JOHNSON v JOHNSON [2020] NZHC 1563

JOHNSON v JOHNSON [2020] NZHC 1563 [3 July 2020]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2018-485-144[2020] NZHC 1563BETWEEN B E JOHNSON, D H WALE andC D WILLIAMS as trustees ofthe Abel TrustPlaintiffsAND C B JOHNSON and M B JOHNSONFirst DefendantsLITTLE SCHOOL LIMITEDSecond DefendantJOHNSON PRESCHOOL LIMITEDThird DefendantHearing: 17 June 2020Appearances: R Fowler QC for plaintiffs (leave to withdraw)C Stevens and T Mijatov for first-named first defendantM Wigley for second-named first defendant and third defendantNo appearance for the second defendantJudgment: 3 July 2020JUDGMENT OF ASSOCIATE JUDGE JOHNSTONIntroduction and the primary matter for determination[1] This is a debt recovery proceeding. The plaintiffs are the trustees of a familytrust known as the Abel Trust. The first-named plaintiff, Mr Bryan Johnson, is thefather of the first-named first defendant, Mr Craig Johnson (Craig). Craig and thesecond-named first defendant, Mrs Maria Johnson (Maria), are a married couple,though they separated some years ago. Craig and Maria are equal shareholders andthe two directors of the third defendant, Johnson Preschool Ltd. Johnson Preschool isone of several businesses apparently owned and operated by Craig and Maria.Between June 2011 and December 2012 the plaintiff trustees advanced monies onthree occasions in connection with Craig and Maria's businesses. To the extent thatthese loans have not been repaid and are due and owing, the trustees sue to recoveroutstanding principal and interest. They sue Craig, Maria and Johnson Preschool.They have abandoned any claim against the second defendant (which, I am told, didnot exist at the time any of the loans were made).[2] Since it was commenced on 28 February 2018, the scope of the proceeding hasexpanded. Why that has happened is not difficult to discern. Craig and Maria appearto be engaged in a no-holds-barred relationship property dispute in which theirliabilities and those of their businesses to the plaintiff trustees are relevant.[3] The primary matter before the Court for determination is an interlocutoryapplication for an order pursuant to s 165 of the Companies Act 1993 granting leavefor a cross-claim in this proceeding against Craig by Maria on behalf of JohnsonPreschool.[4] Mr Fowler for the plaintiff trustees indicated at the outset of the hearing thatthey were taking a neutral position as to whether or not the Court should grant theleave sought. Presumably, the plaintiff trustees are reluctant further to complicatematters by engaging in this interlocutory skirmish. For that the Court should probablybe grateful. Mr Fowler was granted leave to withdraw.Law[5] Section 165 of the Companies Act provides:165 Derivative actions(1) Subject to subsection (3), the court may, on the application of ashareholder or director of a company, grant leave to that shareholderor director to—(a) bring proceedings in the name and on behalf of the companyor any related company; or(b) intervene in proceedings to which the company or any relatedcompany is a party for the purpose of continuing, defending,or discontinuing the proceedings on behalf of the company orrelated company, as the case may be.(2) Without limiting subsection (1), in determining whether to grant leaveunder that subsection, the court shall have regard to—(a) the likelihood of the proceedings succeeding:(b) the costs of the proceedings in relation to the relief likely tobe obtained:(c) any action already taken by the company or related companyto obtain relief:(d) the interests of the company or related company in theproceedings being commenced, continued, defended, ordiscontinued, as the case may be.(3) Leave to bring proceedings or intervene in proceedings may begranted under subsection (1), only if the court is satisfied that either—(a) the company or related company does not intend to bring,diligently continue or defend, or discontinue the proceedings,as the case may be; or(b) it is in the interests of the company or related company thatthe conduct of the proceedings should not be left to thedirectors or to the determination of the shareholders as awhole.(4) Notice of the application must be served on the company or relatedcompany.(5) The company or related company—(a) may appear and be heard; and(b) must inform the court, whether or not it intends to bring,continue, defend, or discontinue the proceedings, as the casemay be.(6) Except as provided in this section, a shareholder is not entitled to bringor intervene in any proceedings in the name of, or on behalf of, acompany or a related company.