Phoenix Company: Spence v. R.

Using a series of ‘phoenix’ companies to cheat creditors of his Auckland business trading as Compass Roofing in what was labelled as deliberate, repeated and blatant dishonesty, Sam Oliver Spence was sentenced to three years nine months’ imprisonment.

With his various companies in liquidation, he sent abusive emails to liquidators trying to unravel his business affairs; when bankrupted, he refused to co-operate with Insolvency Service; and when on trial, he tried to manipulate the court’s sentencing process by forging character references and by falsely claiming to be Maori, seeking to have sentence reduced on cultural grounds.  

Five years after Compass Roofing Ltd was set up in 2011, Spence’s business was in severe financial difficulty.  Solvency was dependent entirely on Spence repaying some $154,600 he had drawn down from his company.  Rather than repay his current account, Spence left Compass Roofing creditors stranded by transferring Company Roofing assets across to a new company he controlled called Compass Group Ltd.  This was a ‘phoenix’ company, rising from the ashes of Compass Roofing and carrying on Compass Roofing’s former business.  The Companies Act prohibits directors of a failed company from managing any company taking over its business assets.

When Compass Group itself got into financial difficulty, Spence repeated the process setting up a new phoenix company called Caspian Engineering Ltd and shifting Compass Group assets across to Caspian. This time, it was Compass Group creditors who were left stranded.

Spence was bankrupted in 2018.

One estimate puts creditor losses at $2.4 million. In the District Court, Spence was sentenced to five years three months’ imprisonment for multiple breaches of both the Companies Act and the Insolvency Act.  This sentence was reduced on appeal by 18 months.  The most serious charges Spence faced carried a maximum sentence of five years.  At sentencing, the starting point should have been five years before making deductions for mitigating circumstances, the Court of Appeal ruled.

Spence v. R. – Court of Appeal (30.09.21)

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Family Trust: Addleman v. Lambie Trust

As a discretionary beneficiary in the Lambie Trust, Prudence Addleman wants to know why $44 million dollars of trust money was paid across to an Australian company called Edmonton Pty Ltd, a company not named as a trust beneficiary.

In pre-trial skirmishing at the High Court, Prudence’s sister Annette failed to get breach of trust claims against Edmonton Pty shifted to Australia where she lives.

Litigation has its origins in a $4.25 million payment Prudence received in 2002 described as a first and final payment to her as a discretionary beneficiary in a family trust called the Lambie Trust.  This came as a complete surprise.  She had never heard of the Trust and was unaware she was a beneficiary.  Some sleuthing followed.  A series of court cases forced disclosure of Trust accounts.  There have been various changes of trustee over the years.  Annette was a trustee.

Prudence, Annette and their two siblings were raised in Australia.  Annette lives in Australia; Prudence lives in the United Kingdom.  The two have been estranged for decades.  The Lambie Trust was established by their father in 1990, having as its major asset land surrounding Auckland suburb Howick. Funding for the purchase and development of the 42 hectare land holding came in part from a $1.02 million compensation payout Annette received after being left a quadriplegic following a catastrophic accident at a Sydney swimming pool.

After identifying some $65 million dollars had flowed through Trust bank accounts since 1990, Prudence sued both her sister Annette and Edmonton Co Pty Ltd alleging breach of trust.  In particular, Prudence wants Edmonton Pty to repay $44 million.

In the High Court, Edmonton Pty asked to be removed from the case.  Any claim against it should be heard in Australia, it said.  It is an Australian registered company.  Its relationship to the Lambie Trust and disputed links to Panama could be dealt with in the Australian courts, it said.  Named as a final beneficiary of the Lambie Trust is a Panama company: Edmonton Co Ltd SA.  Annette says Edmonton Pty in Australia replaced Edmonton SA in Panama.

