COFFEY v WALKER [2020] NZCA 621

COFFEY v WALKER [2020] NZCA 621 [4 December 2020]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA206/2020[2020] NZCA 621BETWEEN PAUL CORNEL COFFEY AND WILLISSTREET TRUSTEE SERVICES LIMITEDAS TRUSTEES OF THE PC COFFEYTRUSTAppellantsAND MARK ALAN WALKER AS A TRUSTEEOF THE WYNSFIELD FAMILY TRUSTRespondentHearing: 10 November 2020Court: Courtney, Woolford and Mander JJCounsel: G E Slevin for AppellantsD J Clark and E Z Caro for RespondentJudgment: 4 December 2020 at 2 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The respondent is entitled to costs for a standard appeal on a band A basis,plus usual disbursements.___________________________________________________________________REASONS OF THE COURT(Given by Courtney J)[1] This appeal concerns the sale of shares in two companies, Alligator Ltd(Alligator) and Independent Monitoring Services Ltd (IMS), which provided securityand alarm monitoring services. The shares in both companies were owned by thetrustees of the PC Coffey Trust of which Paul Coffey was a trustee. In May 2008Mr Coffey negotiated the sale of 30 per cent of the shares in each company to thetrustees of the Wynsfield Family Trust, Mr Walker and Mr Bertelsen.1 Mr Walker wasa long-time acquaintance of Mr Coffey. He held a senior position with the ASB Bank(ASB), which was a client of both companies.[2] The purchase price for the shares was $700,000, to be paid by one instalmentof $200,000 due immediately with the balance left in as a loan that fell due in June2013. The parties also entered into a shareholders' agreement.2 The parties agreedthat Mr Walker would leave his employment and work fulltime in the business. Hepaid the $200,000, left the ASB and began work for Alligator and IMS.[3] Within a short time Mr Walker could see there were financial problems. Inparticular, substantial sums were owing to the Inland Revenue Department (IRD) forPAYE and GST. By June 2009 Mr Walker had resigned as a director of bothcompanies. He secured another job with the ASB, which would require him to severhis association with the companies. There were communications between Mr Walkerand Mr Coffey about this, though no formal agreement was entered into.[4] Following Mr Walker's resignation, Mr Coffey tried, unsuccessfully, to resolvematters with the IRD. In 2011 both companies were placed in liquidation. Mr Coffeywas prosecuted by the IRD for failing to ensure that the companies paid the GST andPAYE owing. He was convicted and sentenced to a term of home detention.[5] The date for repayment of the $500,000 balance provided for under the sharesale agreement came and went. Mr Walker did not pay the $500,000. Mr Coffey didnot demand payment. In 2015, however, Mr Coffey (through debt collectors) madedemand for the $500,000 together with contractual interest. Mr Walker did not acceptthat he was under any obligation to pay. Nothing further happened until 2019 whenMr Coffey issued proceedings against Mr Walker, seeking summary judgment.1 Mr Bertelsen is no longer a trustee.2 The signed shareholders' agreement was no longer available but a draft was produced, which bothparties accepted reflected the agreement entered into.[6] Associate Judge Smith refused the summary judgment application on theground that it was reasonably arguable that Mr Coffey had misrepresented the extentof the companies' liabilities and that Mr Walker had cancelled the share sale agreementfor that reason, thus relieving him of any further obligations under the agreement.3[7] Mr Coffey appeals the decision. The 11 grounds of appeal, as argued, can fairlybe summarised as being that the judgment was wrong because:(a) the issue of cancellation was not properly raised as a defence in eitherthe notice of opposition or Mr Walker's evidence and therefore shouldnot have been considered;(b) the evidence did not support the finding that there was a reasonablepossibility that Mr Walker had cancelled the agreement; and(c) Mr Walker had affirmed the agreement in June 2009 and August 2011with full knowledge of the alleged misrepresentations (which weredenied).Failure to raise the issue of cancellation[8] The notice of opposition to the summary judgment application asserted thatMr Walker had a defence to the proceeding and identified 14 aspects of the sale saidto entitle him to remedies under ss 35 and 37 of the Contract and Commercial LawAct 2017 (CCLA), the Fair Trading Act 1986 and "the normal principles relating to abreach of contract". It is unnecessary to record all the alleged misrepresentations. Forpresent purposes the relevant complaint was that Mr Coffey had misrepresented thatthe companies' debtors and creditors were about equal and there were no liabilitiesother than monthly accounts incurred in the normal course of business. In fact, therewere overdue obligations for income tax, GST, PAYE, bank debt and other liabilitiesthat were known to Mr Coffey and which materially affected the value of the sharesand the financial viability of the companies.4 Mr Walker also asserted a right of set3 Coffey v Walker [2019] NZHC 2795 [Decision under appeal].4 Mr Walker also relied on the Limitation Act 2010, which is not relevant to the appeal.off and/or counterclaim based on the various misrepresentations to the extent of$263,333.