B W (2004) Limited v Mlouk

[2021] NZHC 1894

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2021-404-000962

[2021] NZHC 1894

UNDER

Section 143 Land Transfer Act 2017 and s 42, Property (Relationships) Act 1976.

IN THE MATTER OF

of an applicant to remove notices of claim

BETWEEN

B W (2004) LIMITED

First Applicant

AND

B W RENTALS LIMITED

Second Applicant

AND

MOHAMED KADO TURKMANI

Third Applicant

AND

SALWA MLOUK

Respondent

Hearing:

21 July 2021

Appearances:

J McCartney QC & S F Round for the Applicants

L J Kearns QC and Z L Wackenier for the Respondents

Judgment:

26 July 2021

JUDGMENT OF VAN BOHEMEN J

This judgment was delivered by me on 26 July 2021 at 3.30pm Pursuant to Rule 11.5 of the High Court Rules

…………………………

Registrar/Deputy Registrar

Solicitors/Counsel:

Jan McCartney QC, Auckland Lynda Kearns QC, Auckland Rennie Cox, Auckland Tompkins Wake, Auckland

B W (2004) LIMITED v MLOUK [2021] NZHC 1894 [26 July 2021]

Introduction

[1]    The applicants, B W (2004) Ltd and B W Rentals Ltd (the companies) and Mohamed Kado Turkmani, the sole director and shareholder of the companies, seek the removal of notices of claim lodged by the respondent, Salwa Mlouk, under s 42 of the Property (Relationships) Act 1976 (PRA), against 66 properties owned by the companies.1

[2]    Mr Turkmani is Ms Mlouk’s husband, from whom she has separated and with whom Ms Mlouk is engaged in various proceedings before the Family Court.

[3]    The applicants say Ms Mlouk has no interest in the properties capable of registration under the Land Transfer Act 2017 (LTA) and that the notices must be removed.

[4]    Ms Mlouk says she has an arguable claim to an interest in the properties, principally on the basis that Mr Turkmani is the sole director and shareholder of the companies, the notices are necessary to protect her interests under the PRA, and it is arguable that those interests include an interest in the properties.

Relevant background

[5]    Mr Turkmani and Ms Mlouk married by arrangement in Syria in February 1994. Mr Turkmani had been living in New Zealand since 1985. Ms Mlouk came to New Zealand in November 1994.

[6]    From her arrival in New Zealand, Ms Mlouk was homemaker and primary care-giver of the four children born to the marriage. She was not significantly involved in Mr Turkmani’s business ventures.

[7]    Mr Turkmani and Ms Mlouk lived initially in Wellington where Mr Turkmani and his brother, Adnan, established and operated a successful restaurant. That business was sold to purchase another restaurant, which was not as successful.

1      The properties are listed at Schedule A of Mr Turkmani’s affidavit affirmed on 13 July 2021.

[8]    In 2000, Mr Turkmani and Ms Mlouk moved to Auckland and Mr Turkmani became involved in property development.

Incorporation and operation of companies

[9]    In October 2004, Mr Turkmani incorporated Turkmani Developments Ltd (TDL). Mr Turkmani was sole director and Mr Turkmani, Adnan, and another brother, Radwan, each held one-third of the shares. Mr Turkmani says the business made some profits but stopped operating following the establishment of B W (2004).

[10]   In 2004, Adnan incorporated B W (2004) for the purpose of buying and selling properties. Adnan was the sole director and Adnan, Radwan and a Mr Tnatrh each held 1,000 shares. Mr Turkmani says that he was gifted the shares of Mr Tnatrh in December 2005.

[11]   In April 2014, Adnan incorporated B W Rentals for the purpose of holding and renting properties. Adnan was the director, and Adnan and Mr Turkmani each held 1000 shares in the company.

[12]   In April 2016, Adnan became the majority shareholder in B W (2004) to reflect the project management role  he  had  developed.  Adnan  held  2,700  shares  and Mr Turkmani held 300 shares. It appears Radwan was no longer involved in the company.

[13]   In August 2017, Adnan was diagnosed with terminal cancer. In subsequent months, Mr Turkmani took on increasing responsibilities. He became the majority shareholder in B W (2004) and held 2,700 shares while Adnan held 300 shares. He became a director of and majority shareholder in B W Rentals. He held 1,800 shares while Adnan held 200 shares.