Associate judge Bell ruled Edmonton Pty has to front up in the New Zealand courts.  Lambie Trust was established in New Zealand.  The role of Edmonton Pty and any links to Edmonton SA in Panama could be dealt with by New Zealand courts as easily as by Australian courts.  The disputed payments were made from New Zealand out of New Zealand assets, he said.

Addleman v. Lambie Trustee Ltd – High Court (23.09.21)

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Maori Land: Commissioner of Police v. Kiwi

Homes built on Maori freehold land cannot be seized under proceeds of crime legislation even if built using ill-gotten gains, the High Court ruled. 

In 2018, Jay Tarahini Kiwi, Vice-President of the Greazy Dogs motorcycle gang was sentenced to nine years imprisonment for methamphetamine dealing.  The High Court subsequently ordered a property at 135 Kairua Road at Welcome Bay in Tauranga be forfeit as proceeds of crime.  A nearby property at 224A Kairua Road was exempt from seizure; as Maori freehold land it came under exclusive jurisdiction of the Maori Land Court.  The Te Ture Whenua Maori Act prohibits ownership passing to anyone other than those with a kinship connection to current Maori owners.   

As part of their methamphetamine investigations, police investigated Jay Kiwi’s financial affairs.  They identified his uncle, Warren Kiwi, had fallen behind in mortgage payments for 135 Kairua Road during 2015.  With a mortgagee sale threatened, the property was sold to Jay Kiwi. Funding for the purchase materialised through John Aitken, former President of Greazy Dogs.  Justice Katz ruled that Kiwi funded his purchase of 135 Kairua Road by laundering proceeds of his drug sales through a bank account controlled by a member of the Aitken family.  The property was ‘tainted;’ purchased with the proceeds of crime and forfeit under the Criminal Proceeds (Recovery) Act.  Kiwi purchased his uncle’s property at a considerable undervalue, paying some $102,000 for a property then having a rateable value of $227,000.  The High Court was told his uncle has remained in occupation since the sale.  Since 135 Kairua Road is held as general land, not Maori land, it is ‘property’ available for seizure as proceeds of crime.

Prior to his arrest, Kiwi was living at 224A Kairua Road.  Phone calls previously intercepted by police identified Jay Kiwi as the person managing construction of a home at 224A Kairua Road.  Police inquiries identified labour and materials for construction were commonly paid for with cash, in fifty dollar notes.  Justice Katz ruled the home was ‘tainted,’ being funded with proceeds of crime.  The house is built on Maori freehold land.  As a fixture, the house forms part of the land.  The Te Ture Whenua Act is designed to keep Maori land within Maori ownership.  The effect of the Act is to prevent seizure of Maori freehold land as proceeds of crime, Justice Katz ruled.  The High Court was told Maori Land Court records has title to 224A Kairua Road registered in the name of another of Jay Kiwi’s uncles, Graeme Kiwi.  Graeme died in prison in 2017.

Commissioner of Police v. Kiwi – High Court (17.09.21)

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Family Dispute: Avoca Holdings v. Dennehy

A decades old family dispute again surfaced with sale of Whataroa Hotel on the West Coast to pay rates arears. Patrick Dennehy’s claim to $150,000 held in the pot was dismissed by the High Court.

Avoca Holdings Ltd was set up in 2000 with brothers Gerard and Patrick Dennehy 50/50 shareholders.  Ten years on, the two were in court disputing ownership of the company and arguing over who was in charge of running the Whataroa Hotel.  This after Gerard had police evict Patrick from the hotel.  Patrick’s attempt to put the company into liquidation failed; it was a private dispute about share ownership and that was not grounds to put Avoca into liquidation, the judge ruled.  Another ten years on, Westland District Council was looking to force a rating sale for hotel rates arrears.  Hampering Council sale plans was a caveat registered on the title, part of the legal debris left over from the High Court dispute ten years previously.  To expedite matters, Avoca Holdings was put into liquidation for unpaid rates and the hotel sold.  Patrick immediately resurrected his claim to a half share of Avoca’s net assets; in this case a claim against the $150,000 held by Avoca’s liquidator.  Associate judge Paulsen dismissed his claim.  Patrick had no claim against company assets; his claim remained a dispute with his brother, a dispute still not resolved.

