MORGENSTERN v JEFFREYS CA122/2014 [2014] NZCA 449

MORGENSTERN v JEFFREYS CA122/2014 [2014] NZCA 449 [11 September 2014]IN THE COURT OF APPEAL OF NEW ZEALANDCA122/2014[2014] NZCA 449BETWEEN ARTHUR SYLVAN MORGENSTERNFirst AppellantTANYA MAY LAVASSecond AppellantAND STEPHANIE BETH JEFFREYS ANDTIMOTHY WILSON DOWNESRespondentsHearing: 28 May 2014 (further submissions received 21 August 2014)Court: O'Regan P, Harrison and White JJCounsel: C T Walker for AppellantsM T Davies and K M Wakelin for RespondentsJudgment: 11 September 2014 at 11.00amJUDGMENT OF THE COURTA The appeal and the cross-appeals are dismissed.B The first appellant is to pay 90 per cent of the costs of the respondents for a standard appeal on a band A basis with usual disbursements to be fixed by the Registrar. We certify for two counsel.____________________________________________________________________REASONS OF THE COURT(Given by White J)Table of ContentsPara NoIntroduction [1]Background [10]The St Lukes development [11]Mr Morgenstern's overdrawn current account with MSE [18]Professional advice [20]The value of the shares in MS St Lukes [29]The interests of MSE [37]Mr Morgenstern's financial position [41]The High Court judgment [43]The "fair value" of the shares in MS St LukesThe Judge's approach [52]Submissions for Mr Morgenstern [53]Legal principles [55]Application here [64]Reliance on professional adviceThe Judge's approach [72]Submissions for Mr Morgenstern [74]Legal principles [75]Application here [79]Breaches of duties [83]Section 131 [84]Section 135 [86]Section 137 [89]Inconsistent findings? [90]ReliefThe Judge's approach [92]Submissions for Mr Morgenstern [93]Further submissions [94]Legal principles [98]Application here [101]Costs appeal [105]Cross-appeals [108]The s 298 cross-appeal [109]The carpark incentive fee cross-appeal [113]Result [123]Introduction[1] The appellants, Mr Morgenstern and his partner Ms Lavas, appeal against a judgment of the High Court finding Mr Morgenstern in breach of his duties as a director under ss 131, 135 and 137 of the Companies Act 1993 (the Act) andordering him to pay the sum of $3,499,999 to Kingdon Undertaking Ltd, previously Morning Star Enterprises Ltd (in liq)) (MSE) under s 301 of the Act and costs.1[2] The respondents Ms Jeffreys and Mr Downes, are the liquidators of MSE, Kingdon Development Ltd (KDL) and Axon House Carparking Ltd (previously GS & LD Lease Ltd) (GLL), all of which were Auckland property development companies operated by Mr Morgenstern. They cross-appeal against the High Court'sdismissal of their alternative claim for the judgment sum based on s 298 of the Act (in law they seek to support the judgment on another ground) and their claim for an additional amount payable by GLL for a monthly carpark incentive fee ($100,000 annually) based on ss 135 and 136 of the Act.[3] Mr Morgenstern's appeal relates to the sale of his 99 shares in Morning Star (St Lukes Garden Apartments) Ltd (MS St Lukes) to MSE on 30 March 2007 for $3,465,000 and the sale of the remaining one share held by Ms Lavas to MSE on or about 8 May 2007 for $35,000, a total of $3,500,000. The purpose of the sale was to enable Mr Morgenstern, who was the sole shareholder and director of MSE, to repay his overdrawn current account with MSE.[4] In the High Court Rodney Hansen J held that the consideration for the 99 shares of $3,465,000 was excessive.2 Further, he found that, in authorising the purchase of the shares by MSE for an excessive consideration, Mr Morgenstern was in breach of:(a) his duty to act in good faith in the best interests of MSE under s 131 of the Act;3(b) his duty not to agree to, cause or allow reckless trading by MSE under s 135;4 and(c) his duty of care to MSE in his directorial role under s 137.51 Jeffreys v Morgenstern [2014] NZHC 308 [High Court judgment].2 At [96].3 At [110].4 At [112].5 At [116].[5] On this basis the Judge made an order under s 301(1)(b) of the Act requiring Mr Morgenstern to pay $3,499,999 to MSE, being the resultant loss to the company from the purchase of the shares less $1, being the price at which the shares were subsequently sold to St Lukes Holding Ltd.6[6] As no relief was sought against Ms Lavas, no order was made against her.7She was not a director and therefore not in breach of any relevant duties under the Act. Her position therefore does not arise for consideration on this appeal.[7] Mr Morgenstern challenges the High Court judgment on the grounds that:(a) The Judge's finding that the consideration was excessive was inconsistent with his decision to dismiss the liquidators' claim unders 298 of the Act because the liquidators had failed to prove that the shares were worth less than MSE had paid for them.(b) Mr Morgenstern had acted and relied on professional advice in authorising MSE to purchase the shares for $3,465,000.(c) The consideration of $3,465,000 represented the "fair value" of theshares in MS St Lukes as at 30 March 2007.(d) Mr Morgenstern honestly believed that the purchase of the shares was in the best interests of MSE.(e) No loss was caused to MSE by the purchase of the shares on 30 March 2007. Any loss was caused by subsequent events.[8] As is apparent from these grounds, the principal focus of the appeal is on the circumstances surrounding the sale by Mr Morgenstern of his shares in MS St Lukes to MSE on 30 March 2007, including in particular the value of the shares on that date, and the consequential application of the relevant provisions of the Act to the transaction in the light of those circumstances.6 At [120].7 At [120].[9] We address the liquidators' cross-appeals separately.8Background[10] Mr Morgenstern, primarily through MSE, had been a successful property developer in Auckland.9The St Lukes development[11] For present purposes the relevant development was being undertaken at St Lukes, Auckland, by MS St Lukes. Mr Morgenstern was the sole director of the company.[12] St Lukes was a $67,000,000 development (with an anticipated profit in 2004 of $14,335,000) financed by the Bank of New Zealand (the BNZ) as first mortgage lender and Structured Finance (NZ) Ltd (Structured Finance) as second mortgage lender.[13] The financial side of the development was managed by Mr Martyn Reesby of Reesby & Co Ltd. All payments had to be made or approved by Structured Finance. Mr Reesby regularly prepared financial reports and feasibility studies reporting on the projected returns from the development.[14] The St Lukes development, which commenced in 2003, involved two stages. The first stage was completed in 2005 with the construction of 241 apartments and associated retail units. The second stage, comprising 53 apartments and six commercial units, together with a two-storey commercial building, commenced in December 2005 on the basis of building consents issued in June 2005.[15] It was assumed, wrongly, that the necessary resource consents for the second stage had been obtained. When it emerged in early 2006 that this was not the case work on stage two stopped.8 Below at [108].9 See High Court judgment, above n 1, at [2].[16] For various reasons, including objections by a group of stage one apartment owners, there were unexpected delays and a retrospective resource consent was not granted until March 2008. As the consent conditions were more restrictive than sought, there was an appeal which was not resolved until 2010.[17] As Rodney Hansen J noted,10 the delay and the modified terms of consent substantially impacted on the profitability of the project. Indeed it ultimately resulted in a loss. MS St Lukes' liabilities exceeded its assets (which included a debt due by MSE of $1,268,640) by $1,515,012 as at 31 March 2007.11 In 2009, following its failure to pay a debt of $128,569.46, MS St Lukes was placed into liquidation on the application of creditors.12 The liquidators' report indicates it owedmore than $15,000,000 and had negligible assets.Mr Morgenstern's overdrawn current account with MSE[18] In the meantime Mr Morgenstern was also facing difficulties with MSE which by March 2007 was coming under financial pressure, having undertaken a joint venture development (the Axon House development) which was not financially successful. MSE was balance sheet insolvent and being sued as guarantor of a rental underwrite deed for $127,077.80.13[19] Mr Morgenstern had an overdrawn current account with MSE. As at 31 March 2005 the overdrawn balance was $1,776,336. Rodney Hansen J's findingthat drawings during the year ended 31 March 2006 increased the overdrawn balance was not challenged on appeal.14 It is now accepted by Mr Morgenstern that the best case from his point of view is that the overdrawn balance was $1,871,787 on 31 March 2007. The respondents say it was much higher.10 At [74].11 At [81].12 Lim v Morning Star (St Lukes Garden Apartments) Ltd HC Auckland CIV-2009-404-3279, 14 September 2009.13 High Court judgment, above n 1, at [13], [17], [18], [99] and [108]–[109]. Summary judgment was given in respect of that claim: SAITeysMcMahon Property Ltd v Kingdon Developments LtdDC Auckland CIV-2007-004-403, 1 June 2007.14 High Court judgment, above n 1, at [75].Professional advice[20] Mr Morgenstern gave evidence at the trial that in late 2006 or early 2007 he had been given advice by his accountant, Mr Ian Craig of BDO Spicers, Auckland, that he should:(a) pay down his overdrawn current account with MSE in order to bring capital into MSE and to avoid incurring interest on the overdraft which would give rise to deemed interest (for tax purposes);(b) do this by selling his only significant asset, namely his shares in MS St Lukes, to MSE, crediting his current account in payment; and(c) establish a market value for the shares in MS St Lukes, otherwise the transaction would be open to challenge and any difference between the transaction value and the actual value of the shares would be deemed a dividend.