Szekely v North
[2018] NZCA 227
•29 June 2018 at 4 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA249/2017 [2018] NZCA 227 |
| BETWEEN | JOZSEF GABOR SZEKELY |
| AND | SAMUEL RAYMOND NORTH |
| Hearing: | 24 May 2018 |
Court: | Clifford, Venning and Mander JJ |
Counsel: | Q S Haines for Appellant |
Judgment: | 29 June 2018 at 4 pm |
JUDGMENT OF THE COURT
AThe application for leave to adduce further evidence is declined.
BThe appeal is dismissed.
CThe appellant must pay the first respondent costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Venning J)
Jozsef Szekely and Samuel North are chefs. In 2012 they decided to open a restaurant together. They each invested money in the business as did Mr North’s parents and his partner. The restaurant business was established as a company called Muse on Allen Ltd.
The restaurant venture was not successful. Within a short time there was a serious breakdown in the relationship between Mr Szekely and the North interests. Mr Szekely was removed as a director of the company on 11 January 2013 and on 24 February 2013 Mr North altered the Company Office records by transferring Mr Szekely’s shares into his own name. From that time on, Mr Szekely had no involvement in the company.
Mr Szekely brought proceedings against the company, Mr North and his parents, Debbie and Malcolm North, under s 174 of the Companies Act 1993 (the Act). He alleged the Norths had conducted the company’s affairs in an oppressive, unfairly discriminatory or unfairly prejudicial manner.[1] By the time of the hearing the company had been placed into liquidation. The liquidators did not agree to the litigation being continued against the company.[2] Mr Szekely did not seek leave to continue his claim against the company. Instead, Mr Szekely sought compensation from the Norths personally of $97,449.60 together with interest and costs.
High Court decision
[1]The second respondent is Debbie North. At relevant times she was a director of the company.
[2]Companies Act 1993, s 248.
After discussing the background to the breakdown in the relationship and noting that Mr Szekely had been excluded from the business, Mallon J opined that, if the shares had some value at the date he was excluded, then potentially it would be just and equitable to order compensation to Mr Szekely, even if the exclusion was partly or even substantially a result of his own actions.[3] The starting point for assessing compensation would be the fair value of the shareholding at the relevant time.
[3]Szekely v Muse on Allen Ltd [2017] NZHC 703, [2017] NZCCLR 17 at [41].
Mr Szekely and the Norths both called expert accounting evidence on the issue of the value of Mr Szekely’s shareholding at the time he was excluded from the company. The Judge agreed with Mr Rendell, the expert called for Mr Szekely, that 24 February 2013 was the relevant date.[4] But she also agreed with Mr Sutherland, the expert called by the Norths, that in the absence of any better evidence it was appropriate to take the 31 March 2013 accounts as representing the financial position of the company as at 24 February 2013.[5]
[4]At [59].
[5]At [59].
The Judge concluded that as at 31 March 2013 Mr Szekely’s shares were of no value and further, they did not have any value when Mr Szekely was excluded from the company on 24 February 2013.[6] Mr Szekely’s investment was lost by 24 February 2013. That assessment was also consistent with the advice from accountants Crowe Howarth to Mr Szekely in November 2014 that the company was trading at a loss and that there would be no return to shareholders if it was wound up.[7]
[6]At [70].
[7]At [70].
The Judge therefore dismissed Mr Szekely’s application for relief under s 174 of the Act.
The Judge subsequently dealt with the issue of costs. The legal costs had been incurred by the company, not the Norths. As the liquidators had taken no steps and the Norths had represented themselves the Judge made no order for costs. However, she made an order that Mr Szekely was to pay Mr North for the disbursements he had incurred of $7,830.91.[8]
Appeal
[8]Szekely v Muse on Allen Ltd [2017] NZHC 1468.
Mr Szekely raised the following grounds in his appeal to this Court:
(a)the Judge was wrong not to make a declaration that the conduct of one or more of the respondents was oppressive, unfairly discriminatory or unfairly prejudicial to him; and
(b)the Judge was wrong in concluding the shares did not have any value at the time when Mr North unilaterally transferred them from Mr Szekely to himself.
