Williams v Tellen Systems NZ (2013) Ltd

[2021] NZHC 1199

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2018-409-727

[2021] NZHC 1199

BETWEEN

SIMON ANDREW WILLIAMS

Plaintiff

AND

TELLEN SYSTEMS NZ (2013) LIMITED

Defendant

CIV-2018-409-803

BETWEEN

TELLEN SYSTEMS NZ (2013) LIMITED
Plaintiff

AND

SIMON ANDREW WILLIAMS

First Defendant

SIMON ANDREW WILLIAMS, MELANIE JANE WILLIAMS and ROSTOCK TRUSTEES LIMITED

Second Defendant

Hearing:

23, 24, 25, 26, 27, 30 November, 1 and 2 December 2020

Appearances:

G Cooper and M Rhodes for the Plaintiff in CIV-2018-409-272 and the First Defendant in CIV-2018-409-803

B Gustafson and G Grant for the Defendant in CIV-2018-409-727 and the Plaintiff in CIV-2018-409-803

S M Grieve and T Brown for the Second Defendants in CIV-2018-409-803

Judgment:

27 May 2021

JUDGMENT OF GAULT J

This judgment was delivered by me on 27 May 2021 at 5:00 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

……………………………………

WILLIAMS v TELLEN SYSTEMS NZ (2013) LTD [2021] NZHC 1199 [27 May 2021]

TABLE OF CONTENTS

Factual background  [2]

The two proceedings  [12]

Issues  [15]

Approach to contractual interpretation  [16] SPA claims

Non-disclosure?  [17]

Bonus salary and dividend to clear retained earnings  [19]

Sedco’s balance sheet solvency as at 31 March 2017  [54]

Sedco’s ability to pay creditors in January-April 2017  [63]
Factoring of invoices not due  [75]

Material matters  [88]

Cancellation  [95]

Right to cancel  [97]

Affirmation  [102]

Notice to cancel  [103]

Causation and loss  [104]

Mr Williams’ SPA claim  [108]

Tellen’s FTA claim  [110]

Exclusion of FTA liability  [112]

Misleading and deceptive?  [121]

Loss  [122]

Tellen’s SHA claim  [125]

Causation and loss  [132]

Tellen’s claims against the trustees for knowing receipt / dishonest

assistance  [134]

Timing of alleged breach, receipt and use of funds  [142]

Fiduciary duty?  [148]

Knowledge  [154]

Mr Williams’ SHA indemnity claim  [156]

Result  [160]

Costs  [161]

[1]                These two proceedings concern a dispute following an agreement for sale and purchase of 67 per cent of the shares in Sedco New Zealand Ltd (Sedco) for $850,000.

Factual background

[2]                Mr Williams incorporated Sedco in 2012. He was the sole director and shareholder. Sedco manufactured and designed nurse call systems for rest homes and hospitals, and also installed wifi networks, CCTV systems and distributed TV systems.

[3]                Tellen Systems NZ (2013) Ltd (Tellen) is an electrical engineering and communications supplier. It is a specialist in wireless technology and communications systems, including in the healthcare industry.

[4]                Around mid-2016 Mr Williams and Mr Briggs of Tellen began discussing the sale and purchase of part of Mr Williams’ shareholding in Sedco. They signed a non-disclosure agreement on 9 August 2016 and Mr Williams sent Mr Briggs some Sedco  financial  and  sales  pipeline  information.   Over  the  following  months   Mr Williams provided further Sedco financial and other information to Tellen.

[5]                On 22 November 2016 Mr Briggs sent Mr Williams a term sheet for the proposed sale and purchase and a draft shareholders’ agreement. Various further drafts were exchanged over the following months.

[6]                On 28 April 2017 Mr Williams and Tellen entered into an agreement for sale and  purchase  (SPA)  and  a  shareholders’  agreement  (SHA).   Under   the  SPA, Mr Williams agreed to sell and Tellen agreed to purchase 67 per cent of the shares in Sedco. The purchase price of $850,000 was payable in two instalments of $425,000. The first instalment was due on the first completion date, 1 May 2017. $100,000 was paid on 28 April 2017 and the balance  of  $325,000  was  paid  on  1 May  2017. The second instalment was due on the second completion date, 1 May 2018.

[7]The SPA included the following vendor warranties:

7.  Warranties

7.1.   The Vendor warrants, represents and undertakes to the Purchaser in the terms set out in Schedule 1 subject only to the following qualification:

7.1.1.   No other letter, document or other communication from the Company or any other person is deemed to constitute a disclosure for the purposes of this clause unless it is expressly referred to in, or attached to this Agreement.

7.1.2.Any exceptions expressly provided for in this Agreement.

7.2.    Each of the warranties, representations, undertakings and agreements contained in Schedule 1 of this Agreement shall be treated as a separate warranty, representation, undertaking or agreement in respect of each statement contained.

7.3.   The Vendor further warrants, represents, undertakes and agrees with the Purchaser that each of the warranties, representations, undertakings and agreements contained in this Agreement shall be true and correct both on the date of the signing of this Agreement and on the Completion Date as if made on and as at each of those dates.

7.4.   Indemnity: The Vendor indemnifies the Purchaser against any loss or expense suffered or incurred by the Purchaser arising from or in connection with any Warranty being untrue.

7.5 The Warranties given and made under clause 7.1 will be deemed to be given and made by the Vendor upon the Vendor entering into this Agreement, and will also be repeated on the First Completion Date with reference to the facts and circumstances existing at that date.

…

Schedule 1 Warranties

The Vendor makes the following representations and warranties, each of which is declared to be true on the date hereof and each of which shall be true on the respective Completion Date(s) and each of which shall survive the completion of the sale and purchase hereby agreed to be made and each of which is an independent, separate and severable representation and warranty:

…

2.Material Matters

2.1The Vendor has disclosed to the Purchaser in writing all material matters and all material contracts pertaining to the business of the Company to which the Company is party.

3.Business Operations – Compliance

3.1The Vendor is not aware of any breach by the Company of any statutory provision, order, by-law or regulation binding on or

applicable to it in relation to its formation and operation, the use of any of its assets, the carrying on of its business, or in any other respect.

3.2The Vendor is not aware of any matter for which the Company is or will be in breach of any contract, commitment or arrangement of any nature whatsoever to which it is a party.

…

[8]                Mr Briggs became the  managing  director  of  Sedco  on  29  April  2017.  Mr Williams remained a director and continued working for Sedco as sales director.

[9]                Between April and June 2017, the trustees of Mr Williams’ family trust  –  Mr Williams, Mrs Williams and Rostock Trustees Ltd (the trustees) – purchased a family home for the Williams using some of the funds originating from the first instalment of the purchase price under the SPA.

[10]            In about August 2017, for reasons which are in dispute, it became evident that Sedco had a cashflow shortage, which deteriorated further in the following months to the point that the shareholders put the company into liquidation on 7 February 2018.

[11]Tellen says it cancelled the SPA on 14 February 2018.

The two proceedings

[12]            In the CIV-2018-409-727 proceeding, Mr Williams claimed that Tellen breached the SPA because it failed to pay the second instalment of $425,000 due on  1 May 2018 and $300,000 for non-payment of contractual  services  provided  by  Mr Williams. The services claim was abandoned at trial. Mr Williams also claimed, pursuant to an indemnity in the SHA, payment of 67 per cent of his obligations to various third parties as a guarantor of Sedco.

[13]            Tellen responded that it was not liable to pay the second instalment of the purchase price because Mr Williams had breached the SPA and SHA. Tellen also raised a set-off affirmative defence alleging that Mr Williams had breached warranties in the SPA and fiduciary obligations in the SHA. Tellen also raised a counterclaim for breach of the Fair Trading Act 1986 (FTA) seeking $650,000.

[14]            Tellen also commenced a separate proceeding (CIV-2018-409-803) against Mr Williams and the trustees in relation to these alleged breaches:

1.Against Mr Williams, Tellen claimed breach of warranties in the SPA, breach of good faith and disclosure obligations in the SHA, and breach of the FTA. In terms of relief, Tellen claimed that the breaches of the SPA entitled Tellen to cancel, and sought an order that it has no obligation to pay any outstanding sum plus damages of $648,829,48 (refund of the $425,000 paid plus $223,829.48 advanced to Sedco between 25 May 2017 and 7 February 2018). As the parties agreed the two proceedings should be heard together, no issue was taken about any duplication in these claims.

2.Against the trustees, Tellen claimed they were liable for knowing receipt and dishonest assistance.

Issues

[15]There are a number of issues to be determined:

SPA claims

1.Whether Mr Williams failed to disclose the following matters:1

(i)He had resolved to pay himself a bonus salary to clear Sedco’s retained earnings as at 31 March 2017;

(ii)He had passed a resolution granting himself a dividend of

$272,479 on 14 April 2017;

(iii)Sedco was balance sheet insolvent as at 31 March 2017;

(iv)In the first four months of 2017, Sedco could not pay its creditors in the ordinary course of its business:

1      Tellen did not pursue its other pleaded non-disclosures.

(1)It had defaulted on its 28 February 2017 GST payment;

(2)It had defaulted on its agreement with Inland Revenue (IRD) to pay the second tranche of GST by 10 April 2017 and did not pay this until 10 April 2017;

(3)It was not paying all its trade creditors;

(4)It did not have sufficient headroom in its facility with PFNZ Ltd known as Pacific Invoice Finance (Pacific) to pay its creditors without factoring invoices that were not due when they were raised and factored;

(v)Sedco was factoring invoices that were not due and owing.

2.Whether these were material matters.

3.Whether Tellen was entitled to cancel the SPA.

4.Whether Tellen gave Mr Williams effective notice of cancellation of the SPA on 14 February 2018, relieving Tellen of its obligation to pay the second instalment of the purchase price.

5.Causation and loss.

6.If Mr Williams is entitled to the second instalment of the purchase price, whether contractual interest under the SPA is subject to set-off.

Tellen’s FTA claim

7.Whether FTA liability is excluded under s 5D.

8.Whether Mr Williams’ non-disclosures were misleading and deceptive conduct.

9.Causation and loss.

Tellen’s SHA claim

10.Whether Mr Williams’ non-disclosures amounted to breach of the SHA duty of good faith and disclosure.

11.Whether these non-disclosures, and non-disclosure of a further factored invoice in July 2017 that was not due, caused Tellen to advance further funds to Sedco totalling $223,829.

Tellen’s claim against the trustees for knowing receipt / dishonest assistance

12.Whether the SHA duty of good faith and disclosure is a fiduciary duty.

13.Whether Mr Williams was in breach immediately after the SHA came into force, that is before he obtained the payments or transferred funds to the Trust.

14.Whether Mr Williams had actual knowledge that he had obtained funds in breach of fiduciary duty.

15.Whether the trustees (including Mr Williams) knowingly received funds in breach of a fiduciary obligation or dishonestly assisted such a breach by disposing of the funds.

16.If so, the amount of funds that are traceable and subject to an order for equitable compensation.

Mr Williams’ SHA indemnity claim

17.Whether Tellen is liable under the SHA for payment of 67 per cent of Mr Williams’ obligations to various third parties as a guarantor of Sedco.

