Vance v Vey Group Ltd
[2019] NZHC 1676
•18 July 2019
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE
CIV 2018-485-505
[2019] NZHC 1676
UNDER the Companies Act section 174 IN THE MATTER OF
Vey Group Limited
BETWEEN
DAVID VANCE and IAN MILLARD
Plaintiffs
AND
VEY GROUP LIMITED
First Defendant
LESLIE WILLIAM FUGLE
Second Defendant
Hearing: 28 and 29 May 2019 Counsel:
R L Roff for Plaintiffs
J K Mahuta-Coyle for Defendants
Judgment:
18 July 2019
JUDGMENT OF MALLON J
Table of contents
Introduction [1]
The facts [4]
Vey and the trusts [4]
The Wellington property [8]
Changes to ownership of the Wellington property [11]
Relationship breakdown between Patricia and Daryn [13]
Sale of Vey shares [15]
Plaintiffs appointed trustees [17]
Initial dealings between Mr Fugle and the Trustees [18]
The proposed sale of the Wellington property [33]
The alleged debt owed by Vey to Orana [35]
The special general meeting [42]
Proceeding commenced [49]
VANCE v VEY GROUP LIMITED [2019] NZHC 1676 [18 July 2019]
Current value of the Wellington property [53]
First issue: the Trustees’ standing [56]
Second issue: oppressive, unfairly discriminatory or unfairly prejudicial conduct [58]
The law [58]
The defendants’ conduct [63]
My assessment [65]
Third issue: relief [73]
The law [73]
Submissions [77]
My assessment [79]
Result [87]
Introduction
[1] The plaintiffs, Mr Vance and Mr Millard QC, are the independent trustees (the Trustees) of the Orana Trust (Orana). Orana holds 49 per cent of the shares in Vey Group Limited (Vey) (the first defendant). Leslie Fugle (the second defendant) is the sole director of Vey. The Trustees believe the remaining shares are held by people associated with Mr Fugle. They consider Vey, through Mr Fugle, is being conducted in a manner that is oppressive or unfairly discriminatory or prejudicial to Orana. They seek relief under s 174 of the Companies Act 1993 in the form of an order placing Vey in liquidation.
[2] The oppressive, unfairly discriminatory or prejudicial actions concern alleged misleading conduct about registering the Orana shares in the names of the Trustees; approving a financing arrangement that was a major transaction without approval of 75 per cent of the shareholders; refusing to allow the Trustees to vote at a shareholders’ meeting deciding whether to approve the sale of Vey’s only asset; a lack of transparency and Company Act breaches concerning the accounts and other matters; and failing to respond to the Trustees’ claim that Vey is liable to Orana for a substantial debt. Overall, the Trustees say they can no longer have confidence in Mr Fugle’s conduct of Vey because of these matters and the only appropriate relief is liquidation.
[3] The defendants submit the Trustees do not have standing to bring the application; the conduct was not oppressive, unfairly discriminatory or unfairly prejudicial and was understandable in the circumstances; and if any relief is ordered it is not appropriate that it be an order for liquidation.
The facts
Vey and the trusts
[4] Francis Turvey (now deceased) had a range of business interests in which he invested via trusts and corporate structures. Francis was married to Patricia. Daryn is their son.
[5] One of Francis’ business interests was a property in Te Aro, Wellington (the Wellington property). Vey was the vehicle used by Francis to purchase this property. Vey was incorporated on 24 April 1996. Vey purchased the Wellington property on 26 June 1996.
[6] When Vey was incorporated, all of its shares were held by Daryn Turvey and Patricia Turvey as trustees of the D A Turvey Family Trust (Daryn’s family trust).1 Soon afterwards, by deed dated 1 July 1996, Orana was established. The trustees of Orana were Daryn and Patricia and the beneficiaries were Francis, Patricia, their children (Daryn, Glenn and Michele), their children, grandchildren, and any other persons or entities determined as beneficiaries by the trustees.2 A month later, on 1 August 1996, all of the shares in Vey were transferred to Daryn and Patricia in their capacity as trustees of Orana.
[7] Orana remained the 100 per cent shareholder of Vey until 29 September 2016 in circumstances to be discussed shortly. It now holds 49 per cent of the shares.
The Wellington property
[8] The Wellington property is Vey’s only asset. It appears to have been an old residential property when Vey purchased it. As at 31 August 2005, its current market value was $1,018,000 according to a valuation obtained by Daryn at that time.
1 I do not have details of the settlor and beneficiaries of this trust but its name indicates it is Daryn’s, rather than his parents’, family trust.
2 This seems to have been a trust set up by Francis, through a solicitor who was the settlor of the trust with a nominal payment of $10.
[9] In around the mid-2000s the residence was demolished and replaced with a three level apartment building (containing eight residential apartments), a management office and basement car parking.3 The building does not meet the standards of the Wellington City Council Code of Compliance. It is not weathertight and requires extensive work to become code compliant. It is also uninsured.
[10] The Wellington property is tenanted. It earns around $200,000 per year in rent less operating expenses. It is managed by a third-party property manager. It is the subject of two mortgages: one to the Bank of New Zealand (BNZ) registered on 10 November 2005; and another to a company called the Aokautere Land Holdings Ltd (ALHL) registered on 9 December 2016.4
Changes to ownership of the Wellington property
[11] At various times, possibly because of tax advantages, the ownership of the Wellington property moved between Vey and Orana. Specifically:
(a)On 8 June 2001, Orana purchased the property for $405,000 on loan (payable on demand) from Vey.
(b)On 30 September 2005, the property was transferred back to Vey for
$1,018,000 (its current market value at that time).5 The purchase price was funded by:
(i)a $250,000 cash payment from Vey;
(ii)a vendor loan (payable on demand) of $620,000; and
(iii)an agreement that one of Orana’s existing debts, amounting to
$148,000, would be assigned to Vey.
3 The valuation obtained by the Trustees on 24 July 2018 describes the property as built circa 2002 yet the 31 August 2005 valuation obtained by Daryn depicts an old residential property and gives the age of the building as “19?0’s” (sic).
4 There continues to be uncertainty about how much is owing on the mortgages. Mr Fugle deposed on 2 May 2019 that $837,250 (excluding compounding interest) was owed to ALHL and $95,000 was owed to BNZ. However, no up to date mortgage statements have been produced.
5 Refer [8] above.
[12] As discussed below, the parties disagree about the current market value of the Wellington property.
Relationship breakdown between Patricia and Daryn
[13] In about 2010 Daryn and his wife, Fiona, sold their house in Lower Hutt. According to proceedings they later brought, they did so to assist Vey regarding a bank debt that Vey was under pressure to repay, and the proceeds from the sale of Daryn’s family trust’s property were paid to Orana and then loaned to Vey. Daryn and Fiona then moved in with Patricia at the Turvey family home. Around a year later they were required to leave that home pursuant to a Family Court order obtained by Patricia.