Further evidence
Mr Haines for Mr Szekely made an application to adduce further evidence in support of the second ground of appeal. The proposed further evidence is:
(a)an affidavit of Christopher Corke;
(b)the notes of Judge Mill on a sentencing indication in relation to Mr North; and
(c)the summary of facts in the criminal prosecution of Mr North.
Mr Iorns for Mr North opposed the admission of the further evidence.
The principles relating to the admission of further evidence on appeal are well understood and firmly established.[9] The evidence should be fresh, in the sense that it could not have been obtained for the hearing, cogent in that it probably would have had an important influence on the result, albeit it need not be decisive, and credible although it need not be incontrovertible.
[9]Paper Reclaim Ltd v Aotearoa International Ltd (Further Evidence) (No 1) [2006] NZSC 59, [2007] 2 NZLR 1 at [6], referring to Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA) at 192.
The principal evidence Mr Haines sought to have admitted for the purpose of this appeal is an affidavit of Mr Corke. Mr Corke is a trustee of the Corke Family Trust. In approximately March 2015 the Corke Family Trust paid Mr North $25,777.77 for a 20 per cent share in Muse on Allen Ltd. Mr Haines argued that put a value for the shares in the company at the time of approximately $125,000. Subsequently Mr Corke fell out with the Norths and took proceedings against them in the Disputes Tribunal. The Tribunal found that Mr North had misrepresented the financial position of the company to Mr Corke by failing to disclose the tax liability of the company in March 2015 and that, taking account of the tax liability, the value of the company would at most have been $37,000. The Tribunal awarded the maximum it could award to Mr Corke, namely $15,000.
Even if Mr Corke’s evidence could be said to be fresh, it is not cogent. At most it provides evidence of what the company may have been worth in March 2015. But as Mallon J noted, the relevant time for valuing the company in relation to Mr Szekely’s claim was 24 February 2013. Whatever value the shares may have had in March 2015 can have no bearing whatsoever on the value of the shares as at 24 February 2013. The evidence before the High Court was directed at the value of the shares as at the agreed relevant date of 23 February 2013. It is irrelevant that the value of the company’s shares may have altered after that date. The value could have altered for a number of reasons, including the introduction of further capital for example. It is entirely possible that the value of the shares fluctuated over time. As noted, ultimately the company was placed into liquidation in 2016. The shares were valueless at that time.
We decline to admit the evidence of Mr Corke as it fails to satisfy the test for the admission of further evidence on appeal.
The sentence indication of Judge Mill and the summary of facts relating to a charge Mr North faced under the Act for operating a phoenix company also lack the necessary cogency. Those documents disclose that on 3 December 2015 Mr North incorporated another company, Catering Ltd, and after the liquidation of Muse on Allen Ltd he used that entity to carry on the business formerly carried on by Muse on Allen Ltd. Again, all of the relevant actions took place after February 2013. The evidence is irrelevant to the matters raised on the current appeal.
Without the admission of the further evidence, Mr Haines was left with a general submission that the Judge should have preferred Mr Rendell’s approach to that of Mr Sutherland and should have found the shares were worth $87,301 (Mr Rendell’s method 1) or Mr Szekely’s interest in the company was $97,450 (Mr Rendell’s method 2).
The Judge was entitled to prefer the evidence of Mr Sutherland. Mr Rendell’s approaches (methods 1 and 2) inflated the value of the shares and Mr Szekely’s interest in the company. Both methods failed to take account of the liabilities and overstated the goodwill (which, by 31 March 2013, would have been non-existent). Also, Mr Rendell’s methods failed to take account of the additional capital introduced by the Norths. We also agree with, and adopt the Judge’s reasons at [60] to [71] of her judgment for dismissing Mr Rendell’s approach.
We are satisfied the Judge was correct in her conclusion that as at 24 February 2013 the shares and Mr Szekely’s interest in the company had no value.
The declaration
Next Mr Haines submitted that Mr North’s actions of unilaterally transferring the shares and removing Mr Szekely as a director were oppressive, unfairly discriminatory or unfairly prejudicial to Mr Szekely. He submitted that the Judge should have made a declaration to that effect. If she had done so, Mr Szekely would have been entitled to costs at the least.
Neither party has taken any issue with the Judge’s factual findings as to what occurred. Mr Szekely initially contributed $65,000 to the company, while interests associated with the Norths initially contributed $38,000. The Norths said they subsequently introduced further sums of money. As the Judge found:[10]
[10]Szekely v Muse on Allen Ltd, above n 3 (footnotes omitted).
