitution must give specific grounds upon which a share registration can be refused or delayed.  He referred to a well-known text,6  which suggests that it is unclear whether or not a broad discretionary power to refuse to register a transfer can be effective.   He argued that the words “would not be in the best interests of the company and/or its shareholders” contained in cl 9.1.6 added nothing to the broad

discretion, because it is well accepted that directors may only make a decision that is in the best interests of the company and/or its shareholders.

[84]     I do not accept this argument.  The broad discretion conferred by cl 9.1.6 is not unqualified.  Rather, the directors were given the discretion to refuse or delay the registration of any transfer of any share to any person, where, acting in good faith, they decided that registration of transfer would not be in the best interests of the company, and/or any of its shareholders.  The directors were required to expressly consider the interests of the company and/or any of its shareholders.  If they properly concluded that the best interests of the company and/or its shareholders would be adversely affected by a proposed transfer, they could, pursuant to cl 9.1.6, refuse to register or delay the registration of a transfer but not otherwise.  In my judgment, the constitution set out the reasons upon which the board could exercise the powers conferred by the clause, and the discretion was not unfettered.

[85]     The directors were obliged to exercise this discretion in the best interests of the company and in good faith,7  and for a proper purpose.8     There is nothing to suggest that they did not do so when they resolved to delay registration of the transfers on 9 February 2011.  They were then aware that Mr Brown was in poor financial circumstances.  They were aware that he had been borrowing money from shareholders in ACTL.   They knew that he had been pledging his and his wife’s shares in the company to those shareholders.   They were aware of ACTL’s rather unsatisfactory share dealings with Mr Brown, both in regard to the 20,000 shares the directors issued to Abridge Finance Limited, and also in regard to the 200,000 shares

the directors issued to Mr Brown in December 2010. As Mr Lust put it:

It [had] quickly [become] apparent that Mr Brown had been double or triple selling his shares to either con these people for his own financial benefit or in an attempt to settle his debts and [he] had no intention of following through with the transfers.

[86]     The directors took legal advice and they acted in accordance with that advice.

7      Companies Act 1993, s 131.

8      Section 133.

[87]     I am satisfied that the directors were entitled to resolve to delay registration of the transfers presented to  them  by the plaintiffs  on  24 January 2011  by the plaintiffs in the circumstances which applied on 9 February 2011.

c)     Did the directors act in good faith and properly in continuing, after 9 February

2011, to delay indefinitely registration of the share transfers presented to them by the plaintiffs?

[88]     The  directors’  resolution  was  to  delay  registration  of  the  transfers.    A resolution to delay registration of a transfer does not permit directors to sit on their hands indefinitely and do nothing.9  The right to delay conferred by s 84(4) of the Act is simply a right to delay for a reasonable time, to give the opportunity to make reasonable enquiries before registering.  It has been suggested that any steps taken by the directors need to be taken in light of the 30 working-day period set down by the section.10

[89]     Indeed, the directors initially proposed to investigate the competing claims they had given as their reason for delaying registration of the share transfers.  The first and second defendants did not suggest that the share transfers presented to them by the plaintiffs were invalid for any reason.   Rather, they argued that there were actual or potential claims to the shares, which precluded registration of the share transfers presented by the plaintiffs.  In the letter sent by Mr Wright on behalf of the directors and ACTL to Mr Lamberg on 30 March 2011, the board advised that no fewer than four parties had made prior claim to all or a portion of the shares held by Mr and Mrs Brown, and that the claims were still subject to investigation.  The letter then assured Mr Lamberg that the trustees of the Rodgers’ Investment Trust would be

advised of the outcome of the investigations that were then said to be taking place.

9In a similar context, the Court of Appeal in the United Kingdom has held that where there is an obligation on directors who refuse to register a transfer to inform the persons who are aggrieved within two months of such refusal, the directors must make up their minds either to accept the transfer, or to refuse it, and that if they wait for some four months without making any decision

at all, that there is an unreasonable delay — Re Swaledale Cleaners Ltd [1968] 1 WLR 1710 at

1715.  This general proposition has been broadly approved in New Zealand, see Middleditch v
Bital Holdings Ltd (1993) 6 NZCLC 260,260 (CA); Nicholls v Parkview Projects Ltd (1999) 8

NZCLC 262,016 (HC).