Approach to contractual interpretation

[16]            Before turning to these issues, I note the parties agree that the approach to contractual interpretation set out by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd must be applied,2 as recently summarised in Savvy Vineyards 4334 Ltd v Weta Estate Ltd:3

[24] There is no dispute as to the  approach  to  interpretation  applicable. The approach is that set out by this Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd. The Court in that case said the approach was an objective one. The Court went on to accept that “in interpreting commercial contracts the courts should have regard to their commercial purpose and to the structure of the parties’ bargain, to the extent that  they  can  reliably  be  identified”.  The Court also said:

[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.

SPA claims

Non-disclosure?

[17]            It  was  common  ground  that  the   material   matters   warranty   required Mr Williams to disclose to Tellen “in writing all material matters” pertaining to Sedco’s business to which Sedco was party.4

[18]            Mr Gustafson, for Tellen, accepted that for the purpose of the material matters warranty, Mr Williams had to know of the matter he was not disclosing; that is, he would not be in breach of warranty for failing to disclose something he did not know.5

2      Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.

3      Savvy Vineyards 4334 Ltd v Weta Estate Ltd [2020] NZSC 115 (footnotes omitted).

4      Tellen did not suggest that information disclosed in writing but not referred to in the SPA should be ignored pursuant to clause 7.1.1 – indeed it relied on such information.

5      See Tasman Liquor Company Ltd v Nine Paddocks Ltd [2009] NZCA 593 at [22]-[23].

Bonus salary and dividend to clear retained earnings

[19]            I deal with the first two matters raised by Tellen together, that is the bonus salary and dividend.

[20]            Tellen’s position is that Mr Williams failed to disclose that on 14 April 2017 he declared a dividend and that also in April, before the SPA and SHA were executed, he authorised a bonus salary. The dividend amount was $272,479 being Sedco’s retained earnings as at 31 March 2016. The bonus salary was for the further retained earnings as at 31 March 2017, with the amount to be finalised with the 2017 financial statements.

[21]            Mr Williams accepts that he authorised these transactions, which were reflected (at least subsequently) in journal entries. Mr Williams’ position is that these transactions reflected the arrangement he had agreed with Mr Briggs, that the retained earnings of Sedco would be cleared to the existing shareholder before the share sale occurred. Mr Williams also says the money was not paid out to him.

[22]            On 25 January 2017 Mr Briggs sent Mr Williams a marked up revised term sheet prepared by Mr Simmonds, who was providing funding to Tellen. Like the first term sheet of 22 November 2016, the January 2017 term sheet divided the terms into Part A and Part B. The opening paragraph stated:

This document (Term Sheet) summarises in Part A the principal terms of an investment in the Company (Investment) by the Investor and in Part B, some general terms. Part B of this Term Sheet are binding. Part A is non-binding and subject to completion of formal documentation.

[23]In Part B the following term had been added:

Retained earnings of the Company to date will be cleared and paid to the existing shareholder prior to the share transfer occurring.

[24]            Whether or not Part B of the revised term sheet was binding, on 22 February 2017 Ms Sherratt from BDO, acting for Mr Williams, sent Mr Briggs an email, which recorded that:

Retained earnings of the Company to date will be cleared and paid to the existing shareholder prior to the share transfer occurring.

Dividends will be declared / bonus salary paid to clear existing retained earnings. Pre-sale accounts will be prepared to calculate this value.

As noted above the company has insufficient working capital to allow the company [to] settle this dividend in cash and payment arrangements will be necessary.

[25]            Mr Williams engaged solicitors to assist him in drafting the  agreements. They provided a draft agreement for sale and purchase and a draft shareholders’ agreement, which Mr Williams forwarded to Mr Briggs on 27 March 2017. The draft agreement for sale and purchase contained the following clause:

5.3Declaration of Dividends: The Company shall declare a dividend on or before 1 April 2017, any excess retained earnings shall be cleared and paid as bonus salary by the Company to the Vendor as at 1 April 2017.

[26]This clause remained in the 11 April 2017 draft of the SPA.

[27]            BDO prepared dividend documents and provided them to Mr Williams in early April 2017. Ms Sherratt acknowledged in evidence that she prepared the documents on the basis  of her understanding  of the transaction  reflected in  the draft  SPA. The documents provided for a dividend of $272,479 on the basis that was the amount of Sedco’s retained earnings as at 31 March 2016. As Ms Sherratt would then be on holiday until after the sale and purchase was finalised, she arranged for Mr Williams to sign the dividend documents. Mr Williams signed the dividend resolution and solvency certificate on 14 April 2017, declaring a dividend of $272,479.

[28]            I accept that at that time Mr Williams believed that the sale and purchase would proceed on the basis that Sedco’s retained earnings would be cleared prior to the share transfer occurring but that Sedco had insufficient working capital to pay the dividend and bonus in cash. Mr Williams’ understanding was reflected in the correspondence and drafts exchanged from January 2017.

[29]            In relation to the bonus salary, the timing is less clear. There is no record of Mr Williams approving the bonus salary. Mr Gustafson submitted that no formal minute was required to effect the transaction given that Mr Williams was the sole

shareholder, relying on Westpac Securities Ltd v Kensington.6 That case concerned pledging shares to a bank. Even assuming the principle applies to an internal transaction such as a distribution of retained earnings, the issue for disclosure purposes is when Mr Williams authorised the bonus salary transaction and committed the company to it.

[30]            It was common ground that Mr Williams authorised a bonus salary for the further retained earnings (as at 31 March 2017) in April 2017, before the SPA and SHA were executed, with the amount to be finalised with the 2017 financial statements.

[31]            Mr Williams received draft 2017 financial statements from BDO on 27 April 2017, which appeared to show owners’ remuneration clearing Sedco’s surplus (indeed, taking it into deficit), but the 2017 financial statements were never signed by the director(s). Mr Gustafson relied on the journal entries made subsequently to align the financial statements with the management accounts in MYOB.  He also relied on   Mr Williams’ subsequent refusal to repay his current account saying it had been expunged by his dividend. Even if Mr Williams did fix the amount of the bonus salary by approving journal entries, that occurred well after the SPA’s (first) completion date. As at that date, the bonus salary was dependent on retained earnings being determined in the 2017 financial statements.

[32]            In a properly made concession given the prior dealings between the parties, Mr Gustafson accepted there was no disclosure issue in relation to Mr Williams’ dividend  or  bonus  salary  until  there  was  a  development  in  late  April  2017.  Mr Simmonds sent an email to Mr Briggs on 23 April 2017 stating (with reference to Mr Williams):

He also has a right to declare a dividend as of 1 April of any value he thinks is okay. Effectively 67 cents out of every dollar he takes comes off our balance sheet. I think you should fix this number.

[33]            Mr Briggs replied to Mr Simmonds saying he agreed. One or both of them then raised the issue with Mr Williams. Exactly what then occurred is in issue, but the result was that clause 5.3 of the draft SPA was amended to state:

6      Westpac Securities Ltd v Kensington [1994] 2 NZLR 555 (CA).

Declaration of Dividends: payment of $75,000 as a dividend payment to be made to Simon Williams. The company shall declare a dividend on or before 1 May 2017.

[34]Clause 5.3 remained in this form in the SPA executed on 28 April 2017.

[35]            Two issues arise. First, whether Mr Williams told Mr Briggs or Mr Simmonds before the SPA was executed that he had already declared a dividend and authorised a bonus salary to clear the retained earnings. Secondly, what the parties agreed when amending clause 5.3; in effect, the proper interpretation of clause 5.3. These issues are somewhat interrelated given the evidence of the negotiations.

[36]            On the first issue, Mr Briggs said that at no time (during the pre-contract discussions) did Mr Williams tell him that he had resolved to pay a dividend of

$272,479. Mr Simmonds said that he did not recall Mr Williams or Mr Briggs telling him that Mr Williams had resolved to pay a dividend of $272,479 before August 2017. Mr Williams said he did not remember whether he had told Mr Briggs before the SPA was executed that he had already declared a dividend and authorised a bonus. I accept that Mr Williams did not tell Mr Briggs or Mr Simmonds that he had already declared a dividend and authorised a bonus salary.

[37]            I turn to the second and related issue – what the parties agreed when amending clause 5.3; in effect, the proper interpretation of the clause as executed. This is relevant because Tellen’s case is that the non-disclosure issue arises from the change to clause 5.3. But for the change, Tellen accepts it could not complain about non-disclosure of dividend and bonus salary transactions to clear Sedco’s retained earnings given the earlier correspondence. Tellen says that the earlier advice to it about clearing retained earnings was superseded by clause 5.3 in the final version of the SPA. Tellen is not claiming for breach of clause 5.3 but accepts its non-disclosure argument is dependent on clause 5.3 changing in the final days before execution to preclude the dividend and bonus salary that had already been authorised and therefore require their disclosure. Each party used its interpretation of clause 5.3 to support its case on non-disclosure.

[38]            I have already referred to the Court’s approach to contractual interpretation.7 Starting with the natural and ordinary meaning, on its face clause 5.3 as finalised provides that a $75,000 dividend will be paid to Mr Williams, declared on or before 1 May 2017. The clause says nothing about a dividend already declared. Mr Cooper, for Mr Williams, did not suggest the parties were agreeing to a further dividend. The context precludes that since Tellen was unaware of the dividend already declared. Similarly, the clause as amended says nothing about a bonus salary or clearing retained earnings.

[39]            Reflecting the context leading up to the discussion and change to clause 5.3, the competing interpretations are in effect that Tellen says the parties agreed a $75,000 dividend would be paid to Mr Williams instead of distributing all Sedco’s retained earnings, whereas Mr Williams says they agreed that only $75,000 would be paid in cash but the arrangement remained that retained earnings would be cleared.

[40]            Mr Gustafson submitted that by agreeing to change the amount of the dividend to $75,000, Mr Williams had effectively agreed to give up about $600,000 in retained earnings because he was aware the company was under financial pressure and for whatever reason he decided not to tell Mr Simmonds about the dividend and bonus salary.  However, Mr Gustafson later accepted that it  was unnecessary  to decide   Mr Williams’ state of mind in relation to the conversation. That may be correct in relation to Tellen’s SPA claim, and Mr Williams’ subjective understanding is not relevant of course to an objective interpretation of clause 5.3. But Mr Williams’ state of mind may well have a bearing on the SHA good faith fiduciary claim. In any event, it is necessary to consider the dealings between the parties leading to the change in clause 5.3.

[41]            The evidence of the conversation(s) leading to the change of clause 5.3 was underwhelming. The evidence of what was said was limited, with each witness focusing more on what he considered was intended and agreed (in the nature of submission as to each party’s interpretation).

7 Above at [16].

[42]            Mr Briggs said he had discussions with Mr Williams about several unresolved issues, including the dividend, in the days before 28 April 2017. He said he tried to agree the amount of the dividend that Mr Williams would award himself. He wanted a lower exact amount and did not recall that Mr Williams objected strongly to that approach. He also said he recalled discussions about how the $75,000 dividend would be paid but didn’t recall ever agreeing. He recalled Mr Williams saying he would only take payment of the dividend when Sedco could afford it.

[43]            Mr Simmonds said he recalled having a telephone discussion with Mr Williams on or around 26 April 2017 about the wording of clause 5.3 and how the dividend would only be a $75,000 dividend. He too did not give an account of what was said but recalled they agreed the changes to the wording of clause 5.3 with the dividend set at $75,000. He said Mr Williams then emailed to him the version of the draft SPA with  the   changes.   Mr Gustafson   submitted   that   the   cross-examination   of  Mr Simmonds on this evidence was negligible. But it was put to Mr Simmonds that what Mr Williams agreed with him was that he would only take $75,000 of the dividend in cash.

