SZEKELY v NORTH [2018] NZCA 227

SZEKELY v NORTH [2018] NZCA 227 [29 June 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA249/2017[2018] NZCA 227BETWEEN JOZSEF GABOR SZEKELYAppellantAND SAMUEL RAYMOND NORTHFirst RespondentDEBBIE VIVIAN NORTHSecond RespondentHearing: 24 May 2018Court: Clifford, Venning and Mander JJCounsel: Q S Haines for AppellantS J Iorns for First RespondentNo appearance for Second RespondentJudgment: 29 June 2018 at 4 pmJUDGMENT OF THE COURTA The application for leave to adduce further evidence is declined.B The appeal is dismissed.C The appellant must pay the first respondent costs for a standard appealon a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Venning J)[1] Jozsef Szekely and Samuel North are chefs. In 2012 they decided to open arestaurant together. They each invested money in the business as did Mr North'sparents and his partner. The restaurant business was established as a company calledMuse on Allen Ltd.[2] The restaurant venture was not successful. Within a short time there was aserious breakdown in the relationship between Mr Szekely and the North interests.Mr Szekely was removed as a director of the company on 11 January 2013 and on24 February 2013 Mr North altered the Company Office records by transferringMr Szekely's shares into his own name. From that time on, Mr Szekely had noinvolvement in the company.[3] Mr Szekely brought proceedings against the company, Mr North andhis parents, Debbie and Malcolm North, under s 174 of the Companies Act 1993(the Act). He alleged the Norths had conducted the company's affairs in anoppressive, unfairly discriminatory or unfairly prejudicial manner.1 By the time of thehearing the company had been placed into liquidation. The liquidators did not agreeto the litigation being continued against the company.2 Mr Szekely did not seek leaveto continue his claim against the company. Instead, Mr Szekely sought compensationfrom the Norths personally of $97,449.60 together with interest and costs.High Court decision[4] After discussing the background to the breakdown in the relationship andnoting that Mr Szekely had been excluded from the business, Mallon J opined that, ifthe shares had some value at the date he was excluded, then potentially it would bejust and equitable to order compensation to Mr Szekely, even if the exclusion waspartly or even substantially a result of his own actions.3 The starting point forassessing compensation would be the fair value of the shareholding at the relevanttime.1 The second respondent is Debbie North. At relevant times she was a director of the company.2 Companies Act 1993, s 248.3 Szekely v Muse on Allen Ltd [2017] NZHC 703, [2017] NZCCLR 17 at [41].[5] Mr Szekely and the Norths both called expert accounting evidence on the issueof the value of Mr Szekely's shareholding at the time he was excluded from thecompany. The Judge agreed with Mr Rendell, the expert called for Mr Szekely, that24 February 2013 was the relevant date.4 But she also agreed with Mr Sutherland,the expert called by the Norths, that in the absence of any better evidence it wasappropriate to take the 31 March 2013 accounts as representing the financial positionof the company as at 24 February 2013.5[6] The Judge concluded that as at 31 March 2013 Mr Szekely's shares were of novalue and further, they did not have any value when Mr Szekely was excluded fromthe company on 24 February 2013.6 Mr Szekely's investment was lost by 24 February2013. That assessment was also consistent with the advice from accountantsCrowe Howarth to Mr Szekely in November 2014 that the company was trading at aloss and that there would be no return to shareholders if it was wound up.7[7] The Judge therefore dismissed Mr Szekely's application for relief under s 174of the Act.[8] The Judge subsequently dealt with the issue of costs. The legal costs had beenincurred by the company, not the Norths. As the liquidators had taken no steps andthe Norths had represented themselves the Judge made no order for costs. However,she made an order that Mr Szekely was to pay Mr North for the disbursements he hadincurred of $7,830.91.8Appeal[9] Mr Szekely raised the following grounds in his appeal to this Court:(a) the Judge was wrong not to make a declaration that the conduct of oneor more of the respondents was oppressive, unfairly discriminatory orunfairly prejudicial to him; and4 At [59].5 At [59].6 At [70].7 At [70].8 Szekely v Muse on Allen Ltd [2017] NZHC 1468.(b) the Judge was wrong in concluding the shares did not have any valueat the time when Mr North unilaterally transferred them fromMr Szekely to himself.Further evidence[10] Mr Haines for Mr Szekely made an application to adduce further evidence insupport of the second ground of appeal. The proposed further evidence is:(a) an affidavit of Christopher Corke;(b) the notes of Judge Mill on a sentencing indication in relation toMr North; and(c) the summary of facts in the criminal prosecution of Mr North.[11] Mr Iorns for Mr North opposed the admission of the further evidence.