Judge Paulsen also dismissed claims Patrick was owed money by the company for work done.  These claimed debts were over thirteen years old, well outside the six year time limit for taking legal action.

Avoca Holdings Ltd v. Dennehy – High Court (17.09.21)

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Tax Evasion: Commissioner of Police v. Nabawi

Evading tax leaves taxpayers open to all undeclared taxable revenue being confiscated as proceeds of crime together with any assets purchased with this undeclared income.  In a pre-emptive strike, police seized a motor vehicle and cash following alleged tax evasion by Jamal Nasser Nabawi.

Police pounced on Nabawi for alleged tax evasion when investigating other suspected criminal activity.  Probing Nabawi’s financial affairs, police identified $1.3 million had passed through his business and personal bank accounts at a time when first he was working at Countdown earning $11,300 per year and then in subsequent years when he declared for a four year period total income of $10,300.  Police allege just over one million dollars of the money passing through his bank accounts was revenue received by a company called Premium Plasterboard NZ Ltd which was not declared for tax purposes.  Nabawi was sole director of Premium Plasterboard.

Nabawi argued proceeds of crime legislation does not apply to tax evasion.  Tax evaders do not gain a ‘benefit;’ they avoid a liability, so long as any tax evasion goes undetected.

Tax evasion attracts substantial criminal sanctions: up to five year’s imprisonment following knowing failures to pay tax in excess of $30,000.  Tax evasion qualifies as ‘significant criminal activity,’ Justice Duffy ruled. This brings proceeds of crime legislation into play.

Seized as suspected proceeds of crime were a Toyota Hilux van, $58,400 cash found in the van and the balance of Nabawi’s personal ANZ bank account.  The High Court was told this bank account held $107,400 as at September 2020.

It is still to be proved whether Nabawi was guilty of tax evasion and if so whether the seized assets should be forfeit.

Commissioner of Police v. Nabawi – High Court (15.09.21)

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Fair Trading: Shabor Ltd v. Graham

Deer farmers Steve Borland and Bob Sharp recovered $371,000 damages following purchase of their Oparau farm, near Kawhia.  Vendor Robert Graham misrepresented the farm’s carrying capacity on sale.

The Court of Appeal was told the two inspected the property just three days before tenders closed in April 2014.  Their unconditional offer to buy at $5.25 million was based on sales information stating the property had a carrying capacity of 7500 stock units.  Doubts were later raised; the number of animals on changeover were low and some were in poor condition.  A lawyer’s letter followed, indicating they were looking for compensation.  In the winter following purchase, the property supported only 5000 stock units.  Mr Graham said the property had previously supported up to 7500 units, but recent carrying capacity had been badly affected by droughts in two successive years. To say carrying capacity at time of sale was 7500 stock units was a misrepresentation, the High Court decided.

When sued under the Fair Trading Act, Mr Graham pointed to a clause in the sale agreement acknowledging Borland and Sharp had purchased ‘acting solely on [their own] judgement’ and that there was no reliance on any representations made by the vendor.

The Court of Appeal ruled ‘no reliance’ clauses are of no effect in Fair Trading claims if they are overwhelmed by evidence to the contrary.  In fact, the purchasers had relied almost totally on the stated carrying capacity, the court ruled.  Carrying capacity was specific and central to advertising.  As intending purchasers, they spent barely two hours inspecting the property.  They did not negotiate a ‘due diligence’ clause in their agreement. The offered price of $5.25 million was a multiple of 7500 stock units by $700, being their assessment of then current farm prices.

