Stichbury v One4All Limited HC Palmerston North CIV-2004-454-889
[2005] NZHC 1648
•18 April 2005
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2004-454-889
BETWEEN CAMERON JOHN STICHBURY
Plaintiff
AND
ONE4ALL LIMITED
First Defendant
AND
ANNE MARY STICHBURY
Second Defendant
Hearing:
8 March 2005
Appearances: D. Williamson for Plaintiff
T.G.A. Manktelow for Defendants Judgment: 18 April 2005 at 4.00pm
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
Introduction
[1] This is an application by the plaintiff for leave to bring a derivative action in the name of the first defendant, One 4 All Limited (“the Company”), against one of its directors the second defendant, Ms Stichbury.
[2] The plaintiff and the second defendant are married, but have been separated for some time. They each own 25% of the shares in and are directors of the company.
[3] The plaintiff makes a number of allegations against the second defendant. First he suggests that as a director and shareholder, he has been excluded from management of the company. Secondly, he claims that the second defendant has
STICHBURY V ONE4ALL LIMITED And Anor HC PMN CIV-2004-454-889 18 April 2005
caused the company to cease trading, and indeed she has incorporated another company One4All (2004) Limited to take over and trade “in the position” of the company. Thirdly, he contends that assets have been mis-applied by the second defendant as director. And finally, the plaintiff alleges that the second defendant mis-applied company information and used that information to the advantage of One 4 All (2004) Limited, which she continues to own and operate.
[4] It seems to be undisputed that One 4 All (2004) Limited continues to operate from the company’s former premises, and in all respects the actual business of the company carries on unchanged, aside from the fact that One 4 All (2004) Limited appears now to “stand in the shoes” of the company.
Background Facts
[5] The plaintiff as a director and shareholder owns 250 shares in the capital of the company. The second defendant also owns 250 shares. The remaining 500 shares are owned by a family trust operated by the plaintiff and the second defendant known as “The Stichbury Trust”.
[6] The company is a telemarketing and training company based in Palmerston North. Both the plaintiff and the second defendant worked alongside one another in the company until about June 2004 when their working and personal relationship became strained. Their tensions culminated in the second defendant, who at that stage was purporting to act as managing director of the company, taking steps in an endeavour to terminate the plaintiff’s employment. This occurred on or about 6 August 2004.
[7] Interestingly, just two days prior to that time, the second defendant incorporated the new company One 4 All (2004) Limited.
[8] When the plaintiff’s employment ended around 6 August 2004, the second defendant excluded the plaintiff from the company premises and advised him in writing that One 4 All (2004) Limited now held the lease for the premises previously
occupied by the company. The letter warned Mr Stichbury against entering the premises.
[9] On 1 September 2004 the second defendant advised the plaintiff that the company was not trading, and that it had no staff or premises. It seems that the business was then being operated on some basis by the new company One 4 All (2004) Limited.
[10] According to the plaintiff, at present One 4 All (2004) Limited continues to operate from the company’s former premises, and in all other respects the actual business of the company carries on unchanged, aside from the fact that it is the new company One 4 All (2004) Limited (owned entirely by the second defendant) which operates it.
Counsel’s Arguments and My Decision
[11]The application before me is brought pursuant to s165 Companies Act 1993.
[12] The considerations relevant in considering such an application are set out non-exclusively in s165(2) of the Act. They have been developed and applied in cases such as Vrij v Boyle [1995] 3 NZLR 763, and McFarlane v Barlow (1997) 8 NZCLC 261, 470.
[13]Section 165(2) states:
(2)Without limiting subsection (1) of this section, in determining whether to grant leave under that subsection, the Court should have regard to:
(a) the likelihood of the proceeding succeeding
(b) the costs of the proceedings in relation to the relief likely to be obtained
(c) any action already taken by the company or related company to obtain relief, and
(d) the interests of the company or related company in the proceedings being commenced, continued, defended or discontinued as the case may be.
