Vey Group Ltd v Vance
[2020] NZCA 232
•12 June 2020 at 10 am
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| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA368/2019 [2020] NZCA 232 |
| BETWEEN | VEY GROUP LIMITED |
| AND | DAVID VANCE AND IAN MILLARD AS TRUSTEES OF THE ORANA TRUST |
| Hearing: | 11 May 2020 (further submissions 12 and 14 May 2020) |
Court: | Kós P, Venning and S France JJ |
Counsel: | J K Mahuta-Coyle for Appellants |
Judgment: | 12 June 2020 at 10 am |
JUDGMENT OF THE COURT
A The appeal is dismissed.
BOrders appointing receivers to the first appellant are made at [71].
CThe second appellant is to pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
The Orana Trust owned an apartment building in Webb Street, Wellington. It did so via a company called Vey Group Ltd, the first appellant. The trustees, Patricia and Daryn Turvey, mother and son, fell into dispute. The son brought proceedings against Orana and obtained a consent judgment in June 2016. In September 2016 the second appellant, Leslie Fugle, was appointed a director of Vey. He was appointed by the then-sole director, Mrs Turvey, under a power in the company constitution. Mr Fugle and Mrs Turvey are cousins. He says, “I took on Vey in order to help Pat”.
Two weeks later an unusual expedient was taken to meet the judgment. A sheriff’s auction sold 51 per cent of Vey’s shares to Mr Fugle’s son. These 51 shares were then distributed to other persons evidently associated with Mr Fugle. He himself holds, legally at least, just one per cent, said to be on trust for Mrs Turvey. In August 2017 Mrs Turvey resigned as a director, leaving Mr Fugle sole director of Vey.
Differences between the Turveys continuing, in October 2017 Cull J appointed the respondents, David Vance, chartered accountant and Ian Millard QC trustees of Orana in their place.[1] The beneficiaries of the trust remain the Turveys and their various descendants.
[1]Turvey v Turvey HC Wellington CIV-2017-485-150, 27 October 2017.
Dealings between the respondent trustees and Mr Fugle have been deeply unsatisfactory. Exactly what Mr Fugle did will be discussed below when we address Issue Two. It will suffice for present purposes to record that Mallon J found Mr Fugle had conducted himself in a misleading and disingenuous manner concerning registration of the respondents as shareholders; had thereby excluded Orana from participating in a decision to approve a proposed sale of the Webb Street property at a special general meeting; had otherwise excluded the respondents from decisions in which they reasonably could expect to have been involved; failed to be transparent with them and failed to provide information they were reasonably entitled to receive; and had failed to address Vey’s indebtedness to Orana — meaning the respondents could not assess the value of Orana’s shareholding and whether offers made to purchase it were reasonable.[2]
[2]Vance v Vey Group Ltd [2019] NZHC 1676 [High Court judgment] at [65]–[72].
In July 2018 the respondents brought an application under s 174 of the Companies Act 1993 alleging unlawful oppression on the basis that “the affairs of Vey have been and are likely to be conducted in a manner that is or is likely to be aggressive [sic], unfairly discriminatory or unfairly prejudiced to them as shareholders and principal creditors of Vey”.[3] The focus of the claim was Mr Fugle’s management of the company as sole director. The respondents also sought an injunction to restrain the proposed sale of the Webb Street property, Vey’s major asset. An undertaking was instead given not to proceed with that sale.
[3]The reference to “aggressive” presumably is a typographical error for “oppressive”.
In July 2019 Mallon J granted the respondents’ application. She ordered the appointment of an independent chartered accountant to prepare financial statements as from the 2015 year, ascertain the indebtedness of Vey to Orana, and determine a fair sale price for Orana’s shares. Orders were made enabling sale of Orana’s shares to the majority at that price.
Vey and Mr Fugle appeal.[4]
Prejudiced shareholders: s 174 of the Companies Act
[4]In the meantime, the Judge’s orders have been suspended by consent. Mr Fugle remains in control.
Section 174 of the Companies 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.
There are other definitions of importance. “Shareholder” is defined in s 96 thus:
96 Meaning of shareholder
In this Act, the term shareholder, in relation to a company, means—
(a)a person whose name is entered in the share register as the holder for the time being of 1 or more shares in the company:
(b)until the person’s name is entered in the share register, a person named as a shareholder in an application for the registration of a company at the time of registration of the company:
(c) until the person’s name is entered in the share register, a person who is entitled to have that person’s name entered in the share register under a registered amalgamation proposal as a shareholder in an amalgamated company.