Damages were assessed at the difference in value between the price paid and the actual farm value: $530,000.  This figure was reduced by thirty per cent to acknowledge they should have protected their own interests by requiring a due diligence clause. There was industry evidence that farm purchasers almost without exception require due diligence clauses in farm sale agreements.

Shabor Ltd v. Graham – Court of Appeal (15.09.21)

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Fair Trading: Dempsey Wood v. Gapes

Property developer Tony Gapes was ordered to pay $286,200 damages to civil engineers Dempsey Wood after his Springpark development in Auckland collapsed.  It was a breach of the Fair Trading Act to say there was funding available for ongoing work when in fact there wasn’t.  

Gapes Redwood Group started its Mt Wellington residential project in 2014 after achieving pre-sales of some $60 million from homeowners buying off the plan.  Within a year, delays and cost overruns had the development in serious trouble. Initial funders put the project into receivership.  A replacement thirty million dollar financing facility from Singapore-based Koi Structured Credit saw the project re-started.    

Dempsey Wood Civil Ltd had a $5.3 million Springpark contract for civil works, later increased by some two million dollars for approved variations.  The High Court was told Dempsey was very pro-active in getting progress payments. Koi Credit’s funds were held in a lawyer’s trust account, released monthly against contractors’ invoices. Dempsey was in the habit of threatening to ‘down tools’ unless scheduled payments were received on time.

The Koi Credit facility expired in October 2015. Never the less it ran on, while Mr Gapes searched desperately for replacement finance.  Against this background, Dempsey sought confirmation it would be paid for further work if it stayed on the job.  Dempsey was unaware Koi had issued a Property Law Act notice to protect its position should refinancing be unsuccessful and it became necessary to sell the unfinished development.

In mid-November, Mr Gapes forwarded an email to Dempsey Wood confirming funds from Koi were held by lawyers in a dedicated project account ‘earmarked for civils and consultants.’  Within weeks, Koi appointed receivers.  Pre-sale agreements were cancelled, making sale of the unfinished project more attractive since a new financier could re-sell the proposed terraced homes and apartments to new buyers at a higher price.  Koi Credit sold the unfinished project to Wilshire Group for $25 million, leaving Koi with a loss.  Meanwhile, funds in the lawyer’s Springpark project account earmarked for contractors were returned to Koi Credit. 

The likelihood of ongoing funding being available to contractors was quite different from that conveyed by Mr Gapes’ November email, Justice Fitzgerald said.  While Mr Gapes may have been optimistic that Koi would continue to support the project until refinancing was complete, there was no firm commitment from Koi Credit.  Without Mr Gapes’ assurance that funding was safe, Dempsey Wood would have walked off the job.  It invoiced $314,600 for work done between the date of Mr Gapes’ assurance and the date work stopped three weeks later on receivership.  Dempsey Wood was awarded damages of $286,200 for Mr Gapes misleading statement.  Damages were calculated on costs incurred by Dempsey Wood; its invoiced price less its profit margin.

Dempsey Wood Civil Ltd v. Gapes – High Court (10.09.21)

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Family Trust: Mills v. Galway Trust

On their mother’s death, three siblings agreed to pool their inheritances enabling disabled brother Stephen to continue living in the family home.  It was a breach of trust for Stephen to later claim he was absolute owner of the home when in his will he supposedly gifted the Hamilton property to another sibling who had not contributed to the original arrangement.

Stephen Mills suffered from multiple sclerosis.  He was living with his mother at the family home in Galway Street when she died in 2004.  Three of his siblings: Pauline, Wayne and Mary agreed to redirect inheritances from their mother’s estate.  Instead of receiving cash, their estate entitlements would be used to part-fund purchase of Galway Street, providing Stephen with the security of having a home to live in.  The Galway Trust was established to buy the property.  Pauline Wayne and Mary contributed a total of $64,000.  Stephen put in about $80,000; his share of the estate plus personal savings.  A bank mortgage of $58,000 completed the purchase.

