Avcioglu v JPL Enterprise Limited

[2014] NZHC 1492

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-3109 [2014] NZHC 1492

IN THE MATTER

of a Part 18 Subpart 13 High Court Rules

Application under s 174 of the Companies
Act 1993

BETWEEN

MURAT AVCIOGLU, MUSTAFA DEMIRALP, TEYFIK AYYALDIZ and BIRGIL AYYILDIZ

Plaintiffs

AND

JPL ENTERPRISE LIMITED First Defendant

MU LIN
Second Defendant

CASABLANCA SYLVIA PARK LIMITED

Third Defendant

Hearing:	30 June 2014
Appearances:	M I S Phillips for plaintiffs R Hollyman and A J Steel for first and second defendants
Judgment:	30 June 2014

(ORAL) JUDGMENT OF LANG J

AVCIOGLU v JPL ENTERPRISE LIMITED [2014] NZHC 1492 [30 June 2014]

[1]      This proceeding involves a dispute between the shareholders of Casablanca Sylvia Park Limited.  That company was incorporated on 21 November 2012, and one month later acquired a licensed restaurant in the Sylvia Park shopping complex. The plaintiffs and the first defendant are shareholders in the company.   The first defendant holds one-third of the company’s shares.

[2]      The plaintiffs had operated the restaurant business for five or six years prior to December 2012.  The defendants became involved after they expressed interest in acquiring an equity investment in the business.  Within two weeks after settlement, however, the parties agreed they could not work with each other and that an exit strategy was required.  Offers and counter-offers were then made, but no agreement was reached.  This resulted in the present proceeding being filed on 11 June 2013, with the plaintiffs seeking an order that they be permitted to acquire the first defendant’s shares in the company at a value to be agreed or determined by the Court.

[3]      The purpose of today’s hearing was to ascertain the effect of the orders that the Court has made to date, and in light of that conclusion to give directions relating an application for discovery that the first defendant has filed.

Progress to date

[4]      The proceeding was called for the first time on 22 July 2013.  On that date, Andrews J recorded that the defendants had not filed any documents in opposition to the plaintiffs’ application, but through their counsel had indicated that they would consent to an order for the sale of their shares to the plaintiffs.  Matters have then proceeded with different Judges dealing with the proceeding in various Duty Judge Lists.

[5]      The most significant orders that the Court has made to date were those made by Ellis J on 12 August 2013.  On that date the Judge made the following orders by consent:

1.Karen Greenwood of Beattie Varley Limited is appointed to produce a valuation of Casablanca Sylvia Park Limited (“the company”) in accordance with the letter of instruction by Fisher Lamberg to Beattie Varley Limited dated 8 August  2013  attached to these orders and marked “A” (“the valuation”).

2.      The valuation is a final determination of the value of the company.

3.The applicable date of the  valuation for the  purposes of sale and purchase of shares, is to be either agreed between the parties or determined by the Court.

4.On  a  date  to  be  agreed  being  as  soon  as  reasonably  practicable following completion of the valuation and resolution by agreement or by order of this Court of any disputed matters (“the settlement date”), the plaintiffs or their nominee/s buy and the first defendant sells all of the shares in the company that are owned by the first defendant (“the shares”).

5.The price to be paid for the shares shall be the equivalent to one third of the valuation of the company, subject to:

(a)    Any adjustment necessary to account for any different in the current accounts of the shareholders;

(b)    Any adjustment  necessary to  account  for  any disputed items relating to  the  conduct  of the  parties  or the  accounts  of  the company, including any payments made to the parties by the company;

(c)    Any adjustment necessary to account for a final determination of costs in the proceedings.

6.Between the date of these orders and the settlement date, the first defendant shall not withdraw any money from the bank account of the company, save for any monies paid equally to the shareholders in reduction of their current accounts.

7.      Upon settlement of the sale and purchases of the shares:

(a)     The plaintiffs provide a discharge and release of the second

defendant’s guarantee of the company lease;

(b)    The second defendant resigns as a director of the company.

8.Any miscellaneous matters in dispute pertaining to the applicable date of the valuation, the accounts of the company, the conduct of the parties and costs in these proceedings, shall firstly be the subject of good faith negotiations between the parties and failing agreement shall be determined by this Court and the parties shall ensure the prompt disposition of these matters.

9.Leave is reserved for any party to apply to this court on notice to the other parties, for further orders as necessary.

[6]      Thereafter,  Ms  Greenwood  commenced  preparing  her  valuation.     She released  a draft  valuation  to  the parties on  8 October 2013  for their  comment. Counsel for the plaintiffs responded by letter dated 23 October 2013.  Included in the issues that counsel raised in this letter was the methodology Ms Greenwood had adopted for valuing the company.   Counsel pointed out that Ms Greenwood’s methodology appeared to be appropriate for the valuation of a business, but that it would not produce a valuation of the company as a whole.  Counsel annexed to his letter  a  brief  of  evidence  from  Mr  Brian  Sheridan,  a  chartered  accountant  and director of Jolly Duncan & Wells Limited.  Mr Sheridan put forward a proposal as to how the company might appropriately be valued.

