Seimer v Paragon Oil Systems Ltd HC Hamilton CP80/00

[2001] NZHC 658

IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY CP80/00

BETWEEN: VINCENT ROSS SEIMER
First Plaintiff

AND: JANE CHAPMAN SEIMER
Second Plaintiff

AND: PARAGON OIL SYSTEMS LTD
First Defendant

AND: WATERFORD HOLDINGS LTD
Second Defendant

AND: HELEN McCAIG
Third Defendant

AND: DAVID JOHN RUTHERFORD
Fourth Defendant

COUNSEL: C. Morris for Plaintiffs
W. Pyke (given leave to withdraw) for Fourth Defendant

HEARING: 18 July 2001

REASONS FOR JUDGMENT: 19 July 2001

REASONS FOR JUDGMENT OF HAMMOND J

Solicitors: C. Morris, Auckland

INTRODUCTION

[1] This is a proceeding under s 174 of the Companies Act 1993. For shorthand purposes, such a proceeding is usually referred to as an “oppression” action. The relief sought by the plaintiffs is the transfer to them of certain shares in Paragon Oil Systems Ltd, and consequential relief.

[2] The proceeding came on for hearing before me on 18 July 2001. By that time the position of the defendants, and particularly the third and fourth defendants who were originally the “live” defendants in the proceeding, had altered considerably. Paragon Oil Systems Ltd (“Paragon”) is in the hands of a receiver; and Waterford Holdings Ltd (“Waterford”) is in liquidation. Both those parties abide the decision of the Court in this proceeding. The third defendant, Ms McCaig, had her defence struck out by an order of this Court. There was therefore no appearance for her. Mr Rutherford, the fourth defendant, recently died. For the reasons given in an associated Minute in this trial Mr Pyke, who appeared for the executrix of his estate, was given leave to withdraw.

[3] There are therefore, effectively, now no defendants before the Court. The proceeding advanced, in reality, as a formal proof. That said, a case for the relief sought still has to be made out under s 174 of the Statute. I required the plaintiff to lead the evidence which would have been led on a defended hearing; and Mr Morris made helpful and concise submissions.

[4] At the end of that hearing I had reached a clear view that there should be judgment for the plaintiffs. For the convenience of the parties - who were from a distance - I gave a short oral judgment in open Court, giving judgment for the plaintiff and the orders of the Court. I said I would give my reasons for my holdings as soon as I could conveniently do so. This I now proceed to do.

BACKGROUND

[5] The plaintiffs, Mr and Mrs Seimer, are minority shareholders in Paragon. They own 535,000 shares. The other significant shareholder in Paragon is Waterford, which owns 750,000 shares.

[6] Waterford was a company formed by Ms McCaig and Mr Rutherford. It was a research and development company which was developing certain oil purification processes. Waterford went into liquidation on 6 April 2001.

[7] Paragon was the commercial arm of Waterford.

[8] Mr and Mrs Seimer agreed with Waterford and its shareholders that they would provide development funding. They paid $535,000 for their minority shareholding in Paragon. Waterford received 750,000 shares in Paragon as the purchase price paid by Paragon for the assets, intellectual property, records and intellectual know-how owned by Waterford.

[9] The basic scheme of the relevant agreements was as follows:

•   Paragon would receive all assets, tangible or otherwise, of Waterford;

•   Waterford would receive, in turn, 750,00 share in Paragon;

•   Paragon would receive funding from the Seimers of $535,000;

•   Mr Seimer would be the Managing Director and CEO of Paragon;

•   Mr Rutherford, the chief engineer of Waterford, would continue employment with Paragon to develop the processes which had previously been developed by Waterford;

•   Paragon would then be in a position to advance the products and opportunities which were being developed by Waterford;

•   McCaig and Rutherford were also to have a small shareholding in Paragon (10,000 shares each).

[10] Because Waterford was a technology development company, it was central to the transaction that Paragon should receive all of Waterford’s intellectual property. This was recorded in the sale and purchase agreement in clauses 18.2 and 19.4, which acknowledged that the assets of the business were primarily the intellectual know-how contributed by the directors and employees.

