Aburn v Terawhiti Farming Co Limited HC Auckland Civ-2006-404-7541

[2007] NZHC 1641

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2006-404-007541

UNDER  The Companies Act 1993

BETWEEN  JOHN EDWARD ABURN, DONALD LEROY FRANCIS AND JOANNA GORDON GRACE

First Applicants

ANDALISON JOAN COOK AND DONALD LEROY FRANCIS

Second Applicants

ANDTERAWHITI FARMING CO LIMITED First Respondent

ANDALASTAIR CHARLES WRIGHT Second Respondent

ANDPAUL JAMES LAING Third Respondent

ANDWILLIAM RUSSELL GRACE Fourth Respondent

Hearing:         15 February 2007

Appearances: L. Milne for Applicants

T.L. Clarke for Respondents

Judgment:      20 February 2007

In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 3.30pm on the 20th day of February 2007.

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

ABURN AND ANOR V TERAWHITI FARMING CO LIMITED AND ORS HC AK CIV-2006-404-007541

20 February 2007

Introduction

[1]      The first and second applicants apply for leave to commence this proceeding by way of originating application under Part 4A High Court Rules.

[2]      The application is opposed by the second and third respondents.

Background Facts

[3]      The first applicants are the present trustees of the estate of Nancy Gordon Symes.   The second applicants are the present trustees of the estate of Frances Maude Wheeler.

[4]      The  applicants’  position  is  that  both  the  first  applicants  and  the  second applicants in their capacities as present trustees of the respective estates hold shares in the first respondent Terawhiti Farming Co. Limited (“the company”).

[5]      The second and third respondents are directors of the company.

[6]     According to the applicants, the first and second applicants’ respective shareholdings  in  the  company  were  correctly  recorded  in  the  company’s  share register for a number of years until some time ago when that written register was transcribed into a computerised register by a third party.

[7]      During the transcription process it is suggested that an error was made.  This error noted that the shareholding of the first applicants in the  company’s  share register was wrongly identified as being the shareholding of “Estate, Symes, NG”.  A similar mistake was made in respect of the second applicants.   Their shareholding was wrongly identified in the share register as being the shareholding of “Estate, Wheeler, FM”.

[8]      In  their  substantive  proceeding  the  applicants  seek  rectification  of  the company’s share register in accordance with s91 Companies Act 1993.  This section states in part:

91.      Power of Court to rectify share register

(1)If the name of a person is wrongly entered in, or omitted from, the share register of a company, the person aggrieved, or a shareholder, may apply to the Court –

(a)  For rectification of the share register; or (b) For compensation for loss sustained; or (c)  For both rectification and compensation.

[9]      Although the applicants in this proceeding initially also sought compensation from the respondents, they state that in the interests of expediency, they have now filed an amended application under s91 Companies Act 1993 which simply seeks rectification of the share register and the costs of this application.

[10]     Because  an  application  made  under  s91  Companies  Act  1993  is  not  a proceeding that may be brought as of right under Part 4A High Court Rules, in accordance with r458D, the applicants bring this present application for the Court’s permission to proceed by way of originating application.   It is this application for leave in accordance with r458D(1)(e) which is before me.

[11]     Rule 458D(1)(e) states:

458D.   Application of Part 4A

(1) This part applies to –

…

(e)       Any  other  proceeding  that  the  Court,  in  the  interests  of justice, permits to be commenced by the filing of an originating application.

[12]     As I have noted, the second and third respondents oppose this application for leave.

[13]     They note that the present application for rectification of the company’s share register under s91 does not fall within any of the specific statutory provisions under r458D automatically allowing for an application of the Part 4A process.

[14]     Instead,  given that the  applicants here rely on  r458D(1)(e),  the  first  and second respondents contend that it is not in the interests of justice to permit the s91 rectification  application  before  the  Court  to  proceed  by  way  of  originating application under Part 4A and instead the Part 4 High Court Rules procedure should be followed.