[12] The principles relating to the admission of further evidence on appeal are wellunderstood and firmly established.9 The evidence should be fresh, in the sense that itcould not have been obtained for the hearing, cogent in that it probably would havehad an important influence on the result, albeit it need not be decisive, and crediblealthough it need not be incontrovertible.[13] The principal evidence Mr Haines sought to have admitted for the purpose ofthis appeal is an affidavit of Mr Corke. Mr Corke is a trustee of theCorke Family Trust. In approximately March 2015 the Corke Family Trust paidMr North $25,777.77 for a 20 per cent share in Muse on Allen Ltd. Mr Haines arguedthat put a value for the shares in the company at the time of approximately $125,000.Subsequently Mr Corke fell out with the Norths and took proceedings against them inthe Disputes Tribunal. The Tribunal found that Mr North had misrepresented thefinancial position of the company to Mr Corke by failing to disclose the tax liability9 Paper Reclaim Ltd v Aotearoa International Ltd (Further Evidence) (No 1) [2006] NZSC 59,[2007] 2 NZLR 1 at [6], referring to Rae v International Insurance Brokers (Nelson Marlborough)Ltd [1998] 3 NZLR 190 (CA) at 192.of the company in March 2015 and that, taking account of the tax liability, the valueof the company would at most have been $37,000. The Tribunal awarded themaximum it could award to Mr Corke, namely $15,000.[14] Even if Mr Corke's evidence could be said to be fresh, it is not cogent. At mostit provides evidence of what the company may have been worth in March 2015. But asMallon J noted, the relevant time for valuing the company in relation to Mr Szekely'sclaim was 24 February 2013. Whatever value the shares may have had in March 2015can have no bearing whatsoever on the value of the shares as at 24 February 2013.The evidence before the High Court was directed at the value of the shares as at theagreed relevant date of 23 February 2013. It is irrelevant that the value of thecompany's shares may have altered after that date. The value could have altered for anumber of reasons, including the introduction of further capital for example. It isentirely possible that the value of the shares fluctuated over time. As noted, ultimatelythe company was placed into liquidation in 2016. The shares were valueless at thattime.[15] We decline to admit the evidence of Mr Corke as it fails to satisfy the test forthe admission of further evidence on appeal.[16] The sentence indication of Judge Mill and the summary of facts relating to acharge Mr North faced under the Act for operating a phoenix company also lack thenecessary cogency. Those documents disclose that on 3 December 2015 Mr Northincorporated another company, Catering Ltd, and after the liquidation ofMuse on Allen Ltd he used that entity to carry on the business formerly carried on byMuse on Allen Ltd. Again, all of the relevant actions took place after February 2013.The evidence is irrelevant to the matters raised on the current appeal.[17] Without the admission of the further evidence, Mr Haines was left with ageneral submission that the Judge should have preferred Mr Rendell's approach to thatof Mr Sutherland and should have found the shares were worth $87,301 (Mr Rendell'smethod 1) or Mr Szekely's interest in the company was $97,450 (Mr Rendell'smethod 2).[18] The Judge was entitled to prefer the evidence of Mr Sutherland. Mr Rendell'sapproaches (methods 1 and 2) inflated the value of the shares and Mr Szekely's interestin the company. Both methods failed to take account of the liabilities and overstatedthe goodwill (which, by 31 March 2013, would have been non-existent). Also,Mr Rendell's methods failed to take account of the additional capital introduced bythe Norths. We also agree with, and adopt the Judge's reasons at [60] to [71] of herjudgment for dismissing Mr Rendell's approach.[19] We are satisfied the Judge was correct in her conclusion that as at 24 February2013 the shares and Mr Szekely's interest in the company had no value.The declaration[20] Next Mr Haines submitted that Mr North's actions of unilaterally transferringthe shares and removing Mr Szekely as a director were oppressive, unfairlydiscriminatory or unfairly prejudicial to Mr Szekely. He submitted that the Judgeshould have made a declaration to that effect. If she had done so, Mr Szekely wouldhave been entitled to costs at the least.[21] Neither party has taken any issue with the Judge's factual findings as to whatoccurred. Mr Szekely initially contributed $65,000 to the company, while interestsassociated with the Norths initially contributed $38,000. The Norths said theysubsequently introduced further sums of money. As the Judge found:10[19] There is not much in the way of detail about what happened over thenext few months or subsequently. However it is clear that soon after theopening of the restaurant Jozsef's relationship with the Norths deteriorated.Jozsef says this was because the Norths' friends and family were receivingfree food and beverages from the restaurant on a regular basis. Jozsef wasconcerned about this because it was a new business which needed to start ona strong footing. He says he tried to raise the issue with Samuel but was unableto gain any traction.