[7]      Counsel then acting for the defendants also wrote to Ms Greenwood raising two issues, but did not query her proposed methodology for valuing the company.

[8]      Ms  Greenwood  released  her  final  valuation  on  3  December  2013.    The valuation adopted Mr Sheridan’s methodology, and in doing so ascribed a value to the company within the range between $1 million and $1.1 million.  Ms Greenwood then said:

37.The top end of the range reflects both the actual profitability enjoyed by Casablanca plus also the increase in profitability enjoyed by Casablanca when compared to Tasca’s most recent financial results.  If a mid-point in the range was agreed upon, then a value of $1,050,000 would seem to be appropriate.

[9]      I therefore take Ms Greenwood’s valuation of the company to be the sum of

$1,050,000.  The valuation did not take into account the impact of the shareholders’ current accounts on the value of the company.  The current accounts are important in the present case, because the company acquired the restaurant business for the sum of approximately $1,000,000.00.  The three shareholders contributed equally to the purchase price by providing the sum of $333,335.00 each.  These were recorded as current account advances.

[10]     The company also immediately began making regular weekly payments to each of the three shareholders.  Up until today’s hearing, it appears that all parties were agreed that these payments should be treated as reducing the shareholders’

current accounts.  Counsel for the defendants suggested today that his clients may not now accept that the payments should be treated in that way.

[11]     I take Ms Greenwood’s valuation to be based on the premise that the parties agreed that the company had a value in December 2012 of $1,000,000.00, because that was the sum they were prepared to contribute in order to acquire the restaurant business.   Ms Greenwood then viewed her task as being to ascertain whether the value of the company had increased since that time and, if so, by how much.  She concluded that the company had increased in value by $50,000.00, and that this figure should be divided between the three shareholders in proportion to their respective current shareholdings.  This would mean that the sum of approximately

$16,000.00 should be added to each shareholder’s current account.

[12]     The actual value of each shareholder’s current account was not, however, a matter that Ms Greenwood took into account or determined.

Matters yet to be determined

[13]     The orders that Ellis J made on 12 August 2013 expressly excluded three matters  from  Ms  Greenwood’s  valuation.    These  are  found  in  the  following paragraph:

5.The price to be paid for the shares shall be the equivalent to one third of the valuation of the company, subject to:

(a)     Any adjustment necessary to account for any differences in the current accounts of the shareholders;

(b)     Any adjustment necessary to account for any disputed items relating to the conduct of the parties or the accounts of the company, including any payments made to the parties by the company;

(c)     Any adjustment necessary to account for a final determination of costs in the proceedings.

[14]     I take the effect of paragraph 5(a) to be that in assessing the amount to be paid to the first defendant, it would be necessary to take into account the actual level of  its  current  account  as  at  the  date  of  payment.     As  today’s  hearing  has

demonstrated,  the  plaintiffs  consider  that  this  is  a  straightforward  issue.    The

defendants, however, are not satisfied that the plaintiffs’ calculations are correct.

[15]     I take the reference in 5(b) to relate to items that had been identified as being in dispute as at the date the orders were made.  These are largely contained in a letter dated  29 August  2013  that  counsel  then  acting  for  the  defendants  wrote  to  Ms Greenwood.  It is common ground that, although Ms Greenwood dealt with some of the matters raised in that letter, she expressly put the balance to one side on the basis that it was likely the Court would need to determine them in the event that the parties could not reach agreement in relation to them.

[16]     The final adjustment that will need to be made relates to the costs to be awarded in the present proceeding.

The hearing today

[17]     A significant degree of confusion has now arisen as to the effect of various orders that the Court has made to date.  Part of the difficulty has arisen because on

19 December 2013, I directed that the plaintiffs were to pay the first defendant the sum of $269,586.00 on 31 January 2014.  That figure reflected the first defendant’s share of the increase in value of the company as determined by Ms Greenwood, together with calculations that the plaintiffs had made in relation to the amount then owing to the first defendant in respect of its current account.  The plaintiffs were also permitted to retain a specified sum to provide them with some security in the event that they were eventually awarded costs against the defendants.

[18]     As matters transpired, that plaintiffs did not make that payment.  Instead, the matter came back before the Court on 26 February 2014, when I directed that the plaintiffs were to make an interim payment of $240,000.00 to the first defendant on

28  February  2014.    The  reduction  in  the  sum  to  be  paid  reflected  the  weekly payments that the company had continued to make to the first defendant in the interim, together with an increased provision for any award of costs that might be made against the defendants.  I understand that this payment, described by me as an interim payment, was made to the first defendant shortly after the date directed by the Court.