[9] In his affidavit in opposition, Mr Walker canvassed the background to the sharesale agreement from his perspective.5 He described beginning work withthe companies, discovering that suppliers were not being paid, that credit cards werebeing used to buy work related equipment and that the IRD was chasing the companiesfor unpaid PAYE and GST. He said that some time in June 2009 Mr Coffey toldMr Walker that the companies could no longer pay his salary; they agreed thatMr Walker would have to find alternative employment and that "something wouldneed to be done about my shareholding in the companies".[10] Mr Walker returned to his previous employment with the ASB. He emailedMr Coffey confirming that he was "seeking to conclude my involvement withinAlligator Ltd, and Independent Monitoring Services Ltd, as soon as is practicable".He went on to identify steps that would need to be taken to divest himself of hisshareholding in both companies.[11] The parties' counsel exchanged submissions prior to the summary judgmenthearing on 3 September 2019. Mr Coffey's submissions addressed each specificcomplaint raised in the notice of opposition, including the factual question of thecompanies' liabilities and claimed that Mr Coffey had produced accounts for the yearended 31 March 2009 showing that the liabilities had not been misrepresented.[12] The submissions filed on behalf of Mr Walker in response summarised theposition as being that Mr Coffey had induced him to enter the agreement bymisrepresenting the financial position of the companies and had breached the shareagreement and the shareholders' agreement in various ways, and that:The above breaches entitled [Mr Walker] to cancel the Share Agreement whichhe effectively did by leaving the companies in June 2009.[Mr Coffey] failed to take any action against the Defendant until now; thereason being that [Mr Coffey] knew that [he] had no grounds to issue5 Mr Walker filed a second affidavit which simply annexed financial statements for IMS andAlligator inadvertently omitted from the first affidavit.proceedings because [he] accepted the termination of the Share Agreement in2009.[13] It appears that there was no complaint made about the issue of cancellationbeing raised in this way at the hearing of the summary judgment application. Beforeus, Mr Slevin, for Mr Coffey, explained that he had not sought an adjournment becausehe did not consider that cancellation could be raised for the first time in submissions.He did, however, raise the issue at the later hearing of Mr Coffey's application forleave to appeal.6 The Associate Judge rejected the submission that cancellation hadnot been sufficiently raised before the hearing of the substantive appeal. Heconsidered that the reference in the notice of opposition to remedies under the CCLAand the normal principles relating to a breach of contract coupled with Mr Walker'saffidavit constituted sufficient notice to the plaintiff that the defendant would bearguing cancellation. He noted the issue of cancellation was raised in the writtensubmissions served before the hearing and that there was no challenge at the hearingitself to the issue being raised by way of defence.7[14] In our view the issue of cancellation as a defence was adequately raised andthe Associate Judge was right to deal with it. The notice of opposition was not as clearas it could have been, but the foundation for cancellation as a defence was neverthelesslaid in the reference to s 37 of the CCLA, which entitles a party to cancel formisrepresentation. We do not accept Mr Slevin's argument that the reference in thenotice of opposition to Mr Walker being entitled to those remedies ought to be viewedas asserting a current right as opposed to a past exercise of that right. Nor do we acceptthat Mr Walker's failure to expressly say he had cancelled the agreement is significant.Mr Walker acted throughout without legal advice. Where it is said that cancellationoccurred through conduct, it is sufficient to provide evidence of the conduct relied on.Whether the conduct constituted cancellation is a question of law to be addressed insubmissions.[15] Mr Walker's evidence laid an adequate evidential foundation for the latersubmission that the contract had been cancelled. The submission that cancellation wasrelied on as a defence could not have been clearer. There was adequate time for6 Coffey v Walker [2020] NZHC 605 [Leave decision].7 At [30]–[33].Mr Coffey to appreciate the implications of Mr Walker's evidence with the benefit ofthe submissions.Cancellation or affirmation?