Terms of the trust specified the home was not to be sold while Stephen was alive and that he could live there rent free provided he paid outgoings for the mortgage, rates and insurance.

While it was intended title to Galway Street would be registered in names of Galway Trust trustees, it transpired that title was taken in Stephen’s name only.  The court was told Stephen became quite emotional when visiting his lawyer to sign the paperwork, saying he wanted something in his life he did himself. His lawyer made it clear that while Stephen’s name would go on the title alone, he held the property in trust for the Galway Trust.  On his death twelve years later, Stephen left an unsigned document, later confirmed to be his will, stating the house would go to another sibling, Terry.  Only then, did Galway Trust trustees discover they were not registered on the title.  Terry claimed he was now absolute owner of Galway Street.  Terry did not contribute financially to the trust’s Galway Street purchase.

The Court of Appeal confirmed a High Court ruling that Terry did not have ownership; the property was owned by Galway Trust.  Subsequent to Stephen’s death, trust beneficiaries are Pauline, Wayne, Mary and their children.  Stephen’s estate was entitled to repayment of $30,300; money he lent to the Trust for purchase of Galway Street.

Mills v. Galway Trust – Court of Appeal (8.09.21)

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Valuation: Groom v. Bartulovic

Dennis Bartulovic and sister Winnie rented out three shops in Auckland suburb Ellerslie, a commercial holding built up from the profits of their late father’s fish and chip shop.  On Winnie’s death, Dennis tried to get these assets on the cheap, unsuccessfully disputing the value of their rental business.  

Dennis and Winnie ran the rental business as a partnership, sharing equally in profits.  Its major asset was real estate: the three Ellerslie shops.  After Winnie died in 2019, Dennis gave three months’ notice to close down their partnership, as required by the partnership agreement.  Winding down the partnership brought Dennis into conflict with Winnie’s son Paul, acting as executor of his late mother’s estate. They could not agree on a price for Dennis to buy out his sister’s half share.

Dennis demanded partnership real estate be valued on the basis of its current use only, future development potential should be ignored.  The shops were let on long leases and there was no demolition clause allowing eviction to enable redevelopment. He offered $795,000 for Winnie’s half share.  The High Court was to later order payment of $1.25 million.

Associate judge Bell said their partnership agreement required Dennis pay half the ‘net value’ of the partnership.  Valuation required assessment of the land’s market value at the date their partnership ended.  Several valuers were approached.  Their assessments valued the land at some $2.44 million.

Dennis argued the rental business lost value after Winnie’s death because her son Paul interfered with business operations.  As executor of Winnie’s estate, Paul had no legal authority to meddle in partnership business.  Actions taken by Paul did not reduce partnership value, Judge Bell ruled.  In particular, Dennis complained Paul entered into discussions with tenants about rent relief during covid-19 quarantine lockdown.  Paul made no unilateral decisions on rent relief, Judge Bell said. Tenants’ leases specifically excused payment of rent should access be prevented by pandemic restrictions.

Since the partnership ended, Dennis has received all shop rentals.  The partnership agreement specifies he must pay interest on the $1.25 million owed, calculated at bank corporate loan rates plus a margin of two per cent from date the partnership terminated in 2019. 

Groom v. Bartulovic – High Court (8.09.21)

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Kiwifruit: Gao v. Zespri Group

Former Bay of Plenty contractor Haoyu Gao was ordered to pay $12 million dollars for illegally exporting kiwifruit budwood to China. 

Zespri Group Ltd holds rights under the Plant Variety Rights Act for the G3 and G9 varieties of golden kiwifruit it developed. These varieties are commercially valuable; they proved resistant to PSA, the virus which damages legacy varieties.