[14]   In April 2019,  Adnan  gifted  his  remaining  shares  in  the  companies  to Mr Turkmani.

[15]   Adnan died on 2 May 2019. Following Adnan’s death, Mr Turkmani was sole director and shareholder of the companies.

[16]   According to the schedule attached to Mr Turkmani’s affidavit of 13 July 2021, B W (2004) currently owns 37 properties, which it acquired directly, and B W Rentals currently owns 29 properties, which it either acquired directly or from B W (2004). The net worth of the companies in the 2020 financial year was:

(a)       B    W    (2004):    $3,049,665    (assets:    $26,018,574    /    liabilities:

$22,968,909); and

(b)       B W Rentals: $123,589 (assets: $19,349,002 / liabilities: $19, 225,413).

[17]   When the properties are valued to market, the net value of the companies is expected to be much higher. The companies have 13 full time employees.

Separation

[18]Ms Mlouk and Mr Turkmani separated in December 2020.

[19]   Since the separation, Ms Mlouk and the three younger children have lived in a rental property in Epsom, where the family had moved in November 2018 while renovations were undertaken to what had been the family home. Those renovations have been completed and Mr Turkmani has moved back to what had been the family home.

[20]   In April 2021, Ms Mlouk obtained  a  temporary  protection  order  against Mr Turkmani in favour of herself and the three children living with her.

Notices are lodged and counsel become engaged

[21]   On 16 April 2021, Ms Kearns QC, counsel for  Ms Mlouk, sent  a letter to  Mr Turkmani informing him of the actions she wished Mr Turkmani to take for the maintenance of Ms Mlouk and for the disclosure of information. The letter also informed Mr Turkmani that, because he had threatened to leave New Zealand and move his business to Sydney, notices of claim were being lodged against the properties owned by the companies to ensure that the value of the relationship property pool was not dissipated.

[22]   There is a dispute about when this letter was received but the timing of receipt is not of any moment in this proceeding.

[23]   In May 2021, Ms McCartney QC was instructed to act for Mr Turkmani. In the following months, there were exchanges between counsel and solicitors on both sides about the validity of the notices, the appropriateness of the actions sought of Mr Turkmani, and the sufficiency and honesty of Mr Turkmani’s responses. Both sides offered what they considered to be constructive proposals to advance matters, but those proposals were not seen as such by the other side. Some of the contest would appear to relate to issues before the Family Court. For the reasons that follow, I consider there is no need for this Court to recount or make findings on those issues, although I refer to some of them below to the extent they are relevant.

[24]   It is also relevant to record that, in addition to the application to remove all the notices over the properties of the companies, Mr Turkmani applied for an urgent injunction to remove notices over three properties which were in the process of being sold. In the event, the parties, through counsel, were able to cooperate in agreeing to the removal of those notices without the involvement of the Court.

The question for this Court

[25]   The question for this Court is whether the notices lodged by Ms Mlouk against the properties owned by the companies should be removed or sustained. The answer to that question turns on whether there was a proper legal basis for the notices to be lodged and, if so, on whether the notices should be sustained having regard to the policy and provisions of the PRA.

Relevant law

[26]Section 2 of the PRA defines “property” as follows:

property includes—

(a)real property:

(b)personal property:

(c)any estate or interest in any real property or personal property:

(d)any debt or any thing in action:

(e)any other right or interest

[27]   Section 42 of the PRA provides that a claim to an interest pursuant to the PRA in any land shall be deemed to be a registrable interest for the purposes of the LTA. Notice of claim is effected by lodging a completed notice in the prescribed form. The notice has effect as a caveat under the LTA and relevant provisions of the LTA, including s 142, apply.

[28]   Under s 42(3)(a) of the PRA and s 142 of the LTA, the High Court may order that a notice of claim is removed.

[29]   Section 44 of the PRA provides that the Court may make an order of the kind set out in s 44(2) where it is satisfied that a disposition of property has been made in order to defeat the claims or rights of a person under the Act.

[30]   Consistently with well-established principles that apply to the removal of caveats, the Court of Appeal has held that in order to maintain a notice of claim the party that lodges the notice must show an arguable case in respect of the claim.2

Submissions on behalf of Mr Turkmani

[31]   Ms McCartney submits that Ms Mlouk has no claim to an interest in the properties because her relationship property claim is to property held by Mr Turkmani, and Mr Turkmani has no interest in the properties owned by the companies. The only bases on  which  Ms  Mlouk  asserts  an  interest  in  the  properties,  namely  that  Mr Turkmani is the sole director and shareholder of the companies and that relationship property was used to fund the purchase of some of the properties, do not found a claim to an interest under the PRA.