[14] Under s165(2) leave to bring proceedings or intervene in proceedings may be granted under s165(1) only if the Court is satisfied that either:
(a) The company or related company does not intend to bring diligently, continue or defend or discontinue the proceedings, as the case may be; or
(b) It is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
[15] In terms of exercising its discretion under s165(1), the Court is directed to have regard to the criteria at s165(2) which I have noted above.
[16] Clearly here the essence of the dispute which underlies these proceedings relates to the complaints the plaintiff has against his former wife. Notwithstanding this, it is significant, as I see it, that the shareholding in the company is owned as to 50% by the Stichbury Trust. The beneficiaries in this Trust are not only the plaintiff and the second defendant, but also their children and any grandchildren. Their interests here must be considered.
[17] The salient features of the present situation is that there has been, and remains, a complete and what seems to be irreconcilable breakdown of trust and any kind of working relationship or co-operation between the plaintiff on the one hand and his former wife the second defendant on the other. The affidavit evidence before me accentuates this. Notwithstanding this, what is also apparent is that at the time the second defendant purported to terminate the employment of the plaintiff with the company, she immediately incorporated the new 2004 company, and purported to transfer the existing premises lease and the business operation (and presumably also the assets of the company) to that 2004 company.
[18] No sale or transfer agreements, company resolutions, minutes of directors meetings or related material have been provided to substantiate these arrangements.
[19] What may have happened to the assets of the company at the time is in some doubt. That this is unacceptable, particularly from the point of view of all its shareholders, including the Stichbury Trust, which holds 50%, goes without saying.
[20] That brings me back to the present application. Effectively it is an application to enable the company to sue the second defendant as one of its directors for breaches of fiduciary and statutory duties owed by the second defendant. Its genesis is the series of transactions around August 2004 by which the plaintiff’s employment was terminated, and the business of the company and its premises “transferred” to One4All (2004) Limited.
[21] Turning now to s165 Companies Act 1993, it is clear from s165(3) that for the purposes of this case, leave to bring the proceedings may only be granted under s165(1) if the Court is satisfied that the company does not intend to bring the proceedings itself. That seems to be self-evident here. No action has been taken by the company. It is not trading. Under the circumstances here, clearly the second defendant would not contemplate bringing an action against herself.
[22] As I have noted at paragraph [13] above, s165(2) deals with matters the Court must have regard to in determining whether to grant leave to bring a derivative action.
[23] In considering the equivalent provision in the Companies Act 1955 to s165, Fisher J in Vrij v Boyle made the following observations:
(1)In assessing the likelihood of the proceedings succeeding the Court should not conduct an interim trial on the merits.
(2)The appropriate test is that which would be exercised by a prudent businessperson in the conduct of his or her own affairs in deciding whether to bring a claim.
(3)Such a decision requires consideration of the amount at stake, the apparent strength of the claim, the likely costs and the prospect of executing any Judgment.
[24] As to the test outlined in Vrij v Boyle Mr Manktelow for the second defendant suggested that the prudent businessperson test outlined in that case may now have been overridden by a stricter standard outlined by Heath J. in Frykberg v Heaven (2002) 9 NZCLC 262, 996. In his judgment in that case at page 262, 973 Heath J said:
Rather than focussing on a prudent business person determining whether to use his or her money to bring a claim, it may be preferable to focus on whether a person acting as a fiduciary in respect of the funds of others ought to consider whether a prudent trustee would use the other person’s funds for that purpose.
[25] This test does not appear to have been applied in subsequent decisions, but in any event, for the purposes of the present case, I am of the view that it matters little which test might be applied. For the reasons I am about to outline, I am satisfied that the plaintiff’s application for leave here should succeed.
[26] I will outline those reasons under each of the four heads which the Court is to have regard to under s165(2).