10Andrew  Beck  and  others,  Morrison’s  Company  and  Securities  Law  (online  looseleaf  ed, LexisNexis) at [13.28].

[90]     It is trite law, and not disputed by the defendants, that the directors when making inquiry and carrying out their investigations, had to act in good faith and in what they believed to be their best interests of the company.11   Moreover, they had to exercise the powers available to them for a proper purpose.12

[91]     Unfortunately, from their perspective, it is not obvious from the evidence that the directors took any real steps to investigate the various competing claims after the plaintiffs presented the share transfers for registration on 24 January 2011.  It seems from the evidence that the company may have had some preliminary discussions with Mr Brown, although no detail was given in evidence of those discussions.  No correspondence was sent to Mr Brown querying why he had apparently pledged his and his wife’s shares to a number of persons, although at least on 23 February 2011, the company did have Mr Brown’s email address.  When I asked Mr Lust how the company was intending to bring the competing claims to a head, he simply advised me that the intention was to bring Mr Brown in to discuss it, but that following Mr Brown’s email of 23 February 2011, there was no further communication with him.  The directors did lay a complaint with the New Zealand Police, alleging fraud by Mr Brown.  It is not clear when this happened and there is nothing suggesting that the police have made any investigation into this complaint.  There is no evidence of any  other  steps  taken  by  the  company.     Mr  Lust  accepted  that  there  is  no documentary evidence of any investigations made.  Although he went on to assert that this did not mean that they never happened, he was unable to provide any detail of any further investigations at all.   Insofar as I am aware on the evidence, the directors did not contact those persons (other than Mr McElroy) who may have had prior claims after it received the plaintiffs’ share transfers.  They did not take legal advice and they did not commence proceedings to try and resolve matters.  Rather, the directors allowed matters to drift.   It seems to have been their view that the investigations  could  not  be  completed  because  they  could  not  then  contact Mr Brown.  All of this falls well short of “investigating to a degree of certainty” the prior claims, yet this is what Mr Lust told me that the directors anticipated doing

after they resolved to delay registration of the plaintiffs’ share transfers.

11     Companies Act 1993, s 131(1).

12     Section 133.

[92]     If even limited investigation had been made, it seems likely, on the evidence available, that the directors would relatively quickly have resolved the position. Insofar  as  I  can  glean  from  the  evidence  presented,  none  of  the  prior  claims precluded registration of the plaintiffs’ transfers, or relieved the company of its obligation to register the transfers under s 84.

[93]     There was some confusion over the parties who the directors believed had prior claims.   Mr Wright produced a file note recording the directors’ discussions with the company’s solicitors in late January 2011.  They discussed with the solicitor four  parties  who  they  then  considered  might  have  prior  claims.    They  were Abridge Finance Limited, a Mr and Mrs Blake, a Ms Speedy, and a group of persons referred to as “the Russians”.  However, Mr Lust in his evidence in chief said that the four prior interests were Ms Speedy and her partner Mr Flay, the Blakes, a Mr and Mrs McElroy and the company itself.

[94]     I briefly address the entitlement of each of these alleged prior claimants:

Abridge Finance Limited

[95]     The directors were aware in mid 2010 that Abridge Finance Limited had lent money  to  companies  associated  with  Mr Brown,  and  that  those  companies  and Mr Brown had defaulted in their obligations to Abridge Finance Limited. ACTL was party to the agreement dated 5 July 2010, and it had been involved in negotiations between Mr Brown and Abridge.  It was also a party to the agreement with Abridge dated 20 August 2010, whereby it agreed to issue 20,000 shares to Abridge as further security for the debts owing by Mr Brown and his companies, and to procure the six-month moratorium.  It was aware that Mr Brown had agreed in the 5 July 2010 agreement to procure the Kaiiwi Trust to provide a mortgage or mortgages over the trust’s shares in ACTL as might reasonably be required to provide further security to the creditors.  It knew that no such mortgage had been requested by Abridge Finance Limited or by any other creditor.  Rather, the evidence, particularly from Mr Lust, was that the directors considered that the agreement to procure a mortgage of itself created some kind of prior right to the shares.  If that was their view, the directors were mistaken.  The evidence suggested that the directors were aware that Mr Fisher

was negotiating to get more shares from the Browns to set off against the debt owed to Abridge, but the fact of negotiations did not create an entitlement or right to the Brown’s shares.  Moreover, as at the date the plaintiffs presented their share transfers for registration, the moratorium was in place.  There could not have been any claim by Abridge Finance Limited to the shares which Mr Brown had purported to transfer to the plaintiffs in December 2010 and January 2011.