[6] It is well settled that the Court will entertain applications for leave tocommence derivative actions where a company is deadlocked. It is common groundthat that is the case here. Craig and Maria, as equal shareholders and the directors,have very different views as to whether the company should commence the proposedclaim.[7] The dispositive question is whether, in the circumstances, the Court shouldmake the order sought having regard to the considerations identified in sub-s (2) ofs 165 and any other relevant considerations.[8] The leading case is the Court of Appeal's judgment in He v Chen.1 In that casethe Court of Appeal confirmed that the statutory criteria — those set out in s 165(2)— are not exhaustive, that the Court has a discretion whether or not to grant leave, andmay take into account other relevant considerations. The Court went on to say thats 165 "requires the Court to assess each consideration separately" and that "inassessing each statutory criterion the Court should adopt the standard which would beexercised by a prudent business person in the conduct of his or her own affairs whendeciding to bring a claim."2Some preliminary considerations[9] I pause at this point to mention two preliminary matters which I regard aspotentially important aspects of the context in which the Court must deal with thisapplication.[10] First, the application arises in the context of a straightforward debt collectionproceeding with which the plaintiff trustees are entitled to proceed without unduedelay.[11] Having regard to the position adopted by the plaintiff trustees in relation to thisapplication, I place less reliance on this consideration than might otherwise have beenjustified. Nevertheless, I regard this as a factor that should figure in the assessment.[12] Second, as articulated in correspondence between the parties' solicitors andcounsel and elsewhere, the allegations made against Craig by Maria on behalf ofJohnson Preschool are wide-ranging in their nature.[13] In the course of argument Mr Wigley accepted that any derivative action in theform of a cross-claim in this proceeding would necessarily be limited in its scope,1 He v Chen [2014] NZCA 153.2 At [30] citing Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.confined to allegations of breaches of duties owed by Craig to Johnson Preschoolwhich resulted in Johnson Preschool becoming liable in relation to a $1m loan by theplaintiff trustees on 13 June 2011. This follows from the fact that the proposed claimproceeds on the premise that it is only as a result of Craig's actions that the companyis liable for that loan.[14] Accordingly, a derivative action in the form of a cross claim in this proceedingwould not dispose of all aspects of the claim against Craig that Maria is assertingJohnson Preschool may have, and raises the prospect of a further claim or furtherclaims in the future. This too appears to me to be a factor which should properly bebought to account in considering whether to grant the application.The statutory considerations[15] Having identified those two preliminary considerations, I turn to whatMr Wigley identified as the material factors in s 165(2) — those in s 165(2) (a), (b)and (d).[16] As to the apparent merits of the proposed claim (s 165(2)(a)), at this stage, allthe Court is in a position to do is form an impression. Having said that, in this case,counsel has put before the Court what appears to be a comprehensive collection ofrelevant contemporaneous documentation (with one very obvious qualification) andargued the merits of the case fully, with the result that the Court is better placed thanit might have been to assess its merits.[17] Mr Wigley developed this aspect of the case in detail. With the benefit of thatargument, it appears to me to be possible to articulate the proposed claim quitesuccinctly. I do so as follows:(a) On 13 June 2011 the plaintiff trustees paid the sum of $1m to the ANZjoint account of Craig and Maria (their "00" account).(b) From contemporaneous correspondence involving Mr Bryan Johnsonand Craig, it is clear that the former, and therefore the plaintiff trustees,believed that this was a loan being made by them on commercial termsto Johnson Preschool in order to enable the company to fund theacquisition of a property at 34 Long Drive, St Heliers, Auckland, whereit was proposed to establish a new preschool.