Alligators Fast Food Ltd v Chen
[2018] NZHC 587
•29 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-1276 [2018] NZHC 587
BETWEEN ALLIGATORS FAST FOOD LIMITED
First Plaintiff
SHAN HUA CHEN
Second PlaintiffWENG YUAN TSAO
Third PlaintiffAND
YEN WEI CHEN
First Defendant
KUEI HUAN CHEN
Second Defendant
Hearing: 27 February 2018 Appearances:
Plaintiffs, self-represented, with Hai Feng Zhang (interpreter) D G Collecutt for the Defendants
Judgment:
29 March 2018
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 29 March 2018 at 3:30pm
pursuant to Rule 11.5 of the High Court Rules.
…………………………………
Deputy Registrar
Solicitors:
Shean Singh Barristers & Solicitors (Darsan Singh), Auckland, for the Defendants
Copy for:
D Grant Collecutt, Auckland, for the Defendants
ALLIGATORS FAST FOOD LIMITED v YEN WEI CHEN [2018] NZHC 587 [29 March 2018]
[1] According to an adage, friends should not go into business together. This case bears that out. The second and third plaintiffs, a married couple, and the first and second defendants, also a married couple, used to be friends. Then they went into business. The second and third plaintiffs put money in, but they lost it. That was in 2010. They sued in the District Court. But after years of litigation they have got nowhere. After their proceeding in the District Court was struck out, they began this proceeding in this court on 14 June 2017. They were entitled to do so. They failed in the District Court on procedural grounds. There was no substantive decision on the merits that barred them from starting a new proceeding in this court.
[2] There are cross-applications. The defendants apply to strike out the plaintiffs’ amended statement of claim. The plaintiffs ask for orders under s 165 of the Companies Act 1993, s 7 of the Illegal Contracts Act 1970 and s 164 of the Companies Act 1993. The powers to grant relief under s 7 of the Illegal Contracts Act or to issue an injunction under s 164 of the Companies Act are not within the jurisdiction of an associate judge, except on an application for summary judgment or by consent.1 I will accordingly not deal with them.
The District Court proceeding
[3] There has already been a hearing on the merits in the District Court. It is arguable for the plaintiffs that they may prove in this proceeding facts found by District Court Judge Hubble:2
[1] The plaintiffs and the defendants were close friends, having known each other for over 10 years. The second defendant (Ms K Chen) owns adjoining shop properties at Botany Road, Howick. In number 4A the defendants have been unsuccessful in operating a bakery business and they leased the shop next door to a Thai take-away.
[2] In May 2009 the friends had a discussion which led to a proposal that the plaintiffs would go into an equal partnership with the defendants and operate a take-away business in conjunction with the bakery business in the defendants’ premises at 4A Botany Road. The bakery business would
1 See Senior Courts Act 2016, s 20. For jurisdiction to make orders under s 165, see s 20(2)(b). The strike-out power is under the chambers jurisdiction under s 22. Section 7 of the Illegal Contracts Act has been replaced by ss 75-82 of the Contracts and Commercial Law Act 2017.
2 Chen v Chen DC Auckland CIV-2010-092-5263, 23 May 2013 at [1]–[7].
continue to operate during daylight hours and the plaintiffs, with the assistance of the defendants (the plaintiffs having no prior experience), would operate the take-away business in the evening and at night time. Neither party had legal advice or obtained valuations and nothing was formally put in writing or signed by the parties. From this recipe for disaster the parties had widely different views of what transpired, as is apparent from the following:
[a] It is at least clear that both parties agree that a company, to be named Alligators Fast Food Ltd, would be formed with the plaintiffs and the defendants having equal shareholdings all four being directors.
[b] A “valuation” of the new business was agreed upon at $65,500 with the plaintiffs and the defendants contributing equally but the parties seem to be diametrically opposed and indeed confused at what that “valuation” was for; i.e. was it the value of the defendants’ existing business in which case the whole amount was payable to the defendants, was it the intended “start up” capital of a new joint venture: the plaintiffs’ contribution being in cash and the defendants’ contribution being the existing plant, equipment and premises.
[c] The company was formed on 22 May 2009 with all parties being directors and equal shareholders.
[d] The plaintiffs’ cash contribution was $32,500 and it is significant that on 27 May they paid a deposit of $4,000 which went into the company bank account as trading capital.
[e] There was a dispute about the need to pay rent and what amount. In the event no rent was paid.
[3] The plaintiffs made a start in the business in late May or early June and on 18 June they paid the balance of their agreed contribution, namely
$29,750. This cheque was made to Mr Yen Wei Chen personally and it is common ground that he banked this amount and used it for personal living expenses for his family.
[4] The “business” made an extremely slow start and the defendants claim that in addition to the $29,750 paid to them the plaintiffs should have been contributing to the value of stock taken on a “stock take”. From time to time further demands were made on them by the defendants for capital because clearly the business did not have any working capital. Nor surprisingly the parties almost immediately fell out. The plaintiffs walked away from the business (either two months or four months after entering) and retreated in what appears to be confusion. The plaintiffs thereafter took little interest in the business and would not respond to requests by the defendants to sell it. The defendants then continued to run a business from the premises. The plaintiffs finally approached their solicitors who wrote to the defendants on 25 May 2010, demanding accounts and records, and warning that any further dealing by the company required all directors be involved.