[16] The Associate Judge considered that the application for summary judgmentturned on whether it was reasonably arguable that there had been a valid cancellationof the agreement in or around June 2009.8 If so, the case would be unsuitable forsummary judgment; a valid cancellation would have the effect of relieving the partiesof future obligations.9[17] The Associate Judge reviewed the substance of Mr Walker's argumentregarding misrepresentation and considered that:10On any view of it, IMS's debtors and creditors were not "approximately equal"as at 31 March 2008, and the statement that there were no other significantliabilities, if it was made, would have been incorrect. It seems unlikely thatthe position in those respects would have been materially different roughly sixweeks later when the sale agreement was signed.[18] The Associate Judge noted that "Alligator's statement of financial position asat 31 March 2008 did not provide any better picture".11 In these circumstancesthe Associate Judge found that "it is clearly arguable for [Mr Walker] that there werematerial misrepresentations".12[19] This left the questions whether such misrepresentations would have justifiedcancellation and whether Mr Walker did, in fact, cancel. As to the first, the AssociateJudge noted possible issues of causation given that Mr Walker had received advicefrom a chartered accountant but considered that, viewed against the assertion of oralstatements made by Mr Coffey that may have induced Mr Walker to enter theagreement, it was a matter for trial.13 Nor did the Judge see the "entire agreement"provision in the share sale agreement as necessarily precluding cancellation, given theeffect of s 50(2) of the CCLA, the fact that Mr Coffey had greater knowledge of the8 Decision under appeal, above n 3, at [92].9 At [93].10 At [99].11 At [101].12 At [105].13 At [106]. This conclusion is not accepted but is not an issue in the appeal.companies and the fact that Mr Walker did not have legal advice before entering theagreement.14[20] The critical issue in the case, and the focus of the appeal, was whether it wasreasonably arguable that Mr Walker had in fact cancelled the agreement. No issue wastaken with the Associate Judge's statement of the requirements for cancellation:15[108] The rules about cancellation are clear enough, at least for mostsituations. First, a cancellation by a party does not take effect before it is madeknown to the other party. The cancellation may be made known by words orby conduct showing an intention to cancel, or both, and it is not necessary touse any particular form of words, so long as the intention to cancel is madeknown. Secondly, a party with a right to cancel may lose that right if thatparty, with full knowledge of the repudiation, misrepresentation, or breach thatwould entitle it to cancel, affirms the contract.(Footnotes omitted.)[21] The ground of appeal is that the evidence did not support the Associate Judge'sconclusion that it was reasonably arguable that Mr Walker had cancelledthe agreement. Specifically, cancellation requires a positive act and Mr Walker'sconduct reflected affirmation rather than cancellation. These submissions require areview of the evidence.[22] In his first affirmation Mr Coffey described Mr Walker's exit fromthe company only briefly:By June 2009 the companies were suffering from a lack of effectiveadministration and we were experiencing cash-flow issues, at which pointMr Walker decided to leave so that he could return to a position with ASB.An email he sent, me conveying his wish to withdraw from the businesses, isat page 77 of the exhibit.We subsequently had some discussions about the matters raised in his emailbut nothing came of them insofar as his wish to sell his shares back to me wasconcerned. He resigned as a director and ceased working for the companieson or about the same date as he sent this email, as I recall. [23] In response, Mr Walker said that by June 2009 it was clear to him thatMr Coffey had misrepresented the companies' financial position and that he would nothave agreed to buy the shares had he known the extent of the companies' liabilities.14 At [107].15 Decision under appeal, above n 3 (footnotes omitted).In June 2009 his salary from IMS was no longer being paid. It was essential that hesecured a reliable income and he therefore returned to a new role with the ASB.Mr Walker gave evidence of a meeting he had with Mr Coffey in June 2009, describingit as a "frank discussion". He said that:My immediate focus was the discontinuation of my wages and [Mr Coffey]responded by blaming me for a lack of new sales. We both agreed that it wasnecessary for me to find alternative employment and that something wouldneed to be done about my shareholding in the companies.