[21] Mr Morgenstern also gave evidence that Mr Craig agreed with his proposal that Mr Reesby should assess the then current value of the St Lukes project and didnot suggest that a "registered" valuation should be obtained.[22] Mr Morgenstern said that after he had obtained Mr Reesby's analysis of theexpected value of the project he took it to Ms Gina Hull of BDO Spicers, Auckland, another of his accountants, for discussion and review. Mr Morgenstern said that Ms Hull:advised me that I should take a conservative approach to the value and applya 20 per cent discount to Mr Reesby's assessed profit.[23] There was no evidence, however, that Ms Hull had been told that the St Lukes project had stalled. Indeed Mr Walker for Mr Morgenstern acknowledged before us that she did not know this had happened.[24] Mr Morgenstern said that he relied on the advice that he received from BDO Spicers, including the appropriate method for valuing the shares because he did not know what methodology was appropriate.[25] Prior to the trial the liquidators objected to aspects of Mr Morgenstern'sevidence relating to the advice given by BDO Spicers on the grounds that it was inadmissible hearsay evidence. The Judge decided that the evidence should be admitted and that its hearsay nature should go to the weight to be given to it.[26] Neither Mr Craig nor Ms Hull gave written advice to Mr Morgenstern in 2006–2007 and neither was called to give evidence at the trial. The only evidence from BDO Spicers was a letter dated 1 September 2010 from Mr Craig to Mr Walkerproviding Mr Morgenstern's responses to the liquidators' proposed claims. Mr Craigstated in his letter that:BDO Auckland was not asked to undertake a formal valuation of the shares and did not undertake such a valuation. The land, buildings and future development were valued as detailed in this letter [by Mr Reesby]. In order to obtain a valuation of the shares a discount of greater than 20% for risk and profit was applied.[27] Mr Craig went on to say in his letter:We previously indicated the purpose of the transfer in [sic] the shares to MSE was to remove the burden of an overdrawn current account.The shareholder was able to sell an asset to the company for value but could not do so for excess value.At the time of the transfer the project appeared to be fully profitable.The value of $3.465m was at least what a willing but not anxious buyer would have paid a willing but not anxious seller for the shares at the date of transfer, given the information known at the time. The transfer price was not less than the market value. Subsequent diminution in the market value is irrelevant.[28] Rodney Hansen J accepted the evidence of one of the expert witnesses for the liquidators that any advice given by Mr Craig to Mr Morgenstern to pay down hisoverdrawn current account in MSE would have been "orthodox enough".15Mr James Sclater, a chartered accountant, professional company director and member of the Institute of Directors, who gave evidence for the liquidators, alsoaccepted that, if the shares in MS St Lukes were Mr Morgenstern's only asset, theproposed transaction would not have been unreasonable. Rodney Hansen J did not accept, however, that Mr Morgenstern had established that this was the case.16The value of the shares in MS St Lukes[29] Mr Morgenstern acknowledged under cross-examination that his shares in MS St Lukes had no value on the open market in March 2007. He claimed, however, that their value was $3,500,000 to MSE because of his continued involvement in the project and the return he said it was expected to yield. But no independent expert valuation of the fair market value of the shares in MS St Lukes was obtained by anyone prior to the sale of the shares to MSE in March 2007 or for the purpose ofsupporting or opposing the liquidators' claims against Mr Morgenstern and Ms Lavas.[30] Instead, as already noted, Mr Morgenstern, ostensibly acting on the advice of BDO Spicers, relied on Mr Reesby to assess the current value of the St Lukesproject. Mr Reesby prepared a "feasibility study" or "profit assessment" or "profit summary" designed to show, for the benefit of the lenders, the project's financial position as at 28 February 2007. Mr Reesby calculated a projected profit of $4,429,000.[31] For the purpose of his feasibility study, Mr Reesby assumed that construction of stage one would recommence in June 2007 and be completed by May 2008. Mr Reesby assumed an average value of $360,000 for the remaining apartments:those in building "G" and $374,000 for apartments in building "H". He allowedinterest of $600,000 on existing stage one debt and a further $570,000 for stage two debt.15 At [104].16 At [94] and [106].[32] Mr Morgenstern regarded Mr Reesby's feasibility study as providing a fairand accurate analysis of the expected value of the project.[33] Mr Reesby gave evidence at the trial. In his brief of evidence he said that he did not know that the feasibility study would be used for the purpose of a sale of the shares. He explained under cross-examination that what counsel called the feasibility study was a revised budget and profit assessment prepared for the purposeof giving the St Lukes development's funders a view of their security position. Hesaid it could be called a "financial projection". He also said he set out to provide an answer to the question "what is our overall position?"[34] The valuation evidence for the liquidators at the trial was given by Mr Downes, a chartered accountant as well as one of the liquidators, and Mr Justin Bosley, another chartered accountant. Neither was called as an independent expert share valuer.[35] Both gave evidence critical of Mr Reesby's feasibility study. They said thatthe shares in MS St Lukes were worthless when they were acquired by MSE in March 2007 because MS St Lukes was insolvent. Under cross-examination, however, both accepted that the solvency of MS St Lukes should not be assessed solely on the basis of its accounts.[36] Rodney Hansen J concluded that Mr Reesby's feasibility study (as adjustedby the 20 per cent discount) was of no assistance in determining the value of the shares in MS St Lukes.17 As Mr Morgenstern strongly disputes this conclusion andthe Judge's reasons for it, we address this issue separately later.18The interests of MSE[37] As already noted,19 in March 2007 when MSE purchased the 99 shares in MS St Lukes from Mr Morgenstern it was in serious financial difficulties. At that time its principal creditors included trade creditors ($2,211,420), MS St Lukes17 At [93].18 Below at [52]–[71].19 Above at [19].($1,268,640), KDL ($794,986), Newmarket Carparks Ltd ($716,310) and Morning Star Development Ltd ($373,417).[38] While Mr Morgenstern proceeded on the basis that on 30 March 2007 the MS St Lukes shares were worth $3,500,000, they were written off in MSE's financialstatements for the year ended 31 March 2007 to reflect the uncertainty about whether the project could be completed and on what terms.[39] There was no evidence that, at the time of the sale and purchase of the shares, the position of MSE as purchaser had been separately or independently considered. In particular, there was no evidence explaining why it was in the interests of MSE to exchange a debt owed personally by Mr Morgenstern for an equity interest in MS St Lukes. As Mr Walker acknowledged before us, the option for MSE ofsecuring Mr Morgenstern's debt by way of a personal guarantee had not beenexplored. In our view this would have been a better option.[40] While Mr Walker submitted that Mr Morgenstern had received advice in his dual capacities as a director and shareholder of MSE, there was no evidence that MSE had received separate, independent advice from BDO Spicers. In particular, there was no evidence that BDO Spicers had advised MSE that the proposed transaction was in the best interests of MSE. Mr Craig's letter of 1 September 2010 was directed at defending Mr Morgenstern's position.Mr Morgenstern's financial position[41] Mr Morgenstern claimed that it was in the interests of MSE to replace his current account, which he "couldn't pay back", with "a valuable asset", his shares inMS St Lukes. As Mr Walker acknowledged, however, there was no evidence of Mr Morgenstern's assets and liabilities to support his claim.