[19] There is not much in the way of detail about what happened over the next few months or subsequently. However it is clear that soon after the opening of the restaurant Jozsef’s relationship with the Norths deteriorated. Jozsef says this was because the Norths’ friends and family were receiving free food and beverages from the restaurant on a regular basis. Jozsef was concerned about this because it was a new business which needed to start on a strong footing. He says he tried to raise the issue with Samuel but was unable to gain any traction.
[20] The Norths have a different view about what caused the breakdown of their relationship with Jozsef. They learned that Jozsef called the Wellington City Council on 12 December 2012 about the restaurant’s liquor licence. Jozsef says he was concerned the Norths were going to breach their liquor licence by holding a family Christmas function at the restaurant and he wanted clarification from the Council to ensure he was not fined. This incensed the Norths. As I understand it, they also do not accept they were taking free food from the restaurant.
[21] On 19 December 2012 Samuel altered the Companies Office records to show his shareholding as 51 shares (rather than 30) and Jozsef as having 49 shares (rather than 70). Samuel did this unilaterally. He felt justified in doing this to take into account the additional financial contributions his parents had made.
[22] The relationship continued to deteriorate in January 2013. Although the precise details of what occurred are not clear, the issues which arose included the following:
(a)On 6 January 2013 Samuel applied to the bank for an extension to the company’s overdraft of $10,000. The Norths say Jozsef, who was a signatory to the account, refused to sign the application.
(b)Jozsef cut his finger at some point which meant, the Norths say, he could not perform his usual duties.
(c)On 8 January 2013 Jozsef called the police regarding an alleged assault by Malcolm. This concerned an altercation of some kind at the restaurant which Jozsef says occurred when he confronted the Norths about changing his shareholding.
(d)On 9 January 2013 Malcolm called the police to remove Jozsef from the premises. Jozsef says he left the premises on the advice of the police to ensure his safety.
(e)Around this time (it is unclear precisely when), Jozsef worked his shift and then informed staff he would not be returning. Jozsef says this was on the advice of his lawyers. He says it is difficult to recall the details but, if he did not say why he was not coming back, that would have been because he did not think it was appropriate to explain to staff that this was because of a breakdown in the relationship between the owners of the business.
[23] In addition to these events, on 9 January 2013 Samuel added Malcolm as a director of the company. At 10.15 pm on 10 January 2013 the Norths met at their property where they decided to remove Jozsef as a director. They say they invited him to attend by text message. This was not put to Jozsef and I do not know if he accepts they did. A minute of the meeting records this action was taken because Jozsef had threatened the Norths with defamation proceedings, threatened to lay an assault charge against Malcolm when the police had said there was no substance to this, lacked an understanding of the financial position of the business, implied the directors had stolen money from the restaurant, and had shared confidential information to a third party. In accordance with the resolution, on 11 January 2013 the Companies Office records were updated to remove Jozsef as a director.
[24] On 14 January 2013 the company’s bank account was frozen. The bank advised the Norths and Jozsef of this by email. The Bank said it had taken this action because it was getting different messages and instructions and it was clear there was a dispute between the account signatories. The Bank also noted that, although the Companies Office records showed Jozsef was removed as a director, he remained a signatory on the bank account.
[25] On 16 January 2013 solicitors (Mr Jefferies) acting for Jozsef wrote to Malcolm. The letter noted Jozsef’s contribution of $65,000 in return for which he held a 63.2 per cent shareholding in the company and was appointed a director. The letter referred to the changes made in the Companies Office records. Mr Jeffries requested an urgent meeting, preferably within 24 hours, with the Norths, their solicitor, and the company accountant at which he and Jozsef would also attend.
[26] A meeting took place sometime in February 2013. There is little in the way of evidence about what took place at this meeting. Jozsef says the outcome was that he was not going back to the premises until the situation was resolved. Malcolm says Mr Jefferies failed to turn up to a meeting but it is not clear if this refers to an earlier meeting. Samuel says that Mr Jefferies attended a meeting but was asleep and/or affected by drugs. In any case, Jozsef subsequently engaged Duncan Cotterill and the Norths engaged Kensington Swan to act for them. No resolution was achieved.