Counsel’s Arguments and My Decision

[15]     The present application involves a consideration of r458D(1)(e) High Court Rules.  In commenting on r458D(1)(e) McGechan on Procedure at para HR458D.06 states:

HR458D.06     Proceedings which the Court permits to be commenced by originating application

The Court may permit originating applications to be used to commence proceedings in addition to those specified in subcl (1)(a), (b), and (c).  The only criteria referred to are the interests of justice.  This was given a narrow interpretation  in  Jones  v  H  W  Broe  Ltd  (1989)  5  PRNZ  206  where McGechan  J  said  (at  p  207)  that  ‘the  r458D  originating  application procedure was designed as a genuine exception, and as an expedient for cases where there was in reality no opposing party.’

However, in CIR v McIlraith 19/2/03, Randerson J, HC Hamilton M162/02, Randerson J said:

‘I am satisfied that matters have moved well beyond the position which applied in 1989 and a review of the matters now specifically included under r458D shows that Part 4A is intended to have much wider application than earlier envisaged.   The same point is also demonstrated by the number and variety of cases in which leave has been granted to use the Part 4A procedure under the ‘interests of justice’ provision.’

[16]     McGechan in para HR458D.06 does go on to note, however that:

A recent example where the Part 4A procedure was not permitted to be used is Water Care Services Ltd v Registrar of Companies (2004) 17 PRNZ 191, where the applicant applied under s329 Companies Act 1993 to restore a company to the Companies Register. There was also an application for leave to commence the proceeding by way of originating application under Part

4A but the application was opposed.  Associate Judge Faire said that such applications can only be commenced by originating application where the

Court grants leave in the interests of justice.  Where opposed, they are not to

be made by originating application.  Parties to litigation are entitled to the

full range of procedures provided by the High Court Rules and accordingly leave was refused.

[17]     The application of r458D(1)(e) was considered recently in McCullagh v Il Villaggio Limited & Anor (HC AK, 1 May 2006, CIV-2006-404-1852, Venning J). There the Court considered an application for an order that a meeting of shareholders be held under the Companies Act and granted leave to apply by way of originating application under Part 4A.  In doing so, Venning J found that:

a)       Rule 458D(1) which identifies those Companies Act applications to which Part 4A specifically applies does not exclude all Companies Act applications from the operation of the catch-all provision in r458D(1)(e).

b)The Court must obviously consider whether in the particular circumstances of the case before it, it is in the interests of justice to permit  the  application  before  the  Court  to  be  brought  by way of originating application.

c)       Whilst it has been said in certain cases that the originating application procedure is more appropriate where there are no opposing parties or parties with a contrary interest, it is apparent from the applications that may be brought as of right under r458D(1) that the rule contemplates it may apply to applications involving live issues and competing parties.

[18]     In the present case, the broad grounds advanced before me by the first and second respondents in opposing this application were:

a)       The issue of rectification of the share register cannot be considered in isolation.  It is an issue intertwined with other issues concerning the transfer of shares in the company and the operation of the pre-emptive rights provisions.   The  second  and  third  respondents  contend  that these issues have  a  bearing on,  and  therefore  need  to  be  decided simultaneously with the issue of rectification.

b)There is a claim that there are other irregularities with respect to the passing of the applicants’ shares in the company.   These suggested irregularities require further investigations by the respondents.

c)       There  are  also  issues  concerning the  appointment  and  removal  of directors and matters of governance relating to the company.

d)The irregularities and concerns noted above have led to certain shareholders advising that they are about to commence a proceeding under s174 Companies Act 1993.   Given what are said to be the intertwined nature of the issues involved here, the second and third respondents contend that any imminent proceeding under s174 should be consolidated with the present application for rectification.

[19]     Turning now to consider these issues, I need to say at the outset that in my view the various submissions made on behalf of the second and third respondents miss the point by some margin.

[20]     In my view, the issue before the Court in considering the present application is a simple one.  It relates to what appears to be a purely procedural mistake in the company’s share register.