(c) Irrespective of any analysis of what happened to these funds after theyreached Craig and Maria's "00" account, Johnson Preschools' financialstatements for the financial year ending 31 March 2012 did not recordthe $1m as a liability. Nor did the company's financial statements forthe fifteen-month financial period ending 30 June 2016. Earlier, Iqualified my observation concerning the comprehensive nature of thecontemporaneous documentation before the Court because not all ofthe company's financial statements are in evidence. Although there is,amongst the material before the Court, some suggestion that the $1mmay have been included as a liability in the company's financialstatements for one or more of the intervening financial years, in theabsence of the financial statements themselves, I am not prepared toaccept that. I accept Mr Wigley's submission that the fact that theliability — if liability it was — was not so included in the financialstatements for the financial year in which the funds were advanced orany later year for which we have financial statements is powerfulevidence that the company never included it as a liability in its financialstatements.(d) Johnson Preschool's financial statements should be treated asdefinitive. Mr Wigley described the financial statements as the goldstandard. He submitted that the Court would be wrong to look pastthem.(e) It follows that if the plaintiff trustees are entitled to "recover" theamount lent by them together with any outstanding interest against thecompany, that can only have been as a result of Craig' actions, whichwere unbeknown to Maria until well after the event, that Mr Wigleysummarised as follows in his submissions:6. Craig has breached his Companies Act and fiduciary dutiesas director in relation to the treatment of a $1 M payment bythe Abel Trust, including that he told Abel Trust and his fatherthat JPL is the debtor to Abel Trust, when that is not the case(as he knows as he controlled drafting of the JPL accounts andthe $1 Million was not recorded as a debt). The funds wereused for purposes outside JPL. Overlapping is that Craig'salleged misrepresentation to his father and JPL breaches s 9Fair Trading Act, and that has caused JPL to be liable to AbelTrust for a sum it would not otherwise be liable for.[18] Mr Stevens submitted that that analysis was artificial. He contended that theCourt was entitled to "follow the money". He said that it is at least conceivable that,however erroneously, the company failed to account for this loan in its financialstatements because it was viewed as irrelevant to its day-to-day operations, being of along-term capital nature. He suggested that the evidence demonstrated that the $1mtransferred by the plaintiff trustees to Craig and Maria's "00" account, an accountwhich they clearly used both as a personal account and as a clearing account for theirvarious business interests, ultimately found its way to Johnson Preschool and that theplaintiff trustees were therefore entitled to recover the debt from Johnson Preschool,irrespective of whether or not the company's accounts recognised the same as aliability. He did not put the case in quite these terms, but might have submitted that,even if the trustees were not entitled to sue the company in contract, if it received thebenefit of the funds then it would be vulnerable to a claim in quasi contract for moneyhad and received, or some other restitutional remedy.[19] Mr Stevens then submitted that on the evidence it was possible to demonstrateby reference to exchanges between the plaintiff trustees and Craig, JohnsonPreschool's bank statements and documentation relating to the acquisition of34 Long Drive that the $1m paid by the plaintiff trustees to Craig and Maria's "00"account on 13 June 2011 was employed on Johnson Preschool's behalf in theacquisition of that property.[20] On the evidence, it is clear that, as between the plaintiff trustees and Craig, thearrangements relating to the $1m loan were that it was made on commercial termsbetween the former and Johnson Preschool. In order to demonstrate that it is onlynecessary to refer to an email exchange between Mr Bryan Johnson and Craig inOctober 2011.[21] On 12 October 2011 Mr Bryan Johnson wrote to Craig in following terms:CraigRe 1,000,000 advance for St Helliers Property.Abel Trust has advanced Little Schools 1 million on 13/06/2011. As discussedyesterday interest will be charged at say 6% p.a. payable 6 monthly in arrears.So on 13/12 and 13/6 you should arrange to pay into:Jarden Corporation LimitedAccount No: [Account number] $30,000 less withholding tax of 9.900 =20,100 netAbel Trusts IRD No: [IRD number].If okay please acknowledge and confirm.RegardsDad[22] Craig responded by email on 14 October 2011 saying:All good.