[27] On 20 February 2013 the company’s registered office was changed to Malcolm’s address. On 24 February 2013 Samuel altered the Companies Office records by transferring all of Jozsef’s shares into his own name. He says he did this because of Jozsef’s actions, which had included calling the Council, emailing the landlord and having the bank account frozen, and because Jozsef had walked away from the business. Samuel was frustrated with the situation he was in. He felt the shares were worthless because the business was floundering.
Section 174 of the Act provides:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2) If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a) requiring the company or any other person to acquire the shareholder’s shares; or
(b) requiring the company or any other person to pay compensation to a person; or
(c) regulating the future conduct of the company’s affairs; or
(d) altering or adding to the company’s constitution; or
(e) appointing a receiver of the company; or
(f) directing the rectification of the records of the company; or
(g) putting the company into liquidation; or
(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3) No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
The section contemplates a two-stage analysis by the Court. First, consideration of whether the respondents have acted in an oppressive, unfairly discriminatory or unfairly prejudicial way towards the applicant, and, second, if so, whether it is just and equitable to make an order under s 174(2). The second stage involves the exercise of a discretion. Relief does not follow automatically from a finding of oppression.[11] Although not expressly referred to in s 174(2) the Court may make a declaration in an appropriate case. In Taylor v Seahorse World Aquarium the High Court made a declaration that the affairs of the company had been conducted in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to the plaintiff in his capacity as shareholder and it was just and equitable that relief be granted under s 174(2).[12] MacKenzie J adjourned for further consideration the issue of what relief might be appropriate in light of that declaration. He did so because there was insufficient information before the Court to determine the matter.
[11]Sturgess v Dunphy [2014] NZCA 266 at [144].
[12]Taylor v Seahorse World Aquarium [2008] NZCCLR 21 (HC) at [53].
Mr Haines submitted that Mallon J made a clear finding of oppressive, unfairly discriminatory or unfairly prejudicial conduct. He referred to the following passage from her judgment:[13]
What is relevant is that Jozsef had contributed at least $65,000 into a business in which it had become intolerable to both Jozsef and the Norths for him to remain. The Norths continued to operate the business as though Jozsef no longer had any rights in it. They transferred Jozsef’s shares into Samuel’s name, removed Jozsef as a director and no longer included him in any business decisions.
[13]Szekely v Muse on Allen, above n 3, at [40].
Mr Haines submitted that the Judge ought to have gone on to make a declaration to that effect. In failing to do so, she fell into error.
We agree that the logical conclusion from the facts as found by the Judge is that the Norths and Mr North in particular had acted in an oppressive, unfairly discriminatory or unfairly prejudicial way towards Mr Szekely in removing him as a director and unilaterally transferring his shares in breach of s 84 of the Act. The issue is whether, in the exercise of her discretion, the Judge should have gone on to make a declaration to that effect.
While Mr Haines accepted that relief under s 174(2) was discretionary he submitted that declaratory relief will very rarely be denied if grounds for intervention have been established. He relied on Air Nelson Ltd v Minister of Transport and Berkeley v Secretary of State for the Environment for that proposition.[14]
[14]Air Nelson Ltd v Minister of Transport [2008] NZAR 139 (CA) at [59]–[61]; and Berkeley v Secretary of State for the Environment [2001] 2 AC 603 (HL).
Both judgments involved decision-making by public bodies rather than the private law individuals (as raised by the present case). The significance of that appears in the following passage from Air Nelson Ltd v Minister of Transport:[15]
In principle, the starting point is that where a claimant demonstrates that a public decision-maker has erred in the exercise of its power, the claimant is entitled to relief.
[15]At [61].
Relief, including declaratory relief under s 174(2), remains discretionary even if there is a finding of oppression. In Sturgess v Dunphy this Court confirmed that it is the “unfairly detrimental effect of the conduct on the complaining member that brings the remedy into play”.[16] The remedy responds to that detriment, and the court acts for remedial, not punitive, purposes. Where oppression is made out, relief will often be just and equitable because “wrong and remedy are closely linked”.[17] However, it also follows that a court may decline to grant relief where the oppression does not give rise to any detrimental effect.
[16]Sturgess v Dunphy, above n 11, at [148].
[17]At [144].
