Sykes v Sykes
[2019] NZHC 2636
•16 October 2019
IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY
I TE KŌTI MATUA O AOTEAROA
TE ROTORUA-NUI-A-KAHUMATAMOMOE ROHE
CIV 2018-463-0120
[2019] NZHC 2636
BETWEEN ROBERT BRADLEY SYKES
Plaintiff
AND
DAVID WALTER BRADLEY SYKES
Defendant
Hearing: 14 October 2019 (Heard at Hamilton) Appearances:
K G Davenport QC and EID Fox for the plaintiff
S L Robertson QC and A J Harris for the defendant
Date of Judgment:
16 October 2019
Reissued:
22 October 2019
JUDGMENT OF JAGOSE J
Solicitors/Counsel:
Kathryn Davenport QC, Auckland Anderson Creagh Lai Limited, Auckland Suzanne Robertson QC, Auckland Gifford Devine, Waipawa
SYKES v SYKES [2019] NZHC 2636 [16 October 2019]
[1] The plaintiff, Robert Sykes, claims the defendant – Robert’s uncle, David Sykes – holds all the shares in Orchard Investments Limited (the “Company”) on express or constructive trust for him (and, possibly, his brothers). Robert worked as the Company’s operations manager until recently.1 That work is contended to provide an alternative basis for fixing a constructive trust over some lesser proportion of the shares. Trial of his claim for such declarations and ancillary relief is set down for February 2020.
[2] David denies he holds the shares on trust, or such had ever been put to him before receipt of Robert’s solicitors’ letter dated 31 July 2018, but says he acquired them in 1999 in his own right (albeit to advance his deceased brother’s family interests). The Company’s financial circumstances may require sale of its shares or business if it is to avoid insolvency before the end of this year. David’s counsel, Suzanne Robertson QC, provides his undertaking David will “hold half of the net proceeds of sale (after repayment of all shareholder loans and external debt) pending the outcome” of this proceeding (although that does not address Robert’s claim to beneficial interest in the Company).
[3] For my determination is Robert’s application for an interlocutory injunction, comprehensively to prevent David from dealing “in any manner whatsoever” with his shares pending trial.
Background
[4] In continuation of their family tradition, Robert and his brothers, Kevin and Gregory, operated an apple orchard and packhouse business in the Hawkes Bay as Sykes Packhouse Limited. Financial difficulties in the late 1990s led to sale of much of that company’s assets and ultimately to its liquidation. The rump of the company’s unsecured assets was acquired by the Company, originally a shelf company held by
1 Robert’s affidavit describes himself as the Company’s “founder”. I am unsure of the intended meaning of that term, but – with the exception of holding office as director for some 10 months until April 2018 – there is no evidence Robert held any other formal role in the Company’s structure. If he means ‘promoter’ – a person taking an active part in bringing a company into existence: Jubilee Cotton Mills Ltd v Lewis [1924] AC 958 (HL); and having a fiduciary obligation to it so as may be compelled to return secret profits: Gluckstein v Barnes [1900] AC 240 (HL) – there is no evidence of that function on his part, either.
Grant Rae, an insolvency practitioner with family connections to the Sykes, who David joined in its shareholding and provided funding for the acquisition.
[5]David’s involvement came at Mr Rae’s invitation, in which he explained:
I am the sole shareholder and director and my intention was to slowly issue shares back to the Sykes once all the dust had settled and over a period of time exit completely. We would prefer another shareholder/director, provided they shared the same medium/long term exit strategy and were not expecting to receive a personal benefit from holding the shares.
He proposed:
We are seeking at least $50,000 of external funding to enable the purchase of the leasehold orchards, plant and equipment and the grower numbers. The funds can either be in the form of a loan or a combination of a loan and share capital. [The Company] can provide security through a first registered debenture over the company and a directorship. …
[6] David took the debenture and directorship and a 50 per cent shareholding in the Company, and provided $50,000 funding. In 2007, on Mr Rae’s return to Australia, David acquired his shareholding in the Company at a purchase price of $1 under an Agreement for Sale and Purchase identifying Mr Rae to be “the beneficial owner” of those shares.
[7] For some years from 2013, there was desultory but advanced discussion about Robert acquiring a 50 per cent interest in the Company. Toward the end of that discussion period, on 12 September 2018, Mr Rae took a note of a meeting with David, Kevin and Robert in which David is said “not [to] dispute that pa[r]t of [the] co[mpan]y is for the boys”, but he was “not prepared to sell it to Robert” as Robert “will run it into the ground”.