The court was told Mr Gao extended his Bay of Plenty kiwifruit contracting business in 2013 with the purchase of a local kiwifruit orchard.  Outbreaks of PSA put him under severe financial pressure.  Mr Gao subsequently delivered G3 and G9 budwood to an associate in China, receiving cash against future ‘royalties.’  Private investigators hired by Zespri subsequently identified these varieties planted in four orchards near the cities of Chibi, Xianning and Wuhan; orchards controlled by Shu Changqing.  He would not admit that Mr Gao supplied the budwood, but stated he did have a ‘licence agreement’ from Mr Gao supposedly giving him full intellectual property rights to G3 and G9 for the whole of China.

The Court of Appeal confirmed a High Court ruling that Mr Gao breached Zespri’s registered plant variety rights by exporting stock from New Zealand without Zespri approval.

Damages of $24 million were assessed on a notional royalty for the unauthorised kiwifruit subsequently harvested in China.  Damages were reduced by fifty per cent to $12 million, recognising that Zespri could take legal action in China against Mr Shu for illegally cultivating G3 and G9 varieties.

Zespri has registered in China under its equivalent of the Plant Varieties Act, Zespri’s exclusive right to commercially exploit G3 and G9 kiwifruit varieties in that country.  Zespri is required to take action in local courts to enforce these rights against growers in China.

It came out in evidence at the High Court that after Mr Gao sold a supposedly all-China exclusive licence to Mr Shu, he then attempted a sell the same licensing deal to another buyer in China.  Mr Gao was angry when this second buyer backed out, having Mr Gao then accuse him of a lack of honesty.  There was also evidence of Mr Gao suggesting to another associate in China that he get Kiwifruit stock by stealing budwood from a local orchard. Mr Gao provided detailed instructions as to where the orchard was situated.   

Gao v. Zespri Group Ltd – Court of Appeal (7.09.21)

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Relationship Property: Palmer v. Alalaakkola

Works of art produced during a relationship are relationship property as also is copyright in the finished product, the High Court ruled in a dispute between Marlborough artist Sirpa Alalaakkola and her former husband when their twenty year marriage ended. 

Renowned for her colourful artwork, much of it depicting holiday activities, Ms Alalaakkola agreed former spouse Paul Palmer could have some of her paintings but objected to him also having copyright. Mr Palmer said he intended to reproduce copies of the paintings to sell and to derive future income.

In the High Court, Justice Isac ruled copyright in works of art is a ‘property right’ to be valued and divided as relationship property at the end of a relationship.  As a property right, copyright is no different in principle from intangible rights such as fishing quota, options to purchase and insurance claims, all of which have previously been treated as relationship assets.  The physical painting and copyright in the image are not one and the same, Justice Isac said.  They are separate property interests with differing economic values.  One person may own a painting, another hold copyright.

No evidence had been provided as to either the value of paintings completed by Ms Alaakkola during the relationship or the value of copyright attaching to these images.  Justice Isac recommended it was best for the two to reach agreement between themselves.  If no agreement could be reached, it was for the Family Court to decide on the value of paintings still held by Ms Alalaakkola and the value of copyright attaching to those paintings, with Mr Palmer entitled to half the value.  Many of Ms Alalaakkola’s paintings ruled to be relationship property are on exhibition in Finland, the country of her birth.

Not categorised as relationship property were paintings completed before the relationship started, sold during the relationship, or produced after the relationship ended.

Palmer v. Alalaakkola – High Court (7.09.21)

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Share Buy-back: Warkworth Retail Ltd v. Warkworth Holdings Ltd

High Court appointed interim liquidators to Warkworth Holdings Ltd after allegations high-profile investors Todd Strathdee and Andrew Guest improperly used a share buyback to seize control while plotting to do a deal with themselves as neighbours to subdivide land on Falls Road, Warkworth.

Strathdee and Guest are directors on Warkworth Holdings’ board.  Value of bare land around Warkworth has increased markedly, due in part to improved access promised on completion of a new Puhoi-Warkworth highway.  Borrowings of $47 million are secured over Warkworth Holding’s land; funding provided by minority shareholder New York-based Arena Global LLC and former shareholder Warkworth Retail Ltd.  Arena has first claim on sale proceeds. Mr Guest was associated with Warkworth Retail; Mr Strathdee is associated with Arena.

