IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-006729 [2013] NZHC 1438

BETWEEN	AQUAHEAT NEW ZEALAND LIMITED

Plaintiff

AND	HI SEAT LIMITED (In Liquidation and Receivership) and LIA LIMITED (In Liquidation and Receivership)

First Defendants

ANZ FIDUCIARY SERVICES PTY LIMITED

Second Defendant

ANDREW JOHN GRENFELL Third Defendant
Hearing:	30 May 2013

Appearances:	J B M Smith QC for Plaintiff
A M Challis for Third Defendant

Judgment:	14 June 2013

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

This judgment was delivered by me on 14 June 2013 at 3.30 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:
Kensington Swan, Wellington. McElroys, Auckland.

AQUAHEAT NEW ZEALAND LIMITED  v HI SEAT LIMITED (In Liquidation and Receivership) and LIA LIMITED (In Liquidation and Receivership)  [2013] NZHC 1438 [14 June 2013]

[1]       Aquaheat New Zealand Limited (“Aquaheat”) sues to recover losses it has sustained arising from a contract it entered in August 2012 to purchase assets owned by the first defendant, Hi Seat Limited, formerly known as Hastie (NZ) Limited (“HNZ”) and LIA Limited, formerly known as Aquaheat Industries Limited (“AIL”). HNZ and AIL are wholly owned  subsidiaries  of Hastie Holdings  (NZ)  Limited which, at all material times, was in receivership.  The third defendant (Mr Grenfell) was one of two receivers appointed by the second defendant and is said to have played a major part in the lead up to and execution of the agreement which Aquaheat says has caused it losses.  Aquaheat says that Mr Grenfell’s activities were such that he is a director of HNZ and AIL within the meaning of that word given by s 126 of the Companies Act 1993, in that capacity he breached s 136 of the Act, and an order should be made under s 301(1)(c) of the Act directing him to pay a sum of money to Aquaheat in its capacity as a creditor of HNZ and AIL.

[2]       Mr Grenfell applies for summary judgment dismissing the claim by Aquaheat on the ground that he was not a director in terms of s 126 and therefore did not owe to HNZ or AIL the duty imposed on directors by s 136.

[3]       Rule 12.2 High Court Rules provides that the Court may give judgment against a plaintiff if a defendant satisfies the Court that none of the causes of action in the plaintiff’s statement of claim can succeed.   The onus of establishing that position  rests  entirely on  the applicant.   Whilst  the Court  should  take a robust approach, and disregard factual disputes which are plainly spurious or contrived, it is well-established that  the  Court  must  refrain  from attempting to  resolve  genuine conflicts of evidence or to assess the credibility of statements in affidavits.   The
position is summarised in this passage:1

In a matter such as this it would not be normal for a judge to attempt to resolve any conflicts in evidence contained in affidavits or to assess the credibility or plausibility of averments in them.  On the other hand, in the words of Lord Diplock in Eng Mee Yong v Letchumanan [1980] AC 331 at
341E, the judge is not bound:

to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in

1	A-G v Rakiura Holdings [1986] 1 PRNZ 12 at 14, per Greig J; see also, generally, A Beck et al
McGechan on Procedure (looseleaf ed, Brookers) HR12.2.03 and 12.2.08.

precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.

[4]	Further, in Westpac Banking Corp v M M Kembla New Zealand Ltd, the

Court said:2

[60]   Where a claim is untenable on the pleadings as a matter of law, it will not  usually  be  necessary  to  have  recourse  to  the  summary  judgment procedure because a defendant can apply to strike out the claim under r 186. Rather, r 136(2) permits a defendant who has a clear answer to the plaintiff which cannot be contradicted to put up the evidence which constitutes the answer so that the proceedings can be summarily dismissed.  ...

[61]   The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed.  Usually summary judgment for a defendant will  arise  where  the  defendant  can  offer  evidence  which  is  a  complete defence to the plaintiff’s claim.  ...

[62]   Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained  by  the  Court  and  cannot  confidently  be  concluded  from affidavits.  It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. ...

[63]   Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim.   That would permit a defendant, perhaps more in possession  of  the  facts  than  the  plaintiff (as  is  not uncommon  where  a plaintiff is the victim of deceit) to force on the plaintiff’s claim prematurely before completion of discovery or other interlocutory steps and before the plaintiff’s evidence can reasonably be assembled.  ...

[64]   The defendant bears the onus of satisfying the Court that none of the claims can succeed.  It is not necessary for the plaintiff to put up evidence at all although if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own.  Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred.  At the end of the day the Court must be satisfied that none of the claims can succeed.  It is not enough that they are shown to have weaknesses.  The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.

[5]	The first issue in the case against Mr Grenfell is whether he was a director in terms of s 126.	It is the only issue on this application.	It must be decided in
accordance with the principles I have set out.

2	Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 at 313.

Section 126 Companies Act

[6]       Section 126 defines the meaning of a director of a company.   It includes a person appointed as a director, but for the purposes of certain other sections of the Act, including s 136, persons who are not appointed directors of a company but who fit within certain criteria are nonetheless directors. Aquaheat relies on ss 126(1)(b)(i) and (ii) and s 126(1)(c). These are in the following terms:

126	Meaning of director

(1)	In this Act, director, in relation to a company, includes –

(a)   ...