[8] David has contributed substantial funding to support the Company in its orchard business, which it conducts on land under long-term leases. By 31 May 2019, interests associated with David were owed over $4 million. Another $1 million in bank credit is secured over his family home, proceeds from the sale of his family beach house earlier this year going to keep the Company afloat. As at 31 May 2019, the Company had assets of $2.633 million and liabilities of $5.680 million. It forecasts a cashflow deficit of $1.273 million by December 2019.
[9] The present difficulty is, in a nutshell, since 2013, the Company has committed substantial expenditure on additional leases of non-orchard land – in anticipation of returns from orchards then established on them, to mature six and more years later – and cannot meet interim cash flow requirements. The evidence is the business’ revenue stream is seasonally lumpy and heavily reliant on cash from summer crops coming through after March.
[10] Another of the Company’s directors, Philip Mossman, says the Company “has to obtain funding to bridge the forecast deficit between now and the end of the year or it will not survive”. David is “extremely reluctant” to lend more to the Company. Any other lender is likely to require security from the Company, which at least the terms of the injunction sought may prevent (although Mr Mossman attributes it also to unspecified “difficulties [the Company] has providing security/collateral”). The alternative is sale of the Company’s shares or business. Mr Mossman observes:
Ironically … there remains considerable value in the [C]ompany … based on [the Company’s] production in 2–3+ years. … A sale of [the Company] will result in all creditors being paid and, most likely, a profit to David as [the Company’s] 100% shareholder.
Applicable legal principle
—interim injunctions
[11] Interim injunction applications are determined on the basis of whether the plaintiff has a serious question for trial, and whether the balance of convenience and overall interests of justice favour granting the injunction.2
[12] By ‘serious question’ is meant one not vexatious or frivolous, on which the plaintiff has a real prospect of succeeding at trial. On the remaining consideration(s), the question is whether refusing the injunction would be harder on a plaintiff who was successful at trial, than would granting it be on the successful defendant.3 This assessment is undertaken by reference to the adequacy of damages, preservation of the
2 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL); and Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
3 Wellington International Airport Ltd v Air New Zealand Ltd HC Wellington CIV-2007-485-1756, 30 July 2008 at [4] citing [Cayne] v Global Natural Resources Plc [1984] 1 All ER 225 (CA) at 237.
status quo, the uncompensable disadvantages to either party, and the relative strengths of their cases.4
[13] But more than inconvenience is required:5 interlocutory injunctions lie to protect a plaintiff against “irreparable damage” for which they cannot adequately be compensated.6
—trusts
[14] It is common ground an express trust must have certainty of intention, subject- matter and objects.7 While the requirement for ‘certainty’ indicates express trusts are not lightly to be found established, nonetheless they may be inferred.8 A constructive trust may be established on the basis of reasonable expectation as to the consequence of a plaintiff’s contributions to trust property,9 or possibly (if not a specie of express trust) common intention.10
Discussion
—serious question for trial
[15] Given potential for proof of inference and expectation at trial, I cannot discount Robert may succeed there. Nothing in the affidavit evidence before me is sufficient to deny him that prospect. Neither is the prospect so ephemeral as not to be ‘real’.
[16] But I do not think the evidence strongly supports establishment of either an express trust or a constructive trust. The duality of David’s role if as both trustee and securityholder invites scepticism. There are questions as to any trust’s prospective beneficiaries: the three brothers, or Robert alone (or in some representative capacity). The extended discussions over Robert’s acquisition of a 50 per cent interest in the
4 Wellington International Airport Ltd v Air New Zealand, above n 3, at [6]–[14].
5 Pollen-Plus Ltd v Znel Ltd HC Tauranga CIV 2010-470-0848, 20 October 2010 at [40].
6 Finnigan v New Zealand Rugby Football Union Inc (No 2) [1985] 2 NZLR 181 (HC) at 183; and
American Cyanamid Co v Ethicon Ltd, above n 2, at 406.
7 Knight v Knight (1840) 3 Beav 148, 49 ER 58 (Ch) at 68 per Lord Langdale.
8 For example, Paul v Constance [1977] 1 WLR 527 (CA); Levin v Ikiua [2010] NZCA 509, [2011] 1 NZLR 678.
9 Lanklow v Rose [1995] 1 NZLR 277 (CA) at 294.
10 Harvey v Beveridge [2014] NZCA 72, [2014] NZAR 677.
Company also require examination, even if not illuminated by present legal advice. They include Mr Mossman’s reference to “cement the existing verbal agreement”, albeit after exit of “either David or Robert”, such being claimed by Robert as his beneficial entitlement to the Company’s shares.