[24] Mr Walker followed up that meeting with an email to Mr Coffey in which hesaid:Further to our recent discussions, I confirm that I am seeking to conclude myinvolvement with Alligator Ltd, and Independent Monitoring Services Ltd, assoon as is practicable.As conveyed to you, I am seeking to be appointed to a newly created positionwithin ASB Bank, and if successful, that would preclude me from having anyfinancial investment in either Alligator or I.M.S., given the contractualrelationship that currently exist[s] between those entities. If I am unsuccessful in acquiring the "National Security Manager" role forASB Group, then I intend continuing to operate within the Investigative andSecurity areas of business, and would welcome the opportunity in formulatingan association and agreement with yourself, whereby we might be able tomutually benefit from each others' business interests? I am totally committed to the future success of both Alligator and I.M.S. andam acutely aware of our current cash flow difficulties we are experiencing. Inthe interests of lessoning [sic] the financial outgoings and burden, I am willingto discuss the option of lowering or ceasing my drawings, with a view torelying on my investigative and consultancy endeavours as my main incomesource. Accordingly, I seek for the following to be addressed at our earliestconvenience:• Sell my 30% shareholding in Alligator Ltd and I.M.S. to yourself, ata fair commensurate value.• Sell my 30% share of assets and stock to yourself at value.• Determine financial position with regards Current Account andinterest owed to you for unpaid shares.• Resign my directorship of both Alligator Ltd, and I.M.S Ltd.• Amicably conclude any 'housekeeping' issues like Insurance policies,guarantee's [sic], on-going client relationships, etcI thank you for the total commitment and support you have given me overthe past year, and I assure you I will do my utmost to contribute to thefuture success of both Alligator and I.M.S.[25] This email is notable because it signals Mr Walker's intention to withdraw fromthe company, refers to the amount still owing under the share sale agreement andexpresses gratitude to Mr Coffey for his support. Mr Walker offered an explanationfor his expression of gratitude. Such ex post facto rationalisation has no probativevalue and, although the Associate Judge referred to it he appears not to have taken itinto account in reaching his decision.[26] Mr Walker secured a position with the ASB. On 15 July 2009 he emailedMr Coffey:Further to our earlier emails, and discussion of Monday, I forward you mythoughts on how we might conclude my involvement in Alligator & I.M.S. ina fair and reasonable manner. I propose the following:• I am willing to resign as a director of Alligator and I.M.S. as of 30June 2009• I accept that I should receive no further salary payments from thecompany from 30 June 2009.• I am actively pursuing a newly created role at ASB, and understandthe commencement date for that role is within the next 4–6 weeks.• In order to meet my current financial commitments I intend tocontinue undertaking Investigative and Security Consultancy workfor the client companies I have had long standing relationships with.It is my desire to continue that work irrespective of my proposedinvolvement with ASB, however that will be a matter that will bedetermined after further discussions with ASB management.• I suggest that the value of Alligator and I.M.S., and my shareholdingtherein be determined as at 30 June [2009], after which we explorethe options available in settling this aspect, in a manner that is bothfair and workable. As discussed with you, I am open minded andflexible, however have significant commitments that I need to meet.• Upon we [sic] reaching a mutually acceptable agreement, I will assignmy shareholding in both companies to your trust, or to any other entitythat is taking ownership of those shares. It is important that I am ableto illustrate to ASB that I have totally severed my relationship withAlligator and I.M.S. even though the financial settlement may nothave been settled.• In the interim, and until we have been able to reach an agreement onmy departure, I would be grateful if the company was able to meet mymonthly vehicle repayment fee in order to alleviate some of mycurrent financial pressures.[27] This email had a somewhat different tone to the previous email. In particularthere was no mention of the balance owing under the share sale agreement.The mention of financial commitments is non-specific; given that Mr Walker no longerhad a salary from any source (his role with the ASB did not begin for over a month)there is no basis for assuming that he had the balance of share price in mind as opposedto day-to-day financial commitments. Nor is there any indication of gratitude.