(b)   for the purposes of sections 131 to 141, 145 to 149, 298, 299,
301, 383, 385, 386A to 386F, and clause 3(4)(b) of Schedule 7 –

(i)   a person in accordance with whose directions or instructions a person referred to in paragraph (a) may be required or is accustomed to act; and

(ii)  a person in accordance with whose directions or instructions the board of the company may be required or is accustomed to act; and

(iii) ...

(c)   for the purposes of sections 131 to 149, 298, 299, 301, 383, 385,
386A to 386F, and clause 3(4)(b) of Schedule 7, a person to whom a power or duty of the board has been directly delegated by the board with that person’s consent or acquiescence, or who exercises the power or duty with the consent or acquiescence of the board; and

(d)   ...

[7]       Section 126 (1A) provides that:

In this Act, director, in relation to a company, does not include a receiver.

As noted, Mr Grenfell was at the time of the actions relied on by Aquaheat a receiver of the parent company of HNZ and AIL, but not of either of those companies.  It is his actions in relation to these two companies that are called in question in this case. Ms Challis did not argue that s 126(1A) applies, accepting that the reference to a receiver in that subsection applies only to a receiver of the company in respect of which that person might otherwise be alleged to be a director under the extended definitions in s 126(1)(b), (c) and (d). As that was the position of counsel, I accept it for the purposes of this application.

[8]       Whether appointed directors of a company are required to act in accordance with  the  directions  of  another  person  is  a  question  of  fact.3       To  decide  this application, therefore, it is necessary to review the evidence in some detail.

[9]       Ms Challis says that the principal area of dispute between the parties arises because of a subjective difference in perception about Mr Grenfell’s role.  She says, however, that an objective assessment of the evidence before the Court is sufficient for the Court to determine that Mr Grenfell was not at any time a director of AIL or HNZ.  In a detailed analysis she compared Mr Grenfell’s role in the period leading up to, and at the time, HNZ and AIL entered the contract with Aquaheat, with the conduct established on the part of persons alleged to be directors in each of nine cases.

[10]     The evidence in support of the application is contained in two affidavits of Mr Grenfell, three affidavits of Mr N M Millar, a solicitor in the firm which acted for HNZ and AIL, and one affidavit by Ms C L Holland, an accountant with the firm in which Mr Grenfell is a partner who was involved with him in the actions he took, which are under review.  The evidence for the respondent is in an affidavit from Mr P V de Bernardo who was the sole appointed director of HNZ and AIL, and an affidavit by Mr A Anand, the chief executive of Horizon Energy Distribution Limited which is the parent company of Aquaheat.

[11]     As  context  for  this  evidence  it  is  helpful  to  recall  that,  throughout, Mr Grenfell had two roles.  He was the receiver of a parent company charged with the duty to recover the assets of that company, which included HNZ and AIL and, through them, the businesses they ran.   He was required to operate in accordance with the general duties imposed upon him by the Receiverships Act 1993 which include a duty to exercise his powers in a manner he believes on reasonable grounds
to be in the best interests of the person in whose interests he was appointed.4    As
well, he had a duty to the parent company, in receivership, and interests associated with it to obtain the best price reasonably obtainable at the time for sale of assets

3	Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (HC).
4	Section 18(2).

under his control in the receivership.5    He was, for all relevant purposes, the shareholder of HNZ and AIL, required to consider and authorise the sale as it was a major transaction as defined in the Companies Act.     Aquaheat says he assumed a third role, director of HNZ and AIL, in the course of acting in these two capacities. The focus of a review of the evidence, be that on this application or, should it not succeed, at trial will be on a close examination of exactly what happened, and in particular:

•     Whether in terms of s 126(1)(b)(i), Mr de Bernardo as appointed director was required or accustomed to act in accordance with directions or instructions from Mr Grenfell.

•    In terms of s 126(1)(c) whether a power or duty of the board of HNZ or AIL was directly delegated to him with his knowledge and consent, or he exercised a power or duty of the board with its consent or acquiescence.

Mr Grenfell

[12]     The  affidavits  disclose  widely  differing  perceptions  of  what  occurred throughout the period under review.  I start with Mr Grenfell.  In his first affidavit he gives evidence which may be broadly categorised into three areas.  The first is the period from his appointment to the time the process of selling the assets of the subsidiaries commenced.  At the first meeting he arranged with Mr de Bernardo, the purpose  of  which,  he  says,  was  to  introduce  himself  as  receiver  of  the  parent company and to confirm that he was not assuming any control over HNZ and AIL, which would continue business as usual, he sought to get an understanding of the cashflow of the subsidiary companies to determine whether they needed the support of the parent, and for that purpose asked to be provided with cashflow/financial information and to be kept informed and updated with such information.  He says that he did not at any point indicate that he was assuming any authority or control over Mr de Bernardo or HNZ/AIL.  To the contrary he made it clear that he was only
there in his capacity as agent (receiver) of the parent, Hastie Holdings.