[44]            Mr Williams said that by the end of the meeting on 25 April 2017 he  and   Mr Briggs had reached an agreement and all that needed to be done was to finalise and sign the documentation. In relation to the amendment to clause 5.3, Mr Williams said he recognised that all of the profits of Sedco could not be paid to him immediately because this would put a strain on the cash flow of the business. He said they agreed that a dividend would be declared for all the retained earnings to the settlement date, but that he would only be paid $75,000 from Sedco as a bonus salary. The remainder of the dividend would be credited to his current account with Sedco, and he would be paid it at a time when Sedco could comfortably afford it.

[45]            The contemporaneous documents do not explain the change, or even its timing. Mr Williams said that during his meeting with Mr Briggs in Christchurch on 25 April 2017 he sent Tellen a further revised SPA which still contained the earlier version of clause 5.3. However, Mr Simmonds said that after their conversation Mr Williams emailed him the version of the draft SPA with clause 5.3 amended. That email was

dated 25 April 2017 whereas Mr Simmonds referred to the conversation being on or around 26 April 2017.

[46]            An email from Mr Williams to Mr Briggs on 26 April 2017 referred to their meeting and stated:

I can confirm that I am happy to have the value of the Landrover Discovery deducted from the profit loan I will be providing. (profits will be declared as a dividend pay-out but will be left in CDI as a loan. This will be paid out as and when the company can afford it over the 2 years) …

[47]            Although this email referred to CDI (Mr Williams’ other company), I infer this reference to a profit loan is to Mr Williams’ retained earnings in Sedco. Mr Briggs acknowledged this email in evidence and said that from memory, the mechanics of the payment of the dividend was something to be dealt with by Sedco later.

[48]            Neither Mr Briggs nor Mr Williams had a clear recollection of a conversation leading to the amendment to clause 5.3. It is unclear whether Mr Briggs had a conversation with Mr Williams to propose a change to the dividend clause, but I accept that Mr Simmonds did so. Mr Williams accepted that he made the change to clause

5.3 in the draft SPA. The evidence did not indicate that Mr Simmonds talked about the proposed bonus salary as well as the dividend, but reference to a bonus salary was also removed from clause 5.3 as amended.

[49]            I accept that if Mr Briggs or Mr Simmonds had said to Mr Williams that Tellen wanted to change the terms of the deal to limit Mr Williams’ 2016 / 2017 dividend to

$75,000 and leave all other retained earnings in  Sedco for both shareholders, and  Mr Williams had agreed to that and changed clause 5.3 as he did, that context may well affect the interpretation of clause 5.3 as amended and Mr Williams would have known that the dividend and bonus salary already authorised were inconsistent with that agreement. Subject to materiality, Mr Williams would have had to disclose what he had already authorised (unless he was willing to reverse those transactions, which was not suggested).

[50]            But the evidence does not indicate that is what occurred. Mr Williams clearly understood from the earlier dealings with Mr Briggs that Sedco’s retained earnings

were to be cleared before sale by way of dividend and bonus salary. Mr Briggs did not have a clear recollection of a conversation with Mr Williams in which he proposed the change to clause 5.3 even though they met in Christchurch on 25 April 2017. It was Mr Simmonds who recalled such a conversation with Mr Williams. That suggests  Mr Briggs left it to Mr Simmonds to propose the change to Mr Williams and might also suggest a lack of context when it was raised. When Mr Simmonds approached Mr Williams on or shortly before 25 April  2017,  I  consider  it  more  likely  that Mr Simmonds proposed payment of a $75,000 dividend without saying that Tellen now wanted all other retained earnings to remain in Sedco on sale (for Tellen’s benefit in proportion), and so Mr Williams did not appreciate the significance of Tellen’s proposed change to the deal, thinking the proposal was that he would only take

$75,000 in cash. In circumstances where Mr Williams had not taken payment of the dividend, understanding the issue as one of cashflow is also consistent with his statement to Mr Briggs, according to Mr Briggs, that he would only take payment of the dividend when Sedco could afford it. If this conversation was about $75,000 as Mr Briggs indicated, it  likely  occurred  after  Mr Simmonds’  conversation  with  Mr Williams and was in general terms. The alternative proposition that Tellen’s proposed change was clear and Mr Williams agreed to it but took no steps before sale to disclose or reverse the dividend and bonus salary he had already authorised, is less likely. In the context of what was a reasonably open book approach to the due diligence, which included giving Tellen access to Sedco’s MYOB account on 25 April 2017 at least so Ms Enders could do a cashflow, Mr Williams’ evidence about the dividend and bonus salary did not indicate the inclination or sharpness to do that.

[51]            Also, the parties’ subsequent conduct is more consistent with Mr Williams’ understanding in two respects. First, no dividend of $75,000 (or otherwise) was declared after the SPA was executed, by 1 May 2017 (or otherwise). Secondly, Tellen did not raise objection to the earlier dividend when it became aware of it in August 2017. That occurred when  Sedco’s  cashflow  position  caused  Mr Briggs  to  ask Mr Williams about repaying his current account and Mr Williams said it had been expunged by his dividend. If Mr Briggs considered an earlier dividend was inconsistent with clause 5.3, I expect he would have objected.

[52]            I consider the parties were likely talking past each other about the $75,000 dividend and, in circumstances where there was no discussion about what had already occurred, I consider that clause 5.3 did not preclude the earlier dividend or bonus salary. Clause 5.3 as executed was typically forward looking – agreeing what would happen by 1 May 2017 – albeit based on a misunderstanding.

[53]            As Tellen’s case in relation to non-disclosure of the dividend and bonus salary is predicated on an interpretation of clause 5.3 that I have not accepted, it follows that the change to clause 5.3 did not trigger the need for Mr Williams to disclose the transactions already authorised to distribute Sedco’s retained earnings before sale. They appear to be material matters but, in the context of the earlier disclosures, Tellen accepts their non-disclosure only arises if they are precluded by the change to clause 5.3.

Sedco’s balance sheet solvency as at 31 March 2017

[54]            Mr Gustafson submitted that the relevance of Sedco’s balance sheet insolvency as at 28 April 2017 was that, based on the (draft) 2017 financial statements prepared by BDO and sent to Mr Williams on 27 April 2017, the dividend and bonus transactions carried out by Mr Williams (rightly or wrongly) had cleared Sedco’s retained earnings. Also, the inventory was written up by approximately $124,000 from

$360,000 to $484,425.

[55]            Mr Gustafson compared this with the  strong  balance  sheet  provided  by  Mr Williams to Mr Briggs on 24 April 2017, showing total equity of $483,292.33.8

[56]            Mr Williams said he was sure he had forwarded the 27 April 2017 draft financial statements to Tellen but Mr Briggs and Mr Simmonds denied receiving them. There is no record of their having been sent. It is more likely that Mr Williams overlooked sending them on.

8      This MYOB balance sheet was prepared by Sedco’s accountant and was attached at the end of the execution copy of the SHA which followed the SPA, presumably in an attempt to comply with clause 5.4 of the SPA which stated:

“Pro forma balance sheet: The Company’s Accountant is in  the  process of  preparing a pro forma balance sheet for the Company and shall provide that pro forma balance sheet stating the position of the Company as at 31 March 2017 in the form as attached in Schedule 2 [to be attached].”

[57]            It  was  common  ground  between  the  experienced   accounting   experts (Mr Petterson for Tellen and Mr McGlinn for Mr Williams) based on the draft 2017 financial statements that Sedco was at least technically balance sheet insolvent (even if the increased inventory figure was correct). Mr McGlinn said this was a technicality in the sense that the amounts in Mr Williams’ shareholders account following the transactions to clear retained earnings were subordinated and therefore quasi-equity.

[58]            Whether or not Mr McGlinn’s characterisation is correct and Mr Williams was not free to draw funds from his shareholder advance account, I consider it follows from my finding in relation to clause 5.3 that no balance sheet solvency disclosure issue arises in relation to the dividend and bonus salary transactions to clear retained earnings. In any event, I also consider it unlikely that Mr Williams knew that Sedco was (at least technically) balance sheet insolvent.9 Mr Williams is a salesman who relied on his accounting advisers.

[59]            In relation to inventory as at 31 March 2017, Tellen had the $360,000 figure in the 24 April 2017 MYOB balance sheet and the next day Mr Williams emailed Tellen advising that the inventory was $484,425 of which $159,780 should be written off for tax purposes, reducing the amount to $324,645. I do not consider this gives rise to a disclosure issue. Tellen had each of these numbers plus a list of the stock and could assess for itself the significance of the write off for tax purposes. Mr Briggs also had an opportunity to view the stock at the premises in Christchurch.

[60]            Tellen also says the balance sheet provided to it overstated Sedco’s trade debtors / accounts receivable because of the way Sedco was factoring invoices to Pacific. I deal with this below.

[61]            Finally, Tellen says the balance sheet was also overstated because there was no contingent liability for warranty claims in relation to installed nurse call systems. Even if that is correct, I consider it unlikely Mr Williams knew that was the case so as to give rise to a non-disclosure given his reliance on accounting advisers.

9      If Mr Williams did know Sedco no longer satisfied the solvency test before the distribution was made, the earlier authority would be cancelled: Companies Act 1993, s 52(3).

[62]            Subject to the Pacific factoring allegation to be dealt with separately, I do not consider Mr Williams failed to disclose that Sedco was balance sheet insolvent.

Sedco’s ability to pay creditors in January-April 2017

[63]            It was common ground that determining whether Sedco could pay its debts in the ordinary course of business requires a practical business perspective including as to what is temporally proximate.10 With that approach in mind, I turn to the specific issues raised by Tellen.

(i)Tax issues

[64]            Tellen claims that Mr Williams failed to disclose that Sedco had significant tax issues and was not paying its tax debts when due in the ordinary course of business in the first four months of 2017. Tellen claims that Sedco could not, and did not, pay the GST of $52,630.33 for the two month period ending 31 January 2017 by the due date of 28 February 2017. It paid only half that debt on 2 March 2017 and the second half on 10 April 2017, defaulting on an agreement with  IRD to  pay this second half by  1 April 2017. The experts agreed that $52,630.33 was due on 28 February 2017 and that it was not paid (in full) until 10 April 2017, 10 days late on the arrangement with IRD.

[65]Tellen says that as at 28 April 2017, Sedco still owed IRD:

1.$2,261.50 of interest and penalties for late paying the GST payment due on 28 February 2017;

2.overdue GST of $31,041 for adjustments that were required to be made to the 31 March 2017 GST return resulting from errors or omissions by Sedco’s accounting staff;

3.$7,007.78 of unpaid PAYE from December 2016 due and not paid by Sedco on 7 January 2017; and

10     David Browne Contractors Ltd v Petterson [2017] NZSC 116, [2018] 1 NZLR 112 at [90]-[91].

4.resident withholding tax (RWT) of $18,922.15 arising on 14 April 2017 and due in May 2017.