And “entitled person” in s 2(1) thus:
entitled person, in relation to a company, means—
(a) a shareholder; and
(b)a person upon whom the constitution confers any of the rights and powers of a shareholder
Section 163 is also apposite:
163 Interpretation
In this Part, unless the context otherwise requires, the terms entitled person, former shareholder, and shareholder include a reference to a personal representative of an entitled person, former shareholder, or shareholder and a person to whom shares of any of those persons have passed by operation of law.
It will be seen therefore that s 174 permits a shareholder (including the broader meaning given by s 163), former shareholder or entitled person to seek relief where it is alleged that the affairs of a company have been, are being or will be conducted in a manner that was, is or will likely to be “oppressive, unfairly discriminatory, or unfairly prejudicial” to the applicant. The Court may make such orders as it thinks fit if it considers it just and equitable to do so.
“Oppression”, standing alone under previous legislation, was said to imply a “visible departure from the standards of fair dealing, and a violation of the conditions of fair play”.[5] Those words are apt in this case, but oppression was joined by unfair discrimination and unfair prejudice in a 1980 amendment. Together they expand the basis for intervention. As Richardson J observed in 1984, in Thomas v H W Thomas Ltd, the provisioning to an extent overlaps, but is directed at conduct “amounting to an unjust detriment to the interests of a member or members of the company”.[6] In Sturgess v Dunphy this Court confirmed that the statutory standard should not be read restrictively. The conduct need not be undertaken in bad faith or be otherwise unlawful. Reflecting the original premise of oppression, “unfairness” requires a visible departure from the standards of fair dealing, assessed in light of the history and structure of the company and the expectations of its members.[7] A broad view is taken in the authorities of the expression “the affairs of the company”. It may encompass anything generally concerning the company.[8] The prejudice to the shareholder or entitled person applicant may be in a capacity other than purely shareholder, such as a director or creditor of the company.[9] In short, s 174 offers a broad, flexible, remedial rather than punitive, jurisdiction.[10]
[5]Elder v Elder & Watson Ltd [1952] SC 49 at 55.
[6]Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 693; and Sturgess v Dunphy [2014] NZCA 266 at [131].
[7]Sturgess v Dunphy, above n 6, at [137]–[138].
[8]Innes Jones v Innes Jones [2018] NZHC 1889 at [11].
[9]Gamlestaden Fastigheter AB v Baltic Partners Ltd [2007] UKPC 26, [2007] 4 All ER 164 at [35]–[37].
[10]Sturgess v Dunphy, above n 6, at [148].
An issue that we will need to deal with at once is standing. Applications under s 174 may only be made by a “shareholder or former shareholder … or any other entitled person”. Whether the respondents fall within this class is the first issue we need to consider.
Issues
Three issues arise in this appeal:
(a)Standing: did the High Court err in finding that the respondents had standing to bring the application and be granted relief under s 174 of the Companies Act?
(b)Prejudicial conduct: did the High Court err in finding that the affairs of the first appellant had been conducted by the second appellant in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to the respondents?
(c)Relief: did the High Court err in exercising the discretion conferred under s 174 of the Companies Act to provide relief to the respondents in the form of a buy-out process that differed from that provided for in the first appellant’s constitution?
Issue One: Standing
The issue posed is whether the High Court erred in finding that the respondents had standing to bring the application and be granted relief under s 174 of the Companies Act.
Judgment
The Judge recorded a submission by the appellants that the respondents lacked standing to seek relief under s 174, contending that the relevant date for determining standing is the date of application for relief. That was 18 July 2018. At that stage the trustees were not “shareholders”, “former shareholders” or “entitled persons” as defined by the Act.[11]
[11]High Court judgment, above n 2, at [56].
The Judge did not accept that submission however. She said that regardless of whether they had standing when they filed their application, they had standing at the time of the hearing as registered shareholders. That sufficed.[12]
Submissions
[12]At [57].
Before us, Mr Mahuta-Coyle renewed his submission on standing. He did not, however, press it particularly.[13] That course was wise, because while intellectually interesting, the argument in this case is quite devoid of merit. The submission was that the statutory definition of “shareholder” does not encompass those whose interests were either beneficial or unregistered (the latter being relevant here). So they could not apply under s 174. The application here was made upon filing. At that stage the respondents lacked standing under s 174.
Discussion
[13]Indeed, he addressed it only after the other issues.
We reject this submission.