[5] On 27 May 2010 the defendants stopped the bank account. Four days later, on 31 May 2010, the defendants purporting to act on behalf of Alligators Fast Food Ltd transferred the whole business to the defendant Mrs Kuei Huan Chen, for a consideration of $32,500. In the meantime, the defendants decided
rent arrears were due by the company for the entire 12 month period of the lease. For that reason, the sale price of $32,500 was deemed to be covered by a condition providing:
[i] the vendor acknowledges it has not paid the rent or outgoings to the landlord for one year which exceeds the purchase price;
[ii] the vendor accepts the purchaser is also the landlord and transferred to her under this agreement as full satisfaction of the purchase price.
[6] The defendants did not advise the plaintiffs that this had been done and it is not mentioned in pleadings. The defendants continue to trade the business for a further two years when it was sold for $25,000 as a Japanese take-away.
[7] The plaintiffs only found out about the purported sale to the defendants in 2012. In the interim period, the defendants operated the business and agreed that they extracted cash and income from it as it was not particularly successful until it was sold to the Japanese enterprise.
[4] Mr Tsao and Mrs Chen began that proceeding in late 2010. It was under the District Court Rules 2009, which had distinctive procedural requirements — see, for example, the notice of claim, Form 2, which required a plaintiff to set out matters differently from under a conventional pleading. Mrs Chan and Mr Tsao had a lawyer. The defendants in that proceeding were the same as in this proceeding. District Court Judge Hubble found that the parties agreed that each side was to contribute $32,750 for a new company—the defendants by plant and equipment from their existing business and the plaintiffs by cash. The defendants broke that agreement by taking the plaintiffs’ payment of $29,750 for themselves instead of putting it into the business. Judge Hubble gave the plaintiffs judgment for $29,750 plus interest and costs.
[5] The defendants successfully appealed.3 The plaintiffs had different representation on appeal. The appeal succeeded on procedural and jurisdictional grounds. There had been an amended notice of claim which sought relief under s 174 of the Companies Act. Lang J held that claims under s 174 are outside the jurisdiction of the District Court. He also held that if the case had been decided under the original notice of claim, the pleadings did not squarely raise the issue of breach of contract so as to tell the defendants that they had to answer that claim. He also suggested that the person suffering the loss was not the plaintiffs but the company. Lang J recognised Judge Hubble’s desire to reach a practical
3 Chen v Chen [2014] NZHC 2788.
common-sense solution to do justice between the parties. Notwithstanding that, he was required to allow the appeal because of the deficiencies in the plaintiffs’ case. He directed the case to be reheard in the District Court.
[6] From this time on, Mrs Chen and Mr Tsao did not have legal representation. They say that they do not have the funds to pay a lawyer. They also say that they do not qualify for legal aid, mainly because it has been held that any claims should be made in the name of the company rather than by themselves personally. In the meantime, Alligators Fast Food Ltd was removed from the register of companies but has since been restored.
[7] The District Court proceeding was called on 23 February 2016. A District Court Judge held that the plaintiffs’ pleadings were not in order. He gave them time in which to fix them up. When the matter was called again, on 23 March 2016, another District Court Judge directed the plaintiffs to provide evidence of the reinstatement of Alligators Fast Food Ltd, to apply for leave to join Alligators Fast Food Ltd as a defendant and to file an amended statement of claim.
[8] The case was called again on 16 May 2016. The plaintiffs had not attended to the matters directed on 23 March 2016. Another District Court Judge directed that by 28 June 2016 the plaintiffs were to file and serve a formal application to amend their pleadings and to join Alligators Fast Food Ltd as a party. That was to be supported by an affidavit which was to include a proposed draft amended statement of claim with particularised causes of action. She ordered the plaintiffs to pay costs to the defendants. The order to file pleadings was an unless order. The case was adjourned to 5 July 2016. On 25 July 2016, yet another District Court Judge issued a minute striking out the plaintiffs’ case for non-compliance with the directions given on 16 May 2016.
[9] The plaintiffs appealed against the strike-out order. Muir J dismissed the appeal, but added:4
[39] I make one final observation. I encourage the parties to enter into responsible discussions concerning potential claims by AFFL. The prospect that this Court should be required to consider either a s 165 or s 174 application in circumstances where the sum of money involved is under
$30,000 is not a welcome one given the potential complexities of both
4 Chen v Chen [2017] NZHC 242 at [39].
applications. To the extent that there may be an underlying injustice it should be resolved by more efficient means.
This proceeding
[10]The plaintiffs’ current statement of claim has these causes of action:
(1)Breach of directors’ duties—the allegations include failure to keep proper records, excluding the plaintiffs from management, excluding the plaintiffs from the premises, selling the business without the approval of the plaintiffs and other matters.
(2)Breach of contract in not training the plaintiffs, and other matters alleging breaches for misrepresentations all before the plaintiffs made their investment.
(3)Misuse of company funds by the defendants.
(4)Misrepresentations made to induce the plaintiffs to invest in Alligator Fast Foods.
(5)Allegations of “misleading justice”.
(6)Misleading and deceptive conduct under the Contractual Remedies Act 1979.
While the statement of claim shows the plaintiffs as Alligators Fast Food Ltd as well as Mrs Chen and Mr Tsao, the pleading uses “the plaintiffs” in a way that can only refer to Mrs Chen and Mr Tsao, not to the company. The prayer for relief seeks orders under various statutes, including s 174 of the Companies Act 1993. Mrs Chen and Mr Tsao have clearly not had assistance from a lawyer in drawing their statement of claim. They appear to have carried out their own legal research, but they have applied legal terms without showing a deep understanding of what is required for sound pleadings and what causes of action may be available to them. Notwithstanding these difficulties, I have the
firm impression that they intend to continue with their claim come what may and will not
be put off by the defendants’ attritional procedural skirmishing.