[17] But Sykes’ family interests clearly were motivational in securing David’s involvement. There is a question as to the degree those interests were intended to be beneficial in the subsequent arrangements. Such (and other) issues are for trial.
—balance of convenience
[18] I do not understand why David should be held out of all dealings with the shares, even on an interim basis. On Robert’s best case, David is entitled to deal with them as trustee. Although Robert alleges David’s breach of those duties, it is only in relation to his derivation of unquantified financial benefit from the Company. No one denies the Company’s very significant countervailing financial liability to David, which balances out any risk of actual detriment to Robert.
[19] Certainly, if the Company’s shares are sold to some third party in the interim, they will not be available for transfer to Robert. But there can be no suggestion the Company is the exclusive vehicle for Robert’s continued participation in the family’s historic business. Neither can it be said the Company’s assets are necessary for such participation; the original family business assets mostly were sold in the later 1990s, and the bulk of the Company’s present assets have been acquired since then. All that suggests damages should be an adequate remedy on Robert’s success at trial, although I recognise the intangible value of continued family connection to the business, including to particular long-term leases of land.
[20] On the other hand, if David is prevented from dealing with his shares at all pending trial, Mr Mossman considers the Company’s immediate cash flow difficulties are such as will see it put into liquidation later this year (putting Robert’s desired relief beyond reach, in any event). After describing the Company’s recent sale of some leases, on terms of the Company’s continued management of and profit share from that land, to adjust cash flow demand as “prudent business”, Mr Mossman’s 16 July 2019 affidavit said:
It is critical that [the Company] is able to trade on its assets (to the extent it is able) and to do so without limitation to maintain cash flow until a sale can occur – and that sale needs to occur sooner rather than later.
While David endorses Mr Mossman’s view, I take that director’s view also to be important as essentially a third party’s good faith expression made in the Company’s best interest.
[21] Robert’s counsel, Kate Davenport QC, is critical of the absence of updating evidence from Mr Mossman to account for the position now three months later, with the forecast cash flow shortfall only two months away, and trial only two months further distant. But the only inference I can take from the absence of such evidence is whatever Mr Mossman may have said would not further have advanced David’s case.11 And nothing in the reply evidence affidavits gainsays Mr Mossman’s views (although Robert disputes the cause of the cash flow shortfall, saying it is attributable to the directors’ lack of horticultural expertise and thus the lack of revenue from quality crops to offset capital expenditure).
[22] I am troubled by any prospective liquidation’s destruction of the Company’s assets and business, and especially if it should occur as a consequence of Robert’s asserted right to its shares. I accept any liquidation would likely be at a discount from market value. I also am hesitant to interfere in the operation of the Company’s business, absent any suggestion it is done illegitimately or strategically to deny Robert relief. While there is some muted contention additional funding is available to the Company, it seems undeniable such would come with material requirements for security, whether or not constituting “fishhooks”. Any impact on the Company, a third party to the proceeding, has distinct weight.
[23] I am unclear as to any pressing requirement for sale of the Company’s shares. The prospect of sale is presented as the only alternative to additional funding. But the ‘irony’ Mr Mossman identifies suggests external funding should be available, even if at a premium. And there is the prospect Robert could acquire the shares, as has been in negotiation over a number of years. But Robert’s resources now are diminished; the
11 Ithaca (Custodians) Ltd v Perry Corporation [2004] 1 NZLR 731 (CA) at [153].
value of his undertaking for any injunction is undermined by his acknowledgment in other proceedings he is in “serious financial hardship”.
[24] The foundation authority commends maintenance of the status quo only “[w]here other factors appear to be evenly balanced”.12 If the injunction’s focus only was on sale, then the factors may be evenly balanced for the parties during the period until substantive judgment. The “last settled position between the parties” would see David retain his shareholding, while being free to operate the business as the directors saw fit.13
—overall justice
[25] I therefore stand back, to consider what more closely addresses the overall justice of the case.