A shareholder duly registered may apply for relief from unfair prejudice that occurred before registration, when their holding was a beneficial one only.[14] But here the respondents were not registered shareholders when they applied. Did they have standing? We consider they did.
[14]Gavigan v Eichelbaum [2017] NZCA 412, [2018] 2 NZLR 530 at [65].
We start by observing that the statutory jurisdiction conferred on the Court by s 174 is in essence an equitable one. As Lord Hoffmann observed of the comparable English provision, in O’Neill v Phillips:[15]
In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history … that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. …
This Court has confirmed the same as true of s 209 of the Companies Act 1955,[16] and true of s 174 in the 1993 Act.[17]
[15]O’Neill v Phillips [1999] 1 WLR 1092 (HL) at 1098.
[16]Thomas v H W Thomas Ltd, above n 6, at 693–694.
[17]Sturgess v Dunphy, above n 6, at [144]. See also Alligators Fast Food Ltd v Chen [2018] NZHC 587 at [54].
The immediate question is whether the respondents are entitled to be treated as “shareholders” for the purpose of s 174. That term is primarily defined in s 96. Most relevant is the definition in s 96(a): “a person whose name is entered in the share register as the holder for the time being of 1 or more shares in the company”. But s 163’s extended definition is also relevant.
On 27 October 2017 Cull J removed the Turveys as trustees of the Orana Trust and appointed the respondents in their place. At no stage did the respondents acquire beneficial property in the shares. That remained with the beneficiaries of the trust throughout. While Cull J’s order was not a vesting order under s 59 of the Trustee Act 1956, the old trustees were now functus officio and shareholders in name only. The new trustees gained a chose in action pending legal title: an inchoate right to registration (and thereby perfection of their legal title).[18]
[18]See the discussion in Chris Kelly and Greg Kelly Garrow and Kelly Law of Trusts and Trustees (7th ed, LexisNexis, Wellington, 2013) at ch 18; N W R Thomas and J A B O’Keefe “Vesting of Company Shares” [1969] NZLJ 443; and Roger Fenton Garrow & Fenton’s Law of Personal Property in New Zealand (7th ed, LexisNexis, Wellington, 2010) vol 1 at 842.
The former trustees, and the company, were bound to comply with vesting orders made by the Court, should they be obtained. If obtained, that would have made the respondents shareholders under the extended s 163 definition set out at [10] above. Although the expression “passed by operation of law” is usually associated with transmission after death or bankruptcy, it is not limited to those events.[19] Parliament made specific reference to registration of those interests in ss 93 and 94. But in drafting ss 86 and 163, it chose more expansive phrasing. Beyond death and bankruptcy, a chose in action may pass also by operation of law under vesting orders made by the Court.[20] But here no such orders were made until Grice J made them on 7 August 2018. In normal circumstances the Vey shares would not be said to have passed to the respondents by operation of law until those vesting orders were made.
[19]See Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 176–177.
[20]Fenton, above n 18, at 901. See also Official Receiver in Bankruptcy v Schultz [1990] HCA 45, (1990) 170 CLR 306.
But the circumstances here were not normal. In Haddow Nominees Ltd v Rarawa Farm Ltd this Court dealt with a company that had been managed in a very informal and deficient way.[21] It had no register of members at all. Share transfer forms were executed by the transferors but not the transferees. The latter however behaved as if they were shareholders. Under the 1955 Act a “member” (i.e. shareholder) relevantly (and comparably) was defined as: “Every other person who agrees to become a member of a company and whose name is entered in its register of members”.[22] Registration might be thought to be a prerequisite to status as a shareholder.
[21]Haddow Nominees Ltd v Rarawa Farm Ltd [1981] 2 NZLR 16 (CA).
[22]Companies Act 1955, s 39(2).
Applying longstanding authority however, Richardson J observed that the absence of a register did not preclude recognition of a change of membership. What mattered were minutes by the outgoing director of the company recording the resolution that the transferees be registered. Richardson J continued:[23]
… Thereafter the entry of the names of the new members in the register of members would have been a ministerial act only. … It is also implicit in the conduct of [the company] by the [incoming] interests from then on that they accepted and assumed that they were members of the company. I would accordingly conclude that as from about 30 September 1972 the membership of the company for the purpose of voting on the resolution [appointing directors who then executed the debenture in issue] was as set out in that document.
[23]Haddow Nominees Ltd v Rarawa Farm Ltd, above n 21, at 28.