[20] The Norths have a different view about what caused the breakdownof their relationship with Jozsef. They learned that Jozsef called theWellington City Council on 12 December 2012 about the restaurant'sliquor licence. Jozsef says he was concerned the Norths were going to breachtheir liquor licence by holding a family Christmas function at the restaurantand he wanted clarification from the Council to ensure he was not fined.10 Szekely v Muse on Allen Ltd, above n 3 (footnotes omitted).This incensed the Norths. As I understand it, they also do not accept they weretaking free food from the restaurant.[21] On 19 December 2012 Samuel altered the Companies Office recordsto show his shareholding as 51 shares (rather than 30) and Jozsef as having49 shares (rather than 70). Samuel did this unilaterally. He felt justified indoing this to take into account the additional financial contributions hisparents had made.[22] The relationship continued to deteriorate in January 2013. Althoughthe precise details of what occurred are not clear, the issues which aroseincluded the following:(a) On 6 January 2013 Samuel applied to the bank for anextension to the company's overdraft of $10,000. The Northssay Jozsef, who was a signatory to the account, refused to signthe application.(b) Jozsef cut his finger at some point which meant, the Northssay, he could not perform his usual duties.(c) On 8 January 2013 Jozsef called the police regarding analleged assault by Malcolm. This concerned an altercation ofsome kind at the restaurant which Jozsef says occurred whenhe confronted the Norths about changing his shareholding.(d) On 9 January 2013 Malcolm called the police to removeJozsef from the premises. Jozsef says he left the premises onthe advice of the police to ensure his safety.(e) Around this time (it is unclear precisely when), Jozsef workedhis shift and then informed staff he would not be returning.Jozsef says this was on the advice of his lawyers. He says itis difficult to recall the details but, if he did not say why hewas not coming back, that would have been because he didnot think it was appropriate to explain to staff that this wasbecause of a breakdown in the relationship between theowners of the business.[23] In addition to these events, on 9 January 2013 Samuel added Malcolmas a director of the company. At 10.15 pm on 10 January 2013 the Norths metat their property where they decided to remove Jozsef as a director. They saythey invited him to attend by text message. This was not put to Jozsef and Ido not know if he accepts they did. A minute of the meeting records this actionwas taken because Jozsef had threatened the Norths with defamationproceedings, threatened to lay an assault charge against Malcolm when thepolice had said there was no substance to this, lacked an understanding of thefinancial position of the business, implied the directors had stolen money fromthe restaurant, and had shared confidential information to a third party.In accordance with the resolution, on 11 January 2013 the Companies Officerecords were updated to remove Jozsef as a director.[24] On 14 January 2013 the company's bank account was frozen.The bank advised the Norths and Jozsef of this by email. The Bank said it hadtaken this action because it was getting different messages and instructionsand it was clear there was a dispute between the account signatories.The Bank also noted that, although the Companies Office records showedJozsef was removed as a director, he remained a signatory on the bankaccount.[25] On 16 January 2013 solicitors (Mr Jefferies) acting for Jozsef wroteto Malcolm. The letter noted Jozsef's contribution of $65,000 in return forwhich he held a 63.2 per cent shareholding in the company and was appointeda director. The letter referred to the changes made in the Companies Officerecords. Mr Jeffries requested an urgent meeting, preferably within 24 hours,with the Norths, their solicitor, and the company accountant at which he andJozsef would also attend.[26] A meeting took place sometime in February 2013. There is little inthe way of evidence about what took place at this meeting. Jozsef says theoutcome was that he was not going back to the premises until the situation wasresolved. Malcolm says Mr Jefferies failed to turn up to a meeting but it is notclear if this refers to an earlier meeting. Samuel says that Mr Jefferies attendeda meeting but was asleep and/or affected by drugs. In any case, Jozsefsubsequently engaged Duncan Cotterill and the Norths engaged KensingtonSwan to act for them. No resolution was achieved.[27] On 20 February 2013 the company's registered office was changed toMalcolm's address. On 24 February 2013 Samuel altered theCompanies Office records by transferring all of Jozsef's shares into his ownname. He says he did this because of Jozsef's actions, which had includedcalling the Council, emailing the landlord and having the bank account frozen,and because Jozsef had walked away from the business. Samuel wasfrustrated with the situation he was in. He felt the shares were worthlessbecause the business was floundering.