[21]    It is instructive to consider first the entry in the company’s register of shareholders dated April 1986 (exhibited as Exhibit “K” to the affidavit of John Edward Aburn dated 6 December 2006) where the shareholding noted as owned by the trustees of the estate of Nancy Gordon Symes (12,000 shares) was at that point held and registered specifically in the names of “Ivo Alfred Hillis Symes, John Edward Aburn and Donald Leroy Francis” with the words “Est NG Symes” added (after their names).

[22]     Subsequently,  according  to  the  evidence  provided  to  the  Court  by  the applicants, the current first applicants now occupy the position of trustees of the estate of Nancy Gordon Symes.

[23]     Secondly, it is also instructive to consider these entries in the register of shareholders for the company dated April 1986 under the reference to the shares held by the estate Frances Maude Wheeler.   There, the Estate’s shares are recorded as

17,832 shares and held and registered in the names “Ivo Aldred Hillis Symes and Brian Trevor Shannon” with the words “Est F M Wheeler” added (after the specified names).

[24]     Again, according to the evidence provided  by the  applicants,  the  second applicants now occupy the position of trustees of the estate Frances Maude Wheeler.

[25]     And, from the affidavit of John Edward Aburn filed by the applicants and dated 6 December 2006, it seems clear that there has been no change through to November 2006 in the shareholding of the Nancy Gordon Symes Estate  or  the Frances Maude Wheeler Estate in the capital of the company.  Indeed, at Exhibit “L” of  that  affidavit  which  comprises  a  copy of  the  company’s  computerised  share register as at 23 November 2006, 12,000 shares are noted as still held by “Estate Symes, N G”, and 17,832 shares are confirmed as still held by “Estate Wheeler, F M”.

[26]     This new computerised share register for the company goes further.  It also appears to show as an entry next to the listing of the shares owned by the respective estates that, under the general section headed “Transaction”, the shares were shown under the word “Type” as an allotment with a transaction date of 7 July 1969 and a registration date of 7 July 1969.  Interestingly, July 1969 was around the time of the original incorporation of the company.

[27]     I turn now to certain provisions in the Companies Act 1993 which are of relevance here.  First, s92 which provides:

92.      Trust not to be entered on register

No  notice  of  a trust,  whether express, implied,  or  constructive,  may  be entered on the share register.

[28]     Secondly, s93 Companies Act 1993 states:

93.      Personal representative may be registered

(1)Notwithstanding section 92 of this Act, a personal representative of a deceased person whose name is registered in a share register of a company as the holder of a share in that company is entitled to be registered as the holder of that share as personal representative.

(2)Notwithstanding section 92 of this Act, a personal representative of a deceased person beneficially entitled to a share in a company, being a share registered in a share register of that company, is with the consent of the company and the registered holder of that share, entitled to be registered as the holder of that share as personal representative.

(3)The registration of a trustee, executor, or administrator pursuant to this section does not constitute notice of a trust.

[29]     And thirdly, it is clear from s90 Companies Act 1993 that directors of a company have a duty to take reasonable steps to ensure at all times that the company share register is properly kept on pain of conviction and penalty for an offence if this is not the case.

[30]     Section 90 Companies Act 1993 states specifically:

90.      Directors’ duty to supervise share register

(1)It is the duty of each director to take reasonable steps to ensure that the share register is properly kept and that share transfers are promptly entered on it in accordance with section 84 of this Act.

(2)A director who fails to comply with subsection (1) of this section commits an offence and is liable on conviction to the penalty set out in section 373(2) of this Act.

[31]     In  the  present  case,  there  can  be  little  room  for  argument  that  the shareholding in the company of the Estate Nancy Gordon Symes and the Estate Frances Maude Wheeler is incorrectly described in the current share register under the words “Estate N G Symes” and “Estate F M Wheeler”.

[32]     I have noted that s92 of the Companies Act 1993 provides that no notice of a trust, whether express, implied, or constructive, may be entered on the share register. In  contrast,  s93  of  the  Companies  Act  permits  a  personal  representative  of  a deceased person to be registered on a company’s share register.

