Solar Bright Ltd v Martin

[2019] NZHC 300

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2018-409-000604

[2019] NZHC 300

BETWEEN

SOLAR BRIGHT LIMITED

Applicant

AND

PATRICK MARTIN

First Respondent

AND

NICOLA JANE MARTIN

Second Respondent

Hearing:

28 February 2019

Appearances:

G E Slevin for Applicant

P J Shamy for Respondents

Judgment:

28 February 2019

ORAL JUDGMENT OF JUSTICE OSBORNE

(on leave to proceed under Part 19 High Court Rules)

Introduction

[1]    On 11 January 2018, Solar Bright Ltd (Solar Bright) was the owner of an invention relating to an ice warning device for roads, the subject of granted patents, patent applications and trademarks and commonly referred to as “PATeye”. That day, the second respondent, Nicola Martin, as the managing director of Solar Bright, executed a deed whereby all Solar Bright’s right, title and interest in PATeye was assigned to Ms Martin’s husband, Patrick Martin, who had been a director of Solar Bright until he resigned on 20 December 2017.

SOLAR BRIGHT LIMITED v MARTIN [2019] NZHC 300 [28 February 2019]

[2]    On 21 January 2018, Ms Martin also resigned as a director. Those associated with other shareholder interests in Solar Bright appointed John Walley and Murray Spackman as directors of Solar Bright on 14 February 2018.

[3]    In the meantime, the other shareholders had had disclosure that the PATeye assignment had been made.

[4]    On 23 March 2018, the Board of Directors of Solar Bright passed a resolution avoiding the assignment transaction pursuant to s 141 Companies Act 1993.

This proceeding

[5]    By this proceeding, Solar Bright seeks a declaration as to the validity of its avoidance of the assignment transaction. It also seeks consequential directions requiring the respondents to restore the position to what it had been.

[6]    Solar Bright seeks leave to proceed pursuant to r 19.5 of the High Court Rules. This judgment deals with that leave application.

The subject-matter of the litigation – PATeye

[7]    PATeye is, as stated, an invention for ice detection and warning with associated patents, patent applications and trademarks.

[8]    As described by Ms Martin, both PATeye and another invention, DATAeye, were “the brain children of Mr Martin”. PATeye had been transferred into Solar Bright when Mr Spackman and others invested and became involved in Solar Bright. DATAeye was subsequently conceived but is not nearly as developed as PATeye.

[9]    Mr Spackman has deposed that Solar Bright intended to create and commercialise intellectual property. The products normally sold were related to lighting or solar powered products. The intellectual property and patents themselves were not ordinarily sold. In her evidence, Ms Martin refers to the PATeye revenue as having been very low given that it was in the research and development phase, with revenue being between $20,000 and $40,000 per annum. Documents dating from

2017 were produced in order to attract investors to Solar Bright. Those documents indicated that the company was building its future on three foundational pillars: being a patented product portfolio, a product pipeline and a breadth and depth in its products and markets.

[10]   During 2017, issues arose between the shareholders and also the directors as to the future operation of Solar Bright given its level of sales and its need for further cash injection. Those involved in Solar Bright explored the possible sale of assets. Mr Spackman’s resignation from the Board on 27 November 2017 can be seen as having occurred in that context. So too, did Solar Bright’s assignment of PATeye (through Ms Martin) to Mr Martin.

The avoidance of transactions

[11]Section 141 Companies Act provides:

141     Avoidance of transactions

(1)A transaction entered into by the company in which a director of the company is interested may be avoided by the company at any time before the expiration of 3 months after the transaction is disclosed to all the shareholders (whether by means of the company’s annual report or otherwise).

(2)A transaction cannot be avoided if the company receives fair value under it.

(3)For the purposes of subsection (2), the question whether a company receives fair value under a transaction is to be determined on the basis of the information known to the company and to the interested director at the time the transaction is entered into.

(4)If a transaction is entered into by the company in the ordinary course of its business and on usual terms and conditions, the company is presumed to receive fair value under the transaction.

(5)For the purposes of this section,—

(a)a person seeking to uphold a transaction and who knew or ought to have known of the director’s interest at the time the transaction was entered into has the onus of establishing fair value; and

(b)in any other case, the company has the onus of establishing that it did not receive fair value.

(6)A transaction in which a director is interested can only be avoided on the ground of the director’s interest in accordance with this section or the company’s constitution.

[12]   The avoidance of transactions under s 141(1) of the Act must occur within three months after the transaction is disclosed to all the shareholders. Solar Bright, under its new directors, complied with that requirement.

[13]   It is common ground between the parties that Ms Martin had an interest in the transaction.

[14]Thus in this proceedings, there arise only two questions:

(a)First, under s 141(4) – was the transaction entered into by the company in the ordinary course of its business and on its usual terms and conditions? If so, the company is presumed to have received fair value under the transaction.

(b)Secondly, under s 141(2) – did the company receive fair value under the transaction? If s 141(4) applies, fair value is presumed to have been received. If it does not apply, fair value is to be determined under s 141(3) on the basis of the information known to the company and to the interested director at the time the transaction was entered into.

[15]Those are the two questions to be determined.

[16]   Section 141(5) deals with the onus of proof in relation to the question of fair value. It is common ground in this case that the onus of establishing fair value is upon the respondents if they were not engaged in a transaction in the ordinary course of Solar Bright’s business according to its usual terms and conditions.