Mr and Mrs Blake

[96]     Mr Blake gave evidence.  He is a shareholder in ACTL.  Further, he and his wife  loaned  money  direct  to   Mr  Brown.     They  received  some  shares  in GBR Research  Limited  in  return  for  providing  those  loans,  and  they  also  took Mr Brown’s personal guarantee.  Mr Brown defaulted, and Mr Blake met with him in May 2009 to try to sort out the monies owing to him and his wife.  Mr Brown made various promises.   Mr Brown proposed that he would transfer to the Blakes

12,000 shares in ACTL and then later, 20,000 shares in the company.  This offer was accepted and the shares were later transferred and registered.  Mr Brown later agreed to exchange more of his and his wife’s ACTL’s shares for all further debts owing to Mr Blake and his wife.   A letter was signed  by Mr Brown in  early June 2010 referring, albeit in very oblique terms, to this.  In a later letter sent to the Blakes on

18 June 2010, Mr Brown advised that the advances which the Blakes had made to him would be reimbursed, and that the investment loans would be discharged promptly.  The directors did obtain copies of this documentation, although Mr Lust could not remember when this occurred.  Be that as it may, there is nothing in the documentation which creates any right or prior claim in favour of the Blakes over the Brown’s shares in ACTL.   In evidence, Mr Blake accepted that there was no particular agreement reached with Mr Brown as to the number of shares which Mr Brown would allocate to him and his wife in exchange for the debt.   Rather, Mr Blake said that Mr Brown had simply promised to exchange debt for shares, and that no arrangement with Mr Brown was ever concluded.

[97]     At its highest, the Blakes had been in negotiation with Mr Brown in relation to obtaining additional ACTL shares from him and his wife in exchange for debt.  No agreement was ever reached.  It cannot be said that the Blakes had any entitlement,

right or claim over Mr Brown’s shares.   Adequate inquiry by the directors would

have revealed this.

Ms Speedy and Mr Flay

[98]     Mr Lust gave evidence that Ms Speedy and her partner Mr Flay told the directors that they were owed a large sum of money by Mr Brown, and that they were negotiating to exchange shares for this debt.   He said that this advice was relayed to the directors in about September 2010.  He accepted in cross-examination that there was however no documentary evidence to back up Ms Speedy’s advice to the directors and that it was an “unsubstantiated claim”.

[99]     Ms Speedy was called to give evidence by the plaintiffs.  It was not put to her that she and her partner had any entitlement to the shares owned by Mr and Mrs Brown, or that they had any prior claim to any of those shares.

[100]   At its highest, the evidence simply established that Ms Speedy and Mr Flay were negotiating with Mr Brown.  The directors made no further inquiry as to the status of those negotiations.

Mr and Mrs McElroy

[101]   Mr Lust gave evidence that one of ACTL’s shareholders, a Mr McElroy, had paid Mr Brown $64,000 for shares in ACTL, but that the transfer for those shares had never been received by the company.   Mr Lust said that the directors became aware of this in December 2010.

[102]   Mr  McElroy  was  called  by  the  first  and  second  defendants.    He  gave evidence that he and his wife assisted Mr Brown financially from time to time by purchasing some of his shares in ACTL.   The transactions in question took place between December 2009 and July 2010, and were for 17,800 shares.   The share transfer forms for those transactions were produced in evidence.  There is difficulty with those transfer forms.  They are signed only by Mr Brown.  Mr Brown did not own any shares in ACTL in his own right.   He and his wife were the registered

holders of the shares.  There was no valid share transfer in terms of s 84(2) of the

Act.