[32]   Ms McCartney says it is well-established law that shareholders and directors do not have legal or beneficial interest in the assets of a company and that notices of claim cannot be maintained against properties held by companies. This is illustrated

2      Doyle v Doyle (No 2) [2004] NZFLR 43 (CA) at [13] and [17].

by the decisions of High Court in Beric v Beric3 and Strait Views Ltd v Hannaway,4 where notices of claim against properties were removed for that reason. That principle has not been altered by the Supreme Court’s decision in Clayton v Clayton,5 as confirmed by the High Court in Pisidia Holdings Ltd v Darby.6 Where the High Court, in Unkovich v Marbeck,7 and the Family Court, in Bourne v Baker8 and Darby v Haywood,9 have maintained notices of claim against properties owned by companies, they did so on the basis of claims to a beneficial interest in a constructive trust or were wrongly decided.

[33]   Ms McCartney says Mr Turkmani accepts that some relationship property may have been used in the acquisition of properties by the companies. That relationship property interest is reflected in the value of the shares of the companies, to which  Ms Mlouk can properly assert a claim, and will be determined in a tracing exercise in the relationship property proceeding that has been commenced in the Family Court. That interest does not, however, give rise to an interest in the properties themselves.

[34]   Ms McCartney says there is no evidence that the companies were established to defeat Ms Mlouk’s relationship property interests or that they have had the effect of defeating those interests. The companies were established at Adnan’s initiative and for his own purposes. Mr Turkmani became increasingly involved in the companies as circumstances changed, in particular as Adnan’s health deteriorated, and not for relationship property reasons.

[35]   Ms McCartney says Mr Turkmani disputes Ms Mlouk’s assertions that he has failed to disclose relevant documents and has been less than honest in his disclosure of financial information. He also insists that he has no intention to move himself or his business interests to Australia and that  text  messages  with  his  daughter that Ms Mlouk says disclose such an intention have been misinterpreted. However, all of those questions are irrelevant to the question of whether Ms Mlouk has an arguable

3      Beric v Beric Holdings Ltd (1986) 2 FRNZ 522 (HC).

4      Strait Views Ltd v Hannaway (2005) 6 NZCPR 725 (HC).

5      Clayton v Clayton [2016] NZSC 29, [2016] 1 NZLR 551.

6      Pisidia Holdings Ltd v Darby [2019] NZHC 1216, [2019] NZFLR 96, at [34].

7      Unkovich v Marbeck [2015] NZHC 742.

8      Bourne v Baker [2016] NZFC 2668, [2016] NZFLR 944.

9      Darby v Haywood [2019] NZFC 6937.

claim to an interest in the properties of the companies. The notices mean that the companies cannot operate because their principal business involves the buying and selling of properties.

Submissions on behalf of Ms Mlouk

[36]   Ms Mlouk’s counsel, Ms Kearns QC, submits that, as recognised by Jeffries J in Moriarty v Roman Catholic Bishop of Auckland,10 the central purpose of s 42 is to give a non-owning spouse a weapon to prevent probable rights being defeated.

[37]   Ms Kearns submits that the decisions of the High Court that preceded Clayton pre-date the Supreme Court’s acceptance in that decision that a broader more contextual approach to the meaning of “property” is required to give effect to the principles of the PRA, that there is a need for “worldly realism” in applying the PRA and that strict concepts of property law may not be appropriate in a relationship property context.

[38]   Ms Kearns submits that the decisions in Unkovic, Bourne v Baker and Darby v Haywood show that, since Clayton, the Courts have been more inclined to sustain notices of claim in certain circumstances. The Family Court in Bourne v Baker accepted that the fact the respondent in that case was the sole director and shareholder of the company that owned the land established that he had a personal interest in the land. Darby v Haywood followed Bourne v Baker on that basis. Pisidia Holdings can be distinguished on the basis that the former partner of the party asserting the interest in the land was only a director of the company that part-owned the land, the company itself had only a two-fifth’s interest in the land and the shares of the company were held by separate company.