[14] At around this time, on 26 November 2014, Daryn ceased to be a director of Vey.6 Daryn’s family trust lodged proceedings against Orana and Vey for the net proceeds from the sale of their house, along with some other advances, which had been paid to Orana and then loaned to Vey. Patricia eventually consented to judgment and this was entered on 23 June 2016.
Sale of Vey shares
[15] To satisfy the judgment in favour of Daryn’s family trust 51 per cent of the shares in Vey were sold at a Sherriff’s auction on 29 September 2016 for $480,000 to Kaleb Houlihan-Fugle, the son of Leslie Fugle. Mr Fugle had been appointed a director of Vey on 16 September 2016, shortly before the auction sale, at the invitation of Patricia. Mr Houlihan-Fugle never became a registered shareholder in Vey. The registered shareholders of the 51 per cent holding are Jenny Cartwright (30 per cent), Karen Rowland (10 per cent), Christine Davidson (10 per cent) and Mr Fugle (one per cent held on trust for Patricia). The Trustees understand these shareholders are associated with Mr Fugle.7
6 The Trustees’ chronology said that Daryn resigned as director of Vey on 25 January 2014 but the Companies Office records say the he formally ceased directorship on 26 November 2014.
7 Ms Wulff has made enquiries about the other shareholders. She believes: Ms Cartwright is Mr Fugle’s sister-in-law and is based in Australia (according to the Companies Register); Ms Rowland is an associate; and Ms Davidson is also related to Mr Fugle (Ms Wulff considers Ms Davidson may be related to Mr Kane Davidson, the sole director of ALHL).
[16] Patricia officially ceased to be a director of Vey on 7 August 2017 but it appears she relinquished any directorial responsibilities long before this.8 This left Mr Fugle as the sole director.
Plaintiffs appointed trustees
[17] Irreconcilable differences between Patricia and Daryn led to an application to the High Court under the Trustees Act 1956 for court-appointed independent trustees to replace them as trustees of Orana. Pursuant to that application, an order was made appointing the plaintiffs as trustees in the place of Patricia and Daryn on 27 October 2017.9 Following that appointment, Samantha Wulff, a chartered accountant from Deloitte, has had day-to-day management of Orana on behalf of the independent trustees.10
Initial dealings between Mr Fugle and the Trustees
[18] Mr Fugle met with Mr Vance and Ms Wulff on 14 November 2017, two weeks after the Court appointment. At that meeting, Mr Fugle briefed Mr Vance and Ms Wulff on the financial state of Vey. He told them: the investor who purchased the 51 percent shareholding was currently confidential; the value of the Wellington property was unknown; there were $1.6 million in liabilities to BNZ and ALHL secured on the Wellington property; there were three resource consents with the Council but two of them were stalled and Vey owed $16,000 in fees to the Council; the building did not have a code compliance and was not insured in breach of a covenant to the bank; and the cost of remediating the Wellington property would be
$0.3-0.8 million. Mr Fugle proposed that Orana sell its 49 per cent shareholding to raise capital for remediating the Wellington property or it contribute 49 per cent of the funds towards that work.
[19] Following the meeting, Mr Fugle emailed Mr Vance on 17 December 2017 saying:
8 Mr Fugle’s evidence is that Patricia resigned as director after his appointment as director on 16 September 2016. However, the documentary evidence in the Companies Register is that Patricia was a director until 7 August 2017.
9 Turvey v Turvey HC Wellington CIV-2017-485-150, 27 October 2017, Minute of Cull J.
10 Ms Wulff reports to David Vance who is a Partner at Deloitte.
I will be updating the company shareholder register on Wednesday. In terms of the 49 allocation who [sic] name do you require to be recorded. I shall also be forwarding shortly a shareholder’s resolution for the 49 holder perusal.
[20]Mr Vance replied the next day, on 18 December 2017, saying:
The 49% shareholding is beneficially owned by the Orana Trust but is held in the Names of Ian Millard and David Vance in their capacity as Trustee of the Orana Trust.
Could you please advise who the listed owner of the 51% is and in whose interest these are held.
[21] Mr Fugle responded the following day, on 19 December 2017, saying “[t]he online share allocations has been updated. I will replace Patricia/Daryn with yourself and Ian Millard shortly”.
[22] The email attached a shareholders’ resolution and director’s resolution and Mr Fugle’s email said that all other shareholders had given written consent. The resolutions concerned a proposed borrowing of $500,000 for a two-year term at a fixed rate of 9.75 per cent per annum from an unidentified lender for the purposes of carrying out remedial work on the Wellington property. The lender was to be granted a secured charge over the Wellington property and a first right of refusal to purchase the Wellington property at 20 per cent below any public offer should Vey default on its obligations.
[23] The director’s resolution recorded the proposed transaction was likely to be considered a major transaction and would therefore require 75 per cent shareholder approval under s 129 of the Companies Act. The shareholders’ resolution was for approving the transaction. It included the names of the shareholders and provided a space for their signatures. The named shareholders were: Ms Lourie; Ms Cartwright; Ms Rowland; “Orana Trust”; and Mr Fugle “as Agent for Glynn Turvey”.
[24] Mr Vance responded on 20 December 2017. He advised that the Trustees would not be signing the shareholders’ resolution at this point. He requested detailed information about the loan. He also asked for an independent report on the proposed remedial work (covering costs, timing, tender process) and disclosure as to the relationship between the 51 per cent shareholders. He also said the clause in the
proposed lending agreement allowing the lender to obtain a 20 per cent discount after any default was not acceptable.
[25] No response to that request for information was received prior to proceedings being commenced. Unbeknownst to the Trustees until later, on 26 December 2017, Mr Fugle signed a director’s resolution saying that he had 75 per cent shareholder approval to the loan agreement. The details of the loan agreement were as per the director’s resolution provided to Mr Vance on 19 December 2017 except the discount at which the lender could purchase the property in the event of a default by Vey was reduced from 20 per cent to 10 per cent. A shareholders’ resolution, also dated 26 December 2017, giving approval to the loan was signed by Ms Lourie, Ms Cartwright, Ms Rowland and Mr Fugle. The place for Orana’s signature was left blank.
[26] The next time Mr Fugle communicated with the Trustees was on 31 December 2017. On this date he emailed Mr Vance advising he had received an offer from Ms Cartwright to purchase Orana’s shareholding for $100,000 and this offer was open until 16 January 2018. Mr Fugle added that he did not know how the figure was arrived at but that he considered it a fair price given the overall circumstances. Mr Vance responded on 15 January 2018 saying they were not yet in a position to consider any offer and that it would be helpful for Ms Cartwright to outline how she valued the shares. On 23 January 2018 Mr Fugle and Ms Wulff spoke on the phone about this and he told her that Ms Cartwright had withdrawn her offer. Mr Fugle also said he considered it was a mistake not to take the deal because he did not think that any future offers from existing shareholders would be at that level.