5	Section 19.

[13]     He  says  that  his  focus  at  that  time  was  to  ensure  that  Mr  de  Bernardo understood  that  HNZ  and AIL were  not  in  receivership  and  that  he  needed  to continue running those companies as he had been doing.  Mr de Bernardo prepared a statement  advising  customers  of  this  position,  and  Mr  Grenfell  assisted  in  the drafting of this to ensure that the message sent to customers was correct.  At Mr de Bernardo’s request Mr Grenfell went with him to meet two key customers and he says that at those meetings he made it clear that he was only present as agent of the parent company.  He says that after the meeting with one of these customers he told Mr de Bernardo that if he had any concerns, then as sole director of HNZ and AIL he should get his own advice.  He had no discussions with Mr de Bernardo about the operations of HNZ or AIL and at no time did Mr de Bernardo seek his direction or guidance on any operational matters – nor was that offered.  Mr de Bernardo did not delegate any power or duty to him.  He was only interested in cashflow and financial information for the purpose of determining whether the parent company needed to provide financial support to its subsidiaries.

[14]     The second broad area of evidence from Mr Grenfell comprises the sale process which then ensued.  Mr Grenfell says that he and his co-receiver needed to look at selling the businesses as part of their duty to realise assets for the secured creditor.   He says that as the director of HNZ and AIL Mr de Bernardo engaged Grant Samuel, a corporate advisory group, and Minter Ellison Rudd Watts, solicitors, to assist with the sale process.  He produces a copy of the Grant Samuel engagement letter which Mr de Bernardo signed as a director of HNZ and AIL.  He says it is clear on the face of the letter that he did not sign on behalf of HNZ and AIL; rather, he did so in his capacity as receiver of the parent company and by signing, a limitation of liability of the receivers was thereby recorded.   He says that he did not direct or instruct Mr de Bernardo to sign the letter or to appoint Grant Samuel, though he did assist  him  in  identifying  Grant  Samuel  as  a  firm  with  experience  capable  of managing the sale process.

[15]     Mr Grenfell then says that, otherwise, his role during the sale process was limited.   It included being available if required to provide “input (whatever that might be)”.  He said that the sale of assets of the subsidiaries was a major transaction in terms of the Companies Act for the parent company and would therefore require

the consent/approval of that company which he would need to give as receiver.  He says that:

It therefore made sense to keep me involved with the team acting for the vendor companies throughout the process.

In  that  capacity  he  provided  his  views  on  offers  which  later  arrived  for  the businesses, and on which looked more favourable than others, that he signed the non-binding  offer  made  by  Horizon  (the  parent  of Aquaheat)  adding  a  similar limitation of liability, had some input into material contractual issues, and attended some meetings with the advisory team and Mr de Bernardo.  He says he understands that Mr de Bernardo signed the non-binding offer on behalf of HNZ and AIL.

[16]     After the non-binding offer was accepted, and before the sale and purchase agreement was entered, there was a due diligence period.  Mr Grenfell says he was aware that Aquaheat had raised the prospect of an adjustment of the purchase price following settlement, when final financial figures for the businesses, which were intended to be bought and sold as going concerns, were established.   Mr Grenfell then lists the matters of which he was aware during that negotiation.  One proposal was that there be agreement for a fund to be put aside to meet adjustments that might arise under the sale and purchase agreement.   He says it was necessary for the receivers to be parties to such an agreement so he looked at the letter setting out this proposal and refused to sign it.   One reason was that the parent company in receivership was not a party to the sale transaction.  The two other reasons related to the amount of the sum proposed to be set aside.  Grant Samuel then suggested that a fund  of  $250,000  be  set  aside,  with  reasons  for  that  proposal,  and  on  that  Mr Grenfell says:

I was happy for Hastie Holdings to agree the $250,000 figure.

[17]     He says that Mr de Bernardo clearly also agreed, because without direction or instructions from him he signed the sale and purchase agreement on behalf of HNZ and AIL.  Mr Grenfell did not sign that agreement and points out that he did not have the ability to do so given that he was not a director of either of those companies and could not otherwise bind them.   He did, however, sign shareholders’ special resolutions for each company.

[18]     Mr Grenfell says that in one of the meetings he attended with the team advising on the sale, and Mr de Bernardo, he repeated his advice to Mr de Bernardo that if he needed it, he should take further advice himself.   He cites one instance where Mr de Bernardo phoned him to ask whether a payment could be made to his family trust (a dividend) and in response he told Mr de Bernardo that he was not a director so could not give the approval he sought and he should get independent advice.   He thinks that Mr de Bernardo then sought advice from another firm of solicitors and notes that the dividend payment was not ultimately made.

[19]     The third area on which Mr Grenfell gives evidence relates to the actual adjustment to the purchase price which took place.  Clause 8 of the sale and purchase agreement provided for an adjustment to take account of potential collections of book debts and movements in other working capital items.  This is the adjustment in respect of which a figure of $250,000 had been agreed to be put aside into an escrow account  with  Minter  Ellison  Rudd Watts.   When  the  accounts  were  completed, however, it was found that the adjustment figure under clause 8 was $1,737,000, and that a further adjustment figure of $13,716.25 was also required under clause 9 which provided for a final apportionment of certain outgoings.  After deduction of the sum held in escrow this left the sum of $1,500,716.25 owing to Aquaheat by HNZ and AIL.  Mr Grenfell says he had no idea that the figure could or would be anywhere near that high.  He points out a number of reasons for this, including his lack of involvement in the due diligence process, his lack of what he describes as exposure to the data room, which is evidently a collation of historic financial data, the fact that he was not privy to any detailed financial information about the companies apart from some cashflow information, his lack of awareness of the working capital position at the end of the previous quarter or at the date the sale and purchase agreement was signed, his reliance on advice from Grant Samuel of an appropriate level for the adjustment escrow account, the lack of ability to precisely determine the level of adjustment in advance, and the fact that the first time he had access to and reviewed the financial statements on which the adjustment was based was when he received notice of that adjustment after it was calculated.