[42] This is consistent with the Judge's conclusion that Mr Morgenstern couldhave availed himself of his ability to earn funds and raise capital from banks, financecompanies and investors to meet financial obligations, including if necessary repayment of his current account with MSE.20The High Court judgment[43] Against this background, Rodney Hansen J decided that Mr Morgenstern, as a director of MSE, was in breach of his duties under ss 131, 135 and 137 of the Act.[44] First, the Judge held that Mr Morgenstern breached his duty under s 131(1) of the Act by failing to act in good faith and in the best interests of MSE in putting his own personal interests in satisfying his current account ahead of the interests of MSE.21 Both MS St Lukes, with its stalled development project, and MSE were under financial pressure.22 The share transfer had been considered a year earlier at the same price.23 It was remarkable that the later valuation was anticipated with such"uncanny accuracy".24 Mr Reesby's feasibility study fell well short of the requirement for a contemporaneous independent valuation.25 If Mr Morgenstern had been advised that the feasibility study was adequate for the purpose, the accountants should have been called to defend and explain their evidence.26[45] The Judge found that Mr Morgenstern did not honestly believe the sale to be in the best interests of MSE.27 The Judge said:[103] I am also not persuaded that Mr Morgenstern honestly believed the sale to be in the best interests of MSE. I believe his dominant purpose was to avoid exposure to a claim for recovery of his current account and to shift the risk of the St Lukes project to MSE and, through MSE, to its creditors.[46] The Judge also found that there was a central fallacy in the proposition that the acquisition of the shares would "capitalise" MSE. The Judge said:[107] Leaving that to one side there is, however, as Mr Malarao [then counsel for the liquidators] pointed out, a central fallacy in the propositionthat the acquisition of the shares would "capitalise" MSE. The20 High Court judgment, above n 1, at [106].21 At [97]–[110].22 At [99].23 At [99]24 At [100]–[101].25 At [102].26 At [102] and [110].27 At [103]."capitalisation" of MSE would be dependent on the success of the St Lukes development. The acquisition of the shares would only "capitalise" MSE inany real sense if the development were profitable. In that event, Mr Morgenstern's ability to repay his current account, contingent (on his evidence) on the success of the St Lukes development, would be restored. The acquisition of the shares achieved nothing for MSE while Mr Morgenstern was able to shed his personal liability and acquire an asset (the balance of the purchase price) which would be repayable if the St Lukes development were profitable. In a very real sense, MSE surrendered a bird in the hand for one in the bush.[47] Second, the Judge held that Mr Morgenstern was in breach of his duty under s 135 not to agree to or cause or allow the business of MSE to be carried on in amanner likely to create a substantial risk of serious loss to the company's creditors.The Judge described the transaction under which MSE purchased the shares as a transaction which went to the heart of the company's business enterprise.28 The Judge then said:[112] For the reasons already canvassed, I consider the transaction involved an unacceptable level of risk that could not be justified. It involved the company surrendering a valuable asset (the debt recoverable from Mr Morgenstern) in exchange for shares in a stalled property development that had a long way to go before offering any prospect of a return. Mr Morgenstern failed to take even the most elementary steps to protect the interests of the company. The risk of serious loss to company creditors was palpable. It was a proposal that could not have survived a sober assessment. I am satisfied that Mr Morgenstern was in breach of s 135.[48] Third, the Judge held that Mr Morgenstern was in breach of his duty of care under s 137.29 The Judge said:[116] In the circumstances that existed at the time of the share sale, I amsatisfied that Mr Morgenstern's actions fell well short of the standard to beexpected of a reasonable director. Mr Sclater drew my attention to a numberof respects in which the company's recordkeeping was deficient. These included the failure to produce timely accounts; the failure to keep and [sic] interests register; and the omission to ratify the share sale, as a major transaction, by special resolution as required by s 129 of the Act. However, the most egregious omission was Mr Morgenstern's failure to obtain an independent share valuation by a suitably qualified person. I am satisfiedthat a reasonable director in Mr Morgenstern's position would have done so.He is accordingly in breach of s 137 of the Act.[49] As already mentioned, on the basis of these three findings of breach of duty, the Judge exercised the power of the Court under s 301(1)(b) and ordered28 At [111].29 At [113]–[116].Mr Morgenstern to restore MSE to the position it was in before the shares were transferred on 30 March 2007 by paying the sum of $3,499,999 to MSE.30[50] It is implicit in his judgment that Rodney Hansen J was satisfied that the findings of breach of duty and the order for payment of $3,499,999 could be made notwithstanding his earlier finding that the liquidators had not made out a case for recovery under s 298.31 The liquidators' claim under s 298 failed because while the Judge was satisfied the consideration paid by MSE was "excessive", he had noreliable means of determining by how much.[51] Underpinning each of the Judge's findings of breach of the Act was his viewthat Mr Morgenstern was under an obligation to ensure that MSE paid a "fair value"for his shares in MS St Lukes on the basis of an independent valuation of the shares.32The "fair value" of the shares in MS St LukesThe Judge's approach[52] As already noted,33 Rodney Hansen J concluded that Mr Reesby's feasibilitystudy (as adjusted by the 20 per cent discount) was of no assistance in determiningthe value of the shares in MS St Lukes. The Judge's reasons for this conclusionwere:(a) The feasibility study was an assessment of the profitability of the development project, not a valuation of the shares which involvedmore than a valuation of the company's main asset.34(b) The feasibility study may have been acceptable for the purpose of reporting to the project's funders, but it was a wholly unsatisfactorybasis for establishing fair value for a related-party transaction.3530 At [117]–[120].31 At [96].32 At [98].33 Above at [36].34 High Court judgment, above n 1, at [85].35 At [86].(c) Property values used exceeded valuation (which themselves did not meet formal reporting standards) and, in the case of the residentialapartments, did not appear to be supported by "actual sales of comparable units in the same complex".36(d) An allowance for interest of $600,000 (on the stage one debt) was demonstrably inadequate. Even after expected realisations, substantial debt levels would persist until completion.37(e) The feasibility study itself made no allowance for risks and contingencies. They were allowed for in the 20 per cent discount, but that was never explained or justified.38(f) The uncertainties associated with the resource consents required before the St Lukes project could be completed were unrealistically minimised by Mr Morgenstern.39Submissions for Mr Morgenstern[53] Mr Walker submits that the Judge's conclusion was wrong and that none ofhis reasons was correct. In particular, Mr Walker submits that Mr Reesby was"well-positioned" to prepare the analysis of the profitability of the project by reasonof his academic qualifications, his experience in corporate and commercial finance, and his responsibility for supervising the finances of the St Lukes project and for reporting to both the BNZ and Structured Finance on the expected profitability of the project. Mr Walker suggested that Mr Reesby had not been challenged on his evidence about the preparation of his assessment of the profitability of the project and that the liquidators had not called evidence to prove that the shares were worthless than MSE paid. Mr Walker was particularly critical of the "desktop" valuationcarried out by Mr Bosley, which was based solely on the accounts for MS St Lukes.36 At [87].37 At [88].38 At [89] and [91].39 At [90].[54] In respect of the Judge's specific reasons for concluding that Mr Reesby'sfeasibility study was of no assistance in determining the value of the shares in MS St Lukes, Mr Walker submits:(a) It was "a valuation of the St Lukes Garden Apartment project ownedby MS St Lukes, not of the shares in MS St Lukes".(b) While a valuation of the shares would have taken into account potential surplus assets (related-party balances) and any creditors not taken into account in valuing the project, there was no evidence that"such supplementary matters" would have made any difference to thevalue assessed by Mr Reesby.