[27] In the meantime, the Trustees had made enquiries with Commercial Building Inspection Services Ltd (CBIS) for information on the remedial works. CBIS advised there were many aspects of the building that did not comply with the code and there were outstanding fees owing to it and to the Council. The Trustees had also received “limited financial records” for Vey from its accountants. The Trustees wrote to Mr Fugle on 5 March 2018 seeking more information. The letter requested director’s certificates; shareholders’ minutes and resolutions; the company’s interests register; and all financial statements, whether signed or in draft form. The request was said to
be in lieu of a formal notice under s 216 Companies Act but Mr Fugle was asked to advise if a notice was required. The information was sought by 14 March 2018 and was to enable the Trustees to form a view on the value of Orana’s 49 per cent shareholding. The Trustees said they might obtain an independent valuation of the Wellington property.
[28] Mr Fugle replied on 5 March 2018. He said there would be no problem providing the information but could not do so by 14 March 2018 and there would be a cost. He also said it was a waste of time and money to obtain a valuation of the Wellington property because the offer to purchase the shares was withdrawn. On 10 March 2018 Mr Fugle said he would be charging $500 per hour for providing the requested information. Ms Wulff responded on 13 March 2018 saying that this rate was unreasonable. When things did not progress any further, a notice of intention to inspect company records pursuant to s 216 of the Act was served on Mr Fugle on 10 April 2018.
[29] Ms Wulff also emailed Mr Fugle on 11 April 2018 after she checked Vey’s entry on the Companies Register and noticed that it had not filed an annual return.11 She asked Mr Fugle to rectify this as soon as possible.
[30] Mr Fugle responded to the s 216 notice by letter dated on 17 April 2018. He did not provide financial statements, explaining:
All financial statements – registered office retains no annual nor financial returns other than supplied by you. At time of my appointment no bank records, minute book, tax returns nor financial information was delivered to the registered office. For this reason, I am unwilling to sign off the company financial statements.
[31] Mr Fugle did provide the share register. This was a handwritten document. It listed “Daryn & Patricia Turvey, - Trustees Orana Trust” as holding 49 shares. The Companies Office shareholders’ details similarly recorded Daryn and Patricia Turvey as the holders of 49 shares. The Companies Office details recorded it had been last updated on 19 December 2017. When Ms Wulff and the Trustees received these
11 The absence of an annual return meant there was no up-to-date list of shareholders available on the public register.
records, they did not notice that the records did not show Mr Vance and Mr Millard as the shareholders.
[32] Mr Fugle also provided a shareholders’ resolution and two director’s certificates; the interests register; notice of his appointment as director; and the company’s certificate of incorporation. These documents included the director’s and shareholders’ resolutions dated 26 December 2017 referred to above.12
The proposed sale of the Wellington property
[33] On 21 June 2018, Mr Fugle advised the Trustees that he had received a conditional offer of $1.525 million for the purchase of the Wellington property. The Trustees were concerned about the offer given Mr Fugle had told them on 14 November 2017 that secured indebtedness to BNZ and ALHL on the Wellington property amounted to $1.6 million. They were also surprised because Mr Fugle had told them not long before, on 5 March 2018, that Vey had decided to hold on to the Wellington property. Ms Wulff sought details of the proposed sale but Mr Fugle declined to provide this, citing confidentiality and that disclosure to shareholders was not required.
[34] By letter dated 21 June 2018 Mr Vance advised Mr Fugle that the proposed sale was a major transaction and the Trustees did not agree to it in the absence of information that would enable them to assess the impact of the sale on Orana’s shareholding interest. Details of the proposed sale were sought. The letter also expressed the Trustees’ deep concern about the resolutions approving the $500,000 loan agreement despite the Trustees’ opposition to it. The Trustees said they did not know how this could have occurred without their approval as the Trustees of the 49 per cent shareholder.
12 At [25].
The alleged debt owed by Vey to Orana
[35] On 25 June 2018 the Trustees sent Mr Fugle a letter of demand for $1,334,334 owed by Vey to Orana, which was repayable on demand. This was accompanied by documentation supporting Orana’s approach to arriving at the demanded sum.13
[36] On the same day, 25 June 2018, Mr Fugle emailed Ms Wulff a draft notice of a special general meeting to be held on 13 July 2018 for the purpose of approving the proposed sale of the Wellington property. The formal notice was given on 26 June 2018. It contained a list of the parties to whom the notice was sent. This included Ian Millard and David Vance. It also included Daryn and Patricia Turvey. Ms Wulff knew that Mr Fugle had said he held one share on trust for Patricia and Glenn Turvey. She was surprised that Daryn’s name appeared on the list given he had nothing to do with the company anymore. She inquired about the reason he was included in the notice. Mr Fugle responded that he was taking a “scattergun approach to avoid challenge ie someone down the track alleging went aware” (sic).
[37] A copy of the agreement for the sale and purchase of the Wellington property was included with the notice. It identified the buyer as “R Pratt”. The agreement indicated it was a private sale. It was not subject to a Land Information Memorandum or building report condition. Settlement was to take place relatively quickly, on 16 July 2018, but this was subject to Vey shareholder approval by a special majority. If there was no approval, then there would be an extension of six months allowing for that consent to be obtained.14
[38] On 27 June 2018 Mr Fugle advised the Trustees that he would not be disclosing Vey’s financial position until the company records had been reconciled. He said he
13 Ms Wulff deposed that the sum was constructed by her and the trustees as follows: a) Vey’s draft accounts to 31 March 2015 record Vey as owing Orana $1,219,856. These were prepared by Vey’s accountants Crowe Howarth. The formal letter of demand noted that, on review, this amount should be $1,103,143. Most of this is attributable to the 2005 sale of the Wellington property to Vey; b) a further $200,000 had been advanced since then by Orana to Vey and this has been evidenced by an acknowledgement of debt; c) Ms Wulff then went through all bank records and ledger accounts available to her and took a conservative approach to constructing the debt. This was in light of the fact that some of the money going from Orana to Vey might have been for the benefit of Daryn rather than Vey. These transactions make up the rest of the demanded debt.
14 Ms Wulff deposed that there had been no marketing for the Wellington property and no valuation obtained.
was having difficulty with this given previous company management issues with record keeping. He also said that Vey “refutes money is owed to the Orana Trust”. Mr Fugle sent a further email about this on 6 July 2018, again refuting the alleged debt. He said that if Orana were to bring a claim, then Vey would need to increase its secured indebtedness to defend the action or need to call upon shareholders for those funds. He requested further documentation about how the Trustees had arrived at this figure:
On behalf of Vey Group Limited I have refuted a debt owned as set out in your attached letter dated 25 June 2018. Having said, please table copies of all documentation relied upon supporting Orana alleged debt with Vey. Without limiting please supply bank statements of Vey and Orana throughout period of the alleged loan together with evidence that Orana held the funds that is purported to have advanced together with documentation how Orana came to have that capital to enable an advancement.