Objection to Mr Collecutt appearing
[11] Mr Tsao and Mrs Chen objected to Mr Collecutt appearing for the defendants. They allege that he had been “fraudulent” in the District Court proceeding. Mr Collecutt explained that another lawyer had been the solicitor on the record for the defendants in the District Court proceeding, but that lawyer had died. After his death, the firm withdraw as solicitors for the defendants. After Lang J’s appeal decision and the defendants revived the proceeding in the District Court, that firm instructed Mr Collecutt and he appeared, before any documents had been filed showing that the defendants had instructed that firm and Mr Collecutt afresh. Documents were later filed to confirm that the solicitors had been instructed for the defendants. Mr Collecutt says that the District Court Judge who made the strike-out decision on 25 July 2016 addressed the matter then. She did not consider that it gave any grounds. She dealt with the matter as an irregularity that did not require any further orders.
[12] Mr Tsao and Mrs Chen have not suggested that there are any other matters that disqualify Mr Collecutt from appearing.
[13] This matter is trifling. A party is entitled to be represented in court by a lawyer of their choice. Strong grounds are required before the court will require a party to instruct some other lawyer. There is no such basis here. At its worst, there was a procedural irregularity in the District Court but it was dealt with. It does not provide any ground for barring Mr Collecutt from appearing for the defendants in this proceeding.
The defendants’ strike-out application
[14] The defendants apply to strike out the causes of action as statute-barred. They say that Mr Tsao and Mrs Chen are not competent to represent Alligators Fast Food Ltd. A proceeding may be considered an abuse of process or frivolous and vexatious if it is clearly statute-barred. In Murray v Morrel & Co Ltd Tipping J said:5
5 Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721 at [33]–[34].
I consider the proper approach, based essentially on Matai, is that in order to succeed in striking out a cause of action as statute-bared, the defendant must satisfy the court that the plaintiff’s cause of action is so clearly statute-barred that the plaintiff’s claim can properly be regarded as frivolous, vexatious or an abuse of process. If the defendant demonstrates that the plaintiff’s proceeding was commenced after the period allowed for the particular cause of action by the Limitation Act, the defendant will be entitled to an order striking out that cause of action unless the plaintiff shows that there is an arguable case for an extension or postponement which would bring the claim back within time.
In the end the Judge must assess whether, in such a case, the plaintiff has presented enough by way of pleadings and particulars (and evidence, if the plaintiff elects to produce evidence), to persuade the Court that what might have looked like a claim which was clearly to and subject to a statute bar is not, after all, to be viewed in that way, because of a fairly arguable claim for an extension or postponement. If the plaintiff demonstrates that to be so, the court cannot say that the plaintiff’s claim is frivolous, vexatious or an abuse of process. The plaintiff must, however, produce something by way of pleadings, particulars and, if it is so advised, evidence, in order to give an air of reality to the contention that the plaintiff is entitled to an extension or postponement which will bring the claim back within the time. A plaintiff cannot, as in this case, simply make an unsupported assertion in submissions that s 28 applies. A pleading of fraud should, of course, be made only if it is responsible to do so.
[15] The defendants say that all the causes of action pleaded by the plaintiffs occurred before 1 January 2011, when the Limitation Act 2010 came into effect. While the Limitation Act 1950 has been repealed,6 it continues to apply to actions based on acts or omissions before 1 January 2011.7 Section 4(1) of the Limitation Act 1950 provides for a limitation period of six years from the date on which the cause of action accrued for various causes of action, including actions founded on simple contract or on tort (s 4(1)(a) and actions to recover any sum recoverable by virtue of any enactment (s 4(1)(d)). Section 4(9) provides that the limitation period may be applied by analogy to certain claims in equity.
[16] The defendants say that any relevant causes of action arose during 2010. They refer to these events:
(1)The company’s bank account was stopped on 27 May 2010;
6 Limitation Act 2010, s 57.
7 Limitation Act 2010, s 59, and Limitation Act 1950, s 2A.
(2)the company’s business was sold on 31 May 2010 or 1 June 2010; and
(3)the plaintiffs began their proceeding in the District Court in December 2010.
The defendants also point to the start of the proceeding in December 2010 as showing that it is not open to the plaintiffs to seek an extension of time under s 28 of the Limitation Act 1950 on the ground of any alleged fraudulent concealment, because by the end of 2010 the plaintiffs knew that they had suffered wrongs at the hands of the defendants. I consider the plaintiffs’ causes of action.
The first cause of action—breaches of directors’ duties
[17] For the first cause of action the current statement of claim gives 18 particulars of alleged breaches of directors’ duties. The allegations do not expressly refer to any of the duties in ss 131 to 137 of the Companies Act, which are usually the basis for proceedings for breach of duties in Part 8 of the Companies Act. These include the duties to act in good faith and in the best interests of the company, to exercise powers for a proper purpose, not to contravene the Companies Act or the company’s constitution, not to trade recklessly, not to agree to the company incurring obligations without a reasonable belief that it will be able to perform the obligations, and to exercise care, diligence and skill in exercising powers or carrying out duties.
[18] Some of the allegations are irrelevant as raising matters of substantive liability— for example, non-compliance with discovery orders, allegations of fabricating evidence and misleading the court, and disregarding requests to bring a derivative proceeding. While many of the allegations are about events in 2010 and earlier, some are later: an allegation of sale of company assets in October 2011 and another of allowing the company to be removed from the register in September 2012. Those are allegations of fresh wrongdoing, not the continuation of other breaches that began in 2010.