(c) The property values assumed by Mr Reesby did not exceed valuations and, in the case of residential apartments, were supported by actual sales of comparable units in the same complex.(d) Mr Reesby did not miscalculate interest on the debt owing through to the end of the project.(e) There was no evidence to support the finding that the 20 per cent discount was inadequate.(f) The substantial uncertainties concerning the resource consents only arose when owners of the development raised objections to the completion of stage two, after March 2007.Legal principles[55] There is no dispute that the duties imposed on directors by ss 131, 135 and 137 are owed to the company and require directors to act in the best interests of thecompany. A director must not put his or her personal interests ahead of those of the company.40 The duties arise regardless of the size of a director's shareholding and role in the company. They apply even if the shareholding is 100 per cent. It is also well-established that, at least when a company is in financial difficulties, the dutiesextend to a requirement to take into account the interests of the company's creditors.41[56] The existence of these duties means that when there is a transaction between a director and the company there is likely to be a conflict of interest between thedirector's personal interests and the separate interests of the company. A director who is interested in such a transaction must disclose it to the company.42 Unless thetransaction is for "fair value", the company may avoid it within three months.43 If a director seeks to uphold the transaction, the onus of establishing fair value is on the director.44[57] Similarly, a director involved in such a transaction who wishes to avoidbreaching the director's duties to the company will need to be able to satisfy a courtthat the transaction was for fair value.45[58] In a situation where there is no contemporaneous independent valuation and the parties have to rely on the records of the company, it is not unjust to impose an onus of proof in respect of establishing fair value at the time of a transaction on the director.46 The director, who is likely to be in possession of the relevant information,will be in a better position to discharge the onus than the company's liquidators.4740 Peter Watts "Duty to act in the best interests of the company" in Peter Watts, Neil Campbell and Christopher Hare (eds) Company Law in New Zealand (LexisNexis, Wellington, 2011) 445 at [13.4].41 Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA); Robb v Sojourner [2007] NZCA 493, [2008] 1 NZLR 751 at [25]; and Andrew Keay "Directors' Duties and Creditors'Interests" (2014) 130 LQR 443.42 Companies Act, s 140.43 Section 141.44 Section 141(5)(a).45 Peter Watts "Conflicts of interest" in Peter Watts, Neil Campbell and Christopher Hare (eds)Company Law in New Zealand (LexisNexis, Wellington, 2011) 533 at [15.2].46 Robb v Sojourner, above n 41, at [76]–[77].47 Whiting Yachts (1984) Ltd (in liq) (1992) 6 NZCLC 67, 680 (HC) at 67,684; Francis v KenahHC Napier M100100/93, 15 August 1997 at 9; and see Accident Compensation Corp v Ambros[2007] NZCA 304, [2008] 1 NZLR 340 at [59]–[60].The onus should not therefore be on the liquidators as Mr Walker suggested.[59] As this Court held in Robb v Sojourner, to establish "fair value" in a casesuch as this one the director would be well advised to obtain a contemporaneous independent valuation of the assets being acquired. As this Court warned:48In terms of both the process adopted and the price which is eventually fixed, directors would be well advised to err on the side of caution as if the sale is later held to have been at an undervalue, the liability of the directors may well exceed the discrepancy between the contract price and fair value.[60] We therefore do not accept Mr Walker's submission that the decision inRobb v Sojourner applies only to the steps directors would be advised to take if they want to avoid a claim under the avoidance provisions and is not authority for the proposition that a reasonable director engaged in a self-interested transaction should obtain a contemporaneous independent valuation. Mr Davies, counsel for the liquidators, also pointed out that the obligation on a reasonable director in this situation is recognised by the relevant Institute of Chartered Accountants of New Zealand Standard.49[61] As Mr Craig recognised in his letter of 1 September 2010, when the transaction involves a sale and purchase of shares between the director and the company, a contemporaneous independent valuation would require the valuer to determine the value of the shares in accordance with the well-established test, namely the value at which a willing but not anxious vendor would sell and a willing but not anxious purchaser would buy.50 This is essentially a practical question, not to be overlaid by philosophical or legal niceties.48 Robb v Sojourner above n 38, at [31].49 Council of the Institute of Chartered Accountants of New Zealand NZICA Advisory Engagement Standard, AES-2: Independent Business Valuation Engagements (as amended June 2003).50 Hatrick v Commissioner of Inland Revenue [1963] NZLR 641 (CA) at 658 and 661; Holt v Holt[1987] 1 NZLR 85 (CA) at 96; Clark v Clark [1987] 2 NZLR 385 (CA) at 388; Z v Z [1989] 3 NZLR 413 (CA) at 415; Sojourner v Robb, above n 41, at [38]; Boat Park Ltd v Hutchinson[1999] 2 NZLR 74 (CA) at 83–85; Sayes v Tamatekapua [2012] NZCA 524 at [21]; and Sturgess v Dunphy [2014] NZCA 266 at [148].[62] The main recognised share valuation methodologies include asset valuations, capitalisation of earnings, price earnings ratio, and liquidation.51 Which methodology is used will depend on the purpose of the valuation.[63] Bearing in mind the onus of proof and the risk for directors involved in such transactions, they would be well-advised to obtain the requisite independent share valuation from an expert in share valuations.Application here[64] Applying these legal principles here, there is no doubt that Mr Morgenstern, in his capacity as a director of MSE, had a conflict of interest when it came to the purchase by MSE of his shares in MS St Lukes for the purpose of the repayment of his personal MSE loan account. The fact that Mr Morgenstern owned 99 of the 100 shares in MSE made no difference. As the sole director of MSE he still owed all the duties a director owes and was required to take into account the interests of MSE and, in view of MSE's financial difficulties, the interests of its creditors.[65] Consequently, as Rodney Hansen J correctly held, Mr Morgenstern was underan obligation to ensure that MSE paid a "fair value" for his shares in MS St Lukes.In the absence of a contemporaneous independent valuation of the shares, Mr Morgenstern faced the onus of proving that the shares were purchased by MSEfor "fair value" with the difficulties he encountered later once MS St Lukes hadcollapsed. In this situation the onus was not on the liquidators. The fact that the"desktop" valuation for the liquidators could be criticised is therefore of littlerelevance.[66] Mr Morgenstern has failed to discharge his onus. He was intimately involved in the affairs of MS St Lukes and had access to all the relevant information. The liquidators were not liquidators of MS St Lukes and did not have the necessary information about that company.51 AV Adamson The Valuation of Company Shares and Businesses (5th ed, Law Book Company,Sydney, 1975); Vern Krishna "Determining the 'Fair Value' of Corporate Shares" (1987) 13 Can Bus LJ 132; and David Bowes Tolley's Practical Share and Business Valuation (LexisNexis, London, 2008) at [9.1]–[10.57].[67] We agree with Rodney Hansen J that Mr Reesby's feasibility study (asadjusted by the 20 per cent discount) was not an independent valuation of the shares:(a) Mr Reesby was not an independent expert share valuer. Mr Reesby was associated with the St Lukes project. He was not independent. He did not claim to be qualified or experienced as an expert share valuer as required by the Code of Conduct for expert witnesses.52 He was not aware that his feasibility study was going to be used for the purpose of valuing the shares.(b) As Mr Walker acknowledged, the feasibility study was not a valuation of the shares in MS St Lukes. It did not determine the value at which a willing but not anxious vendor would sell and a willing but not anxious purchaser would buy the shares. The purpose of the feasibility study was to assess the value of the St Lukes project inorder to give the project's funders a view of their security position. As Rodney Hansen J held, the feasibility study was therefore a wholly unsatisfactory basis for founding a related-party transaction.