[39] Mr Fugle’s 6 July 2018 email also responded to the Trustees’ complaint about the approval of the $500,000 loan agreement. He said:
I note trustees concern I entered resolution into the company register in opposition to trustee's view. It is further pointed such entry is in breach of s120 of the Companies Act 1993. With respect, pursuant to s129(2A) [the] loan behind that entry is not by definition a major transaction. Given the background history I decided it would be prudent to advise each shareholder and upon doing so received in excess of 75% shareholder number in favour.
[40] The notice of the special general meeting stated: “Postal voting is not permitted; a vote may be cast by a member in person, or a proxy may be appointed using the proxy appointment form enclosed with this resolution”. The Trustees signed the enclosed form to appoint Ms Wulff as their proxy. The form directed Ms Wulff, or failing her the Chairperson of the meeting, to vote against the resolution to approve the proposed sale of the Wellington property. The form was sent by email to Mr Fugle on 10 July 2018 and posted to Vey’s registered office by normal post.15
[41] The Trustees sent another letter on 11 July 2018 reiterating that Mr Fugle already had, or should have, the documentation supporting the debt owed by Vey to
15 The email was sent to the same address as the one used for the prior special resolution in December 2017. Clause 19.5 of the company constitution provided that the instrument appointing the proxy shall be deposited at the company’s registered office or any other place as is specified for that purpose on the form or meeting notice not less than 48 hours before the meeting. If this is not complied with, the proxy shall be treated as invalid. Neither the proxy nor the notice provided for any other time or place of delivery of the proxy.
Orana. For example, the Vey bank statements should be held by Vey as part of Mr Fugle’s duty to maintain company records and to prepare its financial accounts. The letter again explained how the debt had been calculated. The letter also reiterated the Trustees’ view that the loan was a major transaction and, as such, it required approval by 75 per cent of the voting shares (not 75 per cent of the numbers).
The special general meeting
[42] The notice of the special general meeting said it would be held at BNZ, 272 Broadway Avenue, Palmerston North on 13 July 2018 at 9 am. Ms Wulff arrived at that address at 8.40 am that day. The bank was shut but after waiting outside for 10 minutes she was able to attract the attention of a bank officer who informed her there was no meeting planned there. The officer told her to check if the meeting was at another BNZ down the road at 202 Broadway Avenue. Ms Wulff called Mr Fugle who confirmed the meeting was at the 202 address. She arrived at this address at
8.55 am in time for the meeting.
[43] The other attendees were Mr Fugle, Patricia Turvey and Christine Davidson. Proxies had been received from Ms Cartwright and Ms Rowland. Mr Fugle took issue with the delivery of the Orana proxy form referring to the Constitution which required delivery of the proxy to Vey’s registered office. Ms Wulff said the form had been emailed to him and posted to the company’s registered office on 10 July 2018. Mr Fugle said he would give the Trustees the benefit of the doubt and would not challenge the delivery of the proxy.
[44] Mr Fugle then said that the proxy was invalid because neither Mr Vance nor Mr Millard were registered on the company’s share register. Ms Wulff pointed out it was the director’s duty to maintain the share register and he responded that he had not been shown the court documents appointing the Trustees and therefore could not verify their appointment. Ms Wulff showed Mr Fugle a copy of the Court minute appointing the Trustees and said that Mr Fugle had been dealing with the Trustees as if they were shareholders. She told him it was unacceptable that he should raise the issue six months on. Mr Fugle determined that the proxy was invalid and the discussion ceased
until Ms Wulff left the room. The proposed sale of the Wellington property was approved by the other shareholders.
[45] Following the meeting Ms Wulff met Mr Fugle for a brief discussion. He approached her by saying “Sam, it’s nothing personal. It’s business”. Ms Wulff told him that she did not appreciate the way he had acted and considered it unprofessional. They discussed the following matters:
(a)Non-registration of the Trustees as shareholders: Ms Wulff said that Mr Fugle had been dealing with them for months as though the Trustees were shareholders. He had put forward offers to purchase their shares and requested their approval for a shareholders’ resolution and then subsequently ignored their disapproval. Mr Fugle said the loan transaction had not been given effect to.
(b)The secured debt to ALHL: Ms Wulff informed Mr Fugle that the Trustees knew he controlled ALHL despite not being listed as an officer. Mr Fugle did not deny this and said that there was nothing wrong with that transaction. Ms Wulff said that the Trustees had been able to ascertain from Daryn Turvey that the ALHL loan had been used to pay down the BNZ loan (from $1.2 million to around $90,000). She said it was concerning why a borrower would pay down a debt to a first- tier bank lender using mortgaged funds obtained from a non-bank lender at a higher interest rate. Mr Fugle said that BNZ had been getting anxious about the loan, although Vey had not received a demand from the BNZ, and that ALHL’s interest rate was not dissimilar to BNZ’s at the time.
(c)Demand for repayment of alleged debt owed by Vey to Orana: Mr Fugle acknowledged that he had read the letter but that he did not want to delve into the past because he was not involved at the time the family dispute occurred. Ms Wulff pointed out that the Wellington property had belonged to Orana until 2005 and then it was sold to Vey.
Mr Fugle emphasised that if the company were to defend an action for the debt, then it would need to raise funds with another mortgage.
(d)Ms Wulff and Mr Fugle also discussed some possible options for resolving the matters between them but this did not ultimately advance towards a solution.
[46] After this meeting, there was an email exchange between Ms Wulff and Mr Fugle. Mr Fugle said he had made an error regarding the place of the meeting but this had not disadvantaged Ms Wulff and he would not have commenced the meeting without telephoning her. He also said he did not perceive he had been instructed to alter the share register and was surprised, if the Trustees intended that they be named as shareholders, that they did not check that this had been done.
[47] A letter was then sent the same day to Mr Fugle asking for his assurance that he would not proceed with the proposed sale without giving three working days’ notice given the issues with the shareholder registration. Mr Fugle gave that assurance on 15 July 2018 pending clarification of the “poll/vote standing” issue. He also said debt recovery proceedings by Orana against Vey would raise conflict of interest issues.
[48] On 17 July 2018 the Trustees sent Mr Fugle a letter outlining the history of dealings, attaching a copy of the Court Order of their appointment and asking to be registered. Mr Fugle’s lawyers responded that day. They said the Trustees were required to provide a signed share transfer for Mr Fugle to action; Mr Fugle was entitled to assume the Trustees were aware who the current registered shareholders were (the share register having been provided to them by Mr Fugle and the Companies Office register could have been checked at any time); and it was the registered shareholders who were entitled to vote at the special general meeting. Mr Fugle also emailed Ms Wulff saying he was withdrawing his undertaking and would release the sale contract to the purchaser at 4.45 pm the following afternoon.
Proceeding commenced
[49] The next day, on 18 July 2018, the Trustees filed the present proceedings on an urgent basis. The sought an interim injunction of the proposed sale of the Wellington
property and an order that the 49 per cent shares in the name of Patricia and Daryn Turvey be vested in them as the court appointed independent trustees. They also commenced proceedings seeking relief under s 174 of the Companies Act. The relief sought included an order that Vey be put in liquidation or, alternatively, receivership.