[19] As best I can tell, none of the matters pleaded allege breaches of duties owed to the plaintiffs as shareholders under s 169(1) and s 169(3)(a)-(c) of the Companies Act. Instead, the plaintiffs allege that the defendants as directors breached duties they owed to
the company, not to shareholders. There is a question whether they can sue in the name of the company.
[20] The defendants’ submissions assumed that a claim for breach of directors’ duty involved no more than applying the six-year limit under s 4(1) of the Limitation Act 1950. The matter is not so straightforward. A claim by the company for breach of the duties under ss 131 to 137 is a claim for sums recoverable under an enactment under s 4(1)(d), but there are other matters: extension of time arising from the company’s removal from the register and claims against the directors as fiduciaries dealing with company assets.
[21] The company was removed from the register from 14 September 2012 to 12 April 2016. While the parties did not say so, I take it that the company was restored by the Registrar under s 328 of the Companies Act. There is no record of any decision on an application to the court for a restoration under s 329 and I doubt that the plaintiffs could competently make such an application. While the company was removed from the register, it could not sue or be sued. On applications to restore to the register under s 329, the courts have used the power under s 329(4) to make “as you were” orders to stop time running against claimants who were not statute-barred at the date of removal.8 The court has a similar power when the Registrar restores the company, s 328(6):
The court may, on the application of the Registrar or the applicant, give such directions or make such orders as may be necessary or desirable for the purpose of placing a company that is restored to the New Zealand register under this section and any other persons as nearly as possible in the same position as if the company had not been removed from the register.
It is arguable for the plaintiffs that the court may make an order under s 328(6) that time should not run against the company while it was in suspended animation after having been removed from the register at the behest of the defendants. That has a sufficient air of reality to satisfy the second limb of Tipping J’s test in Murray v Morrel & Co Ltd. That counts against applying the limitation rule against the company on a strike-out application.
[22] I deal with claims against the defendants for taking company assets for themselves under the third cause of action. Those claims lie in equity, even though they may be
8 In re Donald Kenyan Ltd [1956] 1 WLR 1397 (Ch D).
concurrent with breaches of duty under Part 8 of the Companies Act. It is also possible that the plaintiffs may have causes of action in equity for breaches of duty as directors, when there was no alleged misapplication of company assets. Such concurrent causes of action are caught by the analogy bar under s 4(9) of the Limitation Act and would be statute-barred unless relief is given under s 328(6) of the Companies Act.
[23] The claims for breach of directors’ duties are actionable only by the company, Alligators Fast Food Ltd, not by Mrs Chen and Mr Tsao personally. They do not and cannot say that the directors owed them personal duties. They have not shown that they can begin a claim in the name of the company against the defendants. As they and the defendants were the directors of the company, there is likely to be a deadlock in the board on any proposal for the company to sue the defendants. Without the authority of the company, Mrs Chen and Mr Tsao can only pursue the matter if they first obtain an order under s 165 of the Companies Act to begin a derivative proceeding. They have applied for that, an apparent acknowledgement that they cannot now sue on behalf of the company. As directors and shareholders, they are entitled to apply under s 165.
[24] Section 165(2) requires that in determining whether to grant leave under s 165 the court must have regard to:
(1)the likelihood of the proceedings succeeding;
(2)the costs of the proceedings in relation to the relief likely to be obtained;
(3)any action already taken by the company or related company to obtain relief; and,
(4)the interests of the company or related company to the proceedings being commenced, continued, defended, or discontinued as the case may be.
[25] The idea of Mrs Chen and Mr Tsao suing in this court in the name of the company for misappropriation of company assets is unattractive. The amount of the loss, about
$30,000, is relatively small, at the lower end of the District Court’s civil jurisdiction.9
9 District Court Act 2016, s 74—up to $350,000.
The company would have to be represented by counsel.10 Mrs Chen and Mr Tsao are not lawyers and are unable to represent the company in this court. Moreover, I have no confidence that they would be able to run a claim for breach of directors’ duty with the skill required for such a proceeding in this court. The costs of the proceeding are likely to be disproportionate in relation to the relief sought.
[26] On the other hand, proceedings authorised under s 165 of the Companies Act do not have to be brought in this court, although they normally are. A claim by a company against a director for breach of director’s duty is within the civil jurisdiction of the District Court so long as the amount of the claim is no more than $350,000. As directors Mrs Chen and Mr Tsao may appear and act for the company in the District Court.11 Some of the difficulties with suing in this court would fall away if they sued in the District Court. The claims for breach of director’s duties could be brought in that court. Given their lack of success in that court, that may not be very appealing to Mrs Chen and Mr Tsao, but suing in this court is no easier.
[27] The circumstances of this case are the sort where in the past a court would recognise that the fraud on the minority exception applies to the rule in Foss v Harbottle.12 Because there is a deadlock at both board level and shareholder level, there appears to be no ability for the company to approve or disapprove the defendants’ actions. But the defendants may arguably have used their de facto control to their personal advantage at the expense of the company. There is good reason to believe that Mrs Chen and Mr Tsao would have obtained leave at equity for a derivative proceeding.13 Section 165 was enacted to allow shareholders to sue derivatively on a wider basis than was possible under Foss v Harbottle. That counts against applying s 165 restrictively. Instead Mrs Chen and Mr Tsao have made out a case under s 165 to sue the defendants in the name of the company, but subject to conditions:
(1)The claim should be brought in the District Court, not this court.
10 Re GJ Mannix Ltd [1984] 1 NZLR 309 (CA); Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2013] NZCA 53, [2013] 2 NZLR 679.