Likelihood of Proceedings Succeeding – s165(2)(a)
First cause of action – s131 Breach of duty to act in good faith and in the best interests of the company
[27] Under s131(1) of the Companies Act 1993 the second defendant owed a fiduciary duty to the company to act in good faith, and in its best interests. As I have noted, the allegations from the plaintiff are that the second defendant has breached this duty by:
(1)Excluding the plaintiff as the other director from the management of the company.
(2)Failing to ensure that the company continued to trade, leaving it bereft of income.
(3)Incorporating another company, of which she is the sole shareholder and director, to take over the business of and to trade in the position of, the company.
(4)Mis-applying company information and assets effectively for her own benefit.
[28] From the affidavit evidence filed in this matter, with the possible exception of the contention outlined in paragraph [27](1) above, at this stage there does not appear to be any major contest by the second defendant of the material facts relating to these aspects.
[29] In Thorrington v McCann (1998) 8 NZCLC, leave to bring a derivative action was granted in circumstances not dissimilar to the present. There, a tavern manager took over a lease with funding provided by a sleeping partner. A company was formed to implement that arrangement. Later the manager did not renew the lease, but formed his own company to take over the lease. The sleeping partner sought to bring a derivative action in the name of the company against the manager for breach of a director’s duties. As I have noted, leave to bring the derivative action was granted, and in doing so the Court noted that the law imposed on the manager a “clear and onerous duty” which the manager had breached by using his fiduciary position as a director to secure his own advantage.
[30] In Pacifica Shipping Co Ltd v Anderson [1986] 2 NZLR 328 a director of a shipping company was involved in planning and approving a possible shipping service involving a particular ship. Pacifica, the company, was in negotiations with the ship owner, but before a final decision was made the director set up a business in competition and chartered the ship. The High Court there held that by exploiting the former company’s business opportunity for his own benefit, the director had breached his fiduciary duty as a director. Pacifica had obtained information to determine whether the market could support a second vessel on the proposed route. The director had gained access to this information in his capacity as director. The Court found that the director had used the information for his personal benefit, thereby mis-applying company property in breach of his fiduciary duty to the company. The Court held that the director was disqualified from usurping for himself or for his own benefit a maturing business opportunity which his company was actively pursuing.
[31] Here, the plaintiff contends that the company was on the brink of concluding a “very lucrative contract” at the time the second defendant both incorporated her 2004 company, and then effectively took over the company’s business undertaking.
As a result, therefore, in terms of the test outlined in the Pacifica Shipping Co case, the plaintiff’s position is that first, the second defendant breached her obligation not to profit personally from her position as a director of the company, and secondly, she has a liability to account for any personal profit made from the use of the business opportunity available to her because of her fiduciary relationship with the company.
[32] Although a Court cannot, and should not, endeavour to fully assess the merits of any claim on affidavit evidence, in my view it is sufficient here to note that based upon the material currently before the Court, the plaintiff’s claim under s131 alleging a breach of duty on the part of the second defendant to act in good faith and in the best interests of the company would appear to have some merit. The company would seem at first glance to be detrimentally affected in a major way by the actions of the second defendant, particularly around August and September 2004 when the company’s business seemed simply to disappear and the newly set-up 2004 company appeared to take over the operation.
Second cause of action – S.145 Breach of duty in relation to use of company information
[33] The plaintiff’s claim under this cause of action is that the second defendant has taken advantage of her position as a director of the company, and misused associated knowledge and information she gained in that role. In so far as this company information is concerned, the plaintiff alleges the second defendant has used for her own benefit:
a)Client and customer lists.
b)Details as to which entities might be seen as potential clients of the company (including “the million-dollar client” – The Muscular Dystrophy Association).
c)Company policies and procedures.
d)Company market knowledge and future business opportunities.
[34] Again, upon the affidavit evidence presently before the Court, there appears to be little dispute as to the major facts surrounding these issues.
[35] Upon the face of it, the new 2004 company formed by the second defendant seems simply to have stepped into the shoes of the company, and taken advantage of any opportunities which the company held at that time.