[20]     Although this level of detachment is propounded by Mr Grenfell to show his lack of direction or instruction for the purposes of s 126, it raises questions in

relation to his fulfilment of his duties as receiver of the parent, and shareholder of the subsidiaries.  These are not questioned in this case, but I mention them because Mr   Grenfell   appears   to   have   considerable   experience   in   receiverships   and liquidations, as well as corporate finance, and might be expected to have satisfied himself on most, if not all, the issues described, as receiver and shareholder.  The point was not argued, nor, of course, was Mr Grenfell cross-examined, so the sole relevance I ascribe to it is to highlight the differences between his stated actions and knowledge, and Mr de Bernardo’s evidence which I will shortly summarise, and to show how inadequate the evidence available on a summary judgment application is to determine the complex issue raised by s 126.

[21]     In  summarising  his  position  in  this  affidavit  Mr  Grenfell  says  that  he monitored the sale of the businesses solely in his capacity as joint receiver, in order to represent the interests of the parent company as shareholder, and that he provided input into the negotiations for the sale agreement solely in his capacity as agent of Hastie Holdings so that he could, in that capacity, sign the special resolution of Hastie Holdings as shareholder.  He says he approved the sale solely in his capacity as joint receiver, did not make (nor was responsible for) any representations concerning the escrow amount, did not sign the agreement, at no stage compelled Mr de Bernardo to sign it and that on appointment and throughout he advised Mr de Bernardo that the only capacity in which he acted was as agent of the shareholder, but full control of HNZ and AIL remained with him as sole director.   A similar message was sent to customers and staff.  All operational decisions made in respect of those companies were made by Mr de Bernardo and management within those companies.  He reiterated to Mr de Bernardo on at least three occasions that he was to obtain independent legal advice if he required it.

Ms Holland

[22]     Ms Holland, then of Mr Grenfell’s office, was involved in the transaction with him.   She attended the first meeting with Mr de Bernardo and confirms that Mr Grenfell made it clear that his role was limited to acting as receiver of the parent company, and that Mr Grenfell expressly conveyed to Mr de Bernardo that the business of HNZ and AIL should continue as usual with him, as director, continuing

to make all management decisions.   She also confirms that Mr Grenfell said he would not be exercising control over Mr de Bernardo given that the companies of which he was a director were not in receivership; to the contrary they were to continue to trade with Mr de Bernardo at the helm.

[23]    Ms Holland refers to the financial information they sought from Mr de Bernardo.   She gives two reasons for this, the first being the need to determine whether the subsidiary companies required support from their parent, as Mr Grenfell had said.  Ms Holland, however, says that slightly later, when the sale process began, the financial information was required for the due diligence process.  She then says:

It  was  the  director  of  HNZ/AIL who  was  selling  the  business  of  those companies.  However they did not have the capacity to establish the systems necessary to facilitate the due diligence process.  As a result, we agreed to collate all the information which was to make up the data room.  This was not in order to review the historic/current financial records of the company but simply to collate them, put them into reasonable order, and add them to the data room.  I was involved in this process, although Andrew [Grenfell] was not.

[24]     Ms Holland then says that she was often the first point of contact at the firm for Grant Samuel which was managing the sale process.   She was either called directly or she was  contacted if  Mr Grenfell  was  out  of the office.    On many occasions, she says, she was called with queries by Grant Samuel about HNZ or AIL. Often they were about operational issues on which she had no knowledge.  Her usual response was to tell them to call Mr de Bernardo or another staff member at the companies.  She says the firm was not representing those companies, did not have any information about the operational side of them, was not involved with them and had only limited exposure to financial information.   She says they only had information   sufficient   to   ensure   the   interests   of   the   parent   company  were represented.

[25]     Ms Holland says she was also present, usually with Mr Grenfell, at meetings with Minter Ellison Rudd Watts at which Mr de Bernardo was often present.  She says that on more than one occasion Mr Grenfell made it abundantly clear the basis on which they were attending, which was to represent as agent the interests of Hastie Holdings as the shareholder of the vendor companies.  As Mr Grenfell was always

going to  be required  to  consent  to  the final  agreement  because it  was  a major transaction  for  the  shareholder,  it  made  sense  for  them  to  attend  meetings  as required,  usually  where  material  contractual  issues  were  discussed  so  that  Mr Grenfell could have input into them.   This would make the giving of his consent much easier if he did not have to “start from scratch” when presented  with an agreement for signing, after negotiation.  She says that at none of the meetings, nor at any time when she was present, did Mr Grenfell instruct or direct Mr de Bernardo to do anything or to take any particular step.  She says that Mr Grenfell even stated that if Mr de Bernardo had any concerns he should seek advice.

Mr Millar

[26]     The third deponent in support of the application is Mr N M Millar, a partner in Minter Ellison Rudd Watts.  Three affidavits from him are in evidence.  The first is an affidavit he swore in support of an application for summary judgment brought by his firm against the plaintiff, when his firm was a fourth defendant.  The second is sworn in support of this application, as is the third, in reply.