[28] Mr Coffey's response came in an undated email:Thanks for your note 15 July 2009 concerning your exit from the company.At this time the situation is difficult for a number of reasons including thecurrent state of the economy and difficult trading times, the now apparentspeed in which this transaction has to be effected together with the extra levelsof the effort we are both exerting to ensure the ongoing success of our businessand personal lives.I am in agreement that the business be valued as at 30 June 2009.I note that you have been conducting investigative work in a personal capacityand conducting meetings with ASB Bank which has resulted in the offer ofemployment with all but immediate start. As stated by you prior and naturallythis is understandable that the matter of addressing the conflict of interest asraised by the Bank is time contingent.We have mentioned verbally prior that the options open to meare to;A Purchase your shareholdingB Decline the offer to purchaseC Sell your shareholding to some other third party.Accordingly to address the situation I suggest we make the managementaccounts available to as at the nominated date at the earliest opportunity andyou (perhaps in consultation with your advisers) formulate a price you wishto sell the shares at and naturally attaching some supporting documentation asto the formulae/methodology you have used in arriving at this figure for myconsideration.In conclusion I reaffirm the time issue and the fact that matter needs to beaddressed expediently. Perhaps if the proposed scenario is not achievable inthe short time [in] order for you to commence immediate employment withthe Bank we should formulate a heads of agreement whereby we agree on avaluation process that will be to the benefit of both parties at some finite futuredate and in the interim you will assign the shares in question back to my trust.[29] This email is notable for the fact that there is no reference to the balance owingunder the share sale agreement.[30] Mr Walker says that there were further discussions but nothing was agreed:There were some discussions between us but as [Mr Coffey] has said, nothingcame of the discussions. [Mr Coffey] was however fully aware of the issuesthat had developed and my view of his responsibility, especially in relation tothe tax obligations and the bank debt, and any refusal and inability to repaythe balance of the share purchase price.[31] In his reply affirmation Mr Coffey rejected any wrongdoing on his part but didnot specifically address the assertion by Mr Walker that he (Mr Coffey) was fullyaware of the issues that had developed and of Mr Walker's view of Mr Coffey'sresponsibility:Mr Walker's return to ASB in a senior management role involving banksecurity created serious problems for me because ASB was a major client andhis ongoing shareholding created a conflict of interest that affected us both. Itwas certainly not something I was comfortable with and I wanted to avoid anyconflict issues arising in the future, so I was willing to either repurchase theshares or arrange for that to occur at a later date by an agreed process. I offeredto do so but he didn't pursue the matter, as I recall, and it was allowed to drift.He did suggest that I should forgive his obligations under the loan agreementat one stage but I never agreed to that. I didn't take any action to enforce theloan agreement while he was at ASB simply because that would have createdserious problems for the companies and ASB. I had several meetings with himin 2011 after I started to think about selling the businesses [32] Mr Coffey also produced an undated file note of a meeting of a meeting on3 August 2011 recording a discussion about the receivership and Mr Walker's requestthat his future liability in relation to the shares be forgiven. The file note included:Immediately asked why I had not consulted him re placing the company inreceivership, replied met twice over the last three weeks, he implicitly advisedme that he didn't want to discuss business affairs due to the potential conflictof interest. Also reiterated his stance that I should do whats [sic] best for thecompany and given my majority shareholding if it was good for me it must begood for him hence he would back any decision that I made. He agreed.Suggested that I forgive him for any future obligation to me in respect of theshare liability, explained that he left the company in the interests of us bothand I should be amicable, explained that there was a lot of money at stake,would seek advice from my legal counsel and financial advisers but it hadbeen discussed before and I didn't see any movement from our original stance. [H]e advised that he had a meeting with his direct report at 1600 hours thenext day at which time he had to advise them of his position, to which I repliedI think you tell them that there is no financial tie up, our business interests arein the process of being dissolved and the new entity of which the both of usdon't have any financial interest will negate any conflict issues.