In this case, as in Haddow, Mr Fugle dealt with the trustees on the basis that they were shareholders, having been appointed by the Court in place of the former trustees on 27 October 2017. On 17 December 2017 Mr Fugle had told them he would be updating the shareholder register on 20 December 2017 and asked what names should be recorded. As the Judge said, the clear inference was that he would be recording as shareholders whomever the trustees required him to record.[24] On 18 December 2017 the trustees provided Mr Fugle with their names. On 19 December 2017 Mr Fugle wrote to Mr Vance saying he had updated the online share allocations and “I will replace Patricia/Daryn with yourself and Ian Millard shortly”. As the Judge observed, the clear inference from that was that he would update the share register accordingly. In the same email he sent the respondents a shareholders’ resolution for execution. Again, confirmation of status.
[24]High Court judgment, above n 2, at [68].
Mr Fugle’s advice to the new trustees that he would register them, and his subsequent dealings with them as if he had done so, was advice also that they need not now seek vesting orders. He would simply proceed to recognise the appointment and register the Trust shares in the trustees’ names. That was entirely apt. The remaining act of registration was merely procedural. Or “ministerial”, as Richardson J put it in Haddow, referring to the still-awaited execution and registration of the share transfers in that case.[25] In these circumstances the company’s unequivocal recognition of shareholder status meant the shares passed to the respondents by operation of law.
[25]Haddow Nominees Ltd v Rarawa Farm Ltd, above n 21, at 28.
For these reasons we find the respondents were shareholders for the purposes of s 174 when they made their application under that provision in July 2018. Given the conclusion we have reached, it is unnecessary for us to address the Judge’s conclusion that the word “apply” in s 174(1) should be construed to refer to the status of the applicant at the time of hearing. But we observe that that construction is perfectly consistent with the equitable approach approved by the House of Lords in O’Neill v Phillips.[26]
Issue Two: Prejudicial conduct
[26]O’Neill v Phillips, above n 15.
The issue posed is whether the High Court erred in finding that the affairs of Vey had been conducted by Mr Fugle in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to the respondents.
Judgment
We summarise at [4] above the essential conduct of Mr Fugle that the Judge held to be oppressive. However the Judge’s essential conclusions are set out in two paragraphs which we now quote:[27]
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.
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.
Submissions
[27]High Court judgment, above n 2, at [65]–[66].
Mr Mahuta-Coyle submits that Mr Fugle did not act in a misleading fashion in relation to the respondents’ shareholding. While he had indicated in his email of 19 December 2017 that changes to the minority share allocations were yet to occur and that he would change it, he had not done so by the time the relationship between the parties “completely degenerated”. The relationship simply and swiftly broke down at that point. He did not misrepresent that he had added the respondents to the share register. Information was provided to the respondents despite the fact they had not yet been formally registered as shareholders and were in conflict with the majority members of the company. The only prejudice suffered by the respondents as a consequence of this was Mr Fugle’s refusal to acknowledge their vote at the July 2018 special general meeting called to approve sale of the company’s major asset. Mr Fugle was entitled to take the position that he could not receive a vote from a non-registered shareholder. The sale transaction adopted at the special general meeting did not in fact proceed and undertakings were given that the asset would not be sold. No prejudice was therefore suffered by the respondents.
Turning to an earlier transaction, a proposal to borrow $500,000 to fund remediation work, although Mr Fugle executed a company resolution on the basis that the transaction was a major transaction requiring the vote of 75 per cent of the shareholding, the loan was not in law a major transaction. Further the loan did not in fact proceed and again no prejudice arose from Mr Fugle’s actions. The fact that his actions contributed to the respondents’ loss of trust and confidence in him was not a reason to invoke s 174, Mr Mahuta‑Coyle submits.
As to failure to provide information and “lack of transparency”, Mr Fugle had complied with formal notices for information issued under s 216. In an all-out dispute between shareholders and managers, the refusal to provide additional information was not unreasonable.
Finally, in relation to the interconnected liability between Orana and Vey (and in particular the debt owed to Orana), Mr Fugle was entitled to be sceptical of this claim, the amount of which changed from time to time and was dependent on the actions of Mr Turvey, prior to his ceasing to be a director, shifting money between Orana and Vey. Scepticism by the recipient is not a basis to conclude that there has been prejudice against the requesting party. Nor did the alleged debt make the share valuation impossible: the trustees could form their own view of the likely provable claim and infer the company’s net worth using that.
Discussion
We conclude, having examined the evidence, that it is far more likely than not that:
(a)Mr Fugle has effective control over the majority shares held in the company; and
(b)Mr Fugle’s conduct amounts to a serious and visible departure from the standards of fair dealing expected in the management of a company, and that as a result the affairs of Vey have been conducted in a manner that is oppressive, unfairly discriminatory and unfairly prejudicial to the respondents as minority shareholders.