[19]   At a telephone conference on 5 June 2004, counsel for the defendants endeavoured to persuade me that I should make wide ranging orders for discovery against the plaintiffs.   I was not prepared to make those orders, because I did not wish to put the plaintiffs to the trouble and expense of complying with discovery orders that were not relevant to issues that the Court is still required to determine. For that reason I directed today’s hearing, at which I wished to review the effect of the Court’s earlier orders so as to be able to consider the application for discovery on an informed basis.

Challenge to valuation methodology

[20]     During the hearing today, counsel for the defendants sought to persuade me that the issue of whether or not Ms Greenwood had adopted an erroneous methodology in valuing the company was a matter that could still be the subject of investigation and determination by the Court.

[21]     I reject that submission.  The parties agreed in the consent orders made on

12 August 2013 that Ms Greenwood’s valuation was to be a “final determination” of the value of the company.  As I have already recorded, Ms Greenwood provided the parties with a draft report on 8 October 2013, in which she expressly set out the methodology she proposed to use.   Although the plaintiffs made submissions in relation to that issue, the defendants chose not to.

[22]     The provision of the draft report presented the defendants with an opportunity to comment on Ms Greenwood’s proposed methodology if they wished to do so. The fact that they did not do so at that time is, in my view, fatal to them now endeavouring to resurrect that issue.

[23]     I therefore consider that Ms Greenwood’s methodology is now no longer open to question.  The parties must now accept the methodology she used regardless of whether another methodology may have been more appropriate having regard to the overall circumstances.

Remaining issues

[24]     This means that the Court now needs to determine how to proceed given the fact that the matters reserved for the Court’s decision in paragraph 5 of the consent orders dated 12 August 2013 are to some extent ambiguous.   As I have already indicated, I consider that the effect of Ms Greenwood’s valuation is to provide each of the three shareholders with a one-third share of the increase in value of the company, namely a one-third share in $50,000.00.

[25]     In the case of the first defendant, that sum needs to be added to the amount now owing to it by way of current account.  There then needs to be an adjustment in respect of the other matters referred to in paragraph 5.

[26]     This  means  that  I am  satisfied  that  the defendants  should  be  entitled  to discovery in relation to any documents that may relate to the first defendant’s current account.  I see no need to order discovery in relation to the current accounts of the other shareholders, because they will not be relevant to the orders the Court will be required to make in relation to the payment to be made to the first defendant.

[27]     The plaintiffs’ calculations regarding the amount owing to the first defendant in respect of its current account are set out in a table at paragraph 3 of an affidavit sworn  by  Mr  Murat Avcioglu  on  9  December  2013.    Discovery  of  documents relevant to the figures contained in this table should obviously be a matter in respect of which counsel should be able to reach agreement.   I do not anticipate that any further discovery will be required in respect of current account payments made to the first defendant.

[28]     In order to deal with the issues raised in paragraph 5(b), it will now be necessary for the defendants  to  ascertain  the extent to  which  they still  wish  to advance arguments based on the matters referred to in their barrister’s letter dated

29 August 2013 to Ms Greenwood.  Once these issues have been identified, counsel should confer in order to ascertain whether they can reach agreement regarding the scope of discovery in respect of those issues.  If they cannot reach agreement, they should file a memorandum to that effect and I will schedule a short hearing to deal with those issues.

[29]     Once  discovery  has  been  resolved  in  relation  to  these  issues,  it  will  be necessary to conduct a further hearing so that all outstanding matters in dispute, including costs, can be finally determined.

Costs

[30]     In earlier hearings counsel for the plaintiffs has indicated that the conduct of the  defendants  may result  in  the plaintiffs seeking  an  order  for increased  costs against the defendants when costs are finally determined.  Counsel for the plaintiffs seeks an order fixing costs for today’s hearing, however, and I consider that to be appropriate.  I take the plaintiffs to have been largely successful in relation to today’s hearing, because they successfully countered the defendants’ submission that the valuation methodology should be reopened.  They have also successfully resisted the defendants’ application for discovery orders in respect of their own current accounts as well as other matters not covered by the discovery directions I have made.

[31]     I therefore propose to fix costs at this stage, but will not award increased costs.  The plaintiffs are entitled to costs on today’s hearing on a Category 2B basis, together with disbursements as fixed by the Registrar.

Next event

[32]     I would be grateful if counsel could liaise over the next two weeks in an endeavour to reach agreement regarding the scope of discovery.  They should then file a joint memorandum no later than 15 July 2014 to update the Court as to the position in that regard.  I will then make such directions as may be appropriate, or I

will schedule a telephone conference to deal with outstanding issues.

Lang J

Solicitors:

Andrew Lemalu, Auckland
Fisher Lamberg, Auckland

Counsel:

M I S Phillips, Auckland
R J Hollyman, Auckland