[68] The unsatisfactory nature of the feasibility study as a share valuation is alsoreinforced by the Judge's other reasons for rejecting it. Mr Walker's submissionsthat there was no evidence that any supplementary matters would have made anydifference to Mr Reesby's value and to support the finding that the 20 per cent discount was inadequate overlooked the fact that the onus was on Mr Morgenstern to adduce evidence to establish these propositions affirmatively. He failed to adduce such evidence. Mr Walker's submission also overlooked his acknowledgment that Ms Hull's advice about the 20 per cent discount was given without knowing that the St Lukes project was stalled.[69] We also accept the Judge's other criticisms of the feasibility study:52 High Court Rules, r 9.43 and sch 4; and Evidence Act 2006, s 26. McGechan on Procedure(online looseleaf ed, Brookers) at [HR9.43]; Donald Mathieson, Grant Burston and Bernard Robertson Cross on Evidence (NZ) (online looseleaf ed, LexisNexis) at [EVA25.5] and [EVA26]; and Richard Mahoney and others The Evidence Act 2006: Act and Analysis (3rd ed, Brookers, Wellington, 2014) at [EV26.01].(a) As Mr Davies pointed out, the Judge's findings that the propertyvalues used by Mr Reesby exceeded valuations were supported by theevidence. The value for the "Stage One Retail" project of $3,500,000,based on estimates by Mr Reesby, was more than $600,000 greater than was given in an informal assessment by Seager Partners. The values of the apartments in stage two (buildings G and H) used in Mr Reesby's feasibility study and the values of the unsold apartmentsranging from $470,000 to $375,000 did not follow the valuesachieved from "actual sales of comparable units in the same complex", as claimed by Mr Reesby. When taken to the evidence of what sales had been achieved up to 7 February 2007, Mr Reesby accepted under cross-examination that very few of the apartment sales actually came near his lower average estimate of $360,000. The actual values were considerably lower.(b) The allowance of $600,000 in further interest (on a total debt of $16,500,000) was plainly inadequate. In the short period February to May 2007, over $600,000 of interest had actually accrued on Structured Finance/Fidelity mezzanine loans.53 Additional interest would also have continued to accrue to BNZ, the primary lender. Under cross-examination Mr Reesby was unable to explain what the $600,000 was supposed to cover. Clearly significantly more interest than $600,000 was going to be accrued. In addition $300,000 of the $600,000 had already been incurred on the Structured Finance/Fidelity loan between January and the end of March 2007.(c) The feasibility study contained no analysis of the risks and no reasoning for the 20 per cent discount that was applied. The risksincluded: obtaining the Council's consent in a timely manner; fundingthe development and the costs of doing so; completing the construction on time and to budget; and selling the units at estimated prices within the required timeframe.53 Fidelity Finance Ltd was Mr Reesby's company. Part of the St Lukes debt was assigned to it.(d) There was ample evidence to support the Judge's view thatMr Morgenstern had unrealistically minimised the uncertainties associated with the resource consents required before the St Lukes project could be completed. The project had stalled prior to March 2007 when it was discovered that the necessary resource consents for stage two had not been obtained. This followed the decision of the Auckland City Council, in May 2006, to issue a Project Information Memorandum unexpectedly imposing five major conditions which led to the development being altered. Both Mr Reesby and Mr Morgenstern experienced difficulties with the Auckland City Council in the resource consent process.[70] Mr Morgenstern's failure to obtain a contemporaneous independent valuation of the shares in MS St Lukes means that he is unable to establish that the shares werepurchased by MSE at "fair value". In particular, Mr Morgenstern has failed to prove that the consideration of $3,465,000 represented the "fair value" of the shares as at 30 March 2007.[71] Mr Morgenstern's attempt to rely on Mr Craig's subsequent letter of1 September 2010 to support the value of $3,465,000 is misconceived as Mr Craig was not called as a witness. In particular, Mr Craig did not appear to justify his views which were inconsistent with the evidence before the Court relating to thedeficiencies in Mr Reesby's feasibility study in light of the stalled project and theinadequacy of the 20 per cent discount.Reliance on professional adviceThe Judge's approach[72] As already noted,54 Rodney Hansen J held that, if Mr Morgenstern wished to rely on the advice, which he said he had received from BDO Spicers, to repay his overdrawn current account with MSE by selling his shares in MS St Lukes to MSE on the basis of Mr Reesby's feasibility study, then it was necessary forMr Morgenstern to call evidence from his advisers at BDO Spicers.54 Above at [44].[73] The Judge did not accept the liquidators' submission that Mr Morgenstern was obliged by s 138 of the Act to plead affirmatively reliance on BDO Spicers'advice.55 Rather the Judge decided that Mr Morgenstern's failure to call evidencefrom the advisers meant that it was open to the Court to draw an adverse inference.56Submissions for Mr Morgenstern[74] Mr Walker agrees with the Judge that s 138(2) is inapplicable because Mr Morgenstern is not seeking to raise an affirmative defence under s 138. Mr Morgenstern's case is simply that the fact he took advice from BDO Spicers andacted in accordance with it was evidence that he was acting in good faith and in the best interests of MSE. On this basis Mr Walker submits it was unnecessary for Mr Morgenstern to call evidence from his advisers and no adverse inference should be drawn because Mr Morgenstern's evidence was before the Court and theliquidators could have called or interviewed Mr Craig or Ms Hull.Legal principles[75] The starting point is that s 138 explicitly recognises that a director is entitled to rely on professional advice. As Rodney Hansen J accepted,57 s 138 provides an affirmative defence to a claim of breach of statutory duty by excusing a director who relies on information provided or advice given by an employee, professional adviser or fellow director and who acts in good faith, makes proper inquiry and has no knowledge that such reliance is unwarranted.58 As with other affirmative defences, the onus of proof is on the director to establish the defence.59 Under the High Court Rules, an affirmative defence should also be pleaded.60[76] A director seeking to rely on the affirmative defence will therefore need to adduce evidence establishing the nature and scope of the advice and the55 High Court judgment, above n 1, at [21].56 At [102].57 At [21].58 Mason v Lewis [2006] 3 NZLR 225 (CA) at [77]; Sojourner v Robb, above n 41, at [48]–[50]; and Re Cellar House Ltd (in liq) HC Nelson CP13/00, 18 March 2004 at [217].59 Humphrey v Fairweather [1993] 3 NZLR 91 (HC) at 94 and Law Commission Law Relating to Civil Penalties (NZLC IP33, 2010) at [6.42].60 Rule 5.48(4); and Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZCA 154, (2012) 21 PRNZ 235 at [22] (rev'd in part on the question of costs: [2012] NZSC 109, [2013] 1 NZLR305).circumstances justifying the director's reliance on the advice. At the very least thedirector would be expected to adduce direct evidence from the professional advisers and make them available for cross-examination.61[77] A director who does not adduce direct evidence from the relevant professional advisers is unlikely to be able to establish the defence solely on the basis of his or her own evidence. As this Court pointed out in Mason v Lewis,62little, if any, weight could appropriately be given to a director's suggestion in evidence that he had been reassured as to his company's prospects by his accountant,who was not called.[78] Furthermore, failure to adduce evidence from the relevant professional advisers would support the inference that their evidence would not assist the director when the director would be expected to call them as witnesses, their evidence would explain or elucidate their advice and their absence is unexplained.63 In a civil case, contrary to Mr Walker's suggestion, there is no obligation on a party to call theprofessional advisers of the other party as witnesses. An adverse inference may bedrawn where a witness is in the "camp" of one party and it would be natural for that party to produce the witness.64 This is particularly the case where the witness has a relationship of confidence with the party,65 and, specifically, where the witness is theparty's accountant.66Application here[79] Mr Morgenstern did not plead as an affirmative defence under s 138 that in proceeding with the sale of his shares in MS St Lukes to MSE he had relied on the professional advice of Mr Craig and Ms Hull of BDO Spicers. Nor did he seek to amend his statement of defence during the High Court trial or adduce any direct61 Mason v Lewis, above n 58, at [82].62 At [82].63 Jones v Dunkel (1959) 101 CLR 298 at 308, 312 and 320–321; Perry Corp v Ithaca (Custodians) Ltd [2004] 1 NZLR 731 (CA) at [153]–[154]; Kuhl v Zurich Financial Services Australia Ltd [2011] HCA 11, (2011) 243 CLR 361 at [63]–[64]; and Forivermor Ltd v ANZ Bank New Zealand Ltd [2014] NZCA 129 at [15] (leave to appeal refused [2014] NZSC).64 JD Heydon Cross on Evidence (8th ed, Lexis Nexis Butterworths, Australia, 2010) at [1215].65 Payne v Parker [1976] 1 NSWLR 191 (CA) at 201–202 per Glass JA.66 Steele v Mirror Newspapers Ltd [1974] 2 NSWLR 348 (CA) at 366–367 per Hutley JA andPayne v Parker, above n 65, at 202.evidence from Mr Craig or Ms Hull as to the nature and scope of their advice. Instead he relied solely on his own evidence of what he said he had been advised andMr Craig's subsequent letter of 1 September 2010.