On the first conclusion, Mr Fugle is Mrs Turvey’s cousin. His son originally purchased the shares, but did not become a registered shareholder. The other majority shareholders all appear to be associates of Mr Fugle. Initially he would not identify them at all, asserting confidentiality. Mr Fugle has not challenged the respondents’ evidence that Ms Rowland is an associate and that Ms Cartwright and Ms Davidson are relatives. These shareholders were served by the respondents with the proceedings. None sought to intervene. All this, in conjunction with the manner in which Mr Fugle has managed Vey, indicates clearly that the company is controlled by him.
We turn now to our conclusion that Mr Fugle has departed from the standards of fair dealing expected in the management of a company. We draw attention to eight points. The first three are in something of a category of their own.
First, within two months of Messrs Vance and Millard becoming independent trustees of Orana, Mr Fugle sought from them approval in writing to what was said to be a major transaction. That was the borrowing of $500,000 for two years at 9.75 per cent per annum secured by way of second mortgage (with the mortgagee having the right of first refusal on default to purchase the property at a 20 per cent discount). The name of the lender was not disclosed. Nor was it disclosed when specific requests were made. The respondents declined to approve. Despite that non-approval, on 26 December 2017 Mr Fugle executed a director’s resolution to enter into what was acknowledged in the resolution to be a major transaction on these terms:
1.The proposed transaction is likely considered a major transaction for the purpose of Section 129 of the Company Act 1993 …
2.The transaction is in the best interest of the Company.
3.As the proposed transaction is likely a major transaction the proposed transaction has been referred to the shareholder’s [sic] as required by section 129 of the Act and that shareholder approval by 75% majority having been received the Company approves and enters into the transaction and approves the Company Director to execute and perform all necessary documentation to satisfy the Lender terms.
Although the loan did not proceed, the execution of a resolution recording 75 per cent approval when 49 per cent of those recognised by the company as shareholders had opposed, is and was deceitful. Mr Fugle skirts this inconvenient reality in the various affidavits he has sworn. He states the loan transaction was a major transaction making it necessary to obtain a special resolution. He notes the respondents voted against that special resolution. He does not explain how, in light of that fact, he thought it legitimate to sign the director’s resolution as he did. Instead, Mr Fugle now advances (through Mr Mahuta-Coyle) an argument that the loan transaction was not a major transaction after all. Regardless, Mr Fugle clearly thought it was at the time and the resolution was executed as if it was, and as if it had the 75 per cent shareholding support required when 49 per cent in fact opposed and did not vote for it. It was submitted for Mr Fugle that as the transaction did not proceed, no prejudice occurred. That submission entirely overlooks the broader ramifications of an act of deceit by a sole director, the shareholders’ fiduciary, in managing the company and executing resolutions.
Secondly, associated with the preceding point is Mr Fugle’s inconsistent dealing with the respondents as to their shareholding status. We have set out already the exchange between the parties.[28] In short, on 19 December 2017 Mr Fugle had stated that he would be replacing the names of the Turveys with the names of Messrs Vance and Millard “shortly”. In the circumstances of their appointment, and given that representation, the respondents had no reason to believe that formal shareholder transfers were needed or that anything more need be done. In short, they would be registered as shareholders before Christmas 2017 (and probably on 20 December 2017). No suggestion was made prior to July 2018 that the respondents had not been registered duly in accordance with his representation. Rather, Mr Fugle dealt with the respondents as if they were in all respects shareholders, including in soliciting their approval of the borrowing transaction just referred to.
[28]Above at [27].
A special general meeting of shareholders was then called for 13 July 2018. The agenda was to consider a resolution to sell the Webb Street property, the company’s major asset. The Orana shareholder representative was given a notice with the wrong address but managed to get to the meeting notwithstanding and in time. At that juncture, despite his prior representations and the notice having been sent to the respondents as shareholders, Mr Fugle refused to accept a proxy signed by them — on the basis they had not been registered as shareholders. And, even more remarkably, said he was unable even to verify their appointment as trustees — when it is patent that he was aware of Cull J’s orders (and Ms Roff says he was present in Court at the time). The request in December 2017 that the Orana trustees execute the special resolution for the loan transaction represented Mr Fugle’s acceptance that they were shareholders for the purpose of voting. Yet in July 2018 he chose to change course completely.