[27]     In the first of these, the evidence given is principally directed to issues which I take to have been before the Court on the Minter Ellison application.  There are, however, a number of statements of present relevance.  It is convenient to summarise these as bullet points:

•     In relation to the negotiation of the amount to be placed in  escrow, Mr Millar says the issue was what amount the vendors were prepared to agree to.   He says Mr Grenfell told him that the receivers would not agree to a $1m escrow amount and that he believed that the banking syndicate would not agree either (both the receivers of the parent of the vendors, given this would be a major transaction, and the banking syndicate, given that the deal was conditional on the release of their security, needed to give their consent to the final terms of the transaction for it to proceed).

•     After  receiving  further  information  from  Grant  Samuel  suggesting  a suitable escrow amount Mr Millar spoke to Mr Grenfell and they agreed

to seek an escrow arrangement, with Mr Grenfell indicating that in his capacity  as  the  receiver  of  the  parent  company  he  would  accept  an amount of $250,000.

[28]     In his second affidavit Mr Millar describes setting up a team of relevant people to consider and, if appropriate, undertake the sale process.  These were Mr de Bernardo, two representatives of Grant Samuel, two solicitors from Minter Ellison Rudd Watts and Mr Grenfell and/or Ms Holland.  Mr Millar describes this group as the “deal team” and says that throughout the negotiation all members of it gave input into the stance taken by the vendor companies on each point that arose.  He says, however, it was clear to him that the only person who had the authority to approve the transaction and sign the sale documentation was Mr de Bernardo.   Equally, though, it was clear to him that the receivers would have to be happy with the terms of the transaction before their approval on behalf of the shareholder would be given. Therefore, rather than forwarding an agreement to Mr Grenfell at the conclusion of negotiations between the vendors and Aquaheat, it made sense to him to keep Mr Grenfell informed throughout and consult him where necessary.  This would mean that once final agreement between the parties to the contract had been reached there should not be any delay in obtaining the necessary parent company approval.   He therefore included Mr Grenfell and/or Ms Holland in emails to the vendors’ team.

[29]     Mr Millar says that he understood at all times that any comment or advice from Mr Grenfell or Ms Holland during the course of negotiations was on behalf of Hastie Holdings Limited.  As far as he was concerned he was not giving input or instructions to Mr Millar on behalf of HNZ or AIL.  Instructions for those companies came from Mr de Bernardo.   In particular it was he who signed the relevant resolutions and sale documentation.

[30]     At  meetings   where  Mr  de  Bernardo  and   Mr  Grenfell  were  present Mr Grenfell was very clear about what Hastie Holdings would or would not accept in terms of a deal that it would be prepared to approve as shareholder, but at no time when Mr Millar was present did Mr Grenfell give directions to Mr de Bernardo or instruct him to act in any particular way.   In fact, Mr Millar says, on at least one occasion  Mr  Grenfell  expressly  stated  that  he  was  only  there  to  represent  the

interests of Hastie Holdings in his capacity as receiver of that company.  Similarly, he did not at any point witness Mr Grenfell give any direction or express any opinion about the way in which the vendor companies should conduct any other aspect of their businesses.  He commented only on the transaction at hand, and always only from the perspective of the sole shareholder.

[31]     Mr Millar  gives  evidence of an  exchange  with  the solicitor  representing Aquaheat, Mr Nunns, who suggested that Mr de Bernardo should resign on completion of the transaction due to a perceived conflict, as he was to take up employment with Aquaheat at that point.  Mr Millar’s response was that this would leave the companies without a director, and it would be difficult to find anyone to fulfil that role.  He says that he made it clear on a phone call to Mr Nunns that Mr de Bernardo was the sole source of his instructions on behalf of the vendors and if he were to resign there would be a significant problem.   His recollection is that Mr Nunns acknowledged that predicament.   When they discussed the fact that after settlement of the sale it would be likely that both vendor companies would be placed into receivership, the request that Mr de Bernardo resign was withdrawn.

Mr de Bernardo

[32]     Mr de Bernardo has a very different view of the way matters transpired.  He is an engineer with 44 years experience in various supervisory and management positions.  He is now the executive general manager of Aquaheat.

[33]     At one of the earlier meetings, Mr Grenfell told Mr de Bernardo that he wanted HNZ and AIL to continue trading but that he intended to sell their assets.  Mr de Bernardo says he did not protest or express any contrary view to Mr Grenfell, as he felt this was a matter for Mr Grenfell as he was now effectively the shareholder of the vendor companies.  Although he was the director of them, he did not feel that he had any say in whether the assets were sold.

[34]     Mr  de  Bernardo  refers  to  Mr  Grenfell’s  evidence  that  following  his appointment  as  receiver,  Mr  de  Bernardo  commenced  the  process  to  sell  their business and assets.   Mr de Bernardo says this is not correct: the process was not

commenced by him.    It  was commenced by Mr Grenfell, and Mr de Bernardo indicates how this occurred.