11 District Court Act 2016, s 107(2)(a).
12 Foss v Harbottle (1843) 2 Hare 461, 67 ER 189.
13 For the requirement to obtain leave, see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA) at 222.
(2)Mrs Chen and Mr Tsao are to pay the company’s costs of the proceeding, given that the contest is essentially between them and the defendants. The defendants will pay their own costs, as they have to date. The District Court will keep its normal powers to award costs, when it makes any orders.
[28]I summarise where this has got to:
(1)Claims by the company against the defendants for misapplying company assets are dealt with separately below.
(2)Claims by the company against the defendants for breaches of duty under s 131 to 137 of the Companies Act are subject to the six-year limit under s 4(1)(d) of the Limitation Act 1950 and concurrent claims in equity are subject to the same time limit by analogy under s 4(9). Most of those causes of action appear to have accrued before 15 June 2011 and would ordinarily be out of time. Two allegations about events after that date need to be noted. The allegation of selling assets in October 2011 is not out of time. It is dealt with separately under the third cause of action. The allegation about having the company removed from the register in September 2012 does not seem to raise an arguable breach of duty.
(3)The time bars under s 4(1)(d) and 4(9) would normally apply, save for the effect of the company being removed from the register. An “as you were” order under s 328(6) of the Companies Act that time did not run while the company was removed from the register would allow the claims to run even if they were commenced outside the six years. There may be an argument for such an order, especially if the defendants were responsible for having the company removed from the register. Mrs Chen and Mr Tsao have not applied for such an order yet and will need to obtain it if they are to overcome the time bar.
(4)Mrs Chen and Mr Tsao have made out a case under s 165 of the Companies Act for leave to sue in the name of the company, but any proceeding should
be brought in the District Court, not this court and they should pay the
company’s costs of the proceeding.
Second cause of action—breach of contract
[29] The claim for breach of contract is by Mrs Chen and Mr Tsao against the defendants. The pleading relates to the claims “generally” but in context that does not include the company. The alleged breaches include failure to provide adequate training and keeping equipment at home, and that the income from Alligators Fast Food Ltd is not enough to support the family expenses of the plaintiffs and the defendants. The claim is statute-barred under s 4(1)(a) of the Limitation Act 1950. All the matters pleaded relate to events in 2009 and 2010. The six years in which to bring a proceeding had already expired before June 2017. There is no arguable case for extending time to start a proceeding. Because Mrs Chen and Mr Tsao sue for breaches of their contract with the defendants, the removal of the company from the register is irrelevant and does not give them any ground for claiming any extension of time. There is no basis for extending time under s 28 of the Limitation Act: they were aware of the breaches when they sued in 2010.
[30] The cause of action for breach of contract by Mrs Chen and Mr Tsao is struck out as out of time.
Third cause of action—misuse of company funds
[31] Here I deal not only with the third cause of action but also the allegations of misapplication of company assets in the first cause of action. The third cause of action alleges that the defendants misappropriated $30,750 when they kept that part of Mrs Chen and Mr Tsao’s capital contribution for themselves instead of paying it to the company. The loss is the company’s, not the plaintiffs. That is also the case with the misappropriations alleged in the first cause of action.
[32] In so far as those matters are based on events before the Limitation Act 2010 came into force on 1 January 2011, they may not be statute-barred because they come within the exception under s 21(1)(b) of the Limitation Act 1950. A useful recent example is
the English Court of Appeal’s decision, First Subsea Ltd v Balltec Ltd.14 That was a decision under s 21 of the Limitation Act 1980 (UK) which is in similar terms to s 21 of the Limitation Act 1950 (NZ):
21 Limitation of actions in respect of trust property
(1)No period of limitation prescribed by this Act shall apply to an action by a beneficiary under a trust, being an action—
(a)in respect of any fraud or fraudulent breach of trust to which the trustee was a party or privy; or
(b)to recover from the trustee trust property or the proceeds thereof in the possession of the trustee, or previously received by the trustee and converted to his use.
(2)Subject as aforesaid, an action by a beneficiary to recover trust property or in respect of any breach of trust, not being an action for which a period of limitation is prescribed by any other provision of this Act, shall not be brought after the expiration of 6 years from the date on which the right of action accrued:
Provided that the right of action shall not be deemed to have accrued to any beneficiary entitled to a future interest in the trust property until the interest fell into possession.
(3)No beneficiary as against whom there would be a good defence under this Act shall derive any greater or other benefit from a judgment or order obtained by any other beneficiary than he could have obtained if he had brought the action and this Act had been pleaded in defence.
[33] English courts have held that these limitation rules may apply to fiduciaries who are entrusted with property of their principal. As a director entrusted with company property owes fiduciary duties to the company, under s 21(1)(b) a claim against a director for misappropriation of company property is not subject to a fixed time limit to start a proceeding. Lord Sumption explained this in Williams v Central Bank of Nigeria:15
Because of his fiduciary position, [the true trustee’s] possession of [trust assets] was the beneficiary’s possession and was entirely consistent with the beneficiary’s interest. If the trustee misapplied the assets, equity would ignore the misapplication and simply hold him to account for the assets as if he had acted in accordance with his trust. There was nothing to make time start running against the beneficiary. It will be apparent that this reasoning can apply only to those who, at the time of the misapplication of the assets have assumed responsibility as a trustee, whether expressly or de facto.
14 First Subsea Ltd v Balltec Ltd [2017] EWCA CIV 186, [2018] Ch 25.
15 Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189 at [13].
First Subsea Ltd v Balltec Ltd is the latest in a line of decisions applying that reasoning to proceedings against directors for misapplying company assets.16 Accordingly, insofar as the plaintiffs allege that the defendants, directors of the company, misappropriated company property for themselves, it is arguable that the limitation period under s 21(2) does not apply. The claim is not suitable for pre-trial strike-out.