[11] The various agreements all settled on Friday 1 September 2000. Paragon began operating. Unfortunately - because the oil purification processes being developed hold real promise and are the kind of venture business sorely needed in this jurisdiction - relations between the Seimers on the one hand, and Ms McCaig and Mr Rutherford on the other hand, began to go awry.

[12] The Seimers contend that within weeks of their advancing the cash sum to Waterford, that company literally locked them out of Paragon’s premises, acting through Ms McCaig and Mr Rutherford. Their evidence is that:

•   On the very first working day of the new arrangement, Mr Rutherford, who was by then the technical director of Waterford, resigned as a director and employee of Paragon from 4 September 2000;

•   Ms McCaig, at about the same time, refused to carry out sales and marketing functions;

•   Ms McCaig advised Mr Seimer that intellectual property was being stripped off Paragon by Mr Rutherford;

•   Ms McCaig and Mr Rutherford refused to share records of the intellectual property (formerly that of Waterford) and now owned by Paragon;

•   Mr Rutherford began negotiating with other parties over the sale of intellectual property owned by Paragon;

•   Paragon and Waterford funds were diverted to another company owned and controlled by Ms McCaig and Waterford;

•   Access was actually denied to the company premises by security guards engaged by Waterford;

•   Important commercial mail addressed to Mr Seimer was kept from him by Ms McCaig;

•   Funds of $50,000 belonging to Paragon were sought to be withdrawn by Ms McCaig and Mr Rutherford, for their own purposes.

[13] Given this background, the plaintiffs applied for the appointment of a receiver. On 14 December 2000 this Court ordered (by consent) that a receiver be appointed, on the terms set out in the Court order of that date.

[14] Since the appointment of the receiver, the position has remained tense and, as Mr Morris put it, “deadlocked” as between the shareholders. Waterford has gone into voluntary liquidation and has taken no part in these proceedings. Waterford has no funds. Sadly, Mr Rutherford committed suicide. As a result his partner, Ms McCaig has suffered great trauma and ongoing depression.

[15] Turning now to the position of the plaintiffs. Their fundamental complaint is that their substantial investment in Paragon has realised none of the promised return. Unless a rescue operation can be mounted - really by them - their investment will be entirely lost. And the potential commercial benefits of some very worthwhile industrial technology will also be lost.

[16] The receiver has reported to this Court, as he was required to. In the 18 March 20001 report, the receiver indicated that the sole option in the receivership was to close the premises down. He had the following recommendations:

“(i) For the avoidance of doubt, terminating all employment contracts in
accordance with their terms.

(ii) Securing the assets under our control on the premises (in this respect
we note that the Waterford parties have yet to relinquish the assets they have advised are in their possession. As a result we will not be able to review the information stored on the computer).

(iii) Pursuing the ‘formula’ for the filtration medium. This is a material
asset of the Company and we have not been able to identify any document under our control which contains the formula. We have requested advice of the composition of the filtration medium from the Waterford parties. Mr Scott, solicitors for the Waterford parties, considers it is not necessary for the Waterford parties to re-document the intellectual property. In the circumstances, it may be that the further action on our part will not bring the matter forward. Accordingly, should the issue not be resolved on our current request, we will be obliged to leave the matter for the Court to determine.”

[17] To date, the receivers have in fact been unable to:

•   Secure all the assets from the relevant parties; and

•   Most importantly, the “formula”, which is the significant material asset of Paragon, has not been supplied by the Waterford interests.

THE PLAINTIFFS’ POSITION

[18] It was against this background that the plaintiffs sought, by this proceeding, to have recognised the actions of Waterford as being unduly prejudicial to them. The fundamental relief they seek is an order transferring the Waterford shares to them. In a situation such as has arisen, there is always a question as to whether investing parties should cut their losses. However, that would be difficult for the Seimers in the present case, for a number of reasons. One of the significant practical points is that Mr Seimer guaranteed, for three years, the lease of the business premises. That liability would continue. The Seimers have come to the view that they would be prepared to fund Paragon with the necessary resources to try and rescue their already substantial investment. And, realistically, they are the only parties in a position now, to advance Paragon.