[35]     First, he met Mr Grenfell in Auckland on 7 June 2012 and was informed that Mr Grenfell wanted to start the process of selling the businesses.  He had arranged for a representative of Grant Samuel to attend the meeting, and said he wanted Grant Samuel to give advice on the sale.  Prior to arriving at the meeting Mr de Bernardo was not expecting to meet anyone other than Mr Grenfell.   Mr Cotter of Grant Samuel arrived at the meeting and presented a preliminary version of an engagement letter for his firm’s services.  Mr de Bernardo did not know of its existence prior to the meeting, let alone its contents, but he says it became clear that Mr Grenfell had already discussed the sale of HNZ and AIL with Grant Samuel.  He says Mr Grenfell asked for a number of changes to be made to the letter.  Further, it was clear to Mr de Bernardo that the letter was drafted on the basis of instructions Mr Grenfell had given to Grant Samuel previously.  For example, in the letter which is addressed to the companies, it is stated that “You have advised that Minter Ellison should be able to  construct  a draft  sale and  purchase  agreement  to  be provided to  prospective purchasers”.  That advice did not come from Mr de Bernardo.  He had never met Mr Cotter, nor had any discussions with Minter Ellison or any firm about acting on any sale and purchase.

[36]     Secondly, the letter acknowledges a wish to run a compressed timetable for the process.  Mr de Bernardo says that again, this instruction did not come from him.

[37]     Thirdly, Mr de Bernardo refers to Mr Grenfell’s evidence that he did not instruct him to sign the engagement letter or appoint Grant Samuel, though he did assist in identifying that firm as one with experience, capable of managing the sale process.   Mr de Bernardo says that summary of events significantly downplays Mr Grenfell’s involvement.  First he did not assist him in identifying Grant Samuel – that had been done before Mr de Bernardo was aware of it.   That process was entirely driven by Mr Grenfell.   Mr de Bernardo did not ask Mr Grenfell for assistance to identify an appropriate firm: he had no reason to do so as he was not thinking about selling the assets of the companies.   It was Mr Grenfell who was pursuing that course and making the necessary arrangements.   Further, it is not

correct to say that Mr Grenfell identified Grant Samuel as “a firm” which might be appointed.   When the sale was discussed at the meeting he had referred to, Grant Samuel was the only firm mentioned and it was clear from the discussions that it was the firm which Mr Grenfell intended to instruct.

[38]     In relation to execution of the engagement letter, Mr de Bernardo accepts that Mr Grenfell did not explicitly direct him to sign it, but he told him to take it away, look at it, then sign it.  He did not feel he had any real say whether the businesses were sold or whether Grant Samuel was engaged.  Mr Grenfell was effectively the owner of the businesses and if he wanted to sell them and appoint Grant Samuel to assist in that process he regarded that as a decision for him.

[39]     Mr Grenfell says he was not involved in the decision to instruct Minter Ellison Rudd Watts as solicitors.  That firm was not the usual firm of solicitors for HNZ or AIL, which normally used Chapman Tripp.  Minter Ellison were ultimately paid by Hastie Holdings and not by the companies.

[40]     Mr de Bernardo then gives evidence in relation to Mr Grenfell’s role in the sale process.  He says it was driven by Mr Grenfell, and he was the person making the calls:

(a)     Mr Grenfell made the decision to accept the non-binding offer from Horizon (the parent of Aquaheat) over another offer and he did not have any real input into that decision.

(b)    After that was accepted, due diligence began.   This required many decisions to be made about strategy and about the terms of the sale and purchase agreement.  Although he was copied into many emails about these matters, Mr Grenfell was ultimately the decision-maker.   Any emails about the sale that were sent to him were generally also sent to Mr Grenfell and he generally let Mr Grenfell respond substantively to any request for instructions from Grant Samuel or Minter Ellison.  As far as Mr de Bernardo was concerned Mr Grenfell was running the process and was going to have to make the final call on whether to

proceed with the sale.  There was little he could contribute other than responding to information requests and providing input into matters of detail  where  knowledge  of  the  business  was  required  during  the process.

(c)     Mr de Bernardo identifies an email from Mr Cotter of Grant Samuel concerning liabilities of the two companies in which Mr Cotter says:

Its Andrew’s [Mr Grenfell’s] call.

Mr de Bernardo says that reflects the position – decisions about the terms of the sale and purchase agreement were made by Mr Grenfell and not by him.

(d)    Mr de Bernardo refers to a further email from Mr Cotter in which he was setting up a conference call and says:

I think we should have Andrew [Grenfell] (if you are okay with that Andrew) on that call – these are short strokes – and Andrew (i) knows what he will accept and (ii) because of that it should avoid another circuit of “we have to ask our client”.

Mr de Bernardo says that although Mr Grenfell was not ultimately able to attend the call the email accurately reflects the fact that Mr Grenfell was the ultimate decision-maker and was in reality Mr Cotter’s client.

(e)  At  a  meeting  to  negotiate  price  Mr  Grenfell  attended  and  gave instructions to Mr Cotter over price level.   It was he who made the decision about what price was acceptable and he who agreed to the final structure of the transaction.

(f)     In relation to signing the sale agreement, Mr de Bernardo says that although he signed it the decision to enter into the transaction was one taken by Mr Grenfell.   He had the final decision on all the material terms of the agreement.   In signing the agreement he was acting in accordance with the wishes of Mr Grenfell.  Although Mr Grenfell did not explicitly say to him “You must sign the agreement now”, in the circumstances   he   understood   Mr   Grenfell   was   effectively   the

shareholder and that as the sole director he should support him and act in accordance with decisions taken by him concerning the sale.   He says he received and acted on clear instructions to proceed and sign the sale and purchase agreement.

(h)    In response to Mr Grenfell’s contention that he was in control of the process, Mr de Bernardo says he was not in control of it at all.  It was initiated and run by Mr Grenfell and he was the only one calling the shots.  Mr de Bernardo was responsible for the day to day running of the companies but Mr Grenfell was in charge of the sale process.