[34] Some of the misappropriations alleged against the defendants occurred after the Limitation Act 2010 came into force, for example the sale of company assets without accounting for the proceeds of sale in October 2011. Those are money claims under ss 11 and 12 of the 2010 Act.17 They are subject to the six-year primary period under s 11 of the 2010 Act. It does not appear to have preserved the exception for claims against trustees and fiduciaries under s 21(1) of the Limitation Act 1950. For those matters that occurred within six years of the start of this proceeding, June 2017, there is no problem. They are within time. The defendants have not addressed any events between 1 January 2011, when the 2010 act came into force, and 15 June 2011 (when any claim in this proceeding would be within time under s 11). Instead they directed their case against matters alleged to have occurred in 2010 and earlier. As the defendants have not shown that any claims for their actions in the first half of 2011 are statute-barred, I cannot make any strike out orders for them. That is a matter for trial, as is any argument for an extension of time for any late knowledge period under ss 11(3) and 14. Any “as you were” order under s 328(6) of the Companies Act would also keep any claim within time.
[35] Because the loss is the company’s, an order is required under s 165 of the Companies Act to allow Mrs Chen and Mr Tsao to sue in the name of the company. The same considerations apply as in paragraphs [23]–[27] above.
[36] For these reasons, it is not appropriate to strike out the third cause of action or any allegation of misappropriating company assets in the first cause of action as statute- barred.
16 Other useful English authorities are JJ Harrison (Properties) Ltd v Harrison [2001] EWCA CIV 1467; Gwembe Valley Development Co Ltd v Koshy (No 3) [2003] EWCA CIV 1048; Paragon Finance plc v DB Thakerar & Co [1999] 1 All ER 400 (CA); and Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189.
17 Under s 12(1), “Money claim” means a claim for monetary relief at common law, in equity, or under an enactment. (Emphasis added)
Fourth cause of action—deceit
[37] The heading to this cause of action says, “False representation of facts inducing entry into contract to invest and jointly purchase Alligator Fast Food”. This cause of action alleges that the defendants induced the plaintiffs to invest in Alligator Fast Foods in reliance on certain fraudulent misrepresentations.
[38] Paragraph 10 of the statement of claim says that the defendants represented to the plaintiffs that income from Alligators Fast Food would be sufficient to support the family expenses of them all, and that the defendants would provide training to the plaintiffs. Those appear to be the representations on which the deceit cause of action is based. The cause of action is arguably barred under s 35(1)(b) of the Contract and Commercial Law Act 2017.18 That continues the abolition of claims for damages for fraudulent misrepresentations inducing a contract. The cause of action is in any event statute-barred. It is a claim in tort where the cause of action accrued when Mrs Chen and Mr Tsao suffered loss. That happened when they paid their capital contribution. Fresh losses may have occurred while they were still working in the business, but all their losses had accrued by the time they stopped being involved in the business in May 2010.
Fifth cause of action
[39] The heading to this cause of action is “misleading justice and false representation to use lawyer in proceedings”. It is hard to make anything of this cause of action. As best I can judge, Mrs Chen and Mr Tsao are upset that the defendants advised them not to use a lawyer when they first made their investment but the defendants have used lawyers to resist the claims brought by them.
[40] I cannot see any recognisable cause of action. Part of the plaintiffs’ pleading alleges “breach of contractual terms” in using a lawyer. There is an earlier plea: “No point in finding a lawyer also represented by defendants”, but it is hard to see how that constitutes a contractual term. Representations as to whether parties should use lawyers when they enter into business arrangements has little to do with those parties’ rights to engage legal representation of their own choice once legal proceedings start. A court is
18 Formerly the Contractual Remedies Act 1979, s 6(1)(a).
likely to look very hard at any alleged contractual provision under which a person gave away their right to have legal representation of their own choice in legal proceedings. The plaintiffs’ pleadings certainly do not show any tenable cause of action. It is unnecessary to consider it further. It is struck out.
Sixth cause of action
[41] The sixth cause of action is called “Misleading and deceptive conduct in breach of Contractual Remedies Act 1979”. The Contract and Commercial Law Act 2017 came into force on 1 September 2017. It repealed and replaced the Contractual Remedies Act 1979. The reference to the Contractual Remedies Act can be read as going to the contractual remedies part of the Contract and Commercial Law Act 2017, Part 2 subpart
3. While the pleading is not particularly clear, it must be a claim for contractual misrepresentation inducing Mrs Chen and Mr Tsao to enter into a contract with the defendants to set up the Alligators Fast Food Ltd. Section 35(1)(a) of the Contract and Commercial Law Act 2017 says:
(1)If a party to a contract (A) has been induced to enter into the contract by a misrepresentation, whether innocent or fraudulent, made to A by or on behalf of another party to that contract (B) –
(a) A is entitled to damages from B in the same manner and to the same extent as if the representation were a term of the contract that has been breached …
[42] In a claim for breach of contract time runs from the occurrence of the breach under s 4(1)(a) of the Limitation Act 1950. A claim for damages for misrepresentation inducing a contract is to be decided in the same manner and to the same extent as a claim for breach of contract. Any cause of action for misrepresentation cannot have accrued any later than when the plaintiffs entered into their contract with the defendants. That was in May 2009. This proceeding started in June 2017. It is outside the six-year limitation period. The plaintiffs have not shown any basis for considering that time can be extended. Accordingly, the sixth cause of action is time-barred under s 4(1)(a) of the Limitation Act 1950.