[103]   This would have been clear to the directors had they made adequate inquiry. They should have returned the invalid share transfer forms and left Mr and Mrs McElroy to pursue Mr Brown.   Section 84 is not intended to place the risk on directors where an invalid share transfer form has been presented.13

[104]   Further,  and  in  any  event,  at  the  company’s  annual  general  meeting, Mr McElroy confirmed that he and his wife were willing to forget about the transfers in his and his wife’s favour, and that they did not press any claim for the shares.

The Russians

[105]   This potential claimant was referred to in the file note of the discussions the directors had with the company’s solicitor.  The Russians were not expressly referred to by Mr Lust.  Mr Wright said that the Russians were a group of people who had representatives in the South Island and that Mr Brown had attempted to sell the codex technology to them.   Mr Wright stated in cross-examination that any claim that the Russians may have was “as yet undetermined”.  The proposed sale of the codex technology to the Russians was apparently part of the complaint made to the police by the directors.   Again, it cannot be said that the Russians had any prior claim to the shares owned by Mr Brown and his wife.

ACTL

[106]   The directors claimed that ACTL had a prior interest in two parcels of shares, first, 20,000 shares, which they said Mr Brown had promised to transfer to the company  when  the  company  in  turn  issued  20,000  shares  to  Abridge Finance Limited in August 2010, and secondly, 200,000 shares, which the company issued to Mr and Mrs Brown on 2 December 2010, on the condition that Mr Brown deliver the

completed codex technology to the company.

13     Nicholls v Parkview Projects Ltd (1999) 8 NZCLC 262,016 at 262,024.

[107]   I discuss first the 20,000 shares which the directors say Mr Brown agreed to transfer to ACTL.   There is no reference in the agreement dated 20 August 2010 relating to the transfer of shares from ACTL to Abridge Finance Limited to any collateral arrangement with the Browns.   Rather, the agreement records that the consideration for the issue of the shares to Abridge Finance Limited was $1.  Further, there is no evidence that the directors took any steps to enforce the agreement they say Mr and Mrs Brown made with the company.  Any claim as the company may have had under the agreement seems to be against the Browns personally and it could not give rise to a right to the shares themselves.  The directors did not obtain a signed share transfer from Mr and Mrs Brown.  It seems that they were anxious not to antagonise Mr Brown, for fear that he might  withhold the codex technology, which was of course pivotal to the company’s success.  I do not consider that such inchoate claim as the company may have had, operated to defeat the valid transfers presented by the plaintiffs.

[108]   As for the 200,000 shares, the second defendants argued that because the codex technology was not delivered in a complete state, the shares were “unpaid”. That argument faces significant difficulties:

a)       There was no restriction or limitation noted in the company’s register in respect of these 200,000 shares.  It was not recorded that they were unpaid;

b)There was no evidence of any claim or letter of demand for payment from ACTL to Mr Brown;

c)       The defendants elected not to forfeit the shares.  Whether or not the technology delivered by Mr Brown was complete, the directors are estopped from now asserting that the shares were unpaid.   They decided not to invoke forfeiture and to leave the shares available for Mr Brown so that he could settle with other creditors who he owed money to.  ACTL and its directors cloaked Mr Brown with the ability to continue to deal with the 200,000 shares, and that they cannot now

assert that they have any status as a prior claimant in regard to those shares.

d)The directors took no action in regard to the 200,000 shares.   Both Mr Lust and Mr Wright accepted this when it was put to them in cross-examination.

[109]   In my judgment, no adequate investigation into the competing claims was undertaken by the directors after they received the share transfers from the plaintiffs. Rather, the evidence compelled the conclusion that they did little, if anything, to investigate the prior claims.

[110]   Nor did ACTL or the directors provide any information to the plaintiffs to enable them to try and bring matters to a head

[111]   Mr Lamberg was asking for information regarding the prior claimants.  The directors declined to provide that information.   They considered that it was confidential, but they did not check with the various persons who might have prior claims to the shares, whether or not they objected to the information being disclosed. Arguably, the directors failed to comply with s 178 of the Act.   It provides that within 10 working days of receiving a written request for information, the company must either provide the information, or refuse to provide the information specifying the  reasons  for  the  refusal.    The  reason  given  by  the  company in  its  letter  of

30 March 2011 that there would be no disclosure of any material that could be regarded as evidence until all parties and all matters pertaining to the investigation have been properly determined and acted upon is not in my view a reason for declining the request made by Mr Lamberg.   Rather, it is a statement of position. Confidentiality may have been a good reason, but it was not claimed and in any event, there was no proper explanation offered in evidence by the directors as to why those persons with potential claims were not asked if the directors could disclose their claims to the plaintiffs so that the claims could be investigated.

