Aveyard v Kakariki Proteins Ltd

[2020] NZHC 2904

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE

CIV-2019-454-90

[2020] NZHC 2904

BETWEEN

ELIZABETH JANE AVEYARD,

STEPHEN ERIC DAHLENBURG and HARKNESS & PETERSON TRUSTEES LTD
Applicants

AND

KAKARIKI PROTEINS LTD

First Respondent

RONALD ADRIANUS TURK

Second Respondent

Hearing:

16 October 2020

Appearances:

D Calder and C Houlahan for applicants No appearance for first respondent

M Harris and M Ho for second respondent

Judgment:

5 November 2020

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]                 This is an application by the trustees of the Dahlenburg Family Trust pursuant to s 165(1) of the Companies Act 1993 for leave to bring proceedings in the name of the first respondent, Kakariki Proteins Ltd, against the second respondent, Mr Ronald Turk. The trustees own 50 per cent of the shares in Kakariki. The other 50 per cent are owned by Mr Turk (as to one share) and a company by the name of Turks Poultry Farms Ltd (in which Mr Turk is a minority shareholder) as to the balance. Mr Stephen Dahlenburg and Mr Turk are the two directors of Kakariki. Mr Dahlenburg manages the concern.

AVEYARD v KAKARIKI PROTEINS LTD [2020] NZHC 2904 [5 November 2020]

[2]                 Kakariki was incorporated in January 2007, with the shareholding and directorships already described. It is in the business of producing  animal  feed. Turks Poultry Farm is both a supplier and a customer — it supplies raw material for this process and buys animal feed.

[3]                 From the outset, Kakariki’s governance and management has been of an informal nature, with no regular shareholder or board meetings. Mr Dahlenburg and Mr Turk have known each other for some time and, until comparatively recently, appear to have worked well together. Kakariki has been and is a successful concern. In mid-2019 Turks Poultry Farm was facing cashflow difficulties. It needed to raise funds to pay growers for feed as a matter of urgency and was having difficulty doing so. Its own bankers, Rabobank, were not prepared to extend further credit. Mr Turk, who, aside from his governance role with Kakariki, is involved in the management of Turks Poultry Farm, conceived of the notion of using Kakariki to raise funds needed by Turks Poultry Farm from BNZ, Kakariki’s bankers.

[4]                 On Monday 3 June 2019 Mr Turk rang Mr Brian Henderson who was apparently the BNZ executive who dealt with Kakariki and “asked if he could start the process of having the loan documents drawn up. Brian said he would. He also offered, unprompted, for BNZ to set up an overdraft facility until the paperwork was done and which would allow the loan to be drawn down immediately. I was happy to agree to this. While the overdraft facility carried a higher interest rate (10.95 per cent) I only expected this to be in place for a couple of weeks until the loan paperwork was completed, and it meant that [Turks Poultry Farms] could immediately start to pay its growers”.

[5]                 It is common ground that in July 2019 the BNZ uploaded a $2.5 million overdraft facility for Kakariki, that Mr Turk in his capacity as one of the directors procured the company to draw down on that facility, and then immediately arranged for it to be transferred to Turks Poultry Farm.

[6]                 There is a direct clash of evidence as between Mr Dahlenburg on the one hand and Mr Turk on the other hand as to whether the proposal that Kakariki borrow

$2.5 million for the benefit of Turks Poultry Farm was agreed to by Mr Dahlenburg.

Mr Turk’s evidence is that he rang Mr Dahlenburg on Sunday 2 June 2019 and proposed the idea of Kakariki taking out a loan to assist Turk’s Poultry Farm. He says that Mr Dahlenburg agreed there and then. For his part, Mr Dahlenburg, whilst accepting that Mr Turk rang him, denies that during the telephone discussion Mr Turk proposed anything of the sort. His evidence is that he knew nothing whatsoever of any proposal that Kakariki should borrow funds to assist Turk’s Poultry Farm until mid-August 2019 when he received a letter from solicitors instructed on the transaction.

[7]                 Whilst the clash of evidence between Mr Turk and Mr Dahlenburg relating to what was discussed during the 2 June 2019 telephone conversation cannot be resolved on untested affidavit evidence, as Mr Harris submitted, there must be some doubt around the accuracy of Mr Dahlenburg’s recollection of events because, although he denied any knowledge whatsoever of any proposed lending arrangements prior to   20 August 2019, in his affidavit evidence Mr Turk was able to refer to an email dated 16 July 2019 from CS Law to both directors attaching a letter of the same date describing the proposed loan arrangements in some detail.

