Vance v Vey Group Limited
[2020] NZHC 2592
•2 October 2020
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV 2018-485-505
[2020] NZHC 2592
UNDER the Companies Act 1993 IN THE MATTER OF
Vey Group Limited
BETWEEN
DAVID VANCE and IAN MILLARD AS TRUSTEES OF THE ORANA TRUST
Plaintiffs
AND
VEY GROUP LIMITED
First Defendant
LESLIE WILLIAM FUGLE
Second Defendant
Hearing: 22 September 2020 (further submissions received on 25 September 2020 and 1 October 2020) Counsel:
R A Kirkness for Plaintiff
J K Mahuta-Coyle for Defendants R L Pinny for Receivers
Judgment:
2 October 2020
JUDGMENT OF MALLON J
Introduction
[1] The plaintiffs are the independent trustees (the trustees) of the Orana Trust (Orana). Orana holds 49 per cent of the shares in the first defendant (Vey). The second defendant, Mr Fugle, is the sole director of Vey. The plaintiffs alleged unlawful oppression in the conduct of Vey and applied under s 174 of the Companies Act 1993 for relief in the form of an order placing Vey in liquidation.
VANCE v VEY GROUP LIMITED [2020] NZHC 2592 [2 October 2020]
[2] In the High Court I was satisfied that the grounds for relief were made out.1 As to the appropriate relief, the defendants submitted that liquidation was not the appropriate remedy because the majority shareholders were strongly opposed to it and, as recorded in my judgment, they “would willingly participate in a buy-out process of the Orana shares”.2
[3] An issue with determining the fair price for a buy-out of the minority shareholding was a debt claimed by Orana but disputed by Mr Fugle. Mr Fugle had concerns about the debt because of the intertwined financial affairs of Vey and interests associated with Daryn Turvey prior to Mr Fugle’s involvement. Mr Fugle said he had not signed the 2015 financial statements or prepared financial statements for subsequent years because of these concerns.
[4] I granted relief setting out a process that would have allowed (via the preparation of independently prepared financial accounts for Vey from 2015, with the independent accountant also forming a view on the Orana debt as part of that) the value of the Orana shareholding to be fairly assessed, and for the majority shareholders to have the opportunity to purchase the shareholding on a fair basis. I concluded:3
If Mr Fugle does not cooperate in the process to be carried out by the independent accountant, or the above process does not result in the sale of the Orana shares, the parties have leave to apply for further relief under s 174 if this is necessary. Such relief may be for Vey to be placed in receivership (to manage Vey with a view to remediating the Wellington property or selling it on an “as is” basis) or liquidation.
[5] My judgment was delivered on 18 July 2019. Had that process been followed, either the minority shares would have been purchased by one or more of the majority shareholders or the shares could have been offered for sale to third parties before the end of last year. Instead, the defendants elected to appeal my decision to the Court of Appeal and the parties consented to a stay pending that appeal.
[6] Shortly before the Court of Appeal hearing, counsel for the defendants submitted a memorandum to that Court which annexed draft financial statements for
1 Vance v Vey Group Ltd [2019] NZHC 1676.
2 At [78].
3 At [86].
the year ending 2019 and a valuation that Mr Fugle had arranged to be prepared. Counsel advised the Court that these accounts were prepared largely for Mr Fugle’s own purposes and “enabled the engagement of a suitable expert to report on the value minority’s share interest”. Counsel further submitted that the Court might consider the draft 2019 financial report and valuation met the relief ordered by the High Court.
[7] That submission did not find favour with the Court of Appeal.4 The Court considered it was unfair for the trustees to have foisted upon them draft accounts in which they had no input and which were not in accordance with the independent process I had ordered. That submission having been rejected, the defendants’ submission as to relief were summarised by the Court as follows:
[67] … He submits that making an order for receivership would be an unusual course of action in the case of an otherwise solvent company. The exit by way of share buy-out for fair value would address the concerns of the shareholders. The Court should permit the minimum degree of intervention into the affairs of the company and avoid drastic remedies. That submission was, however, more made in the context of liquidation. He submits therefore that a buy-out is the only just and equitable remedy and that if the Court insisted that only independent management can establish the true financial position of the company, then an interim liquidator be appointed to report solely on the question of fair value for the minority’s share interest. No submissions were made on the specific form of order.