[23] Given that Craig was a director and, on Maria's evidence, was held out by thecompany as having responsibility for the management of the business, it is difficult tosee how, as between the plaintiff trustees and the company, that exchange could not bebinding on the latter.[24] On 13 June 2011 there was a payment into Craig and Maria's "00" accountfrom the plaintiff trustees of $1 m.[25] The narration in the bank statements was "JARDEN PROPERTIES ABELTRUST FUNDING LITTLE SCHOOL", and it is common ground that at this time theparties used the term Little School to refer to the business of Johnson Preschool.[26] Immediately following that transaction, Craig and Maria's "00" account had abalance of $750,939.46.[27] On 14 June 2011 there was a payment out of the account to a firm of solicitors,Jones Law, who were apparently acting for Craig and Maria or Johnson Preschool inrelation to the purchase of 34 Long Drive of $1,036,085.42.[28] The narration in the bank statements was "CHEQUE/WITHDRAWAL."[29] Immediately following that transaction, Craig and Maria's "00" account had adebit balance of $246,167.32.[30] The acquisition of 34 Long Drive was settled on 14 June 2011.[31] The certificate of title for 34 Long Drive indicates that title was transferred toJohnson Preschool on 14 June 2011, since which date the company has been theregistered owner. No one suggests that the company is not the owner, in law andequity.[32] There is considerable force in the submission made on behalf of Maria by MrWigley that the directors of a company, responsible as they are for its governance andthe accuracy of its records, are generally unable to contradict its financial statements.[33] Having said that, even if Johnson Preschool became liable for the debt as aresult of Craig's actions as alleged, if there is evidence demonstrating that the companyreceived the benefit of those monies, it is difficult to see how it suffered any loss thatwould justify a claim.[34] On the available evidence it appears to me to be more likely than not that thosemonies were employed in the acquisition of 34 Long Drive, and it is accepted by allparties that the property was purchased and registered in the name of JohnsonPreschool Ltd.[35] Against that background, the preliminary view I have reached is that a claimby Johnson Preschool against Craig on the basis proposed would face difficulties.[36] That brings me to the second s 165(2) criterion which is the likely cost of suchan action.[37] Mr Wigley helpfully provided an analysis of the likely scale costs of such anaction on a stand-alone basis. He arrived at a figure of $135,000, inclusive of costsand disbursements. Mr Stevens did not disagree. That appears to me to be a fairassessment.[38] However, Mr Wigley contended that as all relevant parties will be involved inthe hearing in any event, and the allegations that would be involved in the proposedderivative action are to an extent at least a replication of the allegations made in thecrossclaim against Craig by Maria already filed and served, the marginal cost of thederivative action would be appreciably less. I accept that.[39] Mr Wigley's assessment was that the marginal cost of the proposed derivativeaction would be no more than $15,000.[40] Mr Stevens questioned that, suggesting that the figure would be significantlyhigher.[41] I agree. My assessment is that the inclusion of the proposed derivation actionwould likely increase the hearing time by between one and a half and three days. I aminclined to think that this would increase Johnson Preschool's solicitor and client costsmaterially, perhaps by as much as one third of Mr Wigley's starting figure, sosomething like $45,000.[42] Pursuant to s 165(2)(d), the Court must have regard to Johnson Preschool'sinterests. It appears to me that in one sense at least this is the ultimate issue. I willreturn to it in due course.A further factor[43] In addition to the two preliminary points identified above, and the statutorycriteria, there is authority for the proposition that the Court may also have regard toany ulterior purpose or purposes on the part of the applicant. I take the references inthe authorities, to which I will refer shortly, to ulterior purposes to mean anythingother than the best interests of the company on behalf of which it is proposed tocommence proceedings.[44] Torrice v Hayhow3 is an example of the courts having regard to an applicant'sulterior purposes which were, in and of themselves, legitimate. In Swansson vRA Pratt Proprietors Pty Ltd4 the New South Wales Supreme Court consideredulterior motives that it concluded amounted to lack of good faith on the applicant'spart.