[33] Mr Slevin submitted that the note was cogent evidence that the contract hadnot been cancelled bur rather showed unequivocally that Mr Walker knew he hadongoing obligations under the contract, acknowledged those obligations and wasseeking to be released from them. The Associate Judge did not place any weight onthis note because, given that it appeared in Mr Coffey's reply evidence, it had not beenthe subject of comment by Mr Walker.16[34] Mr Slevin pointed out that Mr Walker did in fact file a second affidavit afterreceipt of the reply evidence in which he could have commented had he wished. Wedo not accept that. The second affidavit was solely for the purpose of producingdocuments referred to in his first affidavit but inadvertently not annexed. The filingof a substantive affidavit commenting on the reply evidence would have requiredleave. In any event, it is a reasonable assumption from the fact that opposition to thesummary judgment application continued, that Mr Walker does not acceptMr Coffey's assertions.[35] The Associate Judge concluded that:[118] I think it would be dangerous to conclude on a summary application,where the parties have not had the benefit of discovery and there has been nocross-examination of witnesses, that Mr Walker's communications toMr Coffey in mid-2009 did not convey Wynsfield's intention to bring the saleagreement to an end. Both parties were aware that Mr Walker would bemoving to a new role where he could no longer have financial ties with Coffey,and Mr Walker said in his evidence that Mr Coffey was aware of Mr Walker's16 At [121].views on the issues between the parties, including his views on Mr Coffey'salleged responsibility for the debts, and any "refusal and inability" byWynsfield to pay the balance of the share purchase price. In circumstanceswhere the events in question took place over 10 years ago, and it seems clearthat not all of the emails have been produced, I do not consider that Coffeyhas sufficiently shown that the communication of (i) Mr Walker's departurefrom the companies and (ii) Wynsfield's inability and refusal to pay thebalance of the share purchase price, did not together constitute a cancellationof the sale agreement.[36] Mr Slevin submitted that the evidence did not show a positive act that wouldconstitute cancellation or the fact of cancellation being communicated to the otherparty but rather that it showed affirmation by Mr Walker or, at least, allowing thematter to simply run on, which amounted to the same thing. We do not accept thesesubmissions.[37] What emerges from the evidence is that there are a number of important factualissues in dispute regarding what was said between the parties in 2009 and 2011 andthat there is evidence on which it could reasonably be argued that Mr Walker had takensteps that conveyed cancellation of the agreement. Some of the recordedcommunications are consistent with either cancellation or affirmation. But it issignificant that there are a number of pieces of evidence that are consistent withcancellation.[38] These include the lack of any reference in the email of 15 July 2009 to thebalance owing for the shares, Mr Walker's failure to repay the balance when it fell dueand Mr Coffey's failure to do anything in response to that failure (we acknowledgethat Mr Coffey has an explanation for this but it is of course untested). Further,Mr Coffey's actions after Mr Walker resigned as a director are consistent with theagreement having been cancelled: Mr Coffey advanced some $300,000 to thecompanies to deal with the IRD, he procured a general security agreement whichwould have required a shareholders' resolution but the matter was never raised withMr Walker. The receivers' report indicates that the business was sold to a party relatedto the Coffey Trust but the sale was never discussed with Mr Walker. Nor wasMr Walker consulted in relation to the receivership and liquidation of the companies.Mr Slevin's response is that Mr Coffey's conduct is properly characterised as breachof the shareholders' agreement entered into at the same time as the share saleagreement rather than indicative of the agreement having been cancelled. That is amatter for submission. These questions are not amenable to resolution on the affidavitevidence and cannot be determined until there has been discovery andcross-examination.[39] Given the state of the evidence, we see no error in the Associate Judge'sconclusion.Result[40] The appeal is dismissed.[41] The respondent is entitled to costs for a standard appeal on a band A basis, plususual disbursements.Solicitors:Maude & Miller, Wellington for AppellantsWilson McKay, Auckland for Respondent