[36] Where, as is likely here, a director has received confidential information in his or her capacity as a director or employee of a company that would not otherwise be available, that director may not disclose, make use of or act on the information In my view, the plaintiff’s claim against the second defendant here, in part, at least appears to have merit.
Costs in the proceeding in relation to the relief likely to be obtained – s165(2)(b)
[37] A concern in cases of this type must always be the cost of the proposed proceeding and the economics of taking a derivative action relative to any possible return.
[38] Counsel for the plaintiff submits that the costs of the proposed action here would be relatively low. This is disputed by counsel for the second defendant, who contends that the type of case contemplated by the plaintiff is unlikely to be resolved for anything less than $50,000.00, plus GST and disbursements. Counsel notes that the question then becomes whether the proceedings are worthwhile given the “relief likely to be obtained”.
[39] As to this, the second defendant maintains that the Court must take into account the wider consideration that the company has ceased trading. In Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 96, 706 Elias J (as she then was) said that it was usually inappropriate to permit a derivative action where a company was no longer trading. This cannot be conclusive, however, particularly where, as here, there is an allegation that the intended defendant has caused the company to cease trading.
[40]Further, the second defendant contends that the company is already over
$53,000.00 “in the red”, and that given its financial position, any proceedings issued by it would invite an application for security as to costs.
[41] At a general level, the second defendant also submits that the Court should be mindful of Mr Stichbury’s conduct, which it claims includes taking an obstructionist approach to the company’s affairs, and at one stage walking away from his obligations as a director. The second defendant says that the reality is that this conduct upon the part of Mr Stichbury must expose him to a cross-claim.
[42] Finally, the second defendant maintains that the position is simply that Mr Stichbury is attempting to embroil his estranged wife in further and unnecessary proceedings, proceedings which are already effectively the subject of relationship property litigation in the Family Court at Palmerston North. As a result, duplication is alleged.
[43] In response, counsel for the plaintiff submits that the costs of the proposed action are likely to be relatively low, given that there are already proceedings between the relevant parties, as was the case in Vrij v Boyle. There, Fisher J noted that:
a)All that was needed is a Cross-Notice Claim by the company against the director.
b)That the Notice would simply reframe the legal consequences for the relationship between the parties without significant change to the facts and evidence which would have been required in any event.
c)That the company could have an essentially neutral role, as the shell within which the shareholders could resolve their differences.
d)That there was no necessity for the company to have separate legal advisers.
[44] The plaintiff contends that all these considerations are relevant and applicable to the present application before the Court.
[45] In addition, counsel for the plaintiff notes that in 2003 the shares of a former shareholder, Mr Patterson, were bought out by the parties here based upon a
company value of $220,000.00. This was the most recent transfer of shares in the company.
[46] Further, the plaintiff argues that the most recent financial statements of the company showing a $53,000 loss for the seven months to 31 October 2004 (which the second defendant highlights) do not take into account the potential client, referred to by the second defendant as “the million-dollar client”, with whom the plaintiff says negotiations in mid 2004 were about to be concluded.
[47] Finally, the plaintiff suggests that the relief to be obtained is likely to be equivalent to the profit made by the 2004 company. Although there is no evidence before the Court as to this, the plaintiff says it could be significant. The plaintiff notes that the second defendant has not met her obligation to provide evidence to the Court that the 2004 company is not a profitable company. This is particularly significant, he says, given that this evidence is solely within her possession.
[48] In my view, there is some merit in these submissions upon the part of the plaintiff.
[49] A further matter here, in my view, has some significance. Even if the litigation costs as submitted by the second defendant are in the vicinity of
$50,000.00, given the acknowledged value of the company in 2003 at $220,000.00, and the actions by the second defendant in presumably choosing to take over the operation of the business in August 2004 for her own benefit, I must conclude that the derivative action proposed cannot be said to be uneconomic here.
Any action already taken by the company – s165(2)(c)
[50] Here, no action has been taken on behalf of the company, nor, given the second defendant’s position as director, is it likely.