If one single item on the evidence was needed to epitomise Mr Fugle’s departure from the standards of fair dealing expected in the management of a company, it is the conduct just related.
Thirdly, and related to the preceding point, there are Mr Fugle’s actions in attempting to engineer the sale of the major asset of the company. The July 2018 special general meeting was to approve the sale of the building for $1,525,000. That was less than the amount of the secured indebtedness of the property that Mr Fugle had advised in November 2017. There had been no marketing, and no valuation obtained. The sale contract failed to refer to the fact that the property was tenanted, and unusually was not subject to a LIM or building report. The purchaser was said to be “R Pratt and/or nominee”. Mr Fugle says he is an independent investor unrelated to him.
The proposed sale price was substantially below the rating valuation of the property which at 1 September 2015 was $3,050,000. A more up-to-date valuation of the property obtained by the respondent trustees in July 2018 gave the property a market valuation of $3,400,000, assuming remediation work was completed. Mr Fugle had given an estimate for the cost of remediation of $200,000 to $800,000 which even at its highest figure would have given the property a net value of $2,600,000. Mr Fugle says this unusual course of sale would save a $100,000 real estate commission. Perhaps so, but the evidence suggests the mooted sale was substantially under value and a highly improvident act for a director to approve.
Although the special resolution was passed, the transaction did not proceed. But before that fact was announced, the respondents had obtained consent orders from the High Court preventing the sale from proceeding.
We turn now to more generalised directorial defaults.
Fourthly, Mr Fugle became a director of Vey in September 2016. He became a sole director in August 2017. Thereafter he failed to ensure that proper accounting records of the company have been kept, in breach of ss 194 and 201 of the Act. The last set of accounts prepared for Vey were draft accounts to 31 March 2015. The failure to investigate and provide proper financial statements has meant that the minority shareholders do not have a proper understanding of Vey’s financial position. While Mr Fugle may blame the dispute between the Turveys for the absence of proper company records, he appears to have done little to rectify the position and to undertake investigation himself. At the eleventh hour and attached to a memorandum received by this Court on the morning of the hearing, were draft financial statements for the year ending 31 March 2019. These showed that in the 2018 year Mr Fugle took $108,000 in directors’ fees, and in 2019 $80,000 in directors’ fees. This from a company whose entire income is less than $300,000 per annum. We make the simple point that such fees should have been sufficient to ensure the financial status of the company was ascertained and regularised. To put it another way, Mr Fugle had no business taking such fees without putting the company into good order.
Fifthly, associated with the preceding point is Mr Fugle’s failure to resolve the level of Vey’s indebtedness to Orana. The draft 2015 accounts recorded a debt to Orana of $1,219,856. After that date a further $200,000 was advanced from Orana to Vey. Mr Fugle says that a formal demand was made only in June 2018, but the issue had been raised by Mr Vance in a letter dated 20 December 2017. As Ms Roff submits, the prejudicial conduct here is Mr Fugle’s refusal to engage with the respondents and his denial that Vey owes anything at all despite the trustees’ calculation being supported by documentary evidence and the absence of counter-evidence refuting the trustees’ calculations. As Ms Roff also submitted, Mr Fugle’s refusal to discuss the indebtedness despite its major impact on the affairs of Vey is a clear breach of his duties as director to identify the assets and liabilities of the company and to keep proper accounts.
Sixthly, and also relatedly, there are Mr Fugle’s actions in intermingling the property of Vey with his own assets. What he has done is use one of his own bank accounts, an ANZ account called “Woodgate”, to receive Vey’s rental income, along with income from one of his own enterprises. He used it also to make payments for both. Mr Mahuta-Coyle submits that Mr Fugle had reason to be concerned about the standing of Vey’s previous bank account. And although the “Woodgate” account involved his own business affairs, it was only one other business, and the monies were easily separated in hindsight. We do not think that much of an answer. The previous Vey account could have been ruled off in time and thereafter continued on a new basis. Or a new account could easily have been established. On the other hand, the “Woodgate” account involved an intermingling of assets which no competent director should permit. Vey had a rental income of just under $300,000 per annum from the apartment building in Webb Street. It should also have had its own bank account.