[45] In relation to Swansson Mr Wigley pointed out that the Australian legislationdiffers from our own because the statutory criteria there expressly include theapplicant's motivations. I do not perceive that makes any difference. TheNew Zealand courts have been very clear that there exists an element of discretion andthat the Court is not limited to considering the statutory criteria. The existence of anulterior purpose on the part of the applicant is, to my mind, an obvious consideration.[46] Both Mr Wigley for Maria and Mr Stevens for Craig focussed attention on thequestion of whether Maria could be seen to have an ulterior purpose in making thisapplication. Mr Wigley took the position that her sole motivation was the interests ofthe company. Mr Stevens tended to ascribe motives to her which related to her ownposition rather than that of Johnson Preschool. The view I take is that it is unnecessaryto attempt to examine in any detail what may be motivating Maria. It appears to mean unavoidable conclusion that the purposes of a claim against Craig by JohnsonPreschool cannot be the interests of the company alone.[47] The proposed claim must by definition be based on the assumption that theplaintiff trustees are entitled to recover the debt in question against Johnson Preschool;the case against Craig is that it is his actions that have brought that liability into being.If Craig and Maria were not separated, and their interests had not diverged, no usefulpurpose would be served by the proposed proceeding. A successful claim wouldsimply reduce their collective personal wealth and increase the wealth of a companyin which they have equal interests by a corresponding amount (less the costs of theproceeding of course). The unavoidable inference is that the proposed claim is beingpursued in order to advantage Maria as against Craig in one way or another.3 Torrice v Hayhow HC Auckland CIV1453/04, 14 May 2004.4 Swansson v RA Pratt Proprietors Pty Ltd [2002] NSWSC 583, (2002) 42 ACSR 313.[48] I do not say that any such motivation on Maria's part is improper, much lessunlawful. However, the view I take is that any purpose which is not directly relatedto the interests of the company should be brought to account in the analysis againstthe making of the order sought.Discussion[49] It seems to me that the first of the two preliminary points made earlier in thisjudgment — relating to the nature of the proceeding — weighs in the balance againstthe granting of leave. The plaintiff trustees are entitled to pursue their debt recoveryproceeding without undue delay, and there can be no serious doubt that theintroduction of the proposed derivative action would add a further dimension to theproceeding and delay the disposal of it.[50] However, as already said, in view of the position taken by the plaintiff trustees,I do not place significant reliance on this factor.[51] Turning to the second preliminary point, this case is unusual, if not unique, tothe extent that what is proposed is a derivative action in the form of a cross claiminvolving defendants in an existing proceeding.[52] In applying the prudent business person test, the Court must place itself in theposition of a prudent business person in the circumstances facing the company. Thosecircumstances include the fact that what is proposed is a cross claim in existingproceedings. In my view, a prudent business person would be cautious aboutembarking upon a claim in circumstances where he or she was limited to advancingonly some aspects of a claim that he or she perceived to be available. Such a coursemight involve two risks. First, the company might find itself precluded fromadvancing wider claims in the future. Second, it might result in the company havingto shoulder the costs in two proceedings rather than one.[53] In my assessment, these considerations would weigh in the balance against thegranting of leave in the mind of a prudent business person, and accordingly must weighin the balance against the granting of leave here.[54] Turning to the apparent merits of the proposed claim, my judgment is that theseare relatively evenly balanced for the reasons already referred to. It is impossible todeny the conceptual purity of Mr Wigley's starting point that, absent Craig's actions,if the financial statements of Johnson Preschool did not recognise the payment madeby the plaintiff trustees on 13 June 2011 as a debt then the company would have hada strong defence to any claim against it for recovery of that debt, and if, by his actions,Craig rendered the company liable, then a claim against him may lie. As against that,there is comparatively strong evidence that the company received the benefit of theloan as the monies concerned were employed in the purchase of 34 Long Drive that ithas owned from the outset, and if that is the case the company may face difficulties inestablishing any entitlement to damages.