Banks v Farmer and Others

JurisdictionNew Zealand
CourtHigh Court
JudgeMoore J
Judgment Date28 July 2021
Neutral Citation[2021] NZHC 1922
Docket NumberCIV-2016-404-000057

[2021] NZHC 1922

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Moore J

CIV-2016-404-000057

Between
Adam David Banks
Plaintiff
and
William Robert Farmer
First Defendant

and

Simon Mathew Gamble
Second Defendant

and

Christopher James Massam
Third Defendant

and

Douglas Leroy Frederick
Fourth Defendant
Appearances:

Jeremy Johnson, Gregory Simms and William Porter for the Plaintiff

Robert Hollyman QC, Alec Steel, Lance Green and Ana Lenard for the First Defendant

Second Defendant in Person

Third Defendant in Person

No appearance for the Fourth Defendant

Commercial, Companies — claim for compensation for losses in a failed investment — directors duties — debt security — securities advertisements — definition of “offer” and “public” — misleading and deceptive conduct — directors duties in an insolvency context — objective standard of a reasonable director — Securities Act 1978 — Fair Trading Act 1986 — Companies Act 1993

The issues were: whether the money advanced were security allotments or loans under the SA; whether the directors had breached their duties under the CA and whether they had engaged in misleading conduct under the SA and FTA.

The Court held the Agreements took the form of a loan arrangement under which B advanced funds to Mako, with a right to repayment and interest. The statutory definition of debt securities included “an interest in or right to be paid money that is … lent”. The funds advanced under met the definition of debt security. The Agreement which included an additional right of conversion to equity was an allotment of security

Section 3(1)(a) SA (construction of references to offering securities to the public) made it clear that an offer to the public did not need to be open to every member of the public. The evidence was silent on who approached who first. If B approached F as he had prior to the second Agreement, then no offer could have been made by Mako. If F approached B seeking further investment, he did so because of the pre-existing relationship with B. Either way the investment was not made as a result of an offer to the public. No offer of securities was made to the public prior to the allotment of securities by the third Agreement. B's claim under the SA failed.

The totality of the information available to the directors at about the time successfully concluding the deal with a large American telecommunications and mobile network operator looked unlikely was when Mako should have stopped trading. That was late April to mid-May 2014. That was the earliest date the directors could have breached s135 CA. By that date it was apparent that a return to solvency was unlikely, and it was not open to the directors to trade on while attempting to rescue all or part of the business. However, by that date M had already advanced his funds under the third agreement. B was not at risk of further loss resulting from Mako continuing to trade. B's claim under s135 CA failed.

The directors had not breached s136 CA. They had subjectively believed on reasonable grounds that Mako would be able to meet its obligations to B under the agreements when those obligations fell due. The decision by the liquidators or Spark not to pursue a claim against the directors did not provided a basis for B to receive personal compensation under s301 CA.

The directors had breached the s137 CA duty to exercise skill and care, However, that breach was not causative of any loss suffered by B. Until it was reasonable for the directors to believe that Sprint would not enter a binding contract, the directors had exercised the care, diligence and skill of a reasonable director in the circumstances. However, from that point the directors should have caused Mako to cease trading. Having regard to the s137 CA factors, Mako had continued as a viable business for more than a decade. However, by mid-2014, its chronic cash flow difficulties were such that without the realistic and likely prospect of a lucrative, multi-million dollar deal within the foreseeable future, it would not be possible for the company to meet its obligations. At that point, a reasonable director, exercising due care, diligence and skill, would have caused Mako to cease trading and go into liquidation.

The claims under s55G SA and s56 SA failed because B had not subscribed for any security.

There was no causative nexus between the alleged representations or omissions and B's loss. He would have advanced the funds regardless of those representations or omissions. B's claim under s9 FTA failed.

B's claims failed.