(i)     His role was not limited, as Mr Grenfell states, to simply consenting to a major transaction.   He initiated the sale process, organised it and oversaw it.  He arranged the professional advisors to act on behalf of the vendors.   He decided  to  accept  the offer  from  Horizon  over a competing one and had the final say on the price in terms of the sale and purchase agreement.  He was the ultimate decision-maker for the vendors.

(j)     He accepts that Mr Grenfell said he could take independent legal advice if he thought it necessary, but he did not think it necessary as Minter Ellison appeared to be acting appropriately and in the vendors’ best interests and he was not being asked to agree to any matters that were inappropriate.

Mr Anand

[41]	The second witness in opposition to this application is Mr Anand.  Relevant evidence from his affidavit is this:

•     At the meeting to discuss the terms of a sale agreement, Mr Cotter made it clear to him that Mr Grenfell was the ultimate decision-maker for the vendors as to the terms and price under negotiation, and he had the final say on what would be acceptable. Although Mr Grenfell was not present at the meeting, at least twice Mr Cotter excused himself to go and seek

instructions  from  Mr  Grenfell.     He  needed  his  approval  for  the transaction structure and the price.  On the issue of deductions from the offer  price  for  assumed  liabilities,  Mr  Cotter  took  instructions  from Mr Grenfell and reported that he approved one of the options.

•     He says Mr Cotter made it clear to Mr Anand that the only person whose instructions  he  needed  to  seek  on  terms  and  price  were  those  of Mr Grenfell.   Mr Anand was left with the clear impression that Mr de Bernardo would act in accordance with the decisions which Mr Grenfell made.  Mr de Bernardo had a limited role in the negotiations.  He saw the signing of the document by Mr de Bernardo as a formality.

The reply affidavits

[42]     There are reply affidavits from Mr Grenfell and Mr Millar.  In some respects, this evidence highlights the conflicts which will already be apparent from the summary I have given.  One example is in paragraph 2 of Mr Millar’s reply affidavit. He says:

At  paragraph  22  of  Mr Anand’s  affidavit  he  states  that  he  was  of  the impression  that  Mr  Grenfell  was  the  one  who  made  the  final  decision to enter into the [sale and purchase agreement] and that the signing by Mr de Bernardo was a formality.  Mr de Bernardo similarly says that he was acting in accordance with Mr Grenfell’s wishes (at paragraph 36).  I disagree with these viewpoints.   It was clear to me that Mr de Bernardo was the sole decision-maker on behalf of the vendors throughout the transaction.  While I understand that Mr Grenfell’s approval to the terms of the transaction would also be required, it was also clear that any approval he gave was the approval of the shareholder not the vendors.   Accordingly his views expressed throughout the transaction were interpreted by me as the views of the shareholder not the vendors.

[43]     When one considers that statement, and the evidence of Mr Grenfell and Mr de Bernardo, and reflects on the context, which is the need to determine whether Mr Grenfell was a person in accordance with whose directions or instructions Mr de Bernardo was  required  or was  accustomed  to  act,  the difficulties  of reaching a conclusion in favour of Mr Grenfell on this application (as distinct from at trial) are readily apparent.

[44]     Beyond that I need refer to only two aspects of the reply affidavits.   First, Mr Grenfell reiterates that all the actions he took and decisions he made were taken in his capacity as receiver and were necessary in that role.   Secondly, Mr Millar notes that the two vendor companies were in an extremely difficult position. Receivership was a certainty for each company, as they had given security to the banking syndicate which had appointed Mr Grenfell, and as Mr Millar put it, the commercial reality of the situation was that Mr Grenfell was clearly indicating on behalf of the banking syndicate that if a sale process was not undertaken to sell the assets, the next step was receivership.

[45]     These statements neatly highlight the context in which all these events took place.  Within that context Mr Grenfell had a certain role as receiver of the parent company, and Mr de Bernardo had a certain role as director of the subsidiaries, which were the vendors.  In his role Mr de Bernardo had certain duties to perform and certain results to achieve.   He could only do that through the subsidiary companies.  Had he been appointed receiver of those companies, in advance of these events, the situation would have been much simpler. As it was, the sales of the assets were major transactions and the involvement of the parent company was essential. For that purpose Mr Grenfell represented the shareholder.  Mr de Bernardo, though, as director of the vendor companies, had certain duties as well.   Mr Grenfell necessarily needed him to exercise those duties in a certain way or he could not achieve the outcomes he required and fulfil his duties. Thus the scene was set for Mr de Bernardo’s independence to be overborne.  I believe it to be a fair summary of the evidence as it stands to say that Mr de Bernardo thinks it was, and Mr Grenfell thinks it was not.

Discussion

[46]     In her careful and logical submissions Ms Challis urged on me that there was no blurring of the lines between the roles of Mr Grenfell and Mr de Bernardo, and that Mr Grenfell’s capacity, which was clear, was recognised by Mr de Bernardo. There was a clear demarcation of their roles and Mr Grenfell was acting only within his  powers and  doing  his  duties  as  receiver.    From  a  detailed  summary of the

established principles in this area of the law Mr Smith submitted that the evidence shows that Mr Grenfell crossed over into the role of director.

