Banks v Farmer and Others

• Jurisdiction: New Zealand
• Judge: Moore J
• Judgment Date: 28 July 2021
• Neutral Citation: [2021] NZHC 1922
• Docket Number: CIV-2016-404-000057
• Year: 2021
• Court: High Court

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

[2021] NZHC 1922

Moore J

CIV-2016-404-000057

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

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

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

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 for breach of directors' duties?	[557]
Section 383 — Banning orders	[586]
Legal principles	[588]
SECOND AND FOURTH CAUSES OF ACTION: MISREPRESENTATIONS -S 55G OF THE SECURITIES ACT AND S 9 OF THE FAIR TRADING ACT
Introduction	[592]
Section 55G of the Securities Act	[594]
Section 9 of the Fair Trading Act
Mr Banks' case	[598]
Legal principles
Misleading and deceptive conduct in trade	[602]
Analysis	[616]
(a) Was Mr Farmer “in trade”?	[618]
(b) Did Mr Farmer engage in conduct?	[622]
(c) Was Mr Farmer's conduct misleading or deceptive?	[625]
(i) Verbal representations	[628]
(ii) Written representations	[638]
Representations 20, 24 and 31	[641]
Representations prior to Agreement 1	[644]
Representations prior to Agreement 2	[660]
Representations prior to Agreement 3	[669]
Liability of the other directors and relief	[678]
SUMMARY OF CONCLUSIONS
(a) First cause of action	[680]
(b) Third cause of action	[681]
(c) Second and fourth cause of action	[684]
COSTS	[686]
Appendix 1

INTRODUCTION

“Whāia te pae tawhiti kia tata, ko te pae tata whakamaua kia tina!”

1 This case is about the rise and fall of a technology company which held so much promise but which ended up in failure. It is also about a young man who invested part of his family inheritance and lost it.

2 The company was called Mako. It was established by two enthusiasts with information technology (“IT”) skills and a vision. They saw a gap in the emerging technology security market and they developed a technological solution to meet that gap. The system they developed was innovative and world-leading. Mako grew rapidly, initially locally and then globally.

3 Revenue projections were estimated to reach tens, if not hundreds of millions of dollars. But Mako had an Achilles' heel; it lacked the capital to fully realise its potential. It looked for and found investors. One of those was the plaintiff. Between 2011 and 2014 he invested over $3.2 million in the form of unsecured loans. He lost his money when Mako went into liquidation and receivership owing creditors around $34.5 million.

4 The plaintiff sues the four defendants who were directors of Mako. He says they took his money in circumstances where there was a significant information asymmetry; the defendants knew many important and relevant facts about the company's performance and the plaintiff did not. The plaintiff says that if the defendants had acted as they should have as directors of Mako, consistent with their legal obligations, he would not have lost his money.

5 In particular, the plaintiff says the defendants breached their obligations by taking investments from him as a member of the public without a registered prospectus, making misrepresentations about Mako's state and prospects which had no reasonable foundation, failing to disclose critical information about the company before the plaintiff made his investments and continuing to trade the company in circumstances where it was insolvent, under-capitalised and, with no realistic prospect of receiving further capital, allowed Mako to continue to trade to the detriment of its creditors, including the plaintiff.

6 These alleged defaults are reflected in the four causes of actions the plaintiff brings against the defendants.

7 The defendants respond that the failure of Mako was not due to any actionable failure on their part. Mako, despite its promise, never realised...