With money due on loans standing at some $47 million, Warkworth Holdings had received a conditional offer for its land at $50 million.  The High Court was told that some two weeks earlier a majority of Warkworth directors had agreed to a $42 million sale, selling to a company owned ultimately by Mr Strathdee.  Two directors representing majority shareholder Foundation Developments Ltd objected to this sale.  Around the same time, Warkworth Holdings bought back its shares then held by shareholder Warkworth Retail for zero consideration.  Mr Guest facilitated the buy-back.  Reducing the number of Warkworth Holdings’ shareholders created a board deadlock; having the effect of freezing management decisions.  Arena also took steps to seize control of Foundation Developments’ shareholding in Warkworth Holdings under rights contained in a previously arranged shareholders’ agreement.  If all fell into place, Arena Global would then have 100 per cent control of Warkworth Holdings.

Former shareholder Warkworth Retail and majority shareholder Foundation Developments allege that the $42 million sale orchestrated by Strathdee and Guest is at an undervalue, that the buy-back of Retail’s shareholding is in breach of the Companies Act and that the buy-back was engineered for an improper purpose.

Only after applying to the High Court for appointment of an interim liquidator did the two disgruntled shareholders learn a valuable easement was being negotiated between Warkworth Holdings and its neighbour to benefit joint development of the two properties.  The company owning neighbouring land is controlled by Strathdee and Guest. 

Justice Gault appointed interim liquidators to Warkworth Holdings, keeping open the possibility of a later challenge to actions of Strathdee and Guest.  Days before this court hearing, Arena changed tack; exercising its rights as secured creditor, having a receiver take control of Warkworth Holdings’ land.

Warkworth Retail Ltd v. Warkworth Holdings Ltd – High Court (6.09.21)

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Buy-out: PLC Trust v. Birchfield Holdings

West Coast miner Allan Birchfield has been strongly advised to accept a reasonable offer for his 25 per cent shareholding in Birchfield Holdings Ltd after he was kicked off the board.

Mining company Birchfield Holdings is valued in excess of twenty million dollars.  Through PLC Trust, Mr Birchfield controls one quarter of the shares; three siblings who between them hold a majority shareholding are also directors.  They removed Mr Birchfield as director in 2019. The High Court was to learn of deep seated differences of opinion between Mr Birchfield and his siblings, primarily over the company’s strategic direction, its dividend policy and complaints about company resources being diverted in payment of allegedly excessive salaries.  He sued, asking the High Court to have him reinstated to the board and to regulate the company’s future activities by appointing independent directors to take control.  His siblings took a short-cut, getting a court ruling that Mr Birchfield’s reinstatement as director was never on the cards and that all his claims should be dismissed since they had offered to buy him out.  If their brother went ahead with his case, a court ordered buy-out of his shares was the only plausible outcome, his siblings said.

Mr Birchfield appealed.  Any buy-out offer would be unfair, he said.  Value of company shares had been harmed by his siblings’ abject mismanagement, he claimed.  He had rejected their various buy-out offers.

Buying out a minority shareholder at fair value is the appropriate remedy where a minority shareholder complains about how a company is run, the Court of Appeal ruled.  Calculation of fair value can be difficult where majority shareholders’ previous conduct has affected company share value.  This can include payment of allegedly excessive salaries.  In this case, terms of reference previously agreed by the Birchfield family for determining fair value required that prior payment of any excess salaries be taken into account, the court said.

Mr Birchfield was given three weeks to consider the most recent buy-out offer.  Terms of this offer were not publically disclosed.  Failure to agree would see further litigation over what was fair value.

PLC Trust v. Birchfield Holdings Ltd – Court of Appeal (2.09.21)

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