Mallon J considered that the value of the shares as at 24 February 2013 determined whether Mr Szekely had suffered a detriment. She said:
[40] … As it was said in O’Neill v Phillips in relation to a shareholder excluded from the management of the business, “unfairness does not lie in the exclusion alone but in exclusion without a reasonable offer” to buy his shares at a fair value or make some other fair arrangement.[18]
[41] … If the Norths are correct the shares had no value then it would not be appropriate to order compensation. If the shares had some value then I consider it potentially would be just and equitable to order compensation for [Mr Szekely’s] shareholding at the time he was excluded from the business even if that exclusion was partly or even substantially a result of his own actions. The starting point for any such compensation would be the fair value of the shareholding at this time. It is therefore necessary to consider the expert evidence on this point.
[18]O’Neill v Phillips [1999] 1 WLR 1092 (HL) at 1107 per Lord Hoffmann.
Mallon J, like the parties, focussed on the value of the shares. The Judge implicitly accepted that in the absence of a reasonable offer to purchase the shares it would have been just and equitable to order compensation if the shares had a value but ultimately concluded that as the shares had no value, no order under s 174(2) was required.
We understand why the Judge approached the matter in that way rather than addressing the issue of a declaration. While the relief sought in the first cause of action in the amended statement of claim included a declaration, the focus of Mr Szekely’s case was entirely on the issue of compensation. That is apparent from both the oral and written closings before the Judge.
In the oral closing, after referring to Mr Szekely’s exclusion from the company, Mr Haines submitted that the consequence of the exclusion was that:
Mr Szekely has suffered a loss of capital, a loss of opportunity, a loss of employment, considerable additional expense, as well as stress in this matter. Now, at the outset of these proceedings your Honour raised the question of what was the quantum that is actually been raised by Mr Szekely in this particular matter. Mr Szekely’s claim is made up of several distinct components, the first being a value of his shareholders’ current account. And we heard evidence from both of the experts that it was not possible for someone who is not a shareholder to hold a shareholders’ current account with the company. And on that basis the shareholders’ current account which Mr Szekely held, according to both sets of accounts whichever way you were to interpret them, of $70,487 subject to any withdrawals or advances, must therefore be claimable back.
And later, after referring to the two approaches to valuation provided by Mr Rendell, Mr Haines submitted:
The difference between the two is method 2 says you get your shareholders’ current account then we value the balance of what is left. And method 1 says we add up all of the assets which are there and you take 17% because you are a 17% shareholder.
Ultimately Mr Haines clarified that Mr Szekely was seeking $145,000 (including legal costs of $48,000).
Mr Haine’s written submissions were directed entirely at the issue of compensation. There was no reference in either the oral or written closing submissions on behalf of Mr Szekely to a declaration.
Given the focus on Mr Szekely’s claim for monetary compensation, it is understandable why Mallon J did not address the application for a declaration of oppressive conduct. She had already made a finding to that effect in the course of her judgment but had then gone on and determined that it was unnecessary to make an order under s 174(2) because any wrong inflicted on Mr Szekely had no economic effect on him. The shares that Mr North wrongly transferred from Mr Szekely were worthless at the time they were transferred.
Finally, we note that in his written submissions Mr Haines acknowledged that even if it had been established there had been unfairly prejudicial conduct the Court still had to consider if it was just and equitable to make an order under s 174(2).
Before us, Mr Haines submitted that the significance of the declaration would have been that Mr Szekely would have been entitled to costs at least. But costs follow the event.[19] Given that the focus of the proceeding before the High Court was on the monetary claim which Mr Szekely failed on, on a “realistic appraisal” the defendants, not Mr Szekely, were the successful party notwithstanding the finding of oppression.[20] A declaration would have been a pyrrhic victory for Mr Szekely. The defendants successfully opposed Mr Szekely’s claim for $145,000 (including interest and costs).
Result
[19]High Court Rules 2016, r 14.2; and Water Guard NZ Ltd v Midgen Enterprises Ltd [2017] NZCA 36 at [13].
[20]See Weaver v Auckland Council [2017] NZCA 330 at [26].
The application for leave to adduce further evidence is declined.
The appeal is dismissed.
The appellant must pay the first respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Q H Law, Otaki for Appellant
Hoggard Law Ltd, Wellington for First Respondent
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