[50] On 2 August 2018 the parties filed a consent memorandum. The purchaser of the Wellington property no longer wished to proceed with the purchase and the defendants undertook that they would not proceed with the proposed sale. An order was sought under s 59 of the Trustee Act pursuant to which the Trustees would be granted the right to transfer the 49 per cent shareholding to themselves in their capacity as trustees of Orana and Mr Fugle would immediately update the share register accordingly. The High Court made orders accordingly.16 The Court also granted the vesting orders on 7 August 2018.17 In accordance with those orders, the share transfer forms were executed on 10 August 2018 and Mr Fugle updated the share register on 14 August 2018.
[51] Further correspondence between the parties ensued. In short, Mr Fugle asked the Trustees to advise if they were able to secure funds for Vey from a source other than the second mortgagee for the remediation work, and confirm that Orana would be contributing to the cost of the remediation work or would offer its shareholding for sale. He also refuted that Vey owed Orana the sum claimed and Vey made demand of Orana for the $405,000 advanced to Orana when it purchased the Wellington property from Vey in 2001.
[52] For their part, the Trustees continued to assert that Vey owed Orana a substantial sum, and to seek information from Vey including details of the amounts owed to the secured creditors and annual profit and loss statements for Vey for 2017 and 2018. The Trustees also proposed that the Wellington property be sold in its current state and Vey be liquidated. An offer was made by Ms Cartwright, through Mr Fugle, on 4 December 2018 to purchase the 49 per cent shareholding for $150,000 based on her view that the Wellington property had a present market value of $1.5 to
16 Vance v Vey Group Ltd HC Palmerston North CIV-2018-485-505, 2 August 2018, Minute of Grice J and Vance v Vey Group Ltd [2018] NZHC 1994.
17 Vance v Vey Group Ltd [2018] NZHC 1994. Vey and Mr Fugle as the defendants consented to the application: at [21].
$1.8 million. The Trustees considered no agreement could be reached until the issue of the Orana/Vey current debt was resolved.
Current value of the Wellington property
[53] The parties disagree about the value of the Wellington property. The rating valuation of the Wellington property as at 1 September 2015 was $3.05 million. Ms Wulff provided evidence from a residential property valuation website which estimates the value as being within $4.1 to $4.8 million. The Trustees have also obtained an independent valuation which considers the market valuation of the Wellington property to be around $3.4 million not taking into account any remediation costs to make it code compliant.
[54] During the meeting between the parties on 14 November 2017, Mr Fugle indicated to Mr Vance and Ms Wulff that the cost of the remedial work would be between $0.2-0.8 million but did not provide any formal costings for the work.18 That higher figure was also mentioned by Mr Fugle to the Trustees’ valuer in an email on 24 July 2018, after the proceedings had been commenced. Ms Wulff said that enquiries made with external building consultants who had been engaged by Vey in the past also suggested Mr Fugle’s remediation cost estimate was roughly correct. Taking the higher end of the estimate into account, the Trustees say this means that the value of the Wellington property without remediation is around $2.6 million ($3.4 million post remediation value minus $0.8 million remediation costs).
[55] Mr Fugle disagrees with the Trustees’ valuation. He considers that Vey does not possess the resources to remedy the issues with the Wellington property and that, in any case, the plaintiffs’ valuation method of incorporating a remediation allowance is too simplistic. He says he has obtained advice from professionals and investors that any buyer would be seeking a return on investment of between seven and 10 per cent. Based on this and the Wellington property’s net annual income being around $200,000, the value of the Wellington property is likely to be between $1.8 and $2.6 million
18 Mr Fugle’s first affidavit said $0.2 million as the lower end estimate. $0.8 million consistently seems to be the upper end of the remediation costs estimation. However, Mr Fugle also says that this is notwithstanding the need for any earthquake strengthening work which could cause the costs to balloon.
without remedial works. Given the lack of funds to remediate in the medium-run, and the consequent un-insurability, that estimated value is depressed even further. The market for the Wellington property is of cash-only buyers who might be able to raise finance sufficient to remediate. In light of this, Mr Fugle considered the $1.525 offer from “R Pratt” a fair one.
First issue: the Trustees’ standing
[56] The defendants submit the Trustees do not have standing to seek relief under s 174 of the Companies Act. The section provides that “[a] shareholder or former shareholder of a company, or any other entitled person … may apply to the court for an order under this section”. The defendants contend the relevant date for determining standing is when the application for relief is filed. In this case this was on 18 July 2018. At that time, the Trustees were not shareholders, nor were they former shareholders or entitled persons as defined by the Act.19
[57] I do not accept this submission. Regardless of whether they had standing when they filed their application, they have standing now as registered shareholders. In that capacity they now seek (that is, apply for) the Court’s relief under s 174. If the defendants wished to raise a standing issue, the time to do so would have been when the proceeding was filed. However, any such objection would have been pointless because the proceeding was accompanied by an application for orders to enable their registration as shareholders. In the event, those orders were made by consent. Following their implementation, the Trustees had standing and continue to have it. In these circumstances the defendants’ objection to the Trustees’ standing is without merit.
Second issue: oppressive, unfairly discriminatory or unfairly prejudicial conduct
The law
[58]Section 174 of the Companies Act states:
174 Prejudiced shareholders
19 The relevant definitions are provided in the Companies Act 1993, ss 2, 96 and 163.
(1)A shareholder or, 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.
...
[59]An applicant must therefore:
(a)establish that the affairs of the company have been, are being or are likely to be conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to him or her as a shareholder or in any other capacity; and
(b)persuade the Court that it would just and equitable to intervene in the company’s affairs by granting relief.
[60]As explained in Thomas v H W Thomas Ltd:20
20 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 693 per Richardson J.
… The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s 209 [the former s 174]. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.
[61] The Court further explained that achieving fairness in a given case cannot be done in a vacuum as it requires all interests involved to be balanced against each other, including the policies underlying the Act. For the Court to intervene there must be a visible departure from the standards of fair dealing, viewed in the light of the history and structure of the company and the reasonable expectations of its shareholders.21
[62] This approach was reaffirmed in Latimer Holdings Ltd v SEA Holdings NZ Ltd in the context of an oppression claim against a listed company.22 The Court of Appeal confirmed s 174 applies to listed companies. In doing so, it discussed developments in the United Kingdom that had favoured a stricter test for when relief would be available.23 The Court of Appeal concluded:24
[112] In summary, we are not persuaded that the judicial approach to this important provision in New Zealand company law should be judicially recast in a more restrictive mode at this time. Twenty years after Thomas, in our view the general approach laid down by this Court is still appropriate in New Zealand.