[39]   Ms Kearns also submits that, when assessing whether a party has an arguable claim to an interest in land, consideration must be given to the overall circumstances of the case to assess whether it is arguable that the court that later determines the relationship property claim will find that steps were taken to defeat the relationship property interests of that party and will make orders that will result in that party having

10     Moriarty v Roman Catholic Bishop of Auckland (1982) 1 NZFLR 144 (HC) at 146.

the claimed interest in the land. If it is arguable that it will, then the notices should be sustained pending that determination. The Court of Appeal in Doyle v Doyle had been prepared to take a similar course if the applicant had shown there was an arguable case that there would be serious injustice in giving effect to a separate property agreement under which the respondent had obtained the land at issue.11

[40]   Ms Kearns says the case for Ms Mlouk before the Family Court will be that the properties were acquired at least in part from relationship property and are the only tangible assets of the relationship, and that the companies were set up for the purpose of defeating Ms Mlouk’s relationship property interests. On the basis of the Supreme Court’s decision in Clayton, the Court can pierce the corporate veil and vest all the properties in Mr Turkmani, at which point Ms Mlouk will have a direct interest in the properties.

[41]   Ms Kearns also submits that the Court has a discretion as to whether to sustain or order the removal of the notices. In that regard, the Court should take into consideration that Mr Turkmani has asserted that Ms Mlouk would get nothing in a relationship property determination, has refused to disclose information necessary for Ms Mlouk to determine the size of the relationship property pool, has failed to comply with relevant undertakings and has indicated an intention to relocate to Australia.  Ms Kearns also made much of the fact that Mr Turkmani had not disclosed that he had taken out a $3 million overdraft facility shortly after undertaking not to diminish the size of the relationship property pool.

[42]   Ms Kearns submits that if the notices are removed, the prejudice to Ms Mlouk will be extreme because the value of the relationship pool would be affected if the properties were dealt with, and there is no other way of securing Ms Mlouk’s interest in the relationship property. The notices do not need to be in place for an extended period and Ms Mlouk has undertaken to cooperate when properties are to be disposed of, as she did with the three properties that were the subject of the injunction application.

11     Doyle v Doyle (No 2), above n 2, at [15].

Analysis

[43]   While notices of claim under s 42 of the PRA may be a weapon for a non- owing partner, they are useful only so far as that partner has a claim or an arguable case for a claim to an interest in land.

[44]   That a company is a separate legal entity and holds property in its own right, and that shareholders and directors have no legal or beneficial interest in the assets or liabilities of the company, are fundamental principles of company law – as recognised in Salomon v Salomon.12 The decisions in Beric13 and Strait Views14 illustrate the application of those principles in a relationship property context. I agree with Associate Judge Lester in Pisidia Holdings that the Supreme Court’s decision in Clayton does not modify those principles.15 I also consider that the analysis in Pisidia Holdings, which is expressed at the level of principle, is equally applicable in this case, notwithstanding the factual differences between the cases.

[45]   In Clayton, the Supreme Court accepted that the whole of the definition of “property” in s 2 of the PRA must be interpreted in a manner that reflects the statutory context. However, the Court’s observations about broadening traditional concepts of property were directed principally to paragraph (e) of the definition of “property”. The Court said:16

[38] We accept the submission for Mrs Clayton that the property definition in s 2 of the PRA must be interpreted in a manner that reflects the statutory context. We see the reference to any other “right or interest” when interpreted in the context of social legislation, as the PRA is, as broadening traditional concepts of property and as potentially inclusive of rights and interests that may not, in other contexts, be regarded as property rights or property interests.

[46]   In subsequent paragraphs, the Supreme Court analysed the powers and entitlements of Mr Clayton under the relevant trust deed and concluded that they amounted to a general power of appointment in relation to the trust assets.17 The Court then considered whether Mr Clayton’s powers under the trust deed amounted to

12     Salomon v A S Salomon & Co Ltd [1897] AC 22; (HL); see also Companies Act 1993, s 15.

13     Beric v Beric Holdings Ltd, above n 3.

14     Strait Views Ltd v Hannaway), above n 4.

15     Pisidia Holdings Ltd v Darby, above n 6, at [57].

16     Clayton v Clayton, above n 5, at [38].

17 At [68].

“property”. It was in that context, and having considered the differences between the PRA and equivalent regimes in other jurisdictions, that the Court observed that decisions from other jurisdictions illustrated the need for “worldly realism” and acceptance that strict concepts of property law may not be applicable in a relationship property context. It concluded that the powers under the trust deed were properly classified as “rights” that gave Mr Clayton an “interest” in the trust and its assets,18 and then concluded that the value of the trust’s powers was equal to the value of the net assets of the trust.19

[47]   The references in the Supreme Court’s analysis to “rights” and “interests” were clearly to those terms as used in paragraph (e) of the definition of “property” in s 2 of the PRA. I am satisfied, therefore, that the Supreme Court was not intending to expand the traditional concepts of “property” as set out in paragraphs (a) to (d) of that definition.