[22] Section 174 of the Act provides:174 Prejudiced shareholders(1) A shareholder or former shareholder of a company, or any otherentitled person, who considers that the affairs of a company havebeen, or are being, or are likely to be, conducted in a manner that is,or any act or acts of the company have been, or are, or are likely to be,oppressive, unfairly discriminatory, or unfairly prejudicial to him orher in that capacity or in any other capacity, may apply to the court foran order under this section.(2) If, on an application under this section, the court considers that it isjust and equitable to do so, it may make such order as it thinks fitincluding, without limiting the generality of this subsection, anorder—(a) requiring the company or any other person to acquire theshareholder's shares; or(b) requiring the company or any other person to paycompensation to a person; or(c) regulating the future conduct of the company's affairs; or(d) altering or adding to the company's constitution; or(e) appointing a receiver of the company; or(f) directing the rectification of the records of the company; or(g) putting the company into liquidation; or(h) setting aside action taken by the company or the board inbreach of this Act or the constitution of the company.(3) No order may be made against the company or any other person undersubsection (2) unless the company or that person is a party to theproceedings in which the application is made.[23] The section contemplates a two-stage analysis by the Court. First,consideration of whether the respondents have acted in an oppressive, unfairlydiscriminatory or unfairly prejudicial way towards the applicant, and, second, if so,whether it is just and equitable to make an order under s 174(2). The second stageinvolves the exercise of a discretion. Relief does not follow automatically from afinding of oppression.11 Although not expressly referred to in s 174(2) the Court maymake a declaration in an appropriate case. In Taylor v Seahorse World Aquarium theHigh Court made a declaration that the affairs of the company had been conducted ina manner that was oppressive, unfairly discriminatory or unfairly prejudicial to theplaintiff in his capacity as shareholder and it was just and equitable that relief begranted under s 174(2).12 MacKenzie J adjourned for further consideration the issueof what relief might be appropriate in light of that declaration. He did so because therewas insufficient information before the Court to determine the matter.[24] Mr Haines submitted that Mallon J made a clear finding of oppressive, unfairlydiscriminatory or unfairly prejudicial conduct. He referred to the following passagefrom her judgment:13What is relevant is that Jozsef had contributed at least $65,000 into a businessin which it had become intolerable to both Jozsef and the Norths for him toremain. The Norths continued to operate the business as though Jozsef nolonger had any rights in it. They transferred Jozsef's shares into Samuel's11 Sturgess v Dunphy [2014] NZCA 266 at [144].12 Taylor v Seahorse World Aquarium [2008] NZCCLR 21 (HC) at [53].13 Szekely v Muse on Allen, above n 3, at [40].name, removed Jozsef as a director and no longer included him in any businessdecisions.[25] Mr Haines submitted that the Judge ought to have gone on to make adeclaration to that effect. In failing to do so, she fell into error.[26] We agree that the logical conclusion from the facts as found by the Judge isthat the Norths and Mr North in particular had acted in an oppressive, unfairlydiscriminatory or unfairly prejudicial way towards Mr Szekely in removing him as adirector and unilaterally transferring his shares in breach of s 84 of the Act. The issueis whether, in the exercise of her discretion, the Judge should have gone on to make adeclaration to that effect.[27] While Mr Haines accepted that relief under s 174(2) was discretionary hesubmitted that declaratory relief will very rarely be denied if grounds for interventionhave been established. He relied on Air Nelson Ltd v Minister of Transport andBerkeley v Secretary of State for the Environment for that proposition.14[28] Both judgments involved decision-making by public bodies rather than theprivate law individuals (as raised by the present case). The significance of that appearsin the following passage from Air Nelson Ltd v Minister of Transport:15In principle, the starting point is that where a claimant demonstrates that apublic decision-maker has erred in the exercise of its power, the claimant isentitled to relief.[29] Relief, including declaratory relief under s 174(2), remains discretionary evenif there is a finding of oppression. In Sturgess v Dunphy this Court confirmed that itis the "unfairly detrimental effect of the conduct on the complaining member thatbrings the remedy into play".16 The remedy responds to that detriment, and the courtacts for remedial, not punitive, purposes. Where oppression is made out, relief willoften be just and equitable because "wrong and remedy are closely linked".1714 Air Nelson Ltd v Minister of Transport [2008] NZAR 139 (CA) at [59]–[61]; and Berkeley vSecretary of State for the Environment [2001] 2 AC 603 (HL).15 At [61].16 Sturgess v Dunphy, above n 11, at [148].17 At [144].However, it also follows that a court may decline to grant relief where the oppressiondoes not give rise to any detrimental effect.