[66]            The RWT was not due until 20 May 2017 so that does not indicate a solvency issue and can be put to one side. In relation to the PAYE, Ms Sherratt said that when BDO prepared the financial statements they noted that there was a voluntary disclosure required because a vehicle had been taken by an employee as part of an employment termination and at that point Sedco had to do a voluntary disclosure. That note was provided to Mr Williams around the beginning of March 2017 and the amount would have become due 20 days after the voluntary disclosure, that is in April/May 2017, depending on when the disclosure occurred and the IRD looked at it. This does not indicate a solvency issue.

[67]            In relation to the GST, there was no evidence that the adjustments ($31,041) that were required to be made to the 31  March  2017 GST return  were known to  Mr Williams until BDO’s letter in July 2017. However, absent explanation, I accept that Sedco’s delay in paying the amounts due on 28 February and 1 April 2017 indicates it may not have been able to pay its debts as they fell due.

[68]            Tellen says that Mr Williams did not disclose any of these tax issues to it prior to 1 May 2017. However, the information made available in the 24 April 2017 balance sheet showed Sedco’s GST liability of $77,128.67. This would have included the portion of the February GST still owing as at 31 March 2017.11 The earlier financial statements also showed interest and penalties, indicating that Sedco had been late in paying its taxes. But I accept that Mr Williams did not specifically disclose to Tellen that Sedco owed IRD $2,261.50 of interest and penalties for late payment of the February 2017 GST. I doubt he knew that specific amount of interest and penalties at the time, but I consider Mr Williams did not disclose to Tellen that Sedco had not paid all its GST when due in the four months to April 2017.

11     The $77,128.67 figure may have included the $31,041 adjustments.

(ii)Trade creditors

[69]            Tellen says that Sedco was also not paying all its trade creditors during the first four months of 2017. Sedco’s liquidator, Mr Whittfield, provided emails indicating that Sedco had unpaid DHL and Go Wireless NZ invoices in the period from December 2016 to April 2017, some overdue for more than 30 days. Not paying debts may be evidence of an inability to do so, but this correspondence, of itself, does not indicate that Sedco could not pay its debts in the ordinary course of business so as to give rise to a disclosure issue.

(iii)Insufficient headroom in Pacific facility

[70]            Tellen says that during this same four month period Sedco did not have sufficient headroom in its Pacific facility to pay its creditors without factoring invoices that were not due when they were raised and factored.

[71]            Tellen described the Pacific facility as a factoring arrangement but more accurately it is a confidential invoice finance facility. Pacific provided finance to Sedco based on a security against a pool of eligible invoices. Sedco invoices were automatically forwarded to Pacific electronically on a daily basis and Sedco requested advances as funds were available. Pacific approved invoices received through a combination of automated and manual processes. Pacific calculated the available funds based on 80 per cent of the pool of eligible (approved) invoices, subject to a maximum debtor concentration level, with invoices being excluded (disapproved) after 90 days. Customers made payment into a bank account in the name of Sedco but controlled by Pacific. Pacific had provided this facility to Sedco for a number of years.

[72]            In relation to its headroom argument, Tellen relied on a January 2017 email exchange between Mr Williams and Pacific in which Mr Williams admitted that Sedco had submitted to Pacific, and been paid for, an invoice that had subsequently been deleted from Sedco’s MYOB accounting system. Reversing this invoice took the available funds into negative. Mr Williams acknowledged that an invoice had been deleted, saying it had been billed to the wrong construction company. Pacific asked Sedco to advise in future if any invoices were deleted.

[73]            Tellen also relied on a Pacific service agreement summary as at 25 April 2017, which indicates that the available funds were only $3,350.34. That summary was provided to Tellen the same day, before the SPA was executed. Also, I accept the evidence of Ms Jackson from Pacific as to the dynamic nature of the Pacific revolving credit arrangement. Thus, the 25 April 2017 service agreement summary is only a snapshot of funds available at that time. Indeed, a drawdown by Sedco the very next day indicates that funds were then available. Sedco continued drawdowns thereafter. On the other hand, I do not consider Mr McGlinn’s calculations of the headroom in the Pacific facility as at 28 April 2017 are reliable. They did not take into account disapproved invoices.

[74]            I consider the relevance of headroom in the Pacific facility to Sedco’s solvency depends on Tellen’s related complaint that Mr Williams failed to disclose that Sedco was submitting invoices that were not due, which I deal with next.

Factoring of invoices not due

[75]            Tellen claims that Mr Williams failed to disclose three invoices issued in April 2017 before signing and settlement of the SPA that were improperly issued or at least improperly submitted to Pacific. These three April 2017 invoices were:

1.Radius invoice for $92,438 plus GST;

2.Lakeside invoice for $23,835.40 plus GST; and

3.Ultimate Care invoice for $103,712.75.

[76]            These invoices remained unpaid after 90 days and were therefore disapproved by Pacific in early August 2017. In support of its claim in relation to these invoices, Tellen relies on notes made by Mr Williams for Mr Briggs (inserted into a copy of a letter to Pacific) when the invoices were disapproved in August 2017:

Radius:“project held up and only partly completed when invoiced. will be completed by next week and invoice sent”

Lakeside:“This is the site in Pukekohe that has not paid. We have rectified his issues and payment should now be made.”

Ultimate Care: “this is for the Rhapsody project. Invoiced early to assist us with cashflow but then the job was delayed.”

[77]            Mr Gustafson submitted that Mr Briggs was not cross-examined on his evidence relating to these invoices and the conversations about them he had with   Ms Jackson and Mr Williams around August 2017. But Mr Williams accepted that his notes were his explanation to Mr Briggs about these invoices. I am not being asked to prefer Mr Williams’ evidence over Mr Briggs’ evidence as to what Mr Williams said to Mr Briggs. The issue is rather what to infer from Mr Williams’ explanations. Insofar as Mr Briggs was offering an opinion, it was not incumbent on Mr Williams’ counsel to cross-examine on it. I do not consider a breach of s 92 of the Evidence Act 2006 occurred in relation to this.12

[78]            The issues concerning non-compliance with the terms of the Pacific facility are clouded by a subsequent Sedco invoice to Quadrent dated 12 July 2017 for

$287,427.55 in respect of a Sedco project for Oceania called the Oaks that Tellen says was improperly submitted to Pacific. Tellen says that invoice was not properly issued to Quadrent at all as the customer had not committed to, let alone started, the project. As this  invoice  went  unpaid,  Pacific  followed  up  with  Sedco  and  –  despite  Mr Williams’ explanations – Pacific ultimately disapproved the invoice and took issue with Sedco’s compliance with its terms. Mr Briggs said that Ms Enders contacted him in November 2017 and told him about this invoice.  She said that when she asked  Mr Williams for the contact details for Quadrent he advised her that it was a false invoice and that he had used it to obtain finance from Pacific. Mr Briggs said he was stunned to hear this and contacted Mr Williams who admitted that was accurate. This caused Mr Briggs concern and may well have contributed to his wider concern that earlier invoices were also improperly submitted to Pacific.

[79]            In relation to this Oaks project, I accept that Mr Williams understood from a discussion in March 2017 that the customer wanted the installation to start in July 2017 but, even if that justified raising an invoice on 12 July 2017 without confirming the start with the customer, I consider he should not have allowed Ms Enders to request a

12 Mr Gustafson also raised s 92 in relation to the lack of cross examination on unprofitable contracts that Sedco had to perform post 1 May 2017, but as this was not pursued as a material matter, I do not consider it is significant.

drawdown from Pacific in respect of an invoice for more than the programming work already done given the terms of the Pacific facility. Moreover, when the customer instructed him on 17 July 2017 to place the project on hold again, Sedco should have advised Pacific. All the more so when Mr Williams learned in September 2017 that the project would not be going ahead until later in the financial year. At least in part, I do not accept Mr Williams’ explanations in relation to this Quadrent invoice. He failed to explain the position accurately to Pacific. But that Quadrent invoice post-dated the SPA and does not itself give rise to a breach of warranty issue. The issue is how Mr Williams’ explanations for that invoice affect the earlier invoices – both their issue to customers and submission to Pacific.

[80]            In relation to Sedco’s issue of the three earlier invoices to customers, Tellen has not established that they were improperly issued. The evidence did not show that these invoices were inconsistent with the customer terms of trade. Mr Williams’ note indicated the Radius invoice was issued when the project was partly completed – this may have been in accordance with the customer’s terms. With Lakeside, the note indicated that issues needed to be rectified before payment but does not suggest an initial invoicing issue. With Ultimate Care, the note indicated the project was invoiced early to assist with cashflow. Mr Williams acknowledged in evidence that the invoice was issued to assist with cashflow but said it was issued at the start of the project. Again, this may have been in accordance with the customer’s terms. Tellen suggested invoices were not even sent to customers but the response was that this happened automatically. In any event, although the invoices were unpaid for over 90 days, and the Ultimate Care invoice was subsequently credited and reissued for a lesser sum, payment was ultimately received. Also, Mr Briggs did not appear to take issue with Mr Williams’ explanation in August 2017.

[81]            Turning to Sedco’s submission of these three invoices to Pacific, it was clearly a term of the Pacific facility that Sedco would only submit invoices to be included in Pacific’s facility where the invoice was for a bona fide debt owing from a customer (or becoming owing on receipt of the invoice). As Mr Williams said in evidence, this may include invoices where Sedco’s customer terms provided for an invoice to be issued before work was completed, for example when work started. However, a notice

sent from the Hermes software system used by Pacific to Sedco in November 2017 stated the conditions of the facility included:

1.All goods have been delivered or services provided.

2.All debts are due and payable within standard credit terms, or terms have been provided to Pacific Invoice Finance.

[82]            Such a condition that the goods and services have been provided would mean that, even if Sedco’s terms of trade with its customer provided for invoicing in advance, Sedco could not submit these invoices to be included in Pacific’s facility until the goods and services had been provided (at least not without Pacific’s permission). The reference to standard credit terms, or terms having been provided to Pacific, relates to Sedco’s customer payment terms rather than invoicing. As the Pacific terms themselves focus on the need for a bona fide debt, it is not clear that the Pacific terms were as explicit as this notice suggests in requiring that the goods or services had been provided. Even if they were, in the context of ongoing projects where the customer was invoiced in stages, such a term would permit invoices to be submitted to Pacific for work done in that period.

[83]            If the Pacific terms required that goods and services had been provided, the Ultimate Care invoice at least should not have been submitted to Pacific for inclusion in the facility. Whether issued before or at the start of the project, the services had not already been provided. Even so, and even if the other two invoices should also not have been submitted to Pacific for inclusion in the facility because the goods and services had not already been provided, Tellen has not established that Mr Williams knew that was the case, giving rise (on contract or completion date) to a non-disclosure or to a breach of the compliance warranty that he was not aware of any matter for which Sedco was in  breach of  the Pacific  facility  contract.13  I do not  infer from Mr Williams’ acknowledgment that the Ultimate Care invoice was issued to assist with cashflow that he knew it was improperly submitted to Pacific in breach of contract.  It is more likely he considered that he could issue the customer an invoice for work in the month it was being done and did not appreciate that might create an issue with

13 Clause 3.2 in Schedule 1 of the SPA, at [7] above.

Pacific’s terms if the invoice was submitted to Pacific before the work  was done.  Mr Briggs evidently also did not consider this was an issue at the time as Ms Jackson said he was looking to Pacific for extra funding.