[26]There are at least three factors influencing me against granting interim relief:
(a)the proceeding is brought in late comprehension of the express trust claim, not adverted to in nearly 20 years of the parties’ prior dealings, and arguably inconsistent with Robert’s recent negotiations to acquire an interest in the Company (although Robert characterises those as a vehicle to reduce the Company’s indebtedness to David). That is not to say Robert disqualifyingly delayed in bringing the proceeding, but its merits only are of recent conception, to be assessed in light of David’s extensive personal commitments to the Company over that time;
(b)Robert’s brothers disavow the proceeding, Gregory not wishing to participate in it, and Kevin saying expressly it was his belief “there is no trust in respect of David’s … shares”. While far from determinative, their views are more consistent with the proceeding being brought to benefit Robert alone, at odds with any express or constructive trust contended to benefit the Sykes’ family more generally, as is the foundation of the claim; and
12 American Cyanamid Co v Ethicon Ltd, above n 2, at 408.
13 Levi Strauss and Co v Dino Clothing Co Ltd (1986) 1 TCLR 393 (HC) at 399.
(c)the Company’s present parlous position has to some degree been contributed by Robert’s operation of the business, to the extent Mr Mossman sought in late 2017 he undertake to the Company’s directors to acknowledge the Company “is now in a consolidation phase”, and “I will not enter into any further tree development or capital expenditure of any nature unless expressly authorised by the board of directors of the Company”. Robert responded to David by email “[t]his is an absolute given from me, and you have this assurance”. But the email also has a handwritten annotation, presumably by either David or Mr Mossman: “I asked for a written commitment, that he would not spend any more. It didn’t work”.
[27] I also have regard for David’s very substantial financial support of the Company over the years of its operation. In my view – despite the more limited incursion of an interim injunction against sale only, and acknowledging David’s undertaking to the Court – overall justice is better served by refusing the application.
Result
[28]The application is dismissed.
Admissibility
[29] Ms Robertson objects to admissibility of four sentences in a reply affidavit from Andrew McGrath, formerly the managing director of the North Island’s largest grower of deciduous fruit trees, with some 40 years’ experience in fruit growing and familiar with “all major orchardists in New Zealand”. Mr McGrath says:
In my considerable experience, Robert is one of the best apple orchardists in the North Island. His success with growing different varietals of apples in Hawkes Bay is the primary reason why [the Company] has experienced the success and growth it has had.
…
Most people in the fruit growing industry would be [of the view Robert was the Company’s owner], as their dealings would have almost always been exclusively with Robert.
…
[Robert] is widely regarded in the industry as an excellent and ethical grower.
[30] Ms Robertson says, as non-expert opinion evidence, those statements are admissible only if necessary for Mr McGrath to communicate what he “saw, heard or otherwise perceived”. Such requires expression of such opinion to be “the only way in which to effectively communicate the information to the fact-finder”, and of “something personally perceived, and therefore the experiences upon which the opinion is based must be described by the witness as far as possible”.14 Ms Davenport says Mr McGrath’s statements have the requisite necessity.
[31] The latter references to his opinion of others’ views of Robert are conclusory, to support Mr McGrath’s consistent views of Robert. They are unnecessary to communicate Mr McGrath’s perception. They are inadmissible.
[32] Mr McGrath’s former opinion as to Robert’s qualities is the only way to communicate those qualities’ contribution, on the skeletal foundation of Mr McGrath’s knowledge of Robert’s experience growing different varietals of apples in Hawkes Bay, and the Company’s success and growth. It is admissible.
Costs
[33] In my preliminary view, as the successful party, David is entitled to 2B costs and disbursements.15 That is because, from what I presently know of it, nothing in the steps taken by him in this averagely complex proceeding required other than a normal amount of time.16
[34] If that is not accepted by the parties, and they cannot otherwise agree, costs are reserved for determination on short memoranda of no more than five pages – annexing a single-page table setting out any contended allowable steps, time allocation, and daily recovery rate – to be filed and served by David within ten working days of the
Evidence Act 2006, s 24; Green v Green [2014] NZHC 1991 at [5]–[7], citing R Mahoney and ors
The Evidence Act 2006: Act and Analysis (3rd ed, Thomson Reuters, Wellington, 2014) at 103–
104. See also Elisabeth McDonald and Scott Optican (eds) Mahoney on Evidence: Act & Analysis
(4th ed, Thomson Reuters, Wellington, 2018) at [EV24.02].
15 High Court Rules 2016, r 14.2(1)(a), (c) and (g).
16 Rules 14.3(1) and 14.5(2).
date of this judgment, with any response and reply to be filed within five working day intervals after service.
—Jagose J
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