[43] For completeness, I record that I see no basis for Mrs Chen and Mr Tsao to claim that time for the proceeding has been extended under s 28 of the Limitation Act 1950 for
their second, fourth, fifth and sixth causes of action. By the end of 2010, when they started their proceeding in the District Court, they knew all the matters which they rely on for those causes of action.
A claim under s 174 of the Companies Act 1993?
[44] While Mrs Chen and Mr Tsao’s statement of claim does not have any cause of action under s 174 of the Companies Act, they seek orders under that section (as well as other relief). In the District Court, they had changed their pleadings to include a claim under s 174. Before the court strikes out a statement of claim, it should consider whether a plaintiff’s pleadings can be amended so that they can survive.
[45] For the defendants, Mr Collecutt submitted that a claim for relief under s 174 was subject to the six-year time limit under s 4(1) of the Limitation Act 1950. After the hearing, the parties filed further submissions. Authorities on the point are not all that persuasive. In Re Grandactual Ltd, Hough v Hardcastle, Sir Donald Rattee said of the equivalent English provision (s 459 of the Companies Act 1985):19
Petitions under section 459 are always a very burdensome form of litigation. I understand that section 459 is not subject to any period of limitation, but relief under section 461 is always within the discretion of the Court. I do not consider that the Court should countenance such proceedings in the circumstances that I have described nearly 10 years after the event.
(Emphasis added)
[46] There are New Zealand decisions going the other way: McLachlan v MEL Network Ltd, and Scott v Scott Transport Ltd.20 In McLachlan v MEL Network Ltd, there was a question whether there was a limitation period for proceedings under s 174. The plaintiff had initially submitted that there was no limitation period, but later counsel accepted that a claim under s 174 is subject to the six-year limitation period under s 4(1)(d) of the Limitation Act as an action to recover any sum recoverable by virtue of any enactment.21 Potter J accepted the point without further discussion.
19 Re Grandactual Ltd, Hough v Hardcastle [2005] EWHC 1415 (Comm) at [20].
20 McLachlan v MEL Network Ltd HC Auckland CIV-1998-404-253, 9 December 2004 per Potter J; Scott v Scott Transport Ltd HC Hamilton CIV-2005-419-395, 19 October 2005 per Hugh Williams J.
21 McLachlan v MEL Network Ltd at [44].
[47] In Scott v Scott Transport Ltd, Hugh Williams J tentatively accepted that a claim under s 174 may be statute-barred under s 4(1)(d) of the Limitation Act 1950.22 Counsel cited as authority McLachlan v MEL Network Ltd and Re Network Agency International Ltd though the latter is not a decision on s 174 or its predecessor but on a claim for breach of directors’ duty and is not relevant.23 None of these cases is compelling.
[48]Section 174 says:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2) If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
(c)regulating the future conduct of the company’s affairs; or
(d)altering or adding to the company’s constitution; or
(e)appointing a receiver of the company; or
(f)directing the rectification of the records of the company; or
(g)putting the company into liquidation; or
(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3) No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[49] There is no limitation provision in the section. If the court is satisfied that the affairs of the company have been or are being or are likely to be conducted in a manner
22 Scott v Scott Transport Ltd at [53].
23 Re Network International Agency Ltd [1992] 3 NZLR 325 at 332.
that is oppressive and unfairly prejudicial to a shareholder, it may give relief if it considers that it is just and equitable to do so. A number of remedies are available. Section 174(2) gives instances. Payment of compensation under s 174(2)(b), an order to pay money, is only one possible head of relief.
[50] Section 174 and its predecessor (Companies Act 1955 s 209) were enacted to provide a less drastic alternative to ordering liquidation on an application under the just and equitable ground.24 The court’s exercise of its power under s 174 involves the application of equitable principles.25 “Actions to recover any sum recoverable by virtue of any enactment” is apt to cover claims where a money order is available as a matter of right. That is consistent with the actions in s 4(1)(a) actions in tort or contract, (b) actions to enforce a recognisance and (c) actions to enforce an award. It is not, however, apt to refer to a proceeding where the court is required to weigh equitable considerations and to decide which of a number of remedies best fits the circumstances of the case. When the court in its discretion orders compensation under s 174(2)(b), it is not granting relief which the plaintiff can claim as a matter of right, but has selected that remedy as appropriate to relieve against the unfairly prejudicial conduct.
[51] It would be odd to apply s 4(1)(d) of the Limitation Act 1950 to claims under s 174. It could apply only to the court’s power to order compensation under s 174(2)(b). There seems no principled reason why money orders under s 174 should be subject to a time limit, but others should not be. Moreover, given the equitable nature of the court’s jurisdiction, it is antithetical that black letter time-bars should apply.
[52] In P F Sugrue Ltd v Attorney-General the Court of Appeal used similar reasoning to hold that a claim for monetary compensation for a breach of the New Zealand Bill of Rights Act 1990 was not subject to the time limit under s 4(1)(d) of the Limitation Act 1950.26 Given the similarity of Baigent awards to compensation in equity it held that the court has a discretion to refuse monetary relief if the plaintiff delays too long in making a claim.
24 Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [57]–[58].
25 O’Neill v Phillips [1999] 1 WLR 1092 at 1098-1102, a case under s 459 of the Companies Act 1985(UK), the English counterpart of s 174(4)(1)(d) of the Limitation Act 1950.
26 P F Sugrue Ltd v Attorney-General [2004] 1 NZLR 207 (CA) at [69]–[70]. The point was not discussed on appeal, P F Sugrue Ltd v Attorney-General [2006] 3 NZLR 464 (PC).