[8]The Court dismissed the appeal, but stated:
[68] We consider the circumstances here involve mismanagement of the company by Mr Fugle to such an extent that more intrusive orders are required than those made by the Judge. Nor are we satisfied that the relief suggested by Mr Mahuta-Coyle, at once both more intrusive (liquidation) and less intrusive (limited to ascertainment of fair value), is appropriate. Our views are sustained by subsequent events as we have related. Apart entirely from the mismanagement that has occurred, an overwhelming problem is the interconnected debt between Orana and Vey. The incentives of the minority and majority drive here in opposite directions, and the majority has every incentive to minimise or deflect the debt, which is what has happened to date.
[69] We therefore find that making an order for receivership to place the management of the company in competent and independent hands is the only appropriate course of action here to avert unlawful prejudice to the minority. This power we exercise pursuant to r 48, on the basis that it has proved to be the order that ought to have been made at first instance, and which requires to be made now.
4 Vey Group Ltd v Vance [2020] NZCA 232.
[9] The Court of Appeal set out the purpose of appointing receivers. These purposes included “ascertain[ing] the true liabilities of the company (including the debt due to Orana)” and for them to:5
report to the High Court on the best means of realising the assets of the company and distributing the net assets among the shareholders either pro rata or by enabling the purchase of the shares of the minority by the majority in accordance with the constitution of the company or as otherwise may be ordered pursuant to s 174.
[10] Since then, the receivers have provided their report. The receivers have assessed that the liabilities of Vey include a debt of $1,041,000 to Orana. As to the best means of realising the assets of the company, the receivers provided advice on the three options as follows:
1. Sale of the shares held by Orana to a consortium of majority shareholders, including repayment of the Orana liability.
- This option is likely to have the lowest cost and ongoing risk associated with it, however, we note that financial position of the Company still remains uncertain in some regards and the shareholders have previously sought to proceed on this basis without success.
2. Carry out remedial work on the Property, then sell the Property.
- This option is forecast to provide the best return to shareholders, but is also significantly riskier than the other options, including difficulty in obtaining the necessary remediation funding, lack of trust in the ongoing control of the Company, and wider compliance deficiencies which will require addressing.
3. Sell the Property on an “as is” basis.
- This option is forecast to provide no return to shareholders, and possibly some loss to creditors, however, it avoids many of the risks under option 2 and, if conducted via liquidation, would allow the investigation into and potential pursuit of other recovery actions.
[11]The receivers went on to provide the following recommendation:
· We recommend a period of time, ie. three months, for the shareholders to agree next steps (while the Company remains in receivership). This will provide the shareholders with an opportunity to consider the option of the sale of shares held by Orana to the Majority Shareholder Group, or other courses of action including the agreement of shareholders to either remediate and sell the Property or sell the Property “as is”.
5 Vey Group, above n 4, at [70(d)].
· If no such agreement can be reached, we would recommend a liquidator should be appointed to complete a sale on an as is basis. A liquidator would also have the power to carry out an investigation into the affairs of the Company, and to distribute funds to creditors in order of priority.
[12]Since then, what has happened is this:
(a)On 3 September 2020 the trustees advised they would be prepared to entertain a realistic offer to purchase their shares providing that the Orana debt accepted by the receivers was paid in full and the share purchase price reflected the “as is where is” $2.5 million value of Vey’s principal asset, the Webb Street property.
(b)On 4 September 2020, Mr Fugle advised that the majority shareholders were prepared to make an offer for the purchase of the minority shareholding “based on the conclusions of the report” of the receivers as to its net assets, but “cannot do so on the terms stipulated … in your letter (recovery of the debt [Orana] allege[s] is owed by the company)”. Mr Fugle went on to say the s 174 application was not a debt recovery proceeding and if the constitution’s buy-out process was followed, there would be no scope to argue that a debt claim had to be satisfied at the same time as an offer to sell shares under that process.