[19] In the 18 March 2001 report, the receiver indicated that it was his view that this was a business which could not be traded in receivership. Projected cashflows were supplied. It appears that an immediate injection of $148,000 would be required to allow for all necessary matters, along with the costs of commissioning and the ongoing costs of receivership. Effectively, the receiver could do no more than secure the assets under their control - and as noted, those assets are not complete - and to endeavour to maintain the status quo until this Court disposed of the merits.

[20] The plaintiffs’ position is that the transfer of the Waterford shares to them would assure them of total control of the future of Paragon and their past, and importantly their future, investment within that company.

[21] The commercial reality is that the intellectual property development is still short of full commercial use. To progress the developments, Paragon requires a complete hand-over from Waterford:

•   Of all the relevant data files and the patents comprising the relevant intellectual property; and

•   Funding of Paragon to continue the development of that intellectual property.

THE OPPRESSION REMEDY

[22] The statutory remedy against oppression, unfair discrimination and unfair prejudice - usually compendiously referred to as “the oppression remedy” - is a relatively recent creation of statute. The relevant provisions are now contained in ss174-176 of the Companies Act 1949.

[23] By this remedy, this Court is given a wide discretion to review any type of corporate activity and to grant a wide range of relief. It is not necessary to commence a derivative action. The remedy is intended to protect minority shareholders from exploitation, and against being deprived of their fair share of the enterprise. But, in exercising the remedy, this Court must keep firmly in view the traditional reluctance of this Court - for good and sufficient reasons - to unduly intervene in the management of corporate affairs.

[24] “Oppressive” conduct is not to be read down by reference to the prior law Thomas v HW Thomas Ltd [1984] 1 NZLR 686. In that case the applicant complained against a conservative dividend policy of a family company. He said the return on his investment was inadequate and that he was a locked in minority. Various other shareholders held salaried positions in the company, deriving extra revenue. The applicant asked this Court to order the company or the other shareholders to buy out his shares at a fair price. In the Court of Appeal, Richardson J said:

“In the same way it is the unfairly detrimental effect of the conduct of the company on the interests of the complaining member which brings into play the just and equitable subs (2) of s 209. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 in particular; thus to have regard to the principles governing the duties of a director in the conduct of the affairs of a company and the rights and duties of a majority shareholder in relation to the minority;/ but to recognise that s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member’s interest arising from the acts or conduct of the company in that way is justifiable.”

[25] Richardson J further held that the statements of Lord Wilberforce in Ebrahemi v Westborne Galleries Ltd 1973 AC 360 as to the equitable winding up jurisdiction were equally apt to this oppression remedy.

[26] More recently, the Court of Appeal in M Yovich & Sons Ltd v Yovich CA187/00, 22 February 2001 referred to the Law Commission’s report on “Company Law Reform and Restatement” 1989 NZLR R9. There the Commission noted that s 174 was modified from the previous statutory provision (s 209) to emphasise “the diversity of orders available to the Court where it finds that the shareholders have been prejudiced”.

RESOLUTION

[27] Having regard to the evidence which was tendered before me yesterday, I accepted the plaintiffs’ argument that there has been oppressive conduct within the scope of s 174. Their evidence is uncontradicted. Even if there had been contrary evidence, it would have had to have been extraordinarily compelling to displace the impression created by the plaintiffs’ evidence.

[28] There is, in the earlier papers in this Court, the distinct suggestion by Ms McCaig that Mr Seimer’s style was unduly interventionist and autocratic when it came to management matters. It was a theme of what she has had to say, previously, that Mr Seimer was endeavouring to squeeze her and Mr Rutherford out, to the plaintiffs’ own advantage. I accept the plaintiffs’ evidence that this was not so. Mr Seimer had every reason to be concerned - right from the outset - as to the manner in which Mr Rutherford was proceeding. The reality of the matter is that Waterford was in real difficulty until the Seimer interests emerged with funds. I accept the evidence of the plaintiffs’ witnesses who said that Ms McCaig acknowledged the Seimers as “saviours”. Mr Seimer had every right to be distinctly interested in what was happening to the substantial investment he had made. And on the evidence before me, the affairs of Waterford and Paragon were being seriously mismanaged by Mr Rutherford. Mr Seimer therefore had a legitimate interest in what was happening, and he was being inappropriately excluded particularly by the late Mr Rutherford.