[112]   The way in which the directors dealt with the plaintiffs’ share transfers can be

contrasted with the way in which they dealt with the share transfers presented to

them by Mr and Mrs Fisher in mid April 2011.   The directors did not resolve to refuse registration of the transfers presented by Mr and Mrs Fisher, or to delay registration of those transfers.  Rather, they accepted a statutory declaration signed by Mr and Mrs Brown in which they confirmed that the Kaiiwi Trust had no interest in the shares being transferred, and that the shares were fully paid up and unencumbered.     The  share  transfers  were  registered  on  the  strength  of  that declaration.

[113]   It is curious that the directors did not take the same stance with Mr and Mrs Fisher, as they had taken with the plaintiffs.   When this was put to Mr Lust, he endeavoured to explain the discrepancy in the treatment accorded to the plaintiffs and to Mr and Mrs Fisher, by referring back to the agreement dated 5 July 2010.  He seemed to consider that that agreement obliged Mr Brown and ACTL “to utilise [Mr Brown’s] shares as payment or transfer in respect of those debts that were owed [by] Mr Brown”.  Mr Lust seemed to think that the agreement allowed the directors to register the transfer in favour of Mr and Mrs Fisher, notwithstanding the prior transfers presented by the plaintiffs, and the other claims which the directors considered precluded registration of the transfers in favour of the plaintiffs.   It is clear that Mr Lust has misunderstood the terms of the agreement.   Further, given Mr Brown’s track record, and the suspicions the directors then had, it is surprising that the directors were prepared to rely on a declaration signed by the Browns.  The directors’ stance in regard to the Fisher transfers  does not suggest even-handed treatment as between Mr Rodgers and Lamberg Trust Services Limited on the one hand, and Mr and Mrs Fisher on the other hand.

[114]   In  summary,  in  my  judgment,  the  directors,  having  resolved  to  delay registration of the transfers presented to them by the plaintiffs, failed to proceed to investigate the prior claims relied on as the reason for delaying registration of the transfers, within a reasonable time.  They breached the obligation imposed on them under s 131 of the Act to act in good faith, and the obligation in s 133 to exercise the powers vested in them under s 84 for a proper purpose.  They failed to act promptly, and as a result, they failed to comply with their mandatory obligation under s 84(4), to forthwith enter or cause to be entered in the company’s share register the names of the plaintiffs as holders of the shares the subject of the share transfers.

d)     Did the Fishers have notice of the prior transactions between Mr and Mrs Brown and the plaintiffs when they concluded an agreement with the Browns on 15 April 2011, pursuant to which the Browns transferred 81,860 shares in ACTL to them, and when they presented the transfer for registration to the first and second defendants?

[115]   Mr Fisher gave evidence that at the time Abridge Finance Limited settled with Mr and Mrs Brown in mid April 2011, he and his wife knew nothing about the share transfers between the plaintiffs and the Browns.

[116]   Mr  Waalkens  cross-examined  Mr  Fisher  vigorously  in  relation  to  this assertion.   He also cross-examined a number of other witnesses in relation to the same issue.

[117]   In cross-examination, Mr Fisher explained that he had been negotiating trying to resolve matters with Mr Brown since mid 2010.   He explained that the final agreement entered into in April 2011, whereby Mr Brown transferred 81,860 shares to him and his wife, was the culmination of this long process of negotiation.   He could  not  remember  when  he  told  the  directors  that  he  was  negotiating  with Mr Brown to acquire his shares.  He accepted that the directors did know about this as  at  24 January  2011,  when  the  plaintiffs  presented  their  share  transfers  for registration, but he was adamant that nobody mentioned to him at that time that Mr Brown was endeavouring to transfer his and his wife’s shares to the plaintiffs. The most that Mr Fisher was prepared to concede was that when he discussed with the directors how many shares he was trying to get from Mr Brown, they suggested to him that he should not get “too greedy”, because there were other people to consider.