(c)Given this stalemate, the parties are back before the Court seeking determination of the relief that should now be ordered. The plaintiffs submit that the court should order that Vey be placed into liquidation, and that the existing receivers be appointed as liquidators pursuant to s 28 of the Companies Act 1993 and their receivership terminated. Mr Fugle submits the Court should order that the majority shareholders can purchase the plaintiffs’ shares at fair value but on the basis that it is not contingent upon resolving the disputed Orana debt. Alternatively, Mr Fugle submits the order could be that the parties submit to arbitration to determine the true value of the disputed debt and the fair value of the plaintiffs’ shares. Under either alternative, Mr Fugle submits that the receivers should remain in office until a share transfer is executed or Vey is put into liquidation.
[13] A key stumbling point in resolving the matter is that Mr Fugle maintains his position that the s 174 application was not a debt recovery proceeding. He contends that the only proper forum for resolving the debt is a proceeding in which Daryn Turvey is able to be cross-examined about what the claimed debt. He says that if the Court orders a liquidation, the debt will still not be resolved. The receivers, who would become the liquidators, have already formed the view that the Orana debt would be admitted in the liquidation. Mr Fugle says that decision would compel the majority shareholders to bring proceedings that apply to review the decision. Those proceedings would, in effect, be a trial proving or disproving the debt. He submits it would be more efficient for the court to order his alternative proposed relief pursuant to which the Orana debt would be determined by arbitration. He submits he is entitled to have the disputed debt determined in a proper forum.
[14] It is true that the s 174 application was not a debt recovery proceeding. However, Mr Fugle was conducting the affairs of Vey in an oppressive, unfairly discriminatory and unfairly prejudicial way. The trustees were entitled to pursue relief from that conduct and to anticipate that the disputed debt was capable of resolution once the oppressive, discriminatory and prejudicial conduct had come to an end. The relief in the High Court envisaged that an independent accountant would be able to form a view on the disputed debt. The relief ordered by the Court of Appeal expressly directed that.
[15]The receivers investigated the disputed debt. They concluded that the sum of
$1,040,810 “accurately represent[s] the true value of the Company’s indebtedness to Orana”. They explained how they had reached this conclusion. The receivers reviewed the available financial information to determine the liabilities of Vey. The draft 2019 financial accounts were the starting point. These accounts included the sum of $1,219,856 as a current liability.
[16] The receivers looked for supporting documentation and bank records where they were available and made contact with relevant parties in an attempt to verify them. This included discussions with Mr Fugle. They divided the sums that made up the claimed debt based on whether those sums were verifiable by source documentation prepared by a third party, or whether they were incomplete because
supporting accounting records or source documentation could not be verified with certainty. As a result of this process, the receivers deleted a number of transactions that made up the Orana debt claim. This brought the liability down to $1,041,810.
[17]In reaching this conclusion the receivers noted Mr Fugle’s concerns.
· Mr Fugle argues that the debt did not arise out of normal commercial reasons but rather for family tax purposes. Moreover, given the interdependency of ownership, Mr Fugle questions the existence of two entities in the first place and the overall legitimacy of this debt.
· Mr Fugle specifically brings attention to the $449,409 transfer from Orana to the Company in FY11 – a major component of the net bank transfers from Orana to the Company in FY11 totalling $608,631 was comprised of a $449,409 advance on 21 May 2010. This amount was advanced in a lump sum following the sale of one of Mr Turvey’s properties. Both Mr Fugle and Mrs Turvey question the means in which Mr Turvey obtained the initial funding to purchase said Property and conduct the renovations which were undertaken. Mr Fugle further alleges that this deposit could, in substance, be the return of funds that were provided by the Company.
· We have noted Mr Fugle and Mrs Turvey’s comments around the legitimacy of the debt. However, in the absence of any documents to support such allegations, do not accept the claim as being void.
[18] It is said for Mr Fugle that the only way his concerns about the legitimacy of the debt can be tested is through cross-examination of Daryn Turvey. That is why it has been Mr Fugle’s position that the Orana debt must be determined in debt recovery proceedings when Mr Turvey can be cross-examined. However, as it is put for the trustees, cross-examination of Mr Fugle would be a fishing expedition. He has made allegations but has not produced anything to support those allegations at any time during this long-running dispute.