[80] In declining to accept the liquidators' submission that Mr Morgenstern couldnot rely on his affirmative defence under s 138 without pleading it the Judge said:67It may be that in order to avail himself specifically of the defence, Mr Morgenstern was required to plead s 138 but I think Mr Walker is right to say that for the purpose of considering whether or not there has been a breach of a relevant statutory duty, it must be necessary to consider whether Mr Morgenstern relied on information provided and advice given by others.[81] As Mr Morgenstern does not rely on the affirmative defence, we approach theissue of his reliance on the BDO Spicers' advice in the same way as RodneyHansen J did. We are satisfied that, in the absence of any evidence from Mr Craig or Ms Hull, his reliance on the advice must fail. Our reasons are simply that:(a) Mr Morgenstern was obliged by the onus of proof on him to adduce direct evidence from his professional advisers on whom he claimed to have relied.(b) In the absence of any direct evidence from his professional advisers,Mr Morgenstern's own evidence and Mr Craig's letter of 1 September 2010 could be given little, if any, weight.(c) The unexplained absence of the professional advisers, whose evidence was necessary to establish Mr Morgenstern's case, entitles the Courtto draw the adverse inference that their evidence would not have assisted Mr Morgenstern. In particular, the Court may infer that there was no adequate explanation for the failures to obtain a proper valuation of the shares and to ensure that MSE received independent advice.67 High Court judgment, above n 1, at [21].[82] Mr Morgenstern's claim that in entering into the transaction for the sale of hisshares in MS St Lukes to MSE on the basis of professional advice therefore fails.Breaches of duties[83] With the failure of Mr Morgenstern's principal defences based onMr Reesby's feasibility study and reliance on professional advice from BDO Spicers,we have little difficulty in upholding the judgment of Rodney Hansen J in respect ofMr Morgenstern's breaches of ss 131, 135 and 137.Section 131[84] Mr Morgenstern clearly failed to act in good faith and in what he believed to be the best interests of MSE. Notwithstanding Mr Walker's submissions to thecontrary, we are satisfied that the evidence at the trial provided ample support for theJudge's credibility findings that Mr Morgenstern did not honestly believe the sale to be in the best interests of MSE and that his dominant purpose was to avoid exposure to a claim for recovery of his current account by shifting the risk of the St Lukes project to MSE and, through MSE, to its creditors.[85] In our view these findings were inevitable when the following factors are taken into account:(a) The sale of the shares was a related-party transaction in which Mr Morgenstern was under a conflict of interest.(b) The transaction was solely for his own personal benefit.(c) No consideration was given to the interests of MSE or to alternative means of security for MSE.(d) The share transfer had been considered a year earlier at the same price.(e) No independent share valuation was obtained.(f) The required process of approving a major transaction under s 129 of the Act was not followed.Section 135[86] Mr Morgenstern clearly engaged in reckless trading. In the circumstances that existed in March 2007, the purchase of the shares by MSE was likely to create asubstantial risk of serious loss to the company's creditors.[87] We agree with Rodney Hansen J that the share transaction amounted to reckless trading because it had the potential to cause the demise of MSE. The fact that it was a single transaction does not preclude a finding of reckless trading.[88] In our view the fact that MSE failed within a year of the transaction served to confirm how reckless the transaction was as far as MSE was concerned.Section 137[89] Mr Morgenstern clearly breached the duties of care, diligence and skill that a reasonable director would have observed in the same circumstances. As Mr Walker acknowledged, the test under s 137 is an objective one based on the standard of a reasonable director. In our view no reasonable director would have proceeded with this transaction which was clearly only in the interests of Mr Morgenstern.Inconsistent findings?[90] In addition to the submissions for Mr Morgenstern which we have already rejected, we address here Mr Walker's submission that no breach of duty should have been found because Rodney Hansen J had held in relation to the liquidators' claimunder s 298 that the liquidators had failed to prove that the shares were worth less than the consideration received. The other way Mr Walker puts this submission isthat the Judge's finding that the consideration was excessive was inconsistent with his decision to dismiss the liquidators' claim under s 298.[91] The short answer is that the liquidators' claim under s 298(1) required proof of the amount by which the value of the consideration exceeded the value of thebusiness at the time of the acquisition, while the claims under ss 131, 135 and 137 required proof of breach of the duties, with the Court empowered by s 301(1)(b) to order restoration of the money lost by the company as a result of the breaches. The fact that the Judge was unable to determine by how much the consideration was excessive for the purpose of the s 298(1) claim did not preclude him from finding thebreaches of duty under ss 131, 135 and 137 and making the order for any "just" restoration under s 301(1)(b). The Judge's finding in the context of considering thes 298 claim that the consideration was "excessive" was therefore consistent with his findings in respect of the breaches of duty under ss 131, 135 and 137.ReliefThe Judge's approach[92] Rodney Hansen J ordered Mr Morgenstern to pay MSE the sum of $3,499,999.68 The Judge made the order on the basis that:(a) When a director was guilty of breach of duty, the Court was empowered by s 301(1)(b) of the Act to order the director to repay or restore any money or property lost by the company as a result of the breach which it considers is just.69(b) Here MSE should be restored as nearly as possible to the position it was in before the share sale by requiring Mr Morgenstern to"disgorge" the benefits that flowed from the breach, namely theelimination of his current account and/or the credit to him for any balance.70(c) The credit balance appeared to have been largely offset by a debt of $1,612,220 owed by Hamina Enterprises Ltd (Hamina), another of Mr Morgenstern's companies, to MSE.7168 High Court judgment, above n 1, at [120].69 At [117]–[118].70 At [119]–[120].71 At [119], n 32.Submissions for Mr Morgenstern[93] Mr Walker submits that no order should have been made under s 301 because:(a) If there was no sufficient proof that the shares were worth less than $3,500,000 for the purposes of s 298, this must be equally true for the purposes of s 301.(b) No loss was caused to MSE on the date of the transfer because MSEreceived "fair value". The fact that the value of the shares mightsubsequently fall is irrelevant.(c) The Judge's "disgorgement" analysis was inappropriate under s 301,particularly as there was no net benefit to disgorge because Mr Morgenstern gave fair value for the credit in the current account.(d) Even if the shares had been proved to be worth nothing (which is not the case), the most that the director could be ordered to contribute is the amount of the losses caused to the company. Anything above that amount would be returned to him, as the sole shareholder. On theliquidators' own case, the claims filed in MSE's liquidation were nomore than $1,315,807.80. Of this, $794,987 was an intercompany debt to KDL which was wholly owned by Mr Morgenstern.Further submissions[94] In the course of the preparation of this judgment we sought and obtained further submissions from the parties on the question whether, given the financial difficulties faced by MSE on 30 March 2007, it could be argued that all that Mr Morgenstern received for his shares in MS St Lukes was the cancellation of his current account debt of $1,871,787 with MSE and a potentially worthless IOU from MSE for the balance, if any, of the sale price of $3,500,000.