IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2015-404-654 [2015] NZHC 1331

BETWEEN	CHRISTOPHER BRIAN ROBERT
HILSON Plaintiff	

AND	
INTERNATIONAL DRUG DETECTION AGENCY LIMITED
First Defendant

THE NEW ZEALAND DRUG DETECTION AGENCY LIMITED Second Defendant	

Hearing:	15 April 2015	

Appearances:	
A E Hansen for Plaintiff
P F Dalkie for Defendants	

Judgment:	
12 June 2015	

JUDGMENT OF M PETERS J

This judgment was delivered by Justice M Peters on 12 June 2015 at 3 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors:	Heimsath Alexander, Auckland

Counsel:	P F Dalkie, Auckland

HILSON v INTERNATIONAL DRUG DETECTION AGENCY LTD [2015] NZHC 1331 [12 June 2015]

[1]       The  Plaintiff,  Mr Hilson,  is  a  shareholder  in  the  Second  Defendant,  the

New Zealand Drug Detection Agency (“NZDDA”).

[2]       The  First  Defendant,  International  Drug  Detection  Agency  (“IDDA”), appointed NZDDA its master franchisee in New Zealand pursuant to an agreement dated 1 November 2012 (“agreement”), for an initial term of 20 years and with the possibility of a further term beyond that.

[3]       On or about 4 February 2015, IDDA served notice alleging breach of the agreement (“notice”).  The agreement would permit IDDA to terminate if a breach were not rectified within 20 days.

[4]       On about 10 February 2015, NZDDA informed Mr Hilson of the service of the notice.  To date, and despite requests, neither IDDA nor NZDDA has provided a complete copy of the notice to Mr Hilson, although parts of it have been disclosed.

[5]       On 27 March 2015, Mr Hilson commenced proceedings against IDDA and NZDDA and at the same time made the application for interim orders that this judgment determines.  Mr Hilson seeks interim orders:1

(a)	restraining IDDA from terminating the agreement;

(b)	restraining NZDDA from accepting any “settlement option” proposed by IDDA to settle the matters identified in the notice; and

(c)	for discovery of the notice and all related correspondence.

[6]       The  Defendants  oppose  the  making  of  these  orders  on  the  grounds  that Mr Hilson does not have standing to seek such relief and, in any event, they contend that damages are an adequate remedy.   The Defendants filed a joint notice of opposition  dated  1 April  2015,  noteworthy because  a  master  franchisee  who  is alleged to have committed a breach of their agreement does not often find common cause with their master franchisor.  Not so in this case.  Indeed one of Mr Hilson’s

underlying complaints is that IDDA and NZDDA have acted in concert, with the intention of disadvantaging him and diminishing the value of the shares he holds in NZDDA.

[7]       Mr Hilson’s application was called in the Duty Judge list on 30 March 2015 and Katz J made the orders sought, pending further consideration of the matter.   I continued those orders at the conclusion of the hearing before me.

[8]     There have been various developments since.   Most recently, by joint memorandum dated 28 May 2015, counsel for the Defendants advised that IDDA had undertaken to NZDDA that it would not terminate the agreement for any breach referred to in the notice.

[9]       Mr Hilson does not agree that this undertaking renders his application moot, given that it is not extended to him.

Parties

[10]     In 2013 Mr Hilson purchased 33 per cent of the shares in NZDDA, that is

3,334 of the 10,000 shares issued.

[11]     NZDDA had  employed  Mr Hilson as  its CEO in June 2012.   He was a director    of    the    company    until    February    2014,    when    another    director (Mr Colin McMurtrie – referred to below) was appointed in his place.   NZDDA terminated  Mr Hilson’s  employment  on  6  May  2014  and  he  made  a  personal grievance claim on 12 May 2014.   The relationship between the parties has deteriorated since.

[12]     IDDA was incorporated on 29 April 2005.  The evidence before me includes an affidavit sworn by Mr Kirk Brian Hardy, IDDA’s CEO and one of its directors. Mr Hardy  has  had  a  significant  involvement  in  this  dispute.    In  his  evidence, Mr Hardy states that he and his family were the beneficial shareholders of NZDDA
on incorporation and after the agreement was executed.2   They then disposed of their

shares  to  third  parties,  including  Mr Hilson.     Mr Hardy  required  subsequent shareholders  in  NZDDA,  such  as  Mr Hilson,  to  guarantee  the  performance  by NZDDA of its obligations to IDDA.3   This is material to Mr Hilson’s contention that he is a “party” to the agreement, to which I refer below.