[19] What is more, the valuation prepared for Mr Fugle on the basis of the 2019 financial accounts included the Orana debt. For the purposes of this valuation, the valuers discounted the Orana debt to $1,078,433 on the basis of evidence from the trustees in support of the s 174 application. In other words, including the Orana debt as a liability has reduced the net asset value of the company and, in turn, the value of the minority shareholding in Vey. This confirms the view taken in the High Court and the Court of Appeal that a buy-out of the minority shareholding will not be achievable on a fair basis without resolution of the Orana debt.
[20] Mr Fugle filed an affidavit for this hearing on relief in which he advised that court-ordered costs had now been paid. He also advised that a sum of money was held in a law firm’s trust account as an expression of bona fide intent by the majority shareholders to acquire the minority’s shares. Counsel advises that this sum is around
$90,000. I accept that the majority wish to acquire the minority’s shares, but the evidence indicates they wish to do so at a price that reflects a liability of over
$1 million to Orana while also disputing an obligation to pay that liability.
[21] In the circumstances, I consider the only appropriate relief that would be fair and reasonable is that which was recommended by the receivers. That is, following a period to allow a settlement over payment of the Orana debt and the sale of the minority shareholding to be negotiated, there should be a liquidation order. The receivers will become the liquidators and their receivership will come to an end. The receivers consent to being appointed as liquidators. The liquidation order will be made but will lie in Court for a stipulated time period. This will provide an incentive for the parties to negotiate a settlement if they wish to avoid the liquidation order.
[22] At the hearing, I indicated to the parties that this was the form of relief I was contemplating. I asked counsel to provide a form of order in the event I ordered as contemplated. They are agreed as to the form of that order other than the period it should lie in Court. The trustees consider it should lie in Court for three months from the date of the receivers’ report. Mr Fugle considers the three month period should be from the date of my judgment. I consider the period of time should be something in between. On the one hand, the matter has already had a protracted history and an upcoming liquidation order will provide an incentive to settle the matter if it can be. On the other hand, insurance is now in place over Vey’s principal asset (the absence of which was a concern when the s 174 application was made) and it remains desirable for the parties to reach a negotiated settlement and avoid liquidation if possible.
[23] In light of the loss of trust between the parties, it may be that a mediation would assist in seeking to settle the matter. That is for the parties to consider.
Result
[24] I make an order under s 174(2)(g) of the Companies Act 1993 placing Vey into liquidation, but this order is to lie in Court and is not take effect until midday 9 December 2020. The terms of that order are as follows:
(a)pursuant to the application in the plaintiffs’ statement of claim dated 18 July 2018, the Vey Group Limited (in receivership) (the Company) is to be put into liquidation by the Court under the Companies Act 1993 at midday on 9 December 2020;
(b)the court-ordered receivership of the Company shall come to an end upon its liquidation;
(c)the court-appointed receivers of the Company, John Howard Ross Fisk and Richard John Nacey, shall:
(i)remain in office on the same terms and conditions as those imposed upon their appointment in Vey Group Limited & Leslie William Fugle v David Vance & Ian Millard (as Trustees of the Orana Trust) [2020] NZCA 232 (at [71]) (and as varied by the Minute of Clark J of 23 July 2020) until the commencement of liquidation at midday on 9 December 2020;
(ii)by consent of the parties and in light of s 280(1)(c) of the Companies Act 1993, the court-appointed receivers, having consented to act as liquidators in the Consent to Act as Liquidator dated 21 September 2020, are hereby appointed, jointly and severally, as liquidators of the Company with effect from midday on 9 December 2020 and their appointment as receivers terminates upon commencement of the liquidation; and
(iii)the liquidators’ rates of remuneration shall be as set out in the Consent to Act as Liquidator dated 21 September 2020 and
subject to this Court fixing the overall remuneration of the liquidators at the conclusion of the liquidation pursuant to s 284(1)(e) of the Companies Act 1993.
[25] If counsel file a joint memorandum prior to 9 December 2020 seeking alternative orders by consent, I will vacate the order placing the company in liquidation and make those orders by consent.
[26] Costs and disbursements for a defended interlocutory application are to be fixed by the Registrar and paid by Mr Fugle.
Mallon J
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