JUDGMENT OF Moore J

This judgment was delivered me on 28 July 2021 at 2:00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar / Deputy Registrar

Date:

Contents

Paragraph Number

INTRODUCTION

THE CLAIM

[9]

BACKGROUND

[12]

The beginnings of YellowTuna and Mako

[14]

Corporate structure

[19]

Growth and development of Mako

[22]

Mako in 2007 to 2009 and PCI-DSS certification

[27]

Telecom funding

[29]

The Private Placement Memorandum (2010)

[31]

Mr Banks meets Mr Farmer

[38]

Agreement 1

[50]

Mako in 2011 and 2012

Customers and marketing

[54]

Mr Frederick and Mr Frawley join the Board and Mr Gamble moves to the United States

[66]

Finances and cashflow

[71]

Mako in 2013

Telecom Rentals

[79]

Agreement 2

[85]

Initial Public Offering (“IPO”)

[90]

The Norcal Reports

Norcal Marketing Report (15 March 2013)

[92]

The Norcal Pipeline Report (1 July 2013)

[98]

Solvency test paper

[102]

Deloitte Planning Report

[105]

Restated accounts for year ended 30 June 2012

[107]

Bell Gully instructions

[108]

The Weldon Report

[109]

Telecom Rentals raises concerns

[114]

Customers and marketing

[117]

Mr Frawley raises concerns

[121]

Mr Frawley resigns

[127]

Telecom Rentals restructures debt

[130]

Agreement 3

[137]

Mako in 2014

[153]

Sprint

[155]

D&S Communications

[156]

Goldman Sachs

[157]

BP North America

[158]

Mako in 2015

[160]

Post-receivership events

[164]

DEFENCE APPLICATIONS FOR POST-TRIAL PRODUCTION ORDERS AND TO RECALL MR BANKS

Introduction

[166]

Background

[168]

The evidence

[177]

Discussion and findings

[180]

Credibility findings

[191]

FIRST CAUSE OF ACTION — S 37 OF THE SECURITIES ACT

[210]

The parties' positions

[211]

What is the correct approach for this cause of action?

[213]

Can the Agreements be considered security allotments?

[219]

Agreement 1

[224]

Agreements 2 and 3

[225]

Were there offers of securities made to the public?

Legal principles

[228]

What is the effect of the chosen approach?

[248]

Was there an offer to the public?

Agreement 1

(a) Factual circumstances

[249]

(b) Analysis on Agreement 1

[289]

(c) Conclusion

[300]

(d) Was Mr Banks a habitual investor?

[301]

Agreement 2

(a) Factual circumstances

[312]

(b) Analysis on Agreement 2

[318]

Agreement 3

(a) Factual circumstances

[323]

(b) Analysis on Agreement 3

[326]

Liability and relief?

[329]

Conclusion on Securities Act claims

[332]

THIRD CAUSE OF ACTION — BREACH OF DIRECTORS' DUTIES CLAIMS (COMPANIES ACT CLAIM)

Introduction

[334]

The plaintiff's case in summary

[339]

The Board and its decision-making processes

The Board

[341]

Board discussions at meetings

[348]

Adverse inferences and the affirmative defence of reliance on advice

[353]

Policy rationale for directors' duties in an insolvency context

[364]

Section 135 — Reckless trading

Legal principles

[377]

Plaintiff's submissions

[388]

Was Mako insolvent at any point during its trading history?

[391]

(a) Was Mako ever balance sheet insolvent and, if so, when?

[392]

(b) Was Mako cashflow insolvent and, if so, when?

[402]

(i) From Telecom Rentals' withdrawal of funding to the February 2014 debt restructure

[408]

(ii) From the Telecom Rentals debt restructure to the failure of the Sprint deal

[420]

At what point after the failure of the Sprint deal were the directors in breach of s 135?

[442]

Conclusion as to breach

[454]

Section 136 — Improperly incurring obligations

Legal principles

[457]

Plaintiff's submissions

[466]

Agreement 1–4 February 2011

[468]

(a) Subjective belief

[470]

(b) Reasonable grounds for that belief

[472]

Agreement 2–30 June 2013

[475]

(a) Subjective belief

[479]

(b) Reasonable grounds for that belief

[482]

Agreement 3–24 April 2014

[492]

(a) Subjective belief

[493]

(b) Reasonable grounds for that belief

[495]

Conclusion as to breach

[505]

Section 137 — Duty to exercise skill and care

Legal principles

[506]

Plaintiff's submissions

[509]

Did the defendants fail to exercise the skill and care that a reasonable director wuld in the same circumstances?

[512]

(a) Mako's financial position, including liabilities to Telecom and Mr Banks

[513]

(b) Prioritising interests as shareholders over the company's interests

[517]

(c) Overlap between Mr Banks' claims under ss 135, 136 and 137

[523]

Section 301 — Remedy

Introduction

[541]

Legal principles

[542]

(a) Is the remedy available given Mako was not in the course of liquidation?

[544]

(b) Can creditors be personally compensated under s 301...

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