[33]     As I see it here, the acknowledged transcription error has resulted in the removal of the names of the personal representatives (which is contemplated by the Companies Act) and the inclusion of the name of a trust (which is prohibited by the Companies Act).

[34]     In my view, there is a reasonable argument here that the transcription error was a mistake.  The directors of the company (who as I have noted under section 90 have a duty to take reasonable steps to ensure that the share register is properly kept) would not have intentionally breached s92.

[35]     Subject to the Court’s power to rectify the share register the entry of the name of a person in the share register as holder of a share is prima facie evidence that legal title to the share vests in that person – s89.

[36]     And s96 Companies Act provides that a shareholder is the person whose name is entered in the share register as the holder for the time being of one or more shares in the company.

[37]     Necessarily therefore, the powers  reserved to shareholders of a  company (sections 104-107 Companies Act) may only be exercised by shareholders whose names are entered in the share register.

[38]     And as the applicants argue that their respective shareholdings are wrongly entered in the name of trusts, the applicants contend they are no longer the holders of the shares and are therefore unable to exercise the powers reserved to shareholders of the company.

[39]     The  basis  for  the  substantive  orders  sought  by  the  applicants  in  this rectification application is simply that a mistake was made in the transcription of the share register and  that  mistake has  resulted  in  what  is  said  to  be  the  effective disenfranchisement of the applicants.

[40]     Although consideration of the substantive rectification application is not a matter for this Court here, in my view it is an important but purely procedural matter

which requires a straightforward application and does not call for a statement of claim.  The rectification application once dealt with has no further life of its own. The application relates to what appears to be a procedural mistake relating to the share register.  This needs to be remedied in the interests of not only the affected shareholders, but also the directors of the company, bearing in mind the potential liability faced by those directors under s90 Companies Act 1993.

[41]     That said, I have little hesitation in finding that in terms of r458D(1)(e), the interests of justice in the present case permit the application before me to be filed as an originating application under Part 4A High Court Rules.

[42]     The broader questions raised by counsel for the second respondent and third respondent relating to suggested irregularities in the passing of the shares, the status of the respective estate interests as shareholders, and the alleged failure to comply with the company’s pre-emptive rights provisions are separate issues.  If it is thought appropriate, they may be the subject of different and later proceedings.  But those are other matters.   The current proceeding on its face is simply a request to make an administrative  rectification  of  the  share  register.    I accept  that  it  is  a  first  and important procedural step to clarify the register in accordance with s93 Companies Act.

[43]     That said, I am satisfied that it is in the interests of justice in terms of r458D(1)(e)  that  the  present  proceeding  be  commenced  by  the  filing  of  an originating application under Part 4A High Court Rules.  This is an even clearer case than the situation which prevailed in McCullagh where the Part 4A procedure was seen as appropriate.  The words of Venning J in that case apply equally here [at para

26]:

…I am satisfied that it is neither necessary nor in the interests of justice to require  the  applicant  to  follow  the  statement  of  claim  and  notice  of proceeding procedure under Part 4.  It cannot sensibly be said that discovery and interrogatories are necessary or appropriate.  Rather, it is in the interests of justice for this application to be brought by way of originating application. The nature of the application is such that resort to the Part 4 procedure would lead to unnecessary delay in resolving the management issues of this company.

[44]     And, in terms of the tests applied by Randerson J in Commissioner of Inland Revenue v McIlraith, I am satisfied that first, the present application is a straightforward one not calling for a statement of claim, secondly, it is purely procedural and can be promptly disposed of and thirdly, once determined, the application has no further life of its own.

Decision

[45]     I conclude therefore that the application by the first and second applicants for leave to commence this proceeding by filing an originating application under Part 4A of the High Court Rules should be granted. An order to this effect is now made.

[46]     As to costs, the first and second  applicants have been successful in this application and are entitled to costs in the usual way.  Costs are therefore awarded on the present application to the first and second applicants on a category 2B basis,

together with disbursements as fixed by the Registrar.

Associate Judge D.I. Gendall

Solicitors:

Izard Weston, Wellington for Applicants

Bell Gully, Wellington for Respondents