[113] The operative words of the provision express a general principle which is directed to “an unjust detriment to the interests of a member of the company” (Thomas at p 693). That test is an objective one. The provision may be prayed in aid even if the conduct accords with the company’s constitution, because even then inappropriate prejudice may still arise. Relief can be given even if the conduct complained of does not involve a want of good faith or a lack of probity. The fact that all members are treated uniformly as members will not necessarily make conduct fair. The reasonable expectations of members are distinctly relevant – though this factor is not in and of itself necessarily determinative – and those expectations are not necessarily restricted to purely “internal”, or “formal” expectations. There are no fixed categories of cases to which s 174 apply. The provision is one of general application. ...
21 At 695.
22 Latimer Holdings Ltd v SEA Holdings Ltd [2005] 2 NZLR 328 (CA).
23 Namely, the developments in O’Neill v Phillips [1999] 1 WLR 1092 (HL).
24 Latimer Holdings Ltd v SEA Holdings Ltd, above n 22.
The defendants’ conduct
[63] The Trustees allege a series of matters which have given rise to oppression, unfair discrimination or unfair prejudice. The principal allegations are:
(a)Mr Fugle has not ensured proper accounting records for Vey have been kept and has not been forthcoming with information sought by the Trustees. Although the dispute between Patricia and Daryn has caused difficulties, Mr Fugle has been a director for three years and it should be possible to, at the least, prepare interim financial accounts for the 2017 and 2018 years. The result is that the Trustees do not have a proper understanding of Vey’s financial position.
(b)Mr Fugle has failed to engage in resolving the amount of indebtedness to Orana. The last set of Vey accounts are draft accounts to 31 March 2015. These accounts record a debt to Orana of $1,219,856. The Trustees’ demand for payment of the debt was supported by documentary evidence, and was revised as new information came to light.25 Mr Fugle’s refusal to engage unfairly prejudices the Trustees’ consideration of any offer to purchase the Orana shareholding, because the indebtedness to Orana, currently calculated by the Trustees to be
$1,040,810 exclusive of interest, has a major impact on the value of the shares.
(c)Mr Fugle misled the Trustees concerning their registration as shareholders. He was present in Court when they were appointed trustees, he told them he would be updating the share register, and he dealt with them as though they were shareholders (presenting them with offers to purchase their shareholding; providing the shareholders’ resolution for approving the proposed $500,000 loan; responding to the Trustees’ notice to inspect the company’s records; and providing the
25 Ms Wulff carried out further reviews of the alleged debt after this proceeding was commenced, in light of new information including some that became available to her during discovery. Due to this, the trustees revised the quantum to $1,078,483 on 1 April 2019, and subsequently to
$1,040,810.
Trustees with formal notice of the 13 July 2018 special shareholders’ meeting). Mr Fugle only took the point at the 13 July 2018 meeting when the Trustees were intending to vote against the sale proposal and it was too late for the Trustees to rectify the situation to enable them to vote.
(d)Mr Fugle attempted to sell the Wellington property, Vey’s major asset, at undervalue without proper process. The proposed sale was a private one, with no marketing, no valuation and on unusual terms.26 The Trustees consider the sale was not at arms-length and at under-value. A special resolution for the proposed sale was passed only following Mr Fugle taking the point that the Trustees were not entitled to vote on it.
(e)Mr Fugle signed a director’s resolution to enter into borrowing of
$500,000, a major transaction, without having 75 per cent shareholder approval.
(f)Mr Fugle paid $86,666 to Patricia on or about 6 September 2017 without obtaining an ordinary shareholders’ resolution at a time when Vey’s indebtedness was said to be $1.6 million and Mr Fugle sought to sell Vey’s major asset for $1,525,000.
(g)Lastly, Mr Fugle appears to be dealing with the company on his own account. The mortgage to ALHL, of which the sole director is Mr Fugle’s son and of which Mr Fugle says he is an employee, was registered shortly after Mr Fugle became a director of Vey. Mr Fugle has been reluctant to provide information concerning the amount owed to BNZ and ALHL and the ALHL loan appears to be less advantageous than the BNZ loan that it has partly replaced. Further, net rental income from the Wellington property has been paid into a pre-existing account of Mr Fugle’s, advances have been made to parties associated with
26 Settlement was to occur on 16 July 2018, but this could be extended by six months to obtain a special resolution approving the sale.
Mr Fugle and Mr Fugle has paid himself $50,000 without proper records being kept.
[64]The defendants’ response to these matters in summary is as follows:
(a)Mr Fugle has been in a difficult position regarding the financial statements. He did not sign the 2015 accounts based on advice and, because he did have reliable accounts when he assumed control, he is also in a difficult position with financial statements for the subsequent years. A further difficulty with preparing financial statements is the alleged Orana debt that he disputes. The Trustees now have the 2015 draft accounts, the bank statements and the BNZ and ALHL lending documentation and this provides everything of relevance. Vey is not required to prepare financial statements (it has fewer than 10 shareholders and there has been no shareholder notice to require them).27
(b)The dispute over the alleged Orana debt is not an appropriate basis for relief under s 174. The quantum of the alleged debt has changed several times. The claim relies on decisions made by Daryn Turvey who shifted money between Orana and Vey in a highly irregular way. Mr Fugle considers the debt may not be enforceable. It is not unreasonable that, in the three weeks since the demand was made and the s 174 proceeding was issued, the dispute over the debt had not been resolved.
(c)The registration of the Trustees as shareholders has been resolved. Prior to this, Mr Fugle was entitled to assume the Trustees knew they had not been registered and to take the necessary actions for this to occur. The proposed sale has been cancelled. The December 2017 borrowing proposal was not pursued. As these matters are now all moot, relief under s 174 is not warranted.
27 Companies Act, s 200(1)(e).
(d)The payment to Patricia Turvey settled a litigation risk, Vey had sufficient cash flow to make the payment and it was made in good faith. Further, as Patricia is a beneficiary of Orana, it is doubtful whether Orana has suffered any prejudice as a result of the payment.
(e)The revision of Vey’s lending arrangements was a management decision. It was necessary to revise the arrangements because, contrary to the conditions of the BNZ lending, the building was not insured, and was uninsurable, and BNZ had learnt of this. The lending was on commercial terms and a not uncompetitive interest rate. The lending enabled a higher rate of reduction of secured indebtedness than would otherwise have been the case.
(f)It was necessary for Vey to use the bank account it did because BNZ had suspended Vey’s banking account due to Daryn Turvey’s ongoing interference with it. The director’s fees, amounting to $25,000 per year gross) was reasonable for the considerable work Mr Fugle has been required to undertake since becoming director.
My assessment
[65] The Trustees are independent trustees who were appointed following a relationship breakdown between the previous trustees. The trust they were appointed to manage holds a 49 per cent shareholding in Vey. It was entirely appropriate for them to seek to become informed of Vey’s financial position. They were entitled to reasonably expect cooperation with that from Vey’s relatively new controlling sole director, and to participate in major decisions about the company’s affairs for the benefit of Orana. The problematic history of financial intermingling between Vey and Orana made this all the more important.