[8]                 For present purposes, it may not be necessary to take this point any further, and nothing may turn on it. This is because Mr Turk’s evidence, put at its very highest, is that what he discussed with Mr Dahlenburg during their telephone conversation was the prospect of arranging a formal loan. Even if Mr Dahlenburg had agreed to that proposal, he would still be entitled to expect that nothing would be set in concrete so as to expose Kakariki to any risk without all of the formalities being completed. At very least, these required a shareholders’ resolution (this being a major transaction), the board’s agreement to the terms of the loan and the terms of any on-lending arrangements between Kakariki and Turks Poultry Farm. What Mr Turk did was arrange and put in place an overdraft and then on-lend the monies to Turk’s Poultry Farm immediately with none of those formalities or protections completed.

[9]                 So, even on Mr Turk’s version of events, it would be open to Kakariki to contend that Mr Turk breached his obligations as a director.

[10]              In this application, and more particularly in the draft statement of claim accompanying it, the trustees level a series of allegations against Mr Turk in relation to these events. What they say is that in taking the steps that he did Mr Turk breached his statutory obligations as a director of the company contained in ss 131, 133, 134, 136 and 137 of the Companies Act, and his common law, or, rather, equitable, fiduciary responsibilities to the company by committing it to a loan in the sum of $2.5 million in the form of an overdraft without going through the necessary formalities and then transferring those monies to Turks Poultry Farm without any protection, thus exposing Kakariki to significant risk.

[11]              It seems to me that whether or not Mr Turk proposed to Mr Dahlenburg or not during their telephone conversation is only marginally relevant to the claim as formulated.

[12]              The more formal loan arrangements, originally discussed by Mr Turk with the BNZ’s Mr Henderson, that would replace the overdraft arrangement, were never implemented because Mr Dahlenburg refused to sign the documentation. Furthermore, because of the dispute that arose, Turks Poultry Farm made arrangements to repay the $2.5 million to Kakariki enabling Kakariki to discharge the overdraft, and Turks Poultry Farm has compensated Kakariki for the costs involved so that Kakariki is not out of pocket at all.

[13]              Accordingly, it is common ground that Kakariki has no monetary claim, and its draft statement of claim seeks one substantive remedy, that is to say an order removing Mr Turk as a director on the grounds of breach of his obligations to the company.

[14]              The trustees as Kakariki’s shareholders have already commenced proceedings pursuant to s 174 of the Companies Act alleging oppression. In that proceeding they claim the same remedy, that is to say an order for the removal of Mr Turk, together with an order that the 50 per cent shareholding in Kakariki not owned by them be transferred to them.

[15]              The factual foundation for both the existing proceeding and the proposed derivative action are the same – word of word, and, as already said, they both seek an order for the removal of Mr Turk as a director of the company on the ground that he has breached his obligations to Kakariki. The only substantive difference between the two proceedings then is that in the shareholders’ proceeding pursuant to s 174 the trustees claim an order for the transfer of Turk’s Poultry Farm’s shares.

[16]              The essential argument advanced on behalf of the trustees in support of this application is that the duties Mr Turk is alleged to have breached are duties owed primarily to the company as opposed to them as shareholders.

[17]              The leading authority, invariably cited in relation to applications pursuant to  s 165, is Vrij v Boyle.1

[18]              In that case, Fisher J emphasised that the ultimate question is whether the Court should grant leave having regard to the interests of the company. His Honour analysed the statutory criteria set out in s 165(2), and confirmed that the Court was entitled to take into account any other relevant criteria in particular cases.

[19]              Section s 165(3) provides that the Court should only grant leave where the company does not intend to commence and prosecute proceedings or, if it does, that its interests would be better served should the prosecution of those proceedings be in the hands of parties other than the shareholders and directors. In this case, there is no prospect of Kakariki commencing a proceeding of the type contemplated. The company is deadlocked at both the ownership and governance levels.  Accordingly,  s 165(3) cannot operate so as to bar the Court granting leave in this case.

[20]It is necessary then to examine the statutory criteria in s 165(2).

[21]The first criterion is the merits of the proposed proceeding.

[22]              Obviously, at this stage, the Court is not in a position to determine the merits. All it can do is seek to gain an impression on the basis of the affidavit evidence. The

1      Vrij v Boyle [1995] 3 NZLR 763.

key point in this case is that, on any view — indeed, even on Mr Turk’s evidence — the steps he took after having contacted Kakariki’s bank were taken not in Kakariki’s interests (at least not primarily) but in the interests of a third party, albeit a related third party, Turk’s Poultry Farm, and seemingly exposed Kakariki to considerable risk. After all, the company was borrowing $2.5 m from the BNZ on casual overdraft terms, not even recorded in writing at that stage, and then on-lending that to a third party, precisely because that company was unable to meet its own commitments, without any written record and without any security at all. My preliminary view is that, even if Mr Turk’s evidence as to having floated the idea of a loan with Mr Dahlenburg and received a favourable response from him in the first instance were accepted, Mr Turk’s subsequent actions constituted a breach of his core responsibilities as a director.