[95] Mr Davies submits there was in fact no IOU because Mr Morgenstern had a current account debt in excess of $3,500,000 largely because the debt of $1,612,220 owed by Hamina to MSE had been assumed by Mr Morgenstern prior to the sale ofthe MS St Lukes' shares on 31 March 2007.[96] In response Mr Walker submits that the Hamina debt was not assumed by Mr Morgenstern until after the sale of the shares. Mr Walker relies on a BDO workpaper headed "Morning Star Enterprises Limited 31 March 2007 review note" whichsaid:3. The collectivity of Hamina Enterprises Limited.As per Gina Hull's advise [sic] on 12 December 2007, we have offset $1612220 owed by Hamina Enterprises Limited with [Mr Morgenstern's]personal drawing.[97] There are a number of difficulties with this submission for Mr Morgenstern:(a) The issue of the timing of the assumption by Mr Morgenstern of the Hamina debt was not addressed by Rodney Hansen J or, initially, inMr Morgenstern's appeal to this Court.(b) The evidence relied on by the liquidators indicates that Mr Morgenstern had assumed the Hamina debt prior to 31 March 2007.(c) In the face of the evidence for the liquidators, the evidence which Mr Morgenstern now seeks to rely on appears particularly flimsy. The reference in the BDO work paper to the date of "12 December 2007"appears to be the date of Ms Hull's advice rather than the date of the "offset" of the Hamina debt. The more significant date appears to be the reference to "31 March 2007" in the heading of the BDO work paper which suggests that Ms Hull's advice related to an event that had occurred prior to 31 March 2007.Legal principles[98] The power of the Court to order relief for breach of directors' duties underss 131, 135 and 137 is contained in s 301(1) which provides:301 Power of court to require persons to repay money or return property(1) If, in the course of the liquidation of a company, it appears to the court that a person who has taken part in the formation or promotion of the company, or a past or present director, manager, administrator, liquidator, or receiver of the company, has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company, the court may, on the application of the liquidator or a creditor or shareholder,—(a) inquire into the conduct of the promoter, director, manager, administrator, liquidator, or receiver; and(b) order that person—(i) to repay or restore the money or property or any part of it with interest at a rate the court thinks just; or(ii) to contribute such sum to the assets of the company by way of compensation as the court thinks just; or(c) where the application is made by a creditor, order that person to pay or transfer the money or property or any part of it with interest at a rate the court thinks just to the creditor.[99] As this Court held in Sojourner v Robb,72 relief under s 301(1)(b) will,bearing in mind the Court's ultimate discretion,73 be calculated by examining the nature of the breach of duty and by judging the appropriate amount of compensation to be awarded based on common law and equitable principles. A breach of s 131 involves the breach of a fiduciary obligation, requiring a strict standard of causation and imposition of the fiduciary measure of damages, including on a "restitutionary"or notional account of profits basis.74 A company's loss, where "loss" is in any eventthe appropriate measure of compensation, is calculated based on the deterioration of72 Sojourner v Robb, above n 41, at [53] and [58]–[59].73 Mason v Lewis, above n 58, at [55].74 FXHT Fund Managers Ltd (in liq) v Oberholster [2010] NZCA 197 at [28]–[30]: contrast the s 135 and s 137 duties (at [30]) and Robb v Sojourner, above n 41, at [31] and [60]. LynneTaylor "Liquidation" in John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Brookers, Wellington, 2013) 837 at [31.7.2(2)(a)].its financial position between the date of the breach and the date of liquidation.75The onus is on the delinquent director to prove that the loss, or part of it, would have been caused regardless of the breach.76[100] Adopting this approach, the appropriate amount of compensation will be thecompany's actual loss, that is the amount required to put it back into the position itwould have been in but for the transaction.Application here[101] In view of the nature of the breaches of duty by Mr Morgenstern in this case, which included breach of his duty to act in good faith and in the best interests ofMSE, we agree with Rodney Hansen J that a "restitutionary" approach to reliefunder s 301(1)(b) is appropriate. The fiduciary nature of this duty, which Mr Morgenstern breached, means that an order for the "disgorgement" of the benefitreceived is appropriate.[102] We do not accept Mr Walker's submissions that no order should have beenmade. In our view:(a) There was sufficient proof that the shares were worth less than $3,500,000. The Judge was satisfied that the price paid was"excessive". Mr Morgenstern failed to establish that $3,500,000 was the "fair value" of the shares.(b) MSE, which was balance sheet insolvent in March 2007, did incur a"but for" loss of $3,500,000 due to the share transfer, executed inconsequence of Mr Morgenstern's breaches of duty, the cancellation of Mr Morgenstern's overdrawn current account and the offsetting ofthe debt owed by Hamina, a company owned by him and Ms Lavas.[103] Nor do we accept Mr Walker's submission that the maximum amount payableunder s 301 should be the loss suffered by the creditors. The problem with that75 Mason v Lewis, above n 58, at [109].76 FXHT Fund Managers, above n 74, at [28].approach is that it does not leave any funds to pay the respondents. We see no reason why Mr Morgenstern should not be ordered to pay the full $3,499,999 on the basis that, if there is a surplus in the liquidation, the money will be returned to him as the sole shareholder in any event.[104] We therefore agree with Rodney Hansen J that the liquidators were entitled to judgment against Mr Morgenstern for $3,499,999.Costs appeal[105] Mr Morgenstern also appeals against the High Court order for costs in favour of the liquidators on the grounds that the liquidators failed on two out of three transactions and seven out of ten causes of action and most time was spent on matters on which the liquidators were unsuccessful. Mr Walker submits that costs should be refused or, at minimum, awarded on a reduced basis.77[106] Costs matters in relation to High Court proceedings are at the discretion of that Court,78 governed by the guiding principles in case law and the specific costs rules in rr 14.2–14.10 of the High Court Rules.79 Courts should endeavour to do justice to both sides in considering costs, bearing in mind all material features of the case.80 The focus should not be too closely on the question of the extent to which aparty has "succeeded" or "failed" where there is mixed success.81 Success or failure in this context is better assessed by a realistic appraisal of the end result, and of other relevant factors.82[107] Given the time-pressured context of liquidation, where liquidators may haveto take action while continuing to investigate a company's affairs, and the fact thatthe liquidators in this case obtained judgment for $3,499,999, the bulk of the quantum which they might have obtained, we do not consider Rodney Hansen J erred in exercising his discretion to make a costs order in their favour.77 High Court Rules, r 48D.78 Rule 14.1.79 McGechan on Procedure (online looseleaf ed, Brookers) at [HR14.1].80 Packing In Ltd (in liq) formerly known as Bond Cargo Ltd v Chilcott (2003) 16 PRNZ 869 (CA) at [5].81 At [5].82 At [6].Cross-appeals[108] The liquidators cross-appeal against the High Court findings that:(a) they had not made out a case for recovery under s 298 of the Act inrespect of Mr Morgenstern's sale of his shares in MS St Lukes toMSE; and(b) Mr Morgenstern did not breach his duties under ss 135 and 136 of the Act in committing GLL to the carpark incentive fee of $100,000 annually payable to the purchaser of the Axon House development.The s 298 cross-appeal[109] As we have already mentioned, the liquidators also sought recovery of the sum of $3,500,000 from Mr Morgenstern under s 298 of the Act on the basis that the consideration for the sale of his shares in MS St Lukes to MSE was excessive. Rodney Hansen J held that the consideration for the sale was excessive, but declined to order relief because he was unable to determine by how much as required by s 298(1).[110] The liquidators' cross-appeal against the Judge's decision not to order relief isbrought on the narrow ground that once it is established that the consideration for the transaction was excessive the Court should strive to make a finding and any uncertainty around value should not be resolved against liquidators.[111] In support of this cross-appeal, Mr Davies submits that there were clear evidential grounds on which the Judge could have based a finding that the shares were worthless.