[118]   Mr Lust was cross-examined in relation to this matter by Mr Fisher.  Mr Lust was asked when ACTL advised the Fishers that there was a prior claim on the shares. Mr Lust  answered  that  it  would  have  been  just  after  or  on  20 April  2011.    In cross-examination by Mr Waalkens, he acknowledged that there had been a number of earlier discussions between the directors and Mr Fisher, but he denied that he was personally involved in those discussions.  Rather, his involvement had been  with his co-directors, Mr Peach and Mr Wright.

[119]   The matter was then put to Mr Wright.  He accepted that there were a number of discussions with Mr Fisher, but said that those discussions were limited to the fact that Abridge Finance Limited was owed money, that Mr Fisher was intending to put Mr Brown’s companies into receivership, and that to obtain the moratorium, shares would be issued to Abridge Finance Limited by ACTL.  Mr Wright acknowledged that the directors were aware that Mr Fisher was contemplating acquiring further shares from Mr Brown, and that the directors believed that Mr Fisher was having discussions with Mr Brown about exchanging shares for debt, but he stated that the number of shares were not specified at that particular time.  He said that details of the settlement reached between Mr Fisher and Mr Brown, of the number of shares agreed between them, and of the negotiations, were all confidential to Messrs Fisher and Brown, and the directors did not have any direct knowledge of the stage that those negotiations were at.  When it was put to him that he told Mr Fisher that he should have concerns about whether or not Mr Brown was “going to do something tricky with the shares”, he acknowledged that there were discussions with Mr Fisher about the directors’ concern over Mr Brown’s behaviour, and that Mr Fisher was aware that there were other parties “in the same boat as him”.  However, Mr Wright was adamant that the directors were very careful not to disclose the details of other potential claimants to the shares to Mr Fisher.  He said that Mr Fisher was simply aware that Mr Brown had a lot of debt.  He did not recall ever telling Mr Fisher who the other parties were who may have claimed an interest in Mr Brown’s shares.  He said that there was no discussion with Mr Fisher about the share transfers received from Mr Rodgers on behalf of the plaintiffs, and he was firm that the directors did not disclose the receipt of those share transfers to Mr Fisher.   He accepted that Mr Fisher “may” have been told that there “was a delay on Brown’s shares until prior claims and other matters could be sorted out”.  He was, however, sure that the directors did not disclose any detail of the plaintiffs’ share transfers with Mr Fisher, and that they did not tell Mr Fisher that on 24 January 2011, they had been presented with another claim in respect of the Brown’s shares.

[120]   For the sale of completeness, I record that Mr Waalkens also explored this issue with Mr Blake because Mr Blake had discussions with Mr Fisher at one stage. Again, he failed to establish that Mr Blake had put Mr Fisher on notice of the prior transfers to the plaintiffs.

[121]   Despite Mr Waalken’s spirited challenge to the witnesses, I am not persuaded that Mr Fisher had either actual or constructive knowledge of the claims being made by the  plaintiffs  to  Mr  Brown’s  shares  when  he  negotiated  the  settlement  with Mr Brown in mid April 2011, when he obtained from Mr Brown and his wife a share transfer for 81,860 shares in ACTL, and when he presented that transfer to the directors for registration on 20 April 2011.  I find that the Fishers, as holders of the later equity in respect of 81,860 shares transferred to them on 15 April 2011 by Mr and Mrs Brown, did not have actual or constructive knowledge of the plaintiffs’ earlier claim to those shares.

e)      Should the Court exercise its power to rectify ACTL’s share register to permit the plaintiffs’ share transfers to now be registered and if so, how far should any rectification extend?

[122]   The Court has power under s 91 of the Act to order the rectification of a company’s share register, if it concludes that the name of a person has been wrongly entered in, or omitted from, the register.  The Court’s power to make an order under the section is discretionary.  The right to rectify is not an original source of power. Rather, it is a discretionary power enabling the Court to put right the register so as to reflect that which, under some other power, whether originating in the statute, or in

equity, has been or ought to have been done.14    The person claiming rectification

must show some equity, which the Court should protect.15

[123]   I am satisfied on the materials presented to me that the plaintiffs do have an equity vis-à-vis the Browns and that it is appropriate to direct that ACTL’s share register be rectified, to record the transfer of the remaining 286,229 shares held by Mr and Mrs Brown, to Mr Rodgers and Fisher Lamberg Trustee Services Limited.