[23]              Having said that, it is important to record that that does not necessarily translate into a viable claim, because, as it has turned out, Kakariki has not suffered any financial loss. What the trustees say is that whilst Kakariki may not have suffered a financial loss they nevertheless have a viable claim, based on Mr Turk’s alleged breaches of his responsibilities as a director, for his removal. I agree. Accordingly, in my view, the first criteria points in favour of granting leave.

[24]              The second statutory criterion concerns the costs of the proceeding. During the course of the hearing I discussed the costs issue with counsel. Although it is of course impossible to predict with precision what the costs of litigation might be, neither Mr Calder for the trustees nor Mr Harris for Mr Turk disagreed with my preliminary assessment (based on a calculation of 2B costs for a trial, and adding a further sum to cover interlocutory steps and reflect the fact that 2B costs are only intended to reflect two thirds of the objectively assessed costs) that the costs of trial would be between $75,000–$100,000.

[25]              Mr Calder made two important points in relation to the costs issue. First he said that it was the expectation of the trustees that any derivative action would be joined with the existing proceeding they have commenced pursuant to s 174 so that the marginal cost of the derivative action would be considerably less. I accept that. But I accept also Mr Harris’ point that although the marginal cost of the proposed derivative action would be much less than the costs of a stand-alone action, there

would still be a (more than negligible) cost. As Mr Harris submits, examining this criterion on the basis of financial considerations alone, it would be hard to contend for the company incurring any cost at all given that it has no prospect of recovering damages. However, as already said, this case is not about the recovery of damages. It is viewed, by the trustees at least, as being about the removal of a director who has demonstrated a cavalier attitude to its interests and subordinated those to the interests of a third party.

[26]On balance I am inclined to regard this as a neutral factor.

[27]              The third statutory criterion requires the Court to take into account any action already taken by the company to obtain relief. Whilst the company itself cannot take any such action, there is obviously the proceeding commenced by the trustees pursuant to s 174 for relief that subsumes the only relief that would be available to the company in this derivative action. This appears to me to be an important point. I will return to it in dealing with non-statutory considerations.

[28]The fourth and final statutory criterion is:

The interests of the company … in the proceeding being commenced …

[29]In the end, this appears to me, to be the dispositive point.

[30]              As to non-statutory factors which might be of significance, there seem to me to be two.

[31]              There is first the interrelationship in this case between the proposed derivative action and the proceeding already commenced by the trustees pursuant to s 174.

[32]              Mr Harris submitted that, given the absolute coincidence between the factual bases for the two proceedings, the alleged breaches of duty to the company owed by Mr Turk pleaded in both proceedings, and the fact that the relief that it is proposed the company would seek in the derivative action is in precisely the same terms as the relief sought in the trustees’ action pursuant to s 174, no useful purpose would be served by the Court granting leave to the Dahlenburg interests to commence a second

proceeding. To put it bluntly, everything that they anticipate being able to secure in the proposed derivative action could be secured in the s 174 proceeding.

[33]              In response to that Mr Calder submitted that the vital difference between the two proceedings is what the plaintiffs in the two proceedings would be required to establish in order to be entitled to relief. He submitted that in the proposed derivative action the company would simply need to establish Mr Turk’s breach of his responsibilities to place itself in a position to seek an order for his removal as a director. He contrasted that with proceedings pursuant to s 174 where he said that a plaintiff needs to establish not only the breach but also corresponding prejudice to the plaintiff shareholders and that it is just and equitable that the relief sought be granted.

[34]              In my judgement, if the trustees were, in the context of their s 174 proceeding, to establish the breaches alleged in that proceeding (and also in the proposed derivative action) and that those breaches were sufficiently serious to justify the making of an order removing Mr Turk as a director, it would follow – almost as night follows day

—  that they would have a foundation for contending that they had been prejudiced and that it was just and equitable to make such an order. In short I do not accept the submission made on behalf of the Dahlenburg interests that there is a measurable risk of the company being able to establish a basis for contending for the removal of     Mr Turk as a director but the trustees not being unable to do so in their s 174 proceeding.