The leave application

[17]   This proceeding requires leave because s 141 of the Companies Act 1993 is not one of the provisions which are required by r 19.2 to be brought by originating application. Accordingly, I must apply r 19.5. Counsel took me to a number of

authorities on relevant considerations, the most comprehensive of which was the decision of Asher J in the Hong Kong & Shanghai Banking Corporation Ltd v Erceg.1 I accept, as Mr Shamy submitted, that the key conclusions in that judgment are aptly summarised in the Procedure Reports head-note at paragraphs 1 or 2 which records:

(1)        The primary procedure for determining disputes is that set out in Part 5 of the High Court Rules (“the Rules”). That part ensures that parties are fully informed of the case they have to meet by the filing of appropriate pleadings. A range of interlocutory procedures are available to ensure a fair hearing. By contrast, the originating application procedure is short and simple. While orders can be made similar to those in Part 5 proceedings, it would be undesirable for such orders to made as a matter of course. That would damage the procedural structures established by the Rules.

(2)        The type of proceeding suited to the originating application procedure is a straightforward application not requiring detailed pleadings or interlocutory orders. It is not well-suited to the determination of substantive rights involving the application of common law doctrines, as opposed to statutory tests. Nor is it suited to cases involving multiple parties and cross- claims or counterclaims. While the procedure is not confined to situations where there is no opposing party, it is an exceptional procedure for contested proceedings. It should not be adopted as a short cut for urgent cases.

[18]    What Erceg and the other cases indicate is that resort to r 19.5 is to be exceptional rather than so common place that it becomes the rule that leave is granted. The cases recognise, as the rule itself stipulates, that it is the interests of justice which this Court must apply as the overarching test. The interests of justice mean that the Court must secure the just, speedy, and inexpensive determination of this proceeding in its consideration of a r 19.3 application.2

[19]   I now consider specific matters which have engaged the Court when applying r 19.5.

[20]   First, the ordinary procedures under Part 5 of the Rules are designed to ensure that parties to many proceedings are able to be fully informed by the filing of appropriate pleadings, that is to say, the ordinary exchange of statements of claim and statements of defence. Nothing in the documents filed have indicated that in this case a document of the greater length of the statement of claim or statement of defence would better define the issues between the parties. It is fair to say that the

1      Hong Kong and Shanghai Banking Corporation Ltd v Erceg (2010) 20 PRNZ 652 (HC).

2      High Court Rules, r 1.2.

comprehensive submissions filed by both Mr Slevin and Mr Shamy and the detailed evidence filed including that relied on from a related proceeding, indicate that the parties have well understood the issues between them.

[21]   Secondly, a significant feature of the expectation that very many substantive claims will proceed under Part 5 of the Rules is that Part 5 provides interlocutory procedures for the resolution of issues such as discovery.

[22]   In this case there is not any demonstrated absence of fairness or justice through the fact that this proceeding to date has been unaccompanied by interlocutory procedures. It is the respondents who engaged in the conduct which is the subject of this litigation. It is the respondents who must have the most knowledge as to the events and documents relevant to the decisions they made in deciding that the assignment of the asset should take place in the way it did.

[23]   Thirdly, and partly as a consequence of those Part 5 considerations, the courts also speak of Part 19 being available for straightforward applications. Mr Shamy submitted that this is not a straightforward application. I disagree. As I have identified in relation to s 141 of the Act, this case involves a relatively straightforward test involving two questions. Asher J in Erceg, viewed Part 19 as more apt for cases involving the application of statutory tests rather than the application of common law principles. This is a case of statutory tests and relatively straightforward ones at that. Neither party has adduced expert evidence as to valuation with the consequence that the degree of complexity and cross-examination which might have resulted from such evidence has not eventuated.

[24]   Other perhaps less significant matters touched on by Asher J in Erceg relate to the involvement of multiple parties, which is not a feature of matters in this case, and to the possibility of cross-claims. It is difficult to envisage in relation to a matter as straightforward as whether the s 141 tests are satisfied what counterclaim the respondents might advance. Mr Shamy has signalled there may be an intention on the part of the respondents to at least consider such a cross-claim, but that is to some extent cut across by the fact that this proceeding has now been alive for some 190 days and a particular cross-claim has not been identified in submissions filed.

[25]   I conclude that this is an appropriate case in which to grant leave. My conclusion is reinforced not only by the general consideration which I have discussed, it is also reinforced in the particular circumstances of this case by the fact that both the leave and the substantive applications were set down to be dealt with on the one day. That was a case management decision made in the economic interests of both parties and by parallel thinking with the way matters are sometimes dealt with in the Court of Appeal when a leave application has first to be determined. That has resulted, helpfully, in the Court having all the substantive evidence before it today. By the grant of leave, the parties will be able to proceed immediately today to the synopses submissions which the Court had earlier received and which counsel can speak to today and the parties can have resolution through a hearing concluded today.

[26]   The importance of r 1.2 cannot be over-emphasised in the application of the Rules to this proceeding. The just, speedy, and inexpensive determination of the subject-matter of this proceeding requires that leave be granted to enable the parties to move to finality on the very limited issues raised by the application and the intended opposition to it.

[27]I grant the applicant leave to bring the application under Part 19.

Osborne J

Solicitors:

G E Slevin, Barrister, Christchurch P J Shamy, Barrister, Christchurch