Seventhly, as noted it is now apparent that Mr Fugle has received directors’ fees of $108,000 in 2018 and $80,000 in 2019. It may be observed that such fees were about a third of the company’s gross income at the time. Shareholder approval was not sought. The board (i.e. Mr Fugle) resolved the payments, but the absence of accounts denied both transparency and accountability to shareholders. The 2018 fee was not recorded in the interests register as required by s 161(2), despite disclosure of that register on 17 April 2018 after a s 216 request by Mr Vance.[29]
[29]It may be noted that the evidence also shows Mr Fugle authorising an $86,666 gratuity to his cousin, Mrs Turvey in September 2017. He explains this payment as a gratuity to recognise her previous uncompensated work as director. The lawfulness of this payment is disputed, because it appears to exceed the amount directors could award under cl 25 of the constitution without a shareholders’ resolution. Further, it occurred at a time when Vey’s solvency was also doubtful. The company’s indebtedness was said to be $1,6000,000 (as of 14 November 2017), and its sole asset was said by Mr Fugle to be at most $1,525,000 — the price Mr Fugle sought to sell the Webb Street property for in July 2018. We have already discussed that attempted transaction at [44]–[45].
Eighthly, we agree with the Judge’s overall assessment that Mr Fugle provided “limited information and largely acted in a manner that precluded their effective participation in Vey’s affairs”.[30] This is particularly so given that it was only from Mr Fugle’s eventual disclosure of the share register after the respondents’ s 216 request that the respondents ascertained their names had not been entered on it.
Conclusion
[30]High Court judgment, above n 2, at [66].
In these circumstances we agree with the Judge’s assessment that, cumulatively, the actions of Mr Fugle amounted to a serious and visible departure from the standards of fair dealing expected in the management of a company, and that as a result the affairs of Vey have been conducted in a manner that is oppressive, unfairly discriminatory and unfairly prejudicial to the respondents as minority shareholders.
Issue Three: Relief
The issue posed is whether the High Court erred in exercising the discretion conferred under s 174 of the Companies Act to provide relief to the respondents in the form of a buy-out process that differed from that provided for in the first appellant’s constitution.
Judgment
The Judge noted that the power to grant relief depended upon it being “just and equitable to do so”.[31] The discretion is broad, and this Court noted in Sturgess v Dunphy:[32]
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. …
(Footnote omitted.)
[31]At [73].
[32]Sturgess v Dunphy, above n 6, at [148].
In the respondents’ claim, relief in the form of liquidation or receivership was sought. The respondents opposed the making of a buy-out order because they said that due to Mr Fugle’s conduct they could not ascertain a fair and reasonable price for their shares and they had lost all trust and confidence in this management of the company. They therefore sought liquidation.
The Judge considered it just and equitable that relief be granted. As she put it, there had been “oppressive, unfairly discriminatory and unfair prejudicial conduct against [the respondents] by [the appellants]”.[33] The loss of confidence by the respondents in Mr Fugle was probably “irreparable”.[34] The Judge was not persuaded that a liquidation was in the best interests of all the shareholders. Liquidators would be likely to sell the Wellington property on an “as is” basis, which may not provide the best return on investment. Remediation and selling the property, or continuing to hold the property, were likely to be better courses.[35] What was needed was 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 out the minority shareholders if they wish to do so on a fair basis. The Judge noted that this had to be dealt with in a short timeframe because the Webb Street property did not have a certificate of code compliance, required extensive remediation to be code compliant, and was uninsured.[36]
[33]High Court judgment, above n 2, at [79].
[34]At [79].
[35]At [81].
[36]At [82].
The Judge then reasoned relief in this way:[37]
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.
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.
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.
Submissions
[37]At [84]–[86].
Mr Mahauta-Coyle submitted that the constitution’s buy-out procedure was capable of being followed, and the parties should have been left to follow that course which had been open to them from the outset (and without litigation). Vey had done nothing improper, unfair or prejudicial in relation to the respondents’ debt claim on behalf of Orana. The order made by the Judge in his submission gave the respondents a preferential position as creditors. The fact there was an unresolved claim in debt did not frustrate the company’s constitution or the provisions regarding buy-out. There was simply an ordinary commercial risk and not something that justified departing from the company constitution.
For the respondents, Ms Roff essentially sought to sustain the decision on relief made by Mallon J. She submitted it was open to the Court, once unfair prejudice had been made out, to grant relief and fashion a remedy fit for the particular purpose and detriment suffered in this case.
Discussion
The defaults by Mr Fugle as director are profound. On considering the matter afresh, as this Court is bound to do, we are not satisfied the relief ordered by the Judge meets the particular circumstances of this case.
In the respondents’ claim, alternative relief in the form of receivership was sought. This was not pressed as strongly as liquidation before Mallon J, and it appears to have been to a degree put to one side by the Judge. The Judge did recognise the potential for receivership as a supplementary form of relief if Mr Fugle did not cooperate in the process to be carried out by the independent accountant.[38]
[38]At [86].