[35]              The second non-statutory criterion raised in argument was whether the trustees have an ulterior purpose in seeking leave to commence a derivative action in the company’s name — which I take to mean a purpose other than the best interests of Kakariki.   Mr  Harris   submitted  that  it  is  clear  that  what  the  trustees  (and    Mr Dahlenburg) are after, is complete ownership and control of Kakariki Protein. This he said was plain from their prayer for relief in their proceeding pursuant to s 174 where they seek an order requiring the transfer of the shares owned by Turks Poultry Farm to them. I can see that that may be an objective but to categorise it as ulterior seems to me to be a misnomer. It is simply a further motivation over and above the more modest (and I might add somewhat more realistic) claim made in both proceedings for the removal of Mr Turk as a director.

[36]I do not regard this as an influential factor in the determination.

[37]              Cases such as Needham v EBT Worldwide Ltd indicate that it is also necessary to consider the costs issue in a slightly different context.2 For the Dahlenburg interests Mr Calder said that they were prepared to abide by an order that required them to fund the proposed derivative action, on the basis that at the conclusion of the litigation the Court could deal with costs. I do not regard this as a relevant consideration. It simply involves deferring a determination as to costs rather than alleviating the costs risk as far as the company is concerned. In any event, the fact an applicant is prepared to fund the proceeding will not always be a determinative factor.3

[38]              In the end, the dispositive issue in this case appears to me to be whether a claim by the company would offer anything that could not be achieved in the s 174 proceeding. Put another way, why does the company need to commence a proceeding?

[39]              Of course, there is a conceptual difference between the two proceedings.  A   s 165 proceeding would focus on Mr Turk’s duties as owed to the company, whereas the s 174 proceeding will focus on conduct that is or is likely to be oppressive to shareholders. However, from a purely pragmatic perspective, I am not convinced that a conceptual difference — particularly where the company has not suffered any loss

—  is enough to justify the bringing of the 165 proceedings.

[40]                Beyond a potential (and probably symbolic) declaration that Mr Turk breached his duties to the company, I cannot see the value in the company bringing the 165 proceedings with the relief available under the 174 proceedings if successful. Indeed, the relief available under s 174 (such as the removal of Mr Turk as a director and the transfer of his shares) is more likely to resolve the problems currently faced by the company and allow it to get on with things.

[41]              I tend to agree with the approach that focusses on the most practical jurisdictional route — 165 or 174 — rather than looking at whether there will be any

2      Needham v EBT Worldwide (2006) 3 NZCCLR 57.

3 At [74].

“duplication” of the issues to be litigated, as adopted in Vrij v Boyle.4 I think particularly in a case such as this where the dispute does not necessarily affect the company so much as the relationship between two directors and shareholders, assessing the preferable jurisdictional route is a better approach.

[42]              It should be acknowledged that in both Greymouth Holdings Ltd v Jet Holdings Ltd decisions5 — the original decision and the leave to appeal decision — the “duplication” test was favoured, with Potter J in the leave to appeal decision relying on the distinction between the two proceedings to justify allowing both to proceed.6 However, I am inclined to agree with the views of the learned authors of Company Law in New Zealand who say:7

With respect, the suggestion that there is some bright line that can be drawn between the two jurisdictions based upon the nature of the cause of action and/or the relief sought is overly simplistic. The reality is that, as occurred in Greymouth Holdings itself, claims for relief from oppression frequently have the same legal and factual basis as derivative claims; in particular, it is often the case that the basic allegation at the heart of these shareholder disputes (both those framed as a derivative action or brought as an oppression claim) is that the directors have breached their duties to the company. (footnotes omitted)

[43]              In short I am unable to see the utility in the company commencing its own proceeding — where the company has not suffered any identifiable financial loss and the 174 proceeding relies on the same legal or factual basis as the proposed action by the company would.

[44]The application is dismissed accordingly.

[45]              I reserve costs, not having heard from counsel as to these. My preliminary view is that the respondents are entitled to one set of costs on a 2B basis. If counsel

4      Above n 1. See generally Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) from 674 and Christopher Hare “Overlapping Shareholder Remedies in New Zealand: Justified Concurrency or Unnecessary Duplication?” Auckland District Law Society Seminar, Auckland, 5 September 2012.

5      Greymouth Holdings Ltd v Jet Holdings Ltd HC Auckland CIV-2011-404-5309, 10 December 2011 and Greymouth Holdings Ltd v Jet Holdings Ltd [2012] NZHC 471.

6      At [26]-[31].

7      Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand, above n 4 at 675.

are unable to resolve costs, as I would expect them to do, they may file and serve memoranda in the usual way.

Associate Judge Johnston

Solicitors:

Gibson Sheat, Wellington for applicants

Gilbert Walker, Auckland for second respondent