[53] Often the passage of time makes it apparent that the affairs of the company have been conducted in an oppressive or unfairly prejudicial manner. Take for example the facts in M Yovich & Sons Ltd v Yovich where a shareholder had not received any dividends or other tangible benefits for 20 years.27 It would have been absurd to deny him relief because he had not issued proceedings earlier.
[54] In my judgment, a claim for relief under s 174 of the Companies Act is not subject to the time-bar under s 4(1)(d) of the Limitation Act 1950. Although enacted by statute, s 174 involves the application of equitable principles and discretionary powers where relief is moulded to circumstances of the case. As Sir Donald Rattee recognised in Re Grandactual Ltd, Hough v Hardcastle, relief may be refused on the ground of delay.28 But that involves the exercise of an equitable discretion, not the application of a fixed statutory time-bar. A claim under s 174 may be barred for other discretionary matters, but they have not been raised and cannot be dealt with in a strike out application.29
A choice of forum
[55]The position reached now is:
(1)Mrs Chen and Mr Tsao’s cause of action for breach of directors’ duty has survived strike-out for limitation, subject to their obtaining an order under s 328(6) of the Companies Act.
(2)Their claims for misappropriation of company assets in the first and third causes of action are not out of time and do not need an order under s 328(6) of the Companies Act.
(3)Any order under s 165 of the Companies Act to allow them to sue in the name of Alligators Fast Food Ltd will require them to sue in the District Court.
27 M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,490 (CA).
28 Re Grandactual Ltd, Hough v Hardcastle [2005] EWHC 1415 (Comm) at [20].
29 See the comment of Tipping J in Matai Industries Ltd v Jensen [1989] 1 NZLR 525 at 544–545 that laches can rarely be decided in a strike out application.
(4)Their causes of action for breach of contract, deceit and contractual misrepresentation are time-barred under s 4(1)(a) of the Limitation Act and there is no basis for extending the time for suing. Those causes of action are accordingly struck out.
(5)The fifth cause of action is struck out because it does not disclose any reasonable cause of action.
(6)Mrs Chen and Mr Tsao are entitled to amend their statement of claim to include a cause of action under s 174 of the Companies Act. That cause of action is not subject to a statutory time limit under the Limitation Act 1950.
[56] It is desirable in civil proceedings for relatively small sums of money, such as this case, to be heard in the lowest court with jurisdiction. For a claim under s 174, that is this court. Under s 2(1) of the Companies Act, “court” is defined to mean the High Court, not the District Court. On the other hand the derivative proceeding can be brought in the District Court. The requirement to bring a claim under s 174 in this court does not give a sufficient reason to keep the derivative proceeding in this court. That is because in this court Mrs Chen and Mr Tsao will need to instruct a lawyer for the derivative proceeding and there is little prospect of them doing so or wishing to do so. Keeping the derivative proceeding in this court would stymie it.
[57] It would be oppressive for Mrs Chen and Mr Tsao to bring a derivative proceeding in the name of the company against the defendants in the District Court and at the same time make a personal claim against them under s 174 of the Companies Act in this court. While there are different causes of action, they would be sued about the same facts in different courts at the same time. The matter is to be resolved by requiring Mrs Chen and Mr Tsao to choose which course they will take:
(1)On this court making an order under s 165 of the Companies Act, bring a derivative proceeding in the District Court, having also obtained an order under s 328(4) of the Companies Act to overcome the statutory time limit for the claim for breach of directors’ duty;
or
(2)Bring a proceeding in their own names in this court against the defendants and the company seeking relief under s 174 of the Companies Act.
[58] I direct the Registrar to allocate a face-to-face case management conference before me. Ahead of that conference, Mrs Chen and Mr Tsao are to file and serve a memorandum setting out their choice of option (1) or option (2) above. If they elect to sue under s 174 in this court, they will also need to tender a draft statement of claim setting out a cause of action under that section. Further case management directions will be given. If they elect to sue in the District Court in the name of the company, orders will be made under s 165 of the Companies Act and there may be consequential directions for transferring the proceeding to the District Court. They will also need to set out any proposals for applying to this court under s 328(6) of the Companies Act.
[59] I add a comment. In his decision dismissing the plaintiffs’ appeal from the District Court order striking out their claim, Muir J noted the desirability of the parties resolving their differences without requiring a decision of the court. The defendants have apparently not taken that to heart, even though the plaintiffs wrote to them inviting a settlement. I take it from their conduct so far that the defendants intend to take all available procedural points to slow Mrs Chen and Mr Tsao in having a hearing on the merits. Mrs Chen and Mr Tsao are vulnerable to those tactics because they do not have legal representation and know little about bringing civil proceedings in the District Court and the High Court. The result is that the parties and the courts have spent too much time on procedural matters. As this decision shows, those procedural matters have become very complicated. Indeed, they are too complex for the amount in dispute. To a large extent, both sides have brought these difficulties on themselves — Mrs Chen and Mr Tsao through trying to litigate without a lawyer, and the defendants through their attritional tactics. Notwithstanding that, Mrs Chen and Mr Tsao are obviously determined to have their case heard in court. I invite the defendants to reflect whether tactics of obstruction are really in their interest. They may also wish to bear in mind that s 174 gives the court wide powers to do what it considers to be just and equitable.
[60] This decision has gone in favour of Mrs Chen and Mr Tsao. If they had legal representation, I would order costs in their favour. If the defendants may later seek costs against them, Mrs Chen and Mr Tsao may be able to raise their victory on this occasion as counting in reduction of any order for costs they might otherwise be ordered to pay.
……………………………
Associate Judge R M Bell
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