[30] Mallon J considered that the value of the shares as at 24 February 2013determined whether Mr Szekely had suffered a detriment. She said:[40] As it was said in O'Neill v Phillips in relation to a shareholderexcluded from the management of the business, "unfairness does not lie in theexclusion alone but in exclusion without a reasonable offer" to buy his sharesat a fair value or make some other fair arrangement.18[41] If the Norths are correct the shares had no value then it would notbe appropriate to order compensation. If the shares had some value then Iconsider it potentially would be just and equitable to order compensation for[Mr Szekely's] shareholding at the time he was excluded from the businesseven if that exclusion was partly or even substantially a result of his ownactions. The starting point for any such compensation would be the fair valueof the shareholding at this time. It is therefore necessary to consider the expertevidence on this point.[31] Mallon J, like the parties, focussed on the value of the shares. The Judgeimplicitly accepted that in the absence of a reasonable offer to purchase the shares itwould have been just and equitable to order compensation if the shares had a value butultimately concluded that as the shares had no value, no order under s 174(2) wasrequired.[32] We understand why the Judge approached the matter in that way rather thanaddressing the issue of a declaration. While the relief sought in the first cause of actionin the amended statement of claim included a declaration, the focus of Mr Szekely'scase was entirely on the issue of compensation. That is apparent from both the oraland written closings before the Judge.[33] In the oral closing, after referring to Mr Szekely's exclusion from the company,Mr Haines submitted that the consequence of the exclusion was that:Mr Szekely has suffered a loss of capital, a loss of opportunity, a loss ofemployment, considerable additional expense, as well as stress in this matter.Now, at the outset of these proceedings your Honour raised the question ofwhat was the quantum that is actually been raised by Mr Szekely in thisparticular matter. Mr Szekely's claim is made up of several distinctcomponents, the first being a value of his shareholders' current account.18 O'Neill v Phillips [1999] 1 WLR 1092 (HL) at 1107 per Lord Hoffmann.And we heard evidence from both of the experts that it was not possible forsomeone who is not a shareholder to hold a shareholders' current account withthe company. And on that basis the shareholders' current account whichMr Szekely held, according to both sets of accounts whichever way you wereto interpret them, of $70,487 subject to any withdrawals or advances, musttherefore be claimable back.[34] And later, after referring to the two approaches to valuation provided byMr Rendell, Mr Haines submitted:The difference between the two is method 2 says you get your shareholders'current account then we value the balance of what is left. And method 1 sayswe add up all of the assets which are there and you take 17% because you area 17% shareholder.[35] Ultimately Mr Haines clarified that Mr Szekely was seeking $145,000(including legal costs of $48,000).[36] Mr Haine's written submissions were directed entirely at the issue ofcompensation. There was no reference in either the oral or written closing submissionson behalf of Mr Szekely to a declaration.[37] Given the focus on Mr Szekely's claim for monetary compensation, it isunderstandable why Mallon J did not address the application for a declaration ofoppressive conduct. She had already made a finding to that effect in the course of herjudgment but had then gone on and determined that it was unnecessary to make anorder under s 174(2) because any wrong inflicted on Mr Szekely had no economiceffect on him. The shares that Mr North wrongly transferred from Mr Szekely wereworthless at the time they were transferred.[38] Finally, we note that in his written submissions Mr Haines acknowledged thateven if it had been established there had been unfairly prejudicial conduct the Courtstill had to consider if it was just and equitable to make an order under s 174(2).[39] Before us, Mr Haines submitted that the significance of the declaration wouldhave been that Mr Szekely would have been entitled to costs at least. But costs followthe event.19 Given that the focus of the proceeding before the High Court was on the19 High Court Rules 2016, r 14.2; and Water Guard NZ Ltd v Midgen Enterprises Ltd[2017] NZCA 36 at [13].monetary claim which Mr Szekely failed on, on a "realistic appraisal" the defendants,not Mr Szekely, were the successful party notwithstanding the finding of oppression.20A declaration would have been a pyrrhic victory for Mr Szekely. The defendantssuccessfully opposed Mr Szekely's claim for $145,000 (including interest and costs).Result[40] The application for leave to adduce further evidence is declined.[41] The appeal is dismissed.[42] The appellant must pay the first respondent costs for a standard appeal on aband A basis and usual disbursements.Solicitors:Q H Law, Otaki for AppellantHoggard Law Ltd, Wellington for First Respondent20 See Weaver v Auckland Council [2017] NZCA 330 at [26].