[13]     At the time of the hearing before me Mr Hardy and his interests held 75 per cent of IDDA’s shares and a third party held 25 per cent.

[14]     Mr Hardy and Mr Jeremy Carr are the directors of IDDA, Mr Carr being a

partner in Burton & Co, IDDA’s solicitors.

[15]     NZDDA was incorporated on 28 January 2011.  At the time of the hearing, the   shareholders   were   Mr   Hilson,   Mr   McMurtrie   as   to   3,333   shares, Mr John Tidswell as to 3,133 shares and Ms Elizabeth Murray as to 200 shares.

[16]     Mr McMurtrie became a director of NZDDA in February 2014, together with a Mr Ant Carter.   Mr Carter later resigned.  An updated company search filed by counsel for Mr Hilson records that the current directors of NZDDA are Mr Hardy and Mr McMurtrie and that Mr Hardy now holds all the shares previously held by
Mr McMurtrie, Mr Tidswell and Ms Murray.4

Order sought against IDDA

[17]     Mr Hilson’s first cause of action is against IDDA for alleged breach of the agreement.    Mr Hilson  alleges  that  IDDA failed  to  act  in  accordance  with  the relevant  provisions  of  the  agreement  and  was  therefore  unable  to  terminate. Mr Hilson seeks a declaration to this effect, an order requiring IDDA to engage in a dispute  resolution  process  provided  for  in  the  agreement  and  an  injunction restraining IDDA from terminating the agreement in reliance on the notice.  It is this
latter relief which is sought in the interim orders.

3	At [5].
4	Memorandum of  Counsel  for  Plaintiff  Regarding  Late  Provision  of  Undertaking  by  First
Defendant dated 29 May 2015.

[18]     As  the  Defendants  submit,  an  immediate  issue  arises  as  to  Mr Hilson’s

standing to seek to enforce the agreement.

[19]     Mr Hilson submits that he is party to the agreement in his capacity as a guarantor – as to which see [12] above.  On the face of the agreement a guarantor is a “party”.5

[20]     Despite this, and despite the fact that Mr Hilson was sent a form of guarantee to execute, there is no evidence that Mr Hilson actually did execute the document.  I accept the Defendants’ submission that Mr Hilson is unable to pursue an argument that he is a party unless, at the very least, he can prove he executed the guarantee.

Order sought against NZDDA

[21]     Mr Hilson seeks an order restraining NZDDA from accepting any “settlement option” proposed by IDDA to settle the matters identified in the notice.

[22]     I am unable to reconcile the application for such an order with Mr Hilson’s cause  of  action  against  NZDDA,  which  is  brought  pursuant  to  s 174  of  the Companies Act 1993 (“Act”).   Section 174 permits the Court to grant relief to a shareholder if it considers that the affairs of a company, ie NZDDA, have been or are being conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the shareholder.  The interim relief sought is unconnected to that cause of action and in any event ill considered.   Such an order would cut across the obligations of NZDDA’s Board to manage the company’s affairs.  It is for NZDDA’s Board, now Mr Hardy and Mr McMurtrie, to determine where NZDDA’s best interests lie and to pursue those interests (and those interests alone).

[23]     I am also satisfied that damages will be an adequate remedy for Mr Hilson if he establishes this cause of action at trial.

5	Master Franchise Agreement dated 1 November 2012 at 1.

Discovery

[24]     Nor am I willing to order discovery.  That is a matter the Court can consider when Mr Hilson has given further consideration to his proceedings.

Result

[25]     On the evidence before me there appears to be substance to Mr Hilson’s complaint that the directors of NZDDA may not have fulfilled their obligations to act in good faith and in the best interests of the company and to exercise their powers for a proper purpose.

[26]     For the reasons given, however, I am unable to or do not propose to grant the relief that Mr Hilson has sought in his application.  I discharge the existing orders accordingly.

[27]     The Defendants are entitled to costs on a 2B basis, together with the usual disbursements.

..................................................................

M Peters J