[84]Tellen also claimed that Mr Williams failed to disclose a pro forma invoice for

$189,000 issued in the first three months of the year ending 31 March 2017 (that is, April to June 2016) that was not for work done and was manually taken out of MYOB by Ms Sherratt. The experts agreed there was insufficient information as to the nature and timing of the pro forma invoice. I accept the deletion of this earlier invoice was not disclosed to Tellen but the circumstances relating to the issue and deletion of the invoice were not clear and do not establish that it was improperly issued or submitted to Pacific.

[85]            Finally in relation to Sedco’s invoicing, Mr McGlinn accepted that provision against trade debtors of between $45,000 and $50,000 was required. But I consider it unlikely Mr Williams knew that at the time. It was not suggested in the BDO material he received.

[86]            I return to the issue of Sedco’s ability to pay creditors in January-April 2017, having addressed the related claim of factoring invoices not due. I have inferred that Sedco’s delay in paying its GST, but not its trade creditors, indicates it may not have been able to pay its debts as they fell due. Taking the Pacific-related claims together, I do not consider they indicate that Sedco could not pay its debts as they fell due. Sedco was no doubt dependent on Pacific funding to manage its cashflow but it was not established that Pacific funding was unavailable such that Sedco was unable to pay its debts as they fell due.

[87]            Therefore, it was only Sedco’s GST issues that indicate it may not have been able to pay its debts as they fell due. The delays were a matter of days and a practical business perspective may suggest they were insufficient to show that Sedco could not pay its debts as they fell due and was therefore insolvent. In any event, I consider it was not established that Mr Williams knew and therefore failed to disclose to Tellen that Sedco could not pay its debts in the ordinary course of business. BDO was Sedco’s tax agent. BDO knew, and told Tellen, in February 2017 that Sedco had

insufficient working capital to pay Mr Williams’ dividend in cash, but it was not suggested that BDO advised Mr Williams that there was a solvency issue. Indeed, they prepared the dividend documents in early April 2017.  In those circumstances,   I consider it unlikely that Mr Williams knew that the short GST delays meant that Sedco was insolvent. But I have concluded that Mr Williams did not disclose to Tellen that Sedco had not paid all its GST when due in the four months to April 2017, and the next question is whether that was material.

Material matters

[88]           There was no real dispute as to what constitutes a “material matter” for the purposes of the warranty. I have already referred to the Court’s approach to contractual interpretation.14 As Mr  Gustafson  submitted,  “material”  means  “important”  and in context that is important to a reasonable potential shareholder in deciding whether to purchase shares and, if so, how much to pay for those shares. As Mr Cooper submitted, the test for materiality using the term “material” or “materially” in this context has been the subject of judicial consideration. In another warranty case, Lion

- Beer, Spirits & Wines (NZ) Ltd v Pernod Ricard New Zealand Ltd,15 the Court of Appeal applied the test adopted by Cooke J in Coleman v Myers:16

As a broad test of materiality, then, one may speak of “those considerations which can reasonably be said, in the particular case, to be likely materially to affect the mind of a vendor or of a purchaser.” The same idea is expressed more fully by Marshall J in delivering the opinion of the United States Supreme Court in TSC Industries Inc v Northway Inc 426 US 438 (1976), a case under the Securities Exchange Act, of 1934 and concerning proxy solicitation:

“The general standard of materiality that we think best comports with the policies of rule 14a-9 is as follows: An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote …

What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been

14 Above at [16].

15     Lion - Beer, Spirits & Wines (NZ) Ltd v Pernod Ricard New Zealand Ltd [2013] NZCA 625 at [40].

16     Coleman v Myers [1977] 2 NZLR 225 (CA) at 334.

viewed by the reasonable investor as having significantly altered the “total mix” of information made available” (ibid, 449).

[89]            Thus, it is necessary to consider whether the omitted fact would have been viewed by the reasonable purchaser/shareholder as significantly altering the total mix of information made available.

[90]            The accounting experts each gave evidence covering materiality and quantum issues. There is little need to refer to that evidence as essentially it was based on each expert’s view of the facts, neither of which aligned closely with my factual conclusions above.

[91]            I have concluded that Mr Williams did not disclose to Tellen that Sedco had not paid all its GST when due in the four months to April 2017. In particular, in respect of the $52,630.33 GST payment due on 28 February 2017, there was a two day delay before payment of half the amount and, following an arrangement with IRD, a 10 day default on payment of the second half, resulting in interest and penalties of $2,261.50 (although that figure was likely not known at the time). I consider this late payment would not have been viewed by the reasonable purchaser/shareholder as significantly altering the total mix of information made available. In context, the delays were not lengthy and the effect in terms of interest and penalties was modest. I have already concluded they do not warrant a conclusion that Mr Williams knew and therefore failed to disclose to Tellen that Sedco could not pay its debts in the ordinary course of business. I conclude the late payment was not material. Accordingly, Tellen has not made out its claim for breach of warranty.

[92]            If I had concluded that Mr Williams had failed to disclose the dividend and bonus salary transactions, I would have considered they were material. They cleared all Sedco’s retained earnings in an amount approximating its 2017 annual income. They also had implications for Sedco’s balance sheet solvency.

[93]            If I had concluded that Mr Williams had failed to disclose that Sedco was improperly issuing and submitting invoices to Pacific, I would likely have considered that was also material. Whether or not particular invoices were material, such a

practice would have had potential adverse consequences for the Pacific financing arrangement.

[94]            I would not have considered each of the other alleged non-disclosures in relation to balance sheet solvency to be material – the inventory issue amounted to about $35,000; accounts receivable amounted to $45,000–$50,000 and the contingent liability for warranty  claims  was  not  quantified  (insurance  was  also  suggested). I would also not have considered the other tax and trade creditor issues were material

– the amounts were relatively modest. In each case, I do not consider the omitted facts would have been viewed by the reasonable purchaser/shareholder as significantly altering the total mix of information made available. The position may have been different if there were multiple non-disclosures that needed to be considered in aggregate.

Cancellation

[95]            Having not found a breach of warranty, Tellen did not have a right to cancel the SPA for breach. I nevertheless address cancellation issues briefly. Tellen says it gave Mr Williams notice of cancellation of the SPA when Mr Simmonds telephoned him on 14 February 2018, a week after Sedco was placed into liquidation, and told him that Tellen would not be paying the second instalment of the purchase price for the shares given Sedco’s demise and  the  huge  losses  that  meant  for Tellen  and Mr Simmonds.

[96]            Mr Williams disputes that Tellen was entitled to cancel, says that no notice of cancellation was given and says that Tellen affirmed the SPA once it received knowledge of the dividend and bonus salary transactions.

Right to cancel

[97]            Tellen says it was entitled to cancel both because the performance of the material  matters  warranty  and  the  compliance  warranty  were  essential,  and    Mr Williams’ breaches substantially reduced the benefit Tellen received from the SPA and the SHA.

[98]            Section 37(2) of the Contract and Commercial Law Act 2017 (the CCLA) provides:

If subsection (1)(a), (b), or (c) applies, a party may exercise the right to cancel the contract if, and only if,—

(a)the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to the cancelling party; or

(b)the effect of the misrepresentation or breach of the contract is, or, in the case of an anticipated breach, will be,—

(i)substantially to reduce the benefit of the contract to the cancelling party; or

(ii)substantially to increase the burden of the cancelling party under the contract; or

(iii)in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.

[99]            As the Supreme Court said in Mana Property Trustee Ltd v James Developments Ltd,17 dealing with the predecessor statutory provision,18 para (a) deals with the importance of the term which has been broken, para (b) with the seriousness of the consequences of the breach. A breach of an essential term with only a minor effect entitles cancellation under para (a) and so, under para (b), does a breach of any term, even a minor term, if it has a serious effect. Para (a) in essence preserves the common law concept of a “condition”: a term which is so important that any breach of it justifies the innocent party in cancelling.

[100]        Dealing first with para (a) of s 37(2), it is not suggested here that the parties expressly agreed that performance of the relevant terms was essential. In relation to whether that is implied, as the Supreme Court said in Mana,19 the preferable approach is to ask whether, unless the term in question was agreed at the time of contracting to be essential, the cancelling party would more probably than not have declined to enter into the contract. That question must be answered by an objective contextual appraisal

17 Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3 NZLR 805 at [22]-[23], citing John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (3rd ed, LexisNexis NZ Ltd, Wellington, 2007) at [18.2.2].

18 Contractual Remedies Act 1979, s 7(4).

19 Mana Property Trustee Ltd at [25].

which disregards what a party may unilaterally have said about its intention in that regard. Here, I do not consider that the parties impliedly agreed that the performance of the warranties was essential to Tellen. Unlike a term dealing with a specific matter, strict performance of which may be impliedly essential, a warranty to disclose all material matters may cover a multitude of things, some more important than others. By its nature, strict performance of a warranty may not be essential – the significance may depend on the particular breach. In the SPA, the warranty clause includes an indemnity against any loss or expense suffered or incurred by Tellen arising from or in connection with any warranty being untrue but there is no termination clause.

[101]        Therefore, if I had found a breach of warranty, Tellen’s right to cancel under  s 37 would have depended on whether the effect of that breach were substantially to reduce the benefit of the contract under s 37(2)(b)(i) and therefore on the particular breach found. My materiality conclusions would have been at least indicative of this. It would also be necessary to distinguish the effect of that breach on the benefit of the contract from unrelated causes of Sedco’s cashflow difficulties and ultimate collapse.

Affirmation

[102]        A party is not entitled to cancel if, with full knowledge of the breach, it has affirmed the contract.20 Mr Cooper submitted that once Tellen had knowledge of the transactions crediting the retained earnings  to  Mr  Williams’  current  account  on 30 August 2017, Tellen affirmed the SPA. Tellen received the alignment journal for the year ending 31 March 2017 on 30 August 2017, which indicated shareholder capital, shareholder drawings and retained earnings, and Mr Briggs also referred to Mr Williams saying that his current account had been expunged by his dividend. Even if I had concluded that Mr Williams had failed to disclose the dividend and bonus salary transactions, and that gave rise to a right to cancel, I would have concluded that Tellen affirmed the SPA.

20     Contract and Commercial Law Act 2017, s 38.

Notice to cancel

[103]        Cancellation may be made known by words or by conduct showing an intention to cancel.21 I accept that Mr Simmonds told Mr Williams on 14 February 2018 that Tellen would not be paying the second half of the purchase price for the shares given Sedco’s demise and the huge losses that meant for Tellen and Mr Simmonds. But it was not suggested that Mr Simmonds referred to cancellation or even to a breach by Mr Williams. In context, I would not have considered this was an implicit notice to cancel (rather than a repudiation) unless I had concluded that Mr Williams had failed to disclose that Sedco was improperly submitting invoices to Pacific. Even if the other claimed non-disclosures had been established, they were either not material or, in the case of the dividend and bonus salary transactions, the contract had been affirmed.

Causation and loss

[104]        Tellen has not established a breach of warranty, nor that the SPA was validly cancelled. Its claims for interest and indemnity costs pursuant to its contractual indemnity fall away. I refer to causation and loss issues only briefly.