The interests of the company in the proceedings being commenced – s165(2)(d)
[51] As I have noted above, the company shares are owned as to 50% by the Stichbury Trust, and as to the balance by the plaintiff and the second defendant. The interests of the company and all its shareholders including the Trust here should not be ignored.
[52] The plaintiff notes that the company is already embroiled in these proceedings, and that it is in the company’s interests that any profit made by the 2004 company should be disclosed, and if appropriate, redirected to it.
[53] The plaintiff maintains that as a matter of principle, it is desirable that the questions of the fiduciary duty owed by the second defendant to the company are resolved.
[54] I accept these contentions on the part of the plaintiff, and agree that it is in the interests of the company that the proceedings contemplated by this derivative action are brought.
[55] I say this notwithstanding the concession on the part of all parties that this litigation is are set against a background of ill feeling between the plaintiff and the second defendant. This is only natural given the breakdown of their marriage. Nevertheless, the company’s position as a separate entity with its own legal identity (and given that half its shares are owned by the Trust) must be viewed separately.
[56] As to suggestions by the second defendant that these proceedings are frivolous and vexatious, or that they duplicate proposed Family Court proceedings, I reject these arguments.
[57] The company is a separate legal entity from the plaintiff and the second defendant. The alleged actions of the second defendant in passing the business of the company to her newly formed 2004 company effectively pre-empt the Family Court proceedings by ensuring that the company no longer continues to trade. The position concerning the company, its previous assets and operation, as I see it, needs
full and proper investigation. As to this, the Family Court decision in Drew v Drew (1997) NZFLR 491 is relevant here. In that case, the Family Court declined to make an order on the application of a wife seeking to have her husband removed as a director of their joint company, on the basis that the control and management of a company was a different issue from giving effect to the division of shares in a company, and that the powers of the Companies Act 1993 are more appropriate for dealing with such a situation.
[58] And on the question of duplication between the proposed derivative action and the relationship property and other Court proceedings between the parties, Fisher J in Vrij v Boyle held that it was possible in principle to have a situation where a plaintiff could be claiming for independent wrongs done to the plaintiff directly, while a company was at the same time recovering its own compensation for losses due to a breach of fiduciary duty.
Conclusion
[59] It will be apparent from the above that, in my view, a reasonable case of breach of duty on the part of the second defendant as a controlling director of the company has been made out. This is notwithstanding that the Court is not in a position to fully assess the merits of the plaintiff’s claim at this point.
[60] Although the costs of the proceeding may approach the sum of $50,000.00 suggested by the second defendant, given the value of this company established at the figure of $220,000.00 in 2003 when shares in the company were most recently transferred, the potential costs of the proceeding are not prohibitive in relation to the possible relief which might be obtained.
[61] The application by the plaintiff for leave pursuant to s165 of the Act to allow the plaintiff to bring and control proceedings in the name of and on behalf of the company against the second defendant therefore succeeds. An order to this effect is made.
[62] Section 166 Companies Act 1993 must also be considered here. This section provides in effect for costs of a derivative action to be met by the company “unless the Court considers that it would be unjust or inequitable for the company to bear those costs”. Effectively, although the Court has a discretion, there is therefore a presumption in s166 that the costs should be met by the company.
[63] Here the plaintiff is a 25% shareholder in the company. This situation differs from that in Frykberg v Heaven (2002) 9 NZCLC 262, 996 where the Court declined to make an order under this section. I am satisfied that the presumption in s166 that the company should bear the costs of a derivative action should apply here.
[64]An order to this effect is also made.
[65] With regard to the costs of this application, the plaintiff has been successful. The plaintiff is entitled to costs, calculated on a category 2B basis, together with any disbursements as approved by the Registrar.
Associate Judge D.I. Gendall
Delivered aton 18 April 2005.
Solicitors:
Brittens, Palmerston North for Plaintiff
Guy & Toby Manktelow, Barristers & Solicitors, Palmerston North for Defendants
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