The
director of a Christchurch property company was ordered to pay $574,000 damages
to a former shareholder after using inside information to buy shares at a
bargain price. Her advantage was inside
knowledge that Zurich insurance was likely to pay out on their $5.1 million
Madras Street earthquake-damaged property, rather than repair.
The Companies Act requires directors buying
their company’s shares to buy only at fair value. Property developer James Davies alleged his
sister in law took advantage when taking full control of their joint venture
company Madras Street 323 Ltd in 2011.
The Court of Appeal was told Madras 323 was
owned jointly by Cooper-Davies Trustees No.6 Ltd (a company controlled by Mr
Davies) and Cooper Trustee No.11 Ltd (controlled by his sister in law Lilly
Jessica Cooper). The two families had
co-operated on a number of Christchurch property developments. The commercial building owned by Madras 323
was badly damaged by earthquakes in 2010 and 2011. It was the company’s only asset. Evidence was given that the two families fell
out. Mr Davies and his wife decided to
quit their fifty per cent investment in Madras 323, selling to Ms Cooper. In May 2011, Ms Cooper took full control of
Madras 323 after paying $150,000, half the assessed net value of the property. Negotiations had proceeded on the basis that
the the building would be repaired once discussions with insurer Zurich New
Zealand were finalised.
Six months later, Zurich paid out $6.3 million:
compensation for the building as a total loss plus compensation for lost rental
income insured separately under a business interruption policy. A further five
months on, Ms Cooper sold the bare land for $900,000. Mr Davies and his wife complained that Ms
Cooper had made a windfall profit at their expense, saying they would never
have sold out for only $150,000 if they had known the building would be
demolished rather than repaired. They
sued, alleging she was in breach of her statutory duty as a director to buy at
a fair price.
The High Court ruled Ms Cooper was aware before
the share purchase was concluded that Zurich was unlikely to repair. Cash in hand from the insurance recovery and
sale of the bare land, after repayment of mortgages, totalled $1.7 million. The Court of Appeal ruled Mr Davies’ company
was not entitled to half this amount; the figure should be discounted by 15 per
cent to $1.45 million to reflect uncertainties at the time the shares were
sold. At that time, the value of any
bare land could not be reliably assessed because Madras Street lay within the
Christchurch red zone. Future zoning and
building code requirements were not known.
Mr Davies’ company was awarded damages of $574,600: $724,600 less the
$150,000 already paid.
Cooper-Davies
Trustees No.6 v. Cooper Trustee No.11 – Court of Appeal (26.05.15)
15.056