[105]        As to causation, Mr Cooper submitted, in relation to at least some of the claimed non-disclosures, that Tellen would have proceeded with the purchase anyway. Mr Gustafson submitted that because Mr Briggs and Mr Simmonds were not cross- examined on their evidence that, had they known of the material matters they would not have proceeded with the purchase, Mr Williams cannot challenge as a matter of fact (if breach is made out) that it caused the losses claimed. I accept that s 92 of the Evidence Act 2006 would be relevant to this causation issue. But it cannot be assessed in the abstract – s 92 enables the Court to address a failure to cross-examine in various ways and the outcome may depend on the significance of a particular non-disclosure established.

[106]        Given its case on cancellation, Tellen sought return of the purchase price paid and funds advanced to Sedco. Although in substance damages, the relief sought was in the nature of an order under s 43 of the CCLA. The starting position in assessing

21     Contract and Commercial Law Act 2017, s 41(2).

damages for breach of contract is that the claimant has an expectation interest in being compensated for the position it would have achieved, had the contract been performed.22 In the breach of warranty context, the correct measure of expectation damages is the amount that represented the difference between the value of the assets (here shares) being purchased assuming no breach of warranty (that is, assuming the warranted information was true) and the value  of  the  assets  as  represented.23  Here, Tellen instead claimed damages on a reliance rather than expectation basis, seeking return of the purchase price paid and funds advanced to Sedco. That is understandable given Tellen’s case was that it would not have proceeded with the purchase at all. In some cases it is not possible or appropriate to calculate the expectation loss. In such cases, the courts will consider the innocent party’s reliance interest, that is, any money spent in reliance on the other party performing its contractual obligations.24 In the absence of any evidence of an expectation interest difference in value, Tellen’s damages claim would depend on proving that it would not have proceeded with the purchase at all. As indicated, that may depend on the significance of a particular non-disclosure established.

[107]        Finally, I note that Mr Cooper also submitted there was no loss to Tellen because the dividend and bonus salary were merely credited in paper in the books rather than paid out. If I had found that Mr Williams had failed to disclose the dividend and bonus salary, I would not have accepted this submission. The distributions were made when they were reflected in the journal alignment (even if the dividend distribution was not made earlier when it was authorised).

Mr Williams’ SPA claim

[108]        As I have concluded that Tellen did not have a right to cancel the SPA for breach, it was not relieved of its obligation to pay the second instalment of the purchase price ($425,000) under s 42 of the CCLA. Tellen did not suggest the SPA obligation to pay the second instalment was conditional on Sedco’s performance or

22 NZX Ltd v Ralec Commodities Pty Ltd [2016] NZHC 2742 at [467].

23 Lion -  Beer,  Spirits & Wines (NZ) Ltd v Pernod Ricard New Zealand Ltd  [2013] NZCA 625 at [33], citing John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at [21.2.2(a)].

24 NZX Ltd v Ralec Commodities Pty Ltd at [468].

otherwise. Therefore, Mr Williams’ claim for payment of the second instalment must succeed.

[109]        Mr Williams also claims default interest of 15 per cent per annum from 1 May 2018 under clause 4.4, which precludes deduction by way of set-off. While I consider the claims are in effect  interdependent, set-off may be contractually excluded.25       I accept Mr Cooper’s submission that clause 4.4 expressly excludes set-off. Contractual interest is to be calculated on the full amount.

Tellen’s FTA claim

[110]        This claim received little attention during the trial but was nevertheless pursued by Tellen. Tellen’s pleading relies on the same misrepresentations and material omissions as its contract claim, and claims the same loss. It is a claim in the alternative.

[111]        Mr Gustafson submitted that the information Mr Williams provided was misleading and deceptive under s 9 of the FTA and that Tellen was misled and deceived into wrongly believing that Sedco was solvent, trading profitably and producing both significant gross margin and EBITDA, had assets exceeding liabilities by $300,000, was meeting its tax obligations and had over $400,000 worth of inventory stock.  This caused Tellen to enter the SPA, pay the first instalment of the purchase price and make its shareholder advances to Sedco.

Exclusion of FTA liability

[112]        Mr Cooper submitted that this claim is excluded by s 5D of the FTA,26 which provides an exception to the no contracting out rule in s 5C. The SPA includes an entire agreement clause and a clause acknowledging no reliance. Such clauses are included as examples of the types of provisions that are enforceable under s 5D if the requirements of subs (3) are satisfied.27

25     See Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13.

26     In closing Mr Cooper did not pursue an earlier argument that Mr Williams was not acting “in trade”.

27     Fair Trading Act 1986, s 5D(2).

1. The relevant clauses in the SPA are:

8.Purchaser relies on own judgment

8.1.  The Purchaser acknowledges that, except for the Vendor’s Warranties:

8.1.1.  It is entering into this Agreement solely in reliance on its own judgment and due diligence investigation, and not in reliance on any statements, warranties or representations made to it or to any other person by or on behalf of the Vendor.

8 .1. 2. All express or implied warranties and representations in relation to the Company and the sale of the Sale Shares are excluded to the maximum extent permitted by law.

…

16.  Entire Agreement

16.1.   This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes and extinguishes all prior agreements and understandings between the parties with respect to the matters covered.

16.2.  This Agreement may not be amended, modified, or supplemented except by an agreement executed by the parties or by persons duly authorised in writing on behalf of the parties.

[114]        Mr Cooper acknowledges that the no reliance clause carves out the vendor warranties thereby preserving Tellen’s ability to claim for a breach of vendor warranties (which I have already addressed).

1. The requirements of s 5D(3) are that:

(a)the agreement is in writing; and

(b)the goods, services, or interest in land are both supplied and acquired in trade; and

(c)all parties to the agreement—

(i)are in trade; and

(ii)agree to contract out of section 9, 12A, 13, or 14(1); and

(d)it is fair and reasonable that the parties are bound by the provision in the agreement.

[116]Subsection (4) provides that:

If, in any case, a court is required to decide what is fair and reasonable for the purposes of subsection (3)(d), the court must take account of all the circumstances of the agreement, including—

(a)the subject matter of the agreement; and

(b)the value of the goods, services, or interest in land; and

(c)the respective bargaining power of the parties, including—

(i)the extent to which a party was able to negotiate the terms of the agreement; and

(ii)whether a party was required to either accept or reject the agreement on the terms and conditions presented by the other party; and

(d)whether the party seeking to rely on the effectiveness of a provision of the kind referred to in subsection (1) knew that a representation made in connection with the agreement would, but for that provision, have breached section 12A, 13, or 14(1); and

(e)whether all or any of the parties received advice from, or were represented by, a lawyer, either at the time of the negotiations leading to the agreement or at any other relevant time.

[117]        Mr Gustafson submitted that Mr Williams cannot establish the requirements in subs (4)(d) and (e). Rather than requirements as such, these are mandatory considerations when deciding what is fair  and  reasonable  for  the  purposes  of  subs (3)(d). I accept, however, that in relation to subs(4)(d), there is no evidence as to whether Mr Williams knew that a representation made would have breached ss 12A, 13, or 14(1) and, in relation to subs (4)(e), there is no evidence that Tellen received legal advice. Mr Gustafson did not otherwise address the fair and reasonable test.

[118]        Taking into account all the considerations in subs (4), I consider it is fair and reasonable that the parties are bound by the two provisions in the SPA. In the context of the sale and purchase of shares in a business for $850,000, there was no disparity in the respective bargaining power of the parties. Though Mr Williams, as vendor, was in possession of the relevant business information, there was a negotiation and due diligence period spanning nearly nine months during which Tellen received documentation and information, including some access to Sedco’s accountants and MYOB, and negotiated vendor warranties. Although there was no evidence that Tellen

received legal advice, Tellen knew that Mr Williams had legal advisers prepare a draft agreement and Tellen had access to legal advice  if it wished.  It also had access to Mr Simmonds’ business and investment experience. Tellen was well placed to negotiate the terms of the agreement and was not required either to accept or reject the agreement on the terms and conditions presented. The no reliance and entire agreement clauses were included in the draft SPA exchanged in March 2017 and after that date Tellen  requested other changes to the draft.  Also, I have not  found that  Mr Williams dishonestly concealed matters from Tellen.

[119]        As noted, the no reliance clause contains an exception for the vendor warranties and the context here is an FTA claim that replicates the breach of warranty claim relying on alleged non-disclosures. In circumstances where the FTA claim did not rely on any different conduct, and there was no claim for pre-contractual misrepresentation under the CCLA, I consider it is fair and reasonable that the parties are bound by the two clauses.

[120]        The other requirements in subs (3) are met – Tellen did not suggest otherwise. Accordingly, the two clauses are enforceable and Tellen is not entitled to an order under s 43 of the FTA in relation to contravention of s 9.

Misleading and deceptive?

[121]        If a claim under the FTA were not excluded, I would need to determine whether the conduct, examined objectively, was misleading and deceptive following the approach in Red Eagle Corporation Ltd v Ellis.28 Considering my earlier factual findings in this context, I would not have found misleading and deceptive conduct in breach of s 9. The one non-disclosure I have found, in relation to GST, was a non- material omission that did not amount to misleading and deceptive conduct.

28     Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [28].

Loss

[122]        Where a breach of s 9 is found, an order under s 43 requires the claimant to prove that it has suffered loss and damage by the conduct. That requires a common law practical or common-sense concept of causation.29

[123]        Mr Cooper submitted that the clauses (if not conclusive) put Tellen on notice that it was to perform its own due diligence, and this together with unfettered access, means that Tellen’s  inadequate due  diligence has broken the  chain  of  causation.    I consider, however, that this submission is undermined by the carve out of the vendor warranties. At most, I consider a reduction of damages by 50 per cent would have been appropriate to reflect Tellen’s contribution to its loss.

[124]        Mr Cooper acknowledged there is no real difference between the measure of damages under s 43 and reliance damages in contract or tort, but he submitted this necessarily requires valuation evidence of the value of the Sedco shares as at 1 May 2017, which Tellen has not led. As I have indicated in relation to Tellen’s SPA claim, Tellen’s damages claim under the FTA would also depend on proving that it would not have proceeded with the purchase at all.

Tellen’s SHA claim

[125]The SHA contained the following clause:

4.The Company’s objects and business

4.1Primary objective: The primary objective of the Company will be to carry on the Business.

4.2Conduct of the Business: The Company will be conducted on sound commercial profit-making principles so as to generate the maximum achievable value of the Company to the Shareholders.

4.3Carrying out objects: To carry out the Company’s primary objects, each Shareholder must:

29 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at [29], citing Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ, speaking of the equivalent Australian section, s 82 of the Trade Practices Act 1974.

4.3.1In its capacity as a Shareholder, act in good faith and when necessary, provide full information to the other parties in relation to the affairs and activities of the Company and the Business.

[126]        Tellen claims that, pursuant to clause 4.3.1 of the SHA, post 28 April 2017 Mr Williams was required to provide full information to Tellen in relation to the affairs and activities of Sedco and its business, and to act in good faith to achieve the agreed primary objectives for the shareholders, that is to have Sedco carry on  its business so as to generate the maximum achievable value of the company to the shareholders. The existence of the contractual duty is not in dispute.

[127]        Tellen says that Mr Williams’ failure, post execution of the SHA, to disclose the matters relied on in its SPA claim amounted to a breach of the duty of good faith and disclosure in clause 4.3.1 of the SHA. In closing, Mr Gustafson focused on the dividend and bonus salary combined with the fact that the Pacific facility was being breached by ‘factoring’ invoices not due. Tellen also says that Mr Williams’ non-disclosure that the Quadrent invoice ‘factored’ in July 2017 was never owed to Sedco was a breach of clause 4.3.1.