[66] Viewing the circumstances as a whole, I consider that Mr Fugle conducted the affairs of Vey in a manner which frustrated the Trustees’ reasonable expectations as shareholders. Rather than cooperating with their reasonable expectations for information and to participate in major decisions, Mr Fugle provided limited information and largely acted in a manner that precluded their effective participation
in Vey’s affairs. In doing so, I consider that he has engaged in conduct that is oppressive, unfairly discriminatory and unfairly prejudicial to the Trustees.
[67] Without going through all of the detail on each of the matters of concern to the Trustees, there are some obvious matters of prejudicial conduct that support their claim for relief.
[68] First, Mr Fugle’s conduct concerning the registration of the Trustees as shareholders was unnecessarily misleading. Specifically:
(a)On Sunday 17 December 2017 Mr Fugle told the Trustees that he would be updating the shareholder register on “Wednesday” (that is, 20 December) and asked whose name the Trustees “require to be recorded”. The clear inference from this communication was that he would be recording as shareholders whomever the Trustees required him to record.
(b)On Monday 18 December 2017 the Trustees advised that the shares were beneficially owned by Orana but were held in their names in their capacity as trustees. The clear inference from this response is that the Trustees understood Mr Fugle would be attending to recording them as trustees and, given his 17 December 2017 communication, this would occur on 20 December 2017.
(c)On Tuesday 19 December 2017 Mr Fugle said he had updated the online share allocations and “I will replace Patricia/Daryn with yourself and Ian Millard shortly”. The clear inference was that Mr Fugle would be updating the share register to replace Patricia and Daryn with the Trustees and he would be doing so shortly (potentially the next day given his earlier advice it was to be done on Wednesday).
(d)Mr Fugle did not, at this time or any time prior to the 18 July 2018 special general meeting, indicate that he needed any further
information, authority or documentation from the Trustees to attend to updating the share register.
(e)Instead, his conduct up until 18 July 2018 indicated he accepted the Trustees held the shares and were entitled to exercise shareholders’ rights. He made offers to purchase their shareholding. He did not respond to the Trustees’ advice that they would be voting against the proposed resolution to approve the finance agreement. He partially complied with the Trustees’ notice to inspect the company records. He provided the Trustees with the notice of shareholders’ meeting and, when Ms Wulff queried why Daryn Turvey had been sent the notice, he did not say it was because the Trustees were not registered as shareholders.
(f)This conduct explains why the Trustees failed to notice the handwritten share register for Vey had not been altered when they received it on 17 April 2018. This conduct also meant it was disingenuous of Mr Fugle to subsequently claim that he was entitled to expect the Trustees to have known they were not registered shareholders and to insist on them being registered before they could exercise shareholder rights.
[69] Secondly, this misleading conduct enabled Mr Fugle to exclude the Trustees from participating in the decision on whether to approve the proposed sale of the Wellington property at the special general meeting on 18 July 2018. The Trustees were not told Mr Fugle would take the point that they were not registered until the meeting at which the vote was to occur. The unfair prejudice from this conduct is not moot simply because the sale did not proceed and the Trustees are now registered. Relief under s 174 of the Act is available for past conduct that is unfairly prejudicial. That conduct required the Trustees to issue urgent court proceedings to injunct the sale and understandably has contributed to a serious loss of trust and confidence by the Trustees in Mr Fugle, Vey’s sole director.
[70] Thirdly, the conduct in excluding the Trustees from voting on the proposed sale was not the only way in which Mr Fugle sought to exclude them from decisions in which they reasonably expected to be involved. The director’s resolution approving the new financing arrangements in December 2017 is the other significant example of this. Although the terms of the financing arrangement that the trustees had rejected as unacceptable had been amended, Mr Fugle did not inform the Trustees of the amendment nor seek approval of the arrangement before signing off the director’s resolution. Instead, he took the view that he had sufficient approval to the amended arrangement from the 51 per cent shareholders. This view was inconsistent with the original notice that had been sent to the shareholders, which had sought approval by a special resolution. He did not tell the Trustees he had taken this view. The Trustees learned of it more than three months later and only because of their formal request to inspect the company records. As with the proposed sale of the Wellington property, this conduct is not moot simply because the financing proposal did not proceed. It has contributed to the Trustees’ serious loss of trust and confidence that their rights and reasonable expectations as shareholders will be respected by Mr Fugle.
[71] Fourthly, Mr Fugle has not been transparent with the Trustees on other matters. For example: he did not respond to the Trustees’ enquiry as to the relationships between the shareholders who together hold 51 per cent of the shares; it was not until discovery that the Trustees received details of the lending arrangement; an offer was made to purchase the Orana shareholding but it was open for a short time and the Trustees were not given any details about the offer other than that Mr Fugle perceived it to be fair and the Trustees were unwise not to accept it; he did not provide details of the lender for the proposed loan of $500,000; and he did not provide details of the proposed purchaser of the Wellington property.
[72] Fifthly, the intertwined financial affairs of Orana and Vey while Daryn was involved are problematic. The Trustees have determined, based on their investigations, that Vey owes a substantial sum to Orana. The debt and Mr Fugle’s concerns about the accuracy of the financial statements when Daryn was involved has meant that Mr Fugle has not signed the 2015 draft statements or prepared financial statements of the subsequent years. Mr Fugle may have legitimate concerns about the validity of this debt because of the intertwined financial affairs when Daryn was
involved.28 However, Mr Fugle has refused to engage with the Trustees to see if the intertwined affairs can be unravelled so that accurate financial statements can be prepared and the alleged Orana debt resolved by agreement. It is true the Trustees could sue Vey for the debt but proceedings would involve costs for Vey (as well as Orana), and such costs are not necessarily in the interests of Vey (and ultimately its shareholders) if the alleged debt (or some of it) is legitimate. The uncertainty over the debt has meant that Orana has not been able to assess the value of its shareholding in Vey nor whether the offers made to purchase them are reasonable, even though it may be in all the shareholders’ interest (given the breakdown in the relationship of Patricia and Daryn) if Orana sells its Vey shareholding.
Third issue: relief
The law
[73] If oppression, unfair discrimination or unfair prejudice is made out, relief is granted if it is “just and equitable to do so”. A broad discretion is conferred on the Court as to the form of the relief to be granted. The Court of Appeal in Sturgess v Dunphy confirmed that:29
[148] Wrong and remedy are closely linked. As Richardson J put it in Thomas, it is the unfairly detrimental effect of the conduct on the complaining member that brings the remedy into play. The remedy responds to that detriment, and the court acts for remedial, not punitive, purposes. …
[74] The Court needs to be wary of intervening in the management of the company to any greater extent than strictly necessary to provide the appropriate remedy for the problems in the case. It should also avail itself of its broad discretion to select the appropriate remedy and not hesitate in being creative and flexible in fashioning a remedy to fit the case.30
28 For example, is there any connection between the loan of $405,000 on which Vey sold the Wellington property to Orana in 2001 and the loan of $620,000 and cash payment of $250,000 when Orana sold the property back to Vey in 2005 and why was a component of the purchase price the assumption of a debt?