[124]   The  share  transfers  presented  to  the  company  on  24  January 2011  were properly executed.  The Browns cannot have any further claim to the shares.  None of the other potential prior claimants has a valid or enforceable claim which operates to  defeat  the  claim  made  by Mr  Rodgers  and  Fisher Lamberg Trustee  Services

Limited.   It follows that the plaintiffs are entitled to have their names put on the

14     Nicholls v Parkview Projects Ltd (1999) 8 NZCLC 262, 016 at 262,025.

15     Grant v John Grant & Sons Pty Ltd (1950) 82 CLR 1 (HCA) at 51.

register and there is no valid reason why that should not be done.  It is appropriate to exercise the discretion available under s 91, to put right the wrong occasioned by ACTL and the directors’ failure to promptly and adequately investigate the claims made by others to the Brown’s shares and by their failure to register the share transfers presented to them by the plaintiffs.

[125]   It is not appropriate to deprive Mr and Mrs Fisher of the shares which Mr and Mrs Brown transferred to them.  I am persuaded on the evidence that Mr and Mrs Fisher did not have any actual or constructive notice of the plaintiffs’ prior claim to those shares.

[126]   Accordingly, I order, pursuant to s 91(2)(a), that the share register of ACTL be rectified, to record that the 286,229 shares held as at the date of this judgment in the names of Mr and Mrs Brown have been transferred to the plaintiffs.

f)      Should compensation be ordered under s 91(2)(b) of the Companies Act 1993, and if so, who should it be payable by and in what amount?

[127]   As a result of the directors’ actions, the plaintiffs have been deprived of

73,771 shares, which should have been transferred to them had the directors acted promptly and in accordance with their duties.

[128]   In their closing submissions, the plaintiffs suggested that, in the event that the Court concluded that their causes of action were sustained, but they did not receive full relief, they should be entitled to address the Court in regard to the payment of compensation, either by the company, or by the directors, pursuant to s 91(2)(b) of the Act.

[129]   The first and second defendants did not address this issue in their closing submissions.

[130]   It is appropriate that I should give the parties the opportunity to comment on the matter.

[131]   Accordingly, I direct as follows:

a)       Within 15 working days of the date of issue of this judgment, the plaintiffs are to file and serve such additional submissions in relation to the payment of compensation as are appropriate.  I expect that those submissions will cover first, who should pay any compensation ordered, and secondly, the quantum of any compensation that should be ordered.  They will also need to address the evidence — what total sum have the plaintiffs paid for the 360,000 shares that should have been registered in their name?

b)Within  a  further  15  working  day  period,  the  first  and  second defendants are to file and serve any submissions in response that they wish to file.

c)       Given my findings made above, I do not anticipate that Mr and Mrs Fisher will wish to file and serve any submissions in relation to the issue, but if they nevertheless wish to do so, then they are to file and serve their submissions within the same 15 working day period as is available to the first and second defendants.

d)Any submissions in reply by the plaintiffs are to be filed and served within a further five working day period.

Costs

[132]   The plaintiffs are entitled to  their reasonable  costs and disbursements  as against the first and second defendants.  The plaintiffs have not succeeded as against the third defendants, but the Fishers are not entitled to costs as against the plaintiff. They were not legally represented.  They may, however, be entitled to recover their reasonable disbursements as against the plaintiffs.

[133]   Within the same timeframe as I have set out above in relation to the payment of any compensation, the plaintiffs are to file and serve any submissions they wish to make in relation to costs and disbursements.  Within the same 15 working day period as is available to the defendants, the defendants are to file and serve any submissions

in response they wish to file in relation to the plaintiffs’ claim for costs, or in the Fishers’ case, in relation to disbursements.   In the event that the Fishers seek disbursements, the plaintiffs are given the same five working days within which to file and serve their reply.

[134]   I will then deal with the issues of compensation and costs on the papers, unless I require the assistance of the parties, or their counsel, as the case may be.

Wylie J