[29] Quite apart from those historic considerations, there is now the issue of the future of the company. The only alternative remedy to what is now sought would be a liquidation order. A liquidation order would be of a break up variety: it would erode the value of Paragon as it currently stands; it would not recognise the substantial cash investment made by the Seimers; the plaintiffs would lose their investment; and Mr Seimer would have to carry the burden of the three year personal guarantee he has given for the premises leased by Paragon. Then, too, to recover the assets of Paragon would require a liquidator to take a number of the steps already taken in advance by the plaintiffs - at “double up” costs.

[30] In the circumstances which I have found to have existed, normally one might have expected to see the plaintiffs seeking compensation under s 174. But they are realistic that there is no compensation to be had, in any worthwhile terms. At best for them, if they can acquire the shares in the suggested manner, they may be able to rescue the company, and their investment.

[31] I agree with Mr Morris’ observation that the order for divestiture of the shares from Ms McCaig and Waterford is not a “usual” order sought by a majority shareholder. Usually the minority seeks to exit the company and the issue becomes more one of valuation. But given the liquidation of Waterford, that is not an option available to the Seimers.

[32] Having regard to all these considerations, I am of the clear view that there has been oppression within the meaning of the Statute; and that the relief sought by the plaintiffs is appropriate, and indeed the only effective relief which is available to them. In my view, s 174 is wide enough to make the orders applied for.

[33] As a matter of convenience I reproduce hereafter, the orders which were made in open Court yesterday:

1. There will be judgment for the plaintiffs.

2. This Court orders:

2.1 The liquidators, Mr Bernard Montgomery and Mr William Ferguson of Waterford Holdings Ltd (In Liquidation) transfer to Vincent Seimer the shareholding Waterford Holdings Ltd (In Liquidation) holds in Paragon Oil Systems Ltd, being 750,000 ordinary $1.00 shares.

2.2 Helen McCaig transfer to Vincent Seimer the sum of 8000 ordinary $1.00 shares in Paragon Oil Systems Ltd.

2.3 The Registrar of the High Court at Hamilton is appointed as the agent of Helen McCaig, and is authorised to sign any necessary documentation to give effect to order 2.2 above.

2.4 Helen McCaig is to return the computer and fax machine owned by Paragon Oil Systems Ltd to the business premises of Paragon Oil Systems at 39 Northway Street, Te Rapa, Hamilton before 5.00 pm, 23 July 2001 .

2.5 Helen McCaig, and any company with which she is associated, are to take all steps necessary to ensure the Post Office box and telephone number/facsimile number used by Paragon Oil Systems Ltd be available for the immediate and exclusive use of Paragon Oil Systems Ltd. The particulars of those items are P.O. Box 20026, Te Rapa and telephone or facsimile numbers 8490-886, 8490-887, 8474-068, 8474-078.

2.6 The Registrar of the High Court at Hamilton is appointed as agent of Helen McCaig and is authorised to sign any necessary documentation to give effect to order 2.5 above.

3. The plaintiffs will have their costs and disbursements on a 2B basis under the new Rules, if necessary as fixed by the Registrar of this Court.

4. In case there is any item which has been overlooked, I reserve leave to the plaintiff’s solicitors to apply by telephone to me, wherever I happen then to be sitting, on 24 hours’ notice.

5. Any issues as between the plaintiffs and the receiver are reserved and can, if necessary, be brought on again before me. If conference or hearing time is required for that purpose, Mr Morris should liaise with Mr Roach, the Liaison Manager in this Registrar.

6. The orders made by me under Minute No. 4 are hereby revoked in their entirety.