[128]        Tellen claims that these non-disclosures, and non-disclosure of the Quadrent invoice in July 2017 that was not due, caused Tellen to advance further funds to Sedco totalling $223,829 in the mistaken belief Sedco was solvent but experiencing temporary cashflow issues.

[129]        I have already addressed the alleged failure to disclose the dividend and bonus salary and the invoices improperly submitted to Pacific. In relation to those matters (and the other matters relied on in Tellen’s SPA claim), I consider that my factual findings in relation to the breach of warranty claim under the SPA apply equally to answer the non-disclosure claim under the SHA. It is unnecessary to distinguish between the duties of good faith and full disclosure.

[130]        If I had found those matters involved breaches of warranty under the SPA,     I consider a duty to disclose them would have arisen under clause 4.3.1 of the SHA. The timing of any such breach would be relevant to the claim against the trustees, and is addressed below. Tellen’s damages for breach of the SHA would also depend on its

effective cancellation of the SPA on the basis that, if clause 4.3.1 of the SHA had been performed and disclosure had been made, Tellen would have cancelled the SPA. So Tellen’s damages claim under the SHA would also have depended on its position in relation to cancellation of the SPA, addressed above.

[131]        In relation to the Quadrent invoice, for the reasons given above at  [79],        I consider that Mr Williams’ failure to disclose to Tellen  the status of that invoice,  at least from 17 July 2017, was a breach of clause 4.3.1 of the SHA. While Mr Briggs likely knew the issues at Elmwood, another project for Oceania, had delayed the Oaks project, and maybe also should have realised the implications for the Pacific facility, I accept that he did not appreciate that issue until 24 November 2017. Mr Williams should have disclosed it to Tellen more explicitly, as well as advising Pacific.

Causation and loss

[132]        I accept that Tellen advanced funds to Sedco during the period between 17 July and 24 November 2017 albeit that its shareholder balance was in credit from 18 July to 13 September 2017 and again from 31 October to 6 November 2017. In the period from 6 to 24 November 2017, Tellen advanced Sedco $137,094.80. Tellen was also keen to utilise the Pacific facility but may have appreciated Sedco’s position earlier if Mr Williams had been more explicit. However, Tellen continued to advance Sedco approximately $85,000 after 24 November 2017, which suggests it was not especially influenced by the circumstances leading to the reversal of the Quadrent invoice. Tellen had also written to Sedco customers on 2 November 2017 providing new invoicing and bank account details so that payment went into a Tellen bank account instead of the Sedco account controlled by Pacific (which Ms Jackson said was a breach of the Pacific facility agreement). It is possible Tellen recovered some funds in this way before the liquidator was appointed, but the amount of any such recovery and whether it was accounted for to the liquidator is unclear. At least some of these invoices remained unpaid upon liquidation.

[133]        It may be that Tellen’s action on 2 November 2017 contributed to its loss, and that its advances after 24 November 2017 were not caused by the breach, or at least involved a very substantial element of contributory negligence and may have been

offset by recoveries. Balancing these matters, I consider Tellen’s loss arising from the breach relating to the Quadrent invoice is best assessed by reference to the advances of $137,094.80 to 24 November 2017 without deduction for contributory negligence to that date or increase for advances after that date.

Tellen’s claims against the trustees for knowing receipt / dishonest assistance

[134]        In relation to knowing receipt, Tellen claims that when Mr Williams received payment from Tellen he should have returned it or held it as constructive trustee as he knew he had obtained money as a result of breaches of (fiduciary) duty. Tellen says that Mr Williams’ knowledge of his breaches is imputed to the other trustees, so they received $355,000 of the proceeds with actual knowledge that he had obtained payment in breach of (fiduciary) duty.

[135]        In relation to dishonest assistance, Tellen says that Mr Williams knew the financial position of Sedco was so bad that it was only a matter of time before Tellen would start to question if it had been misled by Mr Williams and could recover the

$425,000  it  had  paid  towards  purchasing  the  shares.  Again,  Tellen  says  that Mr Williams’ knowledge of his breaches is imputed to the other trustees. Tellen says that the trustees, by receiving $355,000 of the proceeds, have dishonestly assisted  Mr Williams to breach his (fiduciary) duty and to dispose of the money in an effort to hinder or prevent recovery of it by Tellen, thereby causing Tellen loss as the money is now legally owned by the trustees. Tellen says each of the trustees is jointly and severally liable for $648,829.48.

[136]        A claim for knowing receipt depends on the tainted circumstances of receipt of property. Liability will arise where it is unconscionable for the recipient to retain it because of the recipient’s state of knowledge in respect of the fact that the transfer involved a breach of fiduciary obligation owed by the transferor.30

30     McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405 at [38]. Leave to appeal was declined in McLennan v Livaja [2018] NZSC 1 at [7]-[8].

[137]        In distinguishing the claims of knowing receipt and dishonest assistance,    the Court of Appeal said in McLennan v Livaja:31

… A dishonest assister incurs liability in circumstances that may be likened to the tort of unlawful interference in contractual relations.32 The dishonest assister facilitates dealings that she or he knows involve property passing to other recipients in breach of rights of or obligations owed to the entity deprived of that property. It is not relevant whether the dishonest assister has or had propriety interests in the property involved.33 The dishonest involvement triggers a personal liability to compensate the claimant for facilitating the transfer of property in breach of rights of or obligations owed to the claimant.34 It is common ground that the same person can be the perpetrator of the breach of fiduciary duty and dishonestly assist in that breach as trustee.

[138]        In relation to the scope of constructive or imputed knowledge, the Court of Appeal said that despite the distinctions in the rationale for the claims of knowing receipt and dishonest assistance, the formulation of the requisite knowledge applies to both – actual knowledge or wilful blindness.35 More recently, in the strike out context in relation to knowing receipt, Mallon J has said that the precise scope of this test is uncertain.36 It may continue to develop. I understand wilful blindness to require an actual appreciation that inquiry should be made, but in the context of this case it is unnecessary to say more. Here, the allegation is that Mr Williams had actual knowledge.

[139]        The question is whether Mr Williams had actual knowledge that he had obtained funds in breach. As Mr Gustafson submitted, he need not actually know he was breaching a fiduciary duty.37

31     McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405 at [37]. See also McKay v Sandman

[2018] NZCA 103, [2018] NZAR 707 at [22].

32     Charles Harpum “Accessory Liability for Procuring or Assisting a Breach of Trust” (1995) 111 LQR 545 at 546.

33     Royal Brunei Airlines Sdn Bdh v Tan [1995] 2 AC 378 (PC) at 382.

34     At 392.

35 McLennan v Livaja [2017] NZCA 446, [2018] NZAR 405 at [32]-[45], applying to knowing receipt the approach to knowledge in dishonest assistance cases settled in Westpac New Zealand Ltd v MAP and Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 at [27].

36 Scott v ANZ Bank New Zealand Ltd [2020] NZHC 906 at [135]-[138].

37 Royal Brunei Airlines Sdn Bbd v Tan.

[140]        It was common ground that Mr Williams’ knowledge could be imputed to the trustees.38 It was not suggested the trustees otherwise had knowledge at the time of initial receipt.

[141]        As Ms Grieve, for the trustees, submitted, these are strong allegations involving dishonesty by Mr Williams. The civil balance of probability standard of proof applies but in the case of serious allegations the quality of the evidence required to meet that fixed standard may differ in cogency, depending on what is at stake.39 Here, cogent or strong evidence would be required.

Timing of alleged breach, receipt and use of funds

[142]        Ms Grieve submitted that Tellen is attempting to cloak alleged breaches of warranty under the SPA with fiduciary obligations in order to bring equitable causes of action into play.

[143]        Before considering whether there was a fiduciary obligation, I deal with the timing of Mr Williams’ alleged breach of the SHA, receipt of the purchase price and transfer to the Trust.

[144]        Mr Williams received $100,000 from Tellen on 28 April 2017 and $325,000 on 1 May 2017. Around the same time, the trustees confirmed an agreement to purchase a family home for the Williams. There is no issue about tracing the funds received from Tellen into that property; in any event, Tellen seeks equitable compensation rather than an interest in the property.40 Ms Grieve accepted that $355,000 of the value of the property owned by the Trust was derived from Tellen. This arose as follows.

1.$40,000 of the initial $100,000 received from Tellen was transferred to Harcourts on 28 April 2017 to pay the deposit on the property purchase. The funds were not directly received by the Trust, but the property was purchased in the name of the Trust and this sum was included in

38     As in Torbay Holdings Ltd v Napier [2015] NZHC 2477, [2015] NZAR 1839.

39     Z v Dental Complaints Assessment Committee  [2008] NZSC 55, [2009] 1 NZLR 1 at [101]. See also Napier v Torbay Holdings Ltd [2016] NZCA 608, [2017] NZAR 108 at [38].

40     Nor is there any suggestion the trustees subsequently changed their position.

acknowledgments of debt later executed by the  Trust  to  Mr  and  Mrs Williams. Although the $40,000 was not transferred via the Trust’s bank account, it was in effect transferred to the Trust as it was transferred to Harcourts on behalf of the Trust.

2.The $325,000 received from Tellen was transferred to the Trust’s bank account on 2 May 2017. $315,014.46 of this was used to fund settlement of the property purchase in June 2017.

[145]        Ms Grieve submitted that Tellen’s payments were not induced by breaches of the SHA – they were required under the SPA as the first instalment of the purchase price. That is correct, but claims for knowing receipt and dishonest assistance do not require such inducement. They rely on knowledge of the breach.

[146]        Ms Grieve also submitted that Tellen’s pleaded case against the trustees depends on showing that Mr Williams was in breach of the SHA before he received the payments from Tellen or at least  before funds  were transferred  to  the Trust.  For knowing receipt, it is the circumstances of receipt that must be tainted. But knowing receipt can apply to a person who initially receives property without the requisite knowledge of breach and then gains knowledge while still in possession of the property.41 The position is different if the person only gains knowledge when no longer in possession of the property. Similarly, dishonest assistance requires assessing knowledge at the time of assistance, not subsequently, but assistance may be ongoing.

[147]        Here, the relevant alleged breach is a breach of clause 4.3.1 of the SHA. I have already concluded that Tellen has not established a breach of clause 4.3.1 in relation to the dividend and bonus salary, and the pre-SPA invoices submitted to Pacific. But even if it had, as Ms Grieve submitted, clause 4.3.1 imposes a prospective duty between shareholders. That breach was not automatic upon execution of the SHA. However, I also accept Mr Gustafson’s submission that that does not lead to a blanket exclusion of pre-contractual non-disclosures. Some pre-contractual conduct may have ongoing effect.   Whether failing to disclose post-execution a matter that was not

41     Independent Trustee Services Ltd v GP Noble Trustees Ltd [2012] EWCA Civ 195, [2013] Ch 91 at [76].

disclosed pre-execution gives rise to a breach of clause 4.3.1 will depend on the circumstances, including  when it was necessary to disclose the matter.   I accept   Mr Gustafson’s submission that the dividend and bonus salary, and the invoices submitted to Pacific, would affect the affairs of Sedco going forward. As indicated above, if I had found those matters involved breaches of warranty under the SPA,      I consider a duty to disclose them would have arisen under clause 4.3.1 of the SHA. In terms of when it was necessary to disclose them, I would not have considered    Mr Williams was in breach on 28 April 2017 (the date of execution) but I would likely have considered he was in breach by 2 May 2017 when the $325,000 was transferred to the Trust’s bank account. Mr Williams’ later breach in relation to the Quadrent invoice is not relevant to the claims against the trustees as it occurred after the event.