[55] In my view, a prudent business person would be hesitant about embarking uponlitigation in which it could not be said with confidence that there was an appreciablybetter than even prospects of success.[56] Accordingly, this factor appears to me to weigh in the balance against thegranting of leave.[57] As to costs, this is probably a neutral consideration. Johnson Preschool's costswould certainly increase if the proposed claim were to be made, but not by a very largemargin over the costs it will incur in any event in defending the claim.[58] Turning finally to the question of the motivation behind this application, whilstI make no criticism of Maria, the view I take is that she clearly has an ulterior purpose,that is to say a purpose other than the company's interests.[59] As already said, but for Craig and Maria's separation it seems clear that nouseful purpose would be served by a derivative action. It appears to me to follow thata significant motivating consideration for this application is to advance Maria'sposition vis-à-vis Craig in connection with their relationship property dispute.[60] Doing the best I can to weigh all of these considerations, the view I havereached is that the best interests of Johnson Preschool — which, as already said,appears to me to be the overriding consideration — would not be served by grantingthe leave sought.The ongoing conduct of the defence of the proceeding by Johnson Preschool[61] There is a second issue for determination, namely whether it is appropriate forMaria, through her solicitors and counsel, to continue to carry the burden of theconduct of Johnson Preschool's defence in this proceeding. The current position wasbrought about by agreement between the parties and a consent order made by Ellis Jon 21 October 2019. Given that Johnson Preschool was deadlocked, Craig and Mariaagreed that one or either of them should have responsibility for the conduct of itsdefence and that that should be Maria.[62] Both parties however reserved their positions very carefully. In making theconsent order Ellis J recognised this.[63] Craig's agreement was expressed to be both without prejudice to his contentionthat the company had no defence to the plaintiff trustees' claim, and given on the basisthat the position could be reviewed in the future.[64] Craig now raises this issue and effectively withdraws his consent to Mariahaving the conduct of the company's defence. His contention is that neither he or sheshould have responsibility for that, recognising that they have diametrically opposedviews as to the position which the company should adopt.[65] In my judgement, it is not necessary to go further than that to conclude that thetime has come when the defence of the company in this litigation ought to be placedon a different footing. I do so without reaching any views as to conduct of the defenceto date. As I view it, this is a straightforward matter of a holding position contingentupon mutual consent that no longer exists.[66] Craig's proposal is that independent solicitors and counsel now be appointedto act for Johnson Preschool, with the company being responsible for the costsinvolved (as it is now).[67] The practical difficulty is of course that that will involve the companyappointing solicitors and counsel, which throws everyone back to the underlyingreality that the company is deadlocked.[68] There are of course mechanisms for dealing with a deadlock, but it isappropriate for the Court to do what it can to assist the parties to avoid the costs ofsatellite litigation. In order to facilitate that I invite Mr Stevens and Mr Wigley toliaise and agree on solicitors and counsel. That should not be impossible. If howeverit proves so, the parties may come back by memorandum with a view to inviting theRegistrar to appoint solicitors and counsel to act for the company.Conclusion[69] The second-named first defendant's application is dismissed.[70] The consent order made by Ellis J on 21 October 2019 as to the thirddefendant's representation is revoked.[71] Costs are reserved. If counsel cannot agree on costs, as I would expect themto do, they may come back by memoranda in the usual way.Associate Judge JohnstonSolicitors:Lane Neave, Wellington for plaintiffsDLA Piper, Wellington for first-named first defendantWigley and Company, Wellington for second-named first defendant and third defendant