29 Sturgess v Dunphy [2014] NZCA 266.
30 Giorga Shapira “Prejudiced Shareholders” in Andrew Beck (ed) Morison’s Company Law (online looseleaf ed, LexisNexis NZ) at [37.9].
[75] A share buy-out is the most common form of relief under s 174(2). This will be an appropriate remedy where there is an ongoing dispute between the parties and a buy-out will allow the plaintiff to exit at a fair price. Sometimes, the circumstances of the case will mean that a buy-out will not achieve a just and equitable outcome. In such circumstances liquidation may be the answer.31 However, liquidation is a drastic way to deal with oppressive conduct. It is not lightly ordered where the company is a going concern and the majority shareholders oppose it.32
[76] Provisions in the company’s constitution providing procedures for shareholders desiring to exit the company are relevant when considering what may be a just and equitable form of relief under s 174. However, the plaintiff is not necessarily required to utilise such procedures, and nor is the Court when fashioning the form of relief. This is especially so where the circumstances of the case are such that the company’s constitutional machinery is frustrated in terms of allowing the plaintiff shareholder to exit at a fair price.33
Submissions
[77] The Trustees submit a buy-out order would not be just and equitable because, due to Mr Fugle’s conduct, they cannot ascertain a fair and reasonable price range for their shares and they have lost all trust and confidence in his management of Vey. The Trustees submit the most appropriate relief in the circumstances of the case is an order putting the company into liquidation.34 A liquidator would be able to carry out a thorough and independent investigation of the company’s financial affairs and this would remedy the wrongs arising in this case.
[78] The defendants submit that liquidation is not the appropriate remedy because the majority shareholders are strongly opposed to it and would willingly participate in a buy-out process of the Orana shares. The other shareholders have already made repeated offers which the Trustees have refused to consider. The defendants regard the Trustees’ argument about them having insufficient information to quantify the debt
31 See, for example, Sturgess v Dunphy, above n 29, at [172].
32 Andrew Beck and Andrew Borrowdale (ed) New Zealand Company Law and Practice (online looseleaf ed, CCH New Zealand Ltd) at [50-585].
33 Morison’s Company Law, above n 30, at [37.10.03].
34 Companies Act 1993, s 174(2)(g).
as demonstrating that this case is more about debt recovery than it is about a prejudiced shareholder. The defendants point out that cl 15 of the company’s constitution provides the shareholders with a process for transferring their shares and this should be invoked by the Trustees.
My assessment
[79] I consider that it is just and equitable that relief be granted to the Trustees in this case. There has been oppressive, unfairly discriminatory and unfair prejudicial conduct against them by the defendants. It has led to a loss of confidence by the Trustees in Mr Fugle which is probably irreparable. The real question, as identified by sides, is what just and equitable relief would look like.
[80] A simple buy-out process is not appropriate in my view. The alleged Orana debt is an important factor in determining Vey’s financial position and the value of the Orana shares. Any process for sale of the Orana shares therefore needs to provide a mechanism by which the disputed debt can be resolved. Ideally, for all the shareholders, this mechanism will not be through court proceedings.
[81] On the other hand, liquidation is not necessarily the best course for all the shareholders. Liquidators are likely to sell the Wellington property on an “as is” basis. This may not provide the best return on the investment. Remediation and selling the property or continuing to hold the property may be better. The Trustees seek this remedy because they consider a liquidator will be able to investigate the financial affairs and therefore the validity and quantum of the Orana debt. That may be so, but it also may be that the parties are left with a disputed debt and the Trustees will need to pursue its recovery through the Court.35
[82] In my view just and equitable relief needs to allow an opportunity for the Orana debt to be determined and for the value of the Orana shareholding to be fairly assessed so that the majority shareholders have an opportunity to purchase the shareholding, if they wish to do so, on a fair basis. This opportunity must be within a relatively short
35 A liquidator has the power to reject or refuse to make a decision on an alleged debt and leave it up to the creditor to review that decision in court under s 284(1)(b) of the Companies Act.
prescribed timeframe because the Wellington property does not have a certificate of code compliance, requires extensive remediation in order to become code compliant, is uninsured, and this has been the position for some time.
[83] The procedure provided under Vey’s Constitution for a shareholder wishing to sell their shares involves:
(a)a notice is given by the shareholder to the director of a desire to sell shares (this notice is irrevocable);
(b)the shareholder and the director reach agreement on the price for the shares;
(c)failing agreement within 28 days, on the application of either party a fair price is determined by a person to be nominated by the chairperson of the Auckland District Law Society who will be acting as an expert.
(d)when the price has been agreed or determined by the expert, the director gives notice to the other shareholders inviting them to state in writing within 21 days if they wish to purchase the shares;
(e)if the other shareholders do not purchase the shares within 60 days of receiving the director’s notice, the shareholder wishing to sell the shares can sell them to persons who are not shareholders within a further period of 30 days providing they are not sold at a price less than at which they had been offered to the other shareholders.
[84] The problematic part of this process is there is no prospect of the Trustees and Mr Fugle agreeing a fair price, and an expert would be hampered in determining a fair price, while the quantum of the Orana debt is unresolved. Therefore, the first part of any relief must involve the preparation of financial statements from 2015 to the present by an independent accountant. The independent accountant will need to form a view on the Orana debt as part of that. As part of this process the independent accountant would also give his or her opinion on a fair price for the Orana shares. The
independent accountant is to be appointed by the chairperson of the Auckland District Law Society. The independent accountant is to have access to all Vey’s records and Mr Fugle is to cooperate with this process.
[85] Once that process is complete the parties will be in a position to follow the Constitution process, modified because a fair price will have already been determined, for the sale and purchase of the Orana shares if they wish to do so. Because of the need for a decision to be made on remediating the Wellington property or selling it on an “as is” basis sooner rather than later, I consider the time periods under the Constitution should be reduced. Once the financial statements have been prepared and the independent accountant has given his or her opinion on a fair price, the Trustees must give notice of their desire to sell the shares (if they wish to take this course) within 14 days, the other shareholders will have 14 days to advise if they wish to purchase the shares at that price and, if they do, they will have a further 14 days to purchase them. Failing an agreement being reached on this basis, the Trustees will be free to sell the shares to any other person within a further period of 28 days provided they do not sell at less than the price set by the independent accountant.
[86] 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.
Result
[87] The application for relief under s 174 of the Companies Act is granted. I make orders for relief in the terms set out in [84] to [86] above. This relief is without prejudice to the parties reaching some other resolution at any time. My preliminary view is that the Trustees are entitled to a costs order on a 2B basis. If this indication is not accepted, the parties have leave to file brief memoranda on costs within 14 days of the date of this judgment.
Mallon J
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