[47]     In Re Hydrodam (Corby) Ltd,6 Millett J said that to establish that a person is a director of a company, when not formally appointed to that position, it is necessary to allege and prove:

(a)	who are the directors of the company, whether de facto or de jure;

(b)	that the person said to be a de facto director directed the other directors how to act in relation to the company or that he was one who did so;

(c)	that the other directors acted in accordance with those directions; (d)	that they were accustomed to so act.

[48]     The wording of the Act in New Zealand is such that it is not necessary to show, in addition to a requirement to act, that the director was also accustomed to act.  These are alternatives, in the Companies Act, so the fourth requirement does not necessarily apply.

[49]     The third requirement follows from the second.   In Australian Securities Commission v A S Nominees Ltd, Finn J said that the question is “where, for some or all purposes, is the locus of effective decision-making.”7     There are conflicts of evidence  on  this,  principally  (though  not  exclusively)  on  the  involvement  of Mr Grenfell and the involvement of Mr de Bernardo in the negotiation and structure of the agreement for sale and purchase and, of particular relevance in this case, the escrow amount.

[50]     On  Mr  de  Bernardo’s  evidence,  it  seems  he  saw  himself  cast  into  a subservient role, surrendering his decision-making role on most, if not all, the issues relating to the sale to the wishes of Mr Grenfell.  That will be sufficient to show that
the person who had that effect became a shadow director, but it is not necessary to do

6	Re Hydrodam (Corby) Ltd (1994) 2 BCLC 180.
7	Australian Securities Commission v A S Nominees Ltd (1995) 133 ALR 1, at 53.

so,  as  Mr Smith  submitted.8      Further,  it  is  not  necessary  to  show  that  formal directions or instructions are given on the matters in which an alleged director has become involved.9

[51]     Ms  Challis  referred  also  to  Buzzle  Operations  Pty  Ltd  (in  liq)  v  Apple Computer Australia Pty Ltd.10     At [227] Young JA commenced an exposition of principles derived from cases in this area:

•     First, not every person whose advice is in fact needed as a general rule by a board is to be classed as a de facto or shadow director.

•     Secondly, if a person has a genuine interest of his or her or its own in giving advice to the board such as a bank or mortgagee, the mere fact that the board will tend to take that advice to preserve it from the mortgagee’s wrath will not make the mortgagee etc. a shadow director.

•     Thirdly, the vital factor is that the shadow director has the potentiality to control.  The fact that he or she does not seek to control every facet of the company or the fact that from time to time the board disregards advice is of little moment.

•     Fourthly,  Millett  J’s  proposition  (in  Re  Hydrodam  above)  that  the evidence must show “something more” than just being in a position of control must be shown.   The whole of the facts of the case must be shown to see whether that power to control was put into practice.  The emphasis   that   one   must   judge   on   the   whole   of   the   facts   and circumstances is made many times over in the leading cases.

[52]     Applied to Mr Grenfell, his advice as receiver of the parent company, and thus shareholder, was required, and he had a genuine interest both as receiver and as shareholder to give advice to Mr de Bernardo.  He did not seek to control the running of the businesses of the companies: he largely left that to Mr de Bernardo, and on his
evidence made it clear that he was doing so.   To that extent, these propositions

8	Australian Securities Commission v A S Nominees Ltd, n7 above;
Secretary for State v Devereux [2001] Ch 340 (CA).
9	Australian Securities Commission v A S Nominees Ltd.
10	Buzzle Operations Pty Ltd (in liq) v Apple Computer Australia Pty Ltd 81 NSWLR 471.

support his argument.  It runs into difficulty, however, on an application for summary judgment when the fourth proposition is considered – there can be little doubt that Mr Grenfell was in a position to exercise control, but all the facts of the case must be examined to see whether that control was put into practice.

[53]     Ms Challis also submitted, on the basis of Hydrodam, that a director of a parent company who acts in accordance with his obligations to the parent company, will not be found to be a shadow director of a subsidiary, and the same should apply in relation to a receiver of a parent company.  Accepting that proposition, an assessment of whether that is the position is a matter of fact.

[54]     Although Ms Challis submitted that it is open to me to find on the facts as they stand that Mr Grenfell was acting only as he was required to do as a receiver, I am not satisfied, for the purposes of an application by Mr Grenfell for summary judgment, that I can make that finding.  Quite apart from the identified conflicts in the evidence, the impression I have is that Mr de Bernardo stepped back from the sale process, knowing that if it did not proceed, the companies he directed would be placed into receivership, and let Mr Grenfell take overall control of the process.  I accept that he was doing that in his capacity as receiver of the parent company, but as I have pointed out he had to do that through the subsidiary companies and I cannot exclude the possibility, as I must if I am to grant summary judgment to him, that he also stepped into the role of director of the subsidiary companies in the course of so doing.

[55]     I accept that Mr Grenfell was, therefore, inevitably in a difficult position. This difficulty is recognised by s 126(1A) in relation to companies under a receiver’s control.  As counsel did not argue the point, I simply note the difficulty has been recognised even if, as counsel accepts, statutory relief is not given in the circumstances of this case.  At trial it may well be shown that Mr Grenfell did not undertake his role as receiver in such a way that he also fell into the category of director of the subsidiaries in terms of s 126.  However, as the law requires me to be satisfied that did not occur before I enter summary judgment, the application must be declined.

Outcome

[56]	The application for summary judgment is dismissed.  As Mr Smith suggests, costs are reserved.

J G Matthews
Associate Judge