[112] As we have already held that judgment should be entered against Mr Morgenstern for $3,499,999, no practical purpose would be served in entering judgment against him again for the same amount in the context of the s 298 cross-appeal. For this reason, this cross-appeal is dismissed.The carpark incentive fee cross-appeal[113] The liquidators, who are also the liquidators of GLL, sought recovery from Mr Morgenstern of an unpaid carpark incentive fee of $100,000 plus GST (annually) in respect of another property development (Axon House) on the grounds that as a director of GLL he was in breach of his duties:(a) under s 135 of the Act not to agree to, cause or allow the business of GLL to be carried on in a manner likely to create a substantial risk ofserious loss to GLL's creditors; and(b) under s 136 of the Act not to agree to GLL incurring an obligation unless he believed on reasonable grounds that GLL would be able to perform that obligation when required.[114] Rodney Hansen J declined this claim on the grounds that:(a) Mr Morgenstern reasonably believed that the incentive payment was only due when at least 50 carparks (not including parks already leased at less than market rates) had been let at current market rental, so it could be funded out of receipts;83 and(b) Mr Morgenstern reasonably relied on shareholder support from GLL'sparent GS and LD Investment and Management Services Ltd (GLIMS). The shareholders decided to withdraw their support because they believed that the incentive payment was not due.84[115] In support of this cross-appeal, Mr Davies submits that there were no reasonable grounds to interpret the carpark deed in the way Mr Morgenstern said he did and there was no reasonable basis for Mr Morgenstern to rely on shareholder support when both GLIMS and GLL were insolvent.83 High Court judgment, above n 1, at [66].84 At [68]–[69].[116] The cross-appeal depends on the reasonableness of Mr Morgenstern'sinterpretation of clause 2.9 in the carpark deed which provided:Should at any time during the term of this deed, the number of Carparks leased or licensed by the Property Users fall below 50 Carpark spaces ("minimum threshold"), GS & LD's obligation to pay the Carpark Feeshould be suspended for the period during which the number of Carparks leased or licensed by the Property Users does not exceed the minimum threshold to the intent that no Carpark Fee should be payable by GS & LD during the period where the minimum threshold is not being met. Once the number of Carparks leased by the Property Users meet or exceed [sic] theminimum threshold, GS & LD's obligations to pay the Carpark Fee shallresume with the first payment due on first day [sic] of the month immediately following the date where the Carparks leased or licensed by the Property Users exceeded the minimum threshold.[117] Rodney Hansen J upheld Mr Morgenstern's interpretation of this clause asreasonable. The Judge said:85[66] In my view, Mr Morgenstern had good reason to expect that GLL would not be obliged to make an incentive payment unless there were more than 50 carparks leased at market rates. In a memorandum written to him on 13 May 2005, Kensington Swan had explained the proposed carparking arrangements on the basis that GLL would provide carpark space at current market rentals. The agreement for sale and purchase and the carpark deed itself anticipated the lease of carparks at market rentals. The omission to qualify clause 2.9 may well have been a drafting error. It seems inherently unlikely that Mr Morgenstern would have committed GLL to making the incentive payment without receiving a corresponding benefit. It was the whole purpose of the incentive arrangement.[67] Leaving to one side the unexpected difficulty over the incentive payment, the Newmarket carpark appears to have been operated in a commercial and businesslike way. I was referred to revenue and expense budgets for the 2003 2005 period [sic] which showed continuing growth in revenue and profitability for the overall operation. It is true, as Mr Sclater pointed out, that these budgets covered the whole operation of which the GLL business was just a part, they were for an earlier period and did not include actual figures. However, I have no reason to doubt that they reflected the pattern of growth which could reasonably be anticipated and which Mr Morgenstern said was being achieved. The plaintiffs' experts didnot dispute his evidence that a carpark operation could expect to incur losses in its early years of operation and only gradually build towards profitability.[68] It was inevitable then that both GLIMS and GLL, as GLIMS' whollyowned subsidiary, would be reliant on the continuing support of GLIMS'shareholders. Indeed, a note to the GLIMS accounts records the agreement of shareholders to continue to support the company and ensure that debts are paid when they fall due. Both Mr Bosley and Mr Sclater accepted that the continuation of this support was critical to the survival of both companies.85 Footnote omitted.As previously noted, if such support can reasonably be anticipated if required to meet an obligation, a director will not be in breach of s 136 or guilty of the illegitimate risk-taking which would also found liability under s 135.[69] As I have already said, I take the view that Mr Morgenstern had reasonable grounds for believing that income from the carpark would be sufficient to cover the incentive payment. Further, he appears to have had no reason to think that shareholder support would not continue and extend, if need be, in the event that GLL required assistance to meet its obligations under the carpark deed. I do not think the turn of events which led to the judgment against GLL was reasonably foreseeable. I consider Mr Morgenstern had reasonable grounds for believing that income from the carpark would be sufficient to cover the incentive payment. However, in the event that support was required, Mr Morgenstern was entitled to anticipate that GLIMS would continue to support GLL as it moved towardsprofitability. Indeed, it is clear that GLIMS' shareholders decision towithdraw support from GLL stemmed from their belief that the incentive payment was not payable.[118] We agree with the Judge that Mr Morgenstern's interpretation of clause 2.9 of the carpark deed (that it was unnecessary to insert the words "at market rates" intocl 2.9 because of the surrounding provisions of the deed and context) was reasonably open to him, especially in view of the fact that it was based on advice at the time from Kensington Swan. In these circumstances there is not sufficient evidence to hold that Mr Morgenstern was unreasonable to believe that interpretation and that he was therefore in breach of his duties under ss 135 and 136 of the Act. It was the contractual interpretation which made commercial sense because GLL could cover its obligation with receipts.86[119] Contrary to the liquidators' submissions that the lawyers' advice provided toMr Morgenstern supported the conclusion that he knew his interpretation was unreasonable or was wilfully ignorant, the Kensington Swan letter refers specifically to the rental of the carparks at "at the then current market rates" before advising thatthe incentive fee will not be payable if the number of parks leased at market rates falls below the numbered threshold.[120] We also do not accept the liquidator's submission that, because the expected revenue for the incentive may have been accounted for in setting the sale price of the Axon development, it was not open to Mr Morgenstern reasonably to believe that the86 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR at [8]–[9].expected revenue was contingent on the carparks being leased at market rates. As recognised by cl 2.9 itself, the fact that the sale agreement may have assumed that the incentive would be paid does not mean that it necessarily would be.[121] As Mr Davies accepted, it is permissible for a director to rely on an expectation of shareholder support if that expectation is reasonable. It is accordingly unnecessary for us to review the case law in this area in the circumstances of this case. Here the liquidators have made no investigation of the initial willingness orability of GLIMS's shareholders (who included others as well as Mr Morgenstern) to fund losses in an initial period of loss. There is therefore no basis for us to bepersuaded that the Judge's factual findings were erroneous. The liquidators'arguments concerning reasonableness and timing of GLL's growth from initial lossesare therefore also academic.[122] This cross-appeal is therefore also dismissed.Result[123] For the reasons given the appeal and cross-appeals are dismissed.[124] As the respondents have been successful on the principal appeal, but not on the cross-appeals, the first appellant is to pay 90 per cent of the costs of the respondents for a standard appeal on a band A basis with usual disbursements to be fixed by the Registrar. We certify for two counsel.Solicitors:Gilbert Walker, Auckland for AppellantsMeredith Connell, Auckland for Respondents