What has happened since that judgment is this. The process of appointment of an independent accountant has not been performed. The parties agreed to suspend the Judge’s orders pending appeal. Nothing material has happened since 18 July 2019 when the judgment was delivered. Then, as we noted earlier, at the eleventh hour, on the morning of the hearing before this Court, Mr Fugle sought to present to the Court draft financial statements for Vey for the year ended 31 March 2019, together with the report of an accountant, a “suitable expert” as Mr Mahuata-Coyle put it. It purported to present an independent share valuation for Vey. It was addressed by its author to “Dear Les”. It values the shares of the entire company at $246,130 and the 49 per cent parcel at $120,605.
This turn of events simply reinforces the concern we have about the continued management of the company under Mr Fugle’s direction. The new report was produced out of the blue. It was produced without input from the respondents, and without the independent process mandated by the Judge’s orders. What then was the point of it? And why should the company be foisted with the cost of this irregular report? We consider all this simply exemplifies the assumption of unilateral control by Mr Fugle and the continuing difficulties that causes. It is demonstrative of why the regularisation of the company’s affairs requires that control to cease.
We therefore sought from counsel further submissions following the hearing as to whether the proper order this Court should make was receivership, and the form of any such order, given this Court’s powers under r 48 of the Court of Appeal (Civil) Rules 2005.
Ms Roff’s submissions support that course of action for the respondents. She submits that it is preferable the company’s affairs now be managed in a “competent and transparent way” which would benefit all shareholders. Ms Roff proposed specific orders which the Court might make.
For the appellants, Mr Mahuta-Coyle opposed the appointment of a receiver. He accepts the extent of the Court’s power in r 48 but argues that this Court should be cautious before reversing the Judge on what is essentially a matter of discretionary relief. The respondents had not argued that the remedy fashioned by the High Court was erroneous. 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.
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.
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.
The essential purpose in appointing receivers here is for them to:
(a)take control of and ascertain the assets of the company (including any claims that should now be made against persons associated with the company);
(b)effect insurance of the major asset of the company;
(c)ascertain the true liabilities of the company (including the debt due to Orana); and
(d)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.
We make, therefore, the following orders:
(a)Subject to [72], appointing John Howard Ross Fisk and Richard John Nacey as joint and several Court-appointed receivers of Vey Group Ltd.
(b)Granting the following powers to the receivers:
(i)to demand and recover, by action or otherwise, income of the property in receivership;
(ii)to issue receipts for income recovered;
(iii)to manage the property in receivership;
(iv)to insure the property in receivership;
(v)to repair and maintain the property in receivership;
(vi)to inspect at any reasonable time books or documents that relate to the property in receivership and that are in the possession or under the control of Vey Group Ltd; and
(vii)to exercise on behalf of Vey Group Ltd a right to inspect books or documents that relate to the property in receivership and that are in the possession or under the control of any person.
(c)Directing that:
(i)the requirement that the receivers give security under r 7.61 of the High Court Rules 2016 be dispensed with;
(ii)the receivers shall be indemnified to the extent of the assets of Vey Group Ltd, in priority to any secured or unsecured creditor or shareholder, in respect of all liabilities properly incurred by them in the course of the receivership;
(iii)the receivers may deduct from the assets of Vey Group Ltd their reasonable remuneration, costs and expenses relating to the receivership, in priority to any secured or unsecured creditor or shareholder of Vey Group Ltd, subject to the High Court’s final approval of the receivers’ remuneration, costs and expenses;
(iv)the receivers investigate the financial position of Vey Group Ltd including the likely sale price of, and best realisation process for, all of its material assets and report back to the High Court on those issues within 30 working days from delivery of this judgment;
(v)the receivers file reports as required under the Receiverships Act 1993 which are to include the accounts under r 7.63 of the High Court Rules; and
(vi)the receivers, if acting reasonably and in good faith, shall have no personal liability in relation to the exercise of their powers.
(d)Granting leave to the receivers to seek additional orders or to vary the above orders, including as to the receivers’ powers, in the High Court.
The appointment of each of Messrs Fisk and Nacey is conditional on cause not being shown, within three working days from delivery of this judgment, as to why either should not be appointed.
Result
The appeal is dismissed.
Orders appointing receivers to the first appellant are made at [71].
The second appellant is to pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Dewhirst Law, Whanganui for Appellants
JAG Legal, Lower Hutt for Respondents
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