Fiduciary duty?

[148]        Tellen claims that the duty of good faith and disclosure in clause 4.3.1 of the SHA is also a fiduciary duty. Mr Gustafson submitted that, by adding the words “good faith”, the shareholders agreed to perform this duty honestly and reasonably and that elevated the duty to be fiduciary  in  nature.  He  relied  on  an  article  by  Justice Kiefel, “Good faith in contractual performance”.42 That article is more about the imposition of an obligation of good faith, whereas here we have an express term, but it supports the proposition that the obligations of good faith include to act honestly and reasonably.

[149]        Mr Gustafson also characterised the SHA as a relational contract and submitted there was inequality of power given the information disparity between the shareholders with Mr Williams having been intimately involved in Sedco’s business for a number of years and Tellen coming to it fresh as majority 67 per cent shareholder from 1 May 2017.

[150]        Mr Gustafson also submitted that the recent Court of Appeal decision in  Dold v Murphy supports the proposition that clause 4.3.1 is fiduciary in nature.43    In that case, Kós P for the Court summarised the approach to be taken:

42     Susan Kiefel “Good faith in contractual performance” (2016) 13 TJR 41.

43     Dold v Murphy [2020] NZCA 313 at [52]-[55] and [57].

[52]      First, fiduciary duties are assumed responsibilities. Fiduciary responsibility may be inferred where the relationship is one of assumed trust, confidence  and  loyalty.  These  qualities  were  identified  in  a  trio  of  New Zealand Supreme Court decisions in the latter-half of the first decade of this century: Chirnside v Fay, Paper Reclaim Ltd v Aotearoa International Ltd and Amaltal Corp Ltd v Maruha Corp.44 As Tipping J noted in the Chirnside decision, a relationship may give rise to fiduciary duties in two situations. The first is where there is an inherently fiduciary relationship between the parties, such as between solicitor and client, trustee and beneficiary, and principal and agent.45 The second context is where particular aspects of a relationship that is not inherently fiduciary nonetheless justify it being classified as such. As Tipping J has noted:46

No single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories is such that the parties owe each other obligations of a fiduciary kind.

But the Judge went on to note:47

[A] ll fiduciary relationships, whether inherent or particular, are marked by the entitlement … of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests.

[53]      The point was put slightly differently by Blanchard J in the Paper Reclaim decision:48

A fiduciary relationship will be found when one party is entitled to repose and does repose trust and confidence in the other. The existence of an agreement, express or implied, to act on behalf of another and thus to put the interests of the other before one’s own is a frequent manifestation of a situation in which fiduciary obligations are owed. Partners are a classic example of parties in that situation. Their position is different from that of parties to a contract who may have to cooperate but are doing so for their separate advantages.

[54]The same Judge put it slightly differently again in the Amaltal

decision, noting that in a fiduciary relationship:49

[O]ne party is entitled to rely upon the other, not just for adherence to contractual arrangements between them, but also for loyal performance of some function which the latter has either agreed to perform for the other or for both or has, perhaps less formally, even by conduct, assumed.

44 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433; Paper Reclaim Ltd v Aotearoa  International Ltd [2007] NZSC 26, [2007] 3 NZLR 169; and Amaltal Corporation Ltd v Maruha Corporation [2007] NZSC 40, [2007] 3 NZLR 192 at [20].

45 Chirnside at [73].

46 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [75].
47 At [80].

48 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [31] (footnote omitted).

49 Amaltal Corporation Ltd v Maruha Corporation [2007] NZSC 40, [2007] 3 NZLR 192 at [21].

[55]      We consider the relevant principles can be summarised in this way. Some relationships are inherently fiduciary in nature, involving trust, confidence and a degree of dependence, such as solicitor and client and trustee and beneficiary. In other cases a fiduciary relationship is only likely to be inferred when the legal relationship between parties involves: (1) the conferral of powers in favour of the alleged fiduciary, which may be used to affect the proprietary rights of the beneficiary; (2) the apparent assumption of a representative or protective responsibility by the alleged fiduciary for the beneficiary (for example, to promote the beneficiary’s interests, or to prefer the interests of the beneficiary over those of third parties); and (3) the implied subordination (although, not necessarily, elimination) of the alleged fiduciary’s own self-interest.

[56]      Secondly, where the essential legal relationship is contractual, primacy must be given to the contract. The contract is the starting place. As Blanchard J observed in Paper Reclaim:50

When parties have formed a contract the correct approach is first to decide exactly what they have agreed upon. Only then should the court consider whether any particular aspect of their agreement gives rise to a relationship which can properly be characterised as fiduciary, imposing an obligation of loyalty on one or both parties, which supplements the express or implied contractual powers. It is not enough to attract an obligation of loyalty that one party may have given up more than the other in entering into the contract or that the contract may be more advantageous for one party than the other. Nor is a relationship fiduciary in nature merely because the parties may be depending upon one to perform the contract in its terms. That would be true of many commercial contracts which require co-operation.

[57]      For the same reason given in relation to the first issue, we think it too long a bow to draw to find a fiduciary relationship from the thin patchwork of mutual obligations provided for in the contract. While it contains aspirational objectives in relation to maximisation of shareholders’ returns on funds invested, there are other indicators inconsistent with the proposition that the minority shareholder may not seek a premium (or, for that matter, the majority shareholders). The Judge erred a little in placing as much emphasis as she did on cl 5.4.7, which relates not to the sale of shares but to the sale of the company’s undertaking. But it is nonetheless a signal contrary to representative responsibility in relation to the sale of assets of the company, enabling one party to prefer their own position over those of others. The clause excluding partnership, on which the Judge relied, is also a counter-indicator to fiduciary responsibility, although it does not necessarily exclude it altogether.

[151]        The relationship between shareholders is not inherently fiduciary.51 Nor does the relationship here involve the elements summarised by the Court of Appeal – conferral of powers, assumption of representative or protective responsibility and

50 Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [31].

51 Even the relationship between director and shareholder is not inherently fiduciary: Holmes v Kiriwai Consultants Ltd [2015] NZCA 149 at [57]. Here, the SHA provided that a director may act in the best interests of the appointing shareholder.

implied subordination of self-interest. Also, while the shareholder relationship started with an information disparity, Tellen became the majority shareholder with Mr Briggs as the managing director.

[152]        Moreover, here the essential legal relationship is contractual, and primacy must be given to the contract. The parties agreed clause 4.3.1, in which each shareholder agreed to “act in good faith and when necessary, provide full information to the other parties in relation to the affairs and  activities of  the Company and the  Business”.  In terms of the relationship between the contracting parties, there is no need to supplement this express contractual power by way of a fiduciary obligation of loyalty. Tellen’s desire to advance an equitable claim against the trustees does not provide a need for a fiduciary obligation of loyalty. Indeed, such an obligation would be inconsistent with the terms of the SHA, which include exceptions to a non-competition clause. The clause in the SHA stating that nothing in it or in the relationship between the shareholders or in the relationship between the shareholders and the company will be deemed or construed as creating a partnership, agency or trust is not directly applicable but is equally not indicative of a fiduciary obligation of loyalty. Not every relational contract or contractual obligation of good faith is fiduciary. I consider the parties agreed to act in good faith and provide full information when necessary but not to subordinate each party’s own interests in the sense of acting in the best interests of the other inherent in an obligation of loyalty.

[153]        For these reasons, I consider the SHA, and clause 4.3.1 in particular, did not give rise to a fiduciary duty.

Knowledge

[154]        Given my earlier findings in relation to the dividend and bonus salary and  the invoices submitted to Pacific before the SPA was executed, which are relied on  in Tellen’s claims against the trustees, I consider that Tellen has not established with cogent evidence that Mr Williams knew he was in breach and therefore acted dishonestly. I have not found that Mr Williams agreed to a change to clause 5.3 which triggered the need for him to disclose the transactions already authorised to distribute Sedco’s retained earnings before sale, and I have not found that he knew the

pre-contract invoices were improperly submitted to Pacific. Further, Tellen has not established that the purchase of the property for the Williams was to dispose of the money paid by Tellen in an effort to hinder or prevent recovery of it, as claimed.

[155]        Finally, even if knowing receipt or dishonest assistance had been made out, any equitable compensation from the trustees would also be limited to Tellen’s reliance loss dependent on cancellation, referred to above.52

Mr Williams’ SHA indemnity claim

[156]        Mr Williams claims that Tellen is liable under the SHA for payment of 67 per cent of Mr Williams’ obligations to various third parties as a guarantor of Sedco.

[157]        Mr Gustafson submitted that Tellen has a defence because the guarantee was induced by a misrepresentation. He also submitted that the equitable doctrine of contribution does not countenance an innocent party contributing to relieve a wrongdoer of the consequence of the wrongdoer’s actions, referring to Mr Williams’ practice of ‘factoring’ invoices that Sedco clients were under no obligation to pay.

[158]        I do not consider the guarantee was induced by a misrepresentation. That was not Tellen’s pleaded case and its partial success does not indicate that. I do accept that if Mr Williams had wrongfully caused Sedco to incur obligations, which he and Tellen had guaranteed, and Mr Williams’ guarantee was called upon, he may be unable to recover from Tellen by way of contribution. But the obligations in issue are not obligations that Mr Williams wrongfully caused Sedco to incur. Even the $77,500  Mr Williams paid to Pacific after the liquidation was said by Ms Jackson to be a shortfall following Tellen’s instruction to Sedco customers to pay invoices to the different bank account.

[159]        Under the SHA, Mr Williams is entitled to a 67 per cent indemnity in respect of payments totalling $214,073.81 he made to Sedco’s creditors under his personal guarantee following the liquidation, that is $143,429.45, and a 67 per cent indemnity in respect of further payments made.

52 Above at [130].

Result

[160]I make the following orders:

1.Tellen’s SPA claim for breach of warranty is dismissed;

2.Mr Williams is to pay Tellen $137,094.80  (plus  statutory  interest) for breach of the SHA; and

3.Tellen  is to pay Mr Williams $425,000 (plus contractual interest of  15 per cent per annum from 1 May 2018);

4.Tellen is to pay Mr Williams $143,429.45 (plus statutory interest),  and 67 per cent of further payments made by Mr Williams to Sedco’s creditors under his personal guarantee and notified to Tellen;

5.Tellen’s claim against the trustees is dismissed.

Costs

[161]        In light of this judgment, I expect the parties to seek to agree costs. If costs cannot be agreed, I will receive memoranda (not exceeding five pages) and deal with costs on the papers.  Memoranda seeking  costs  are to be filed  and  served within  20 working days, and memoranda in response within a further 10 working days.

Gault J

Solicitors / Counsel:

Mr G Cooper and Mr M Rhodes, Cavell Leitch, Christchurch Mr B Gastafson, Barrister, Auckland

Ms G Grant (plaintiff’s instructing solicitor), Grant & Co., Auckland Ms S M Grieve, Barrister, Christchurch

Ms M Borcoski and Mr T Brown (second defendants’ instructing solicitor), Saunders Robinson Brown, Christchurch