[48]   Importantly, the Supreme Court’s decision had no impact on the trust structure under consideration. The Court did not hold that the trust’s property was Mr Clayton’s property. Rather, it held that Mr Clayton had an interest that had a value equal to the net value of the trust’s assets. As Associate Judge Lester accepted in Pisidia Holdings, a successful application of the Clayton principle in the case before him did not collapse a trust so as to make property in a trust relationship property.20 Rather, Clayton established that, in certain circumstances, the net value of the assets in a trust, or potentially in a company, could be included in the relationship property pool.21

[49]   Applying that analysis to the present case, I am satisfied that, in accordance with long-established principles, the fact that Mr Turkmani is sole director and shareholder in the companies does not give Mr Turkmani a legal or beneficial interest in the properties of the companies. It follows that, if Mr Turkmani does not have a legal or beneficial interest in the properties, neither does Ms Mlouk. To the extent that Bourne v Baker and Darby v Haywood say that a sole director and shareholder of company has a personal interest in land owned by the company, by virtue of being a

18 At [80].

19 At [107].

20     Pisidia Holdings Ltd v Darby, above n 6, at [32].

21     At [32] – [33].

sole director and shareholder, they are wrong. The constructive trust analysis employed in Unkovic and Bourne v Baker has no application in this case because the companies hold the properties as company assets and not on behalf of anyone else.

[50]   While Clayton has yet to be applied in the context of a company, I accept that it is possible to argue that the powers of a sole director and shareholder over a company that owns assets that, but for the company structure, would have been relationship property, are themselves relationship property. That is, in effect, what Ms Kearns argues when she says that Mr Turkmani’s control over the companies is such that the properties of the companies should be regarded as Mr Turkmani’s properties. The difficulty with that argument is that, even if that analysis were accepted, the result would not be a piercing of the corporate veil and a collapsing of the company structure as Ms Kearns submits should be the case. Clayton does not support such an outcome, as the Court of Appeal confirmed in Heazlewood v Joie De Vivre Canterbury Ltd,22 albeit in relation to its own decision in Clayton.23

[51]   The result might be that the value of the properties was included in the relationship property pool. That would not mean, however, that Mr Turkmani had a legal or beneficial interest in the properties such as to give rise to a claim to a relationship property interest in those properties by Ms Mlouk.

[52]   I do not accept, therefore, that Ms Turkmani has an interest in the properties now, or that she has an arguable case to such an interest if she were able to persuade the Family Court that the company structure had been put in place in order to defeat Ms Mlouk’s relationship property. Leaving aside the significant challenge that the history of the companies poses to persuading the Family Court to reach that conclusion, there is nothing in Clayton that suggests that the Family Court could use its powers under s 44 of the PRA to sweep aside the company structures and hold the companies’ properties to be the properties of Mr Turkmani. Nor would there be any policy reason for doing so where, as here, it is accepted there is a relationship property claim to the shares which themselves represent the net value of the companies’ assets.

22     Heazlewood v Joie De Vivre Canterbury Ltd [2015] NZCA 213, at [53].

23     Clayton v Clayton [2015] NZCA 30.

[53]   For these reasons, I am satisfied that Ms Mlouk does not have an interest under the PRA in the properties of B W (2004) and B W Rentals that is registrable for the purposes of the LTA.

[54]   As Ms Kearns notes, s 142 of the LTA confers a discretion on the Court to decide whether to remove a notice of claim. However, I am satisfied where the Court finds that there is no proper basis for the claim, as is the case here, the correct course is to order the removal of the notices.

[55]   I am reinforced in that view by the number and scope of the notices that have been lodged and the nature of the business that has been affected by the notices. I accept that the notices constrain the companies from their normal business activities, which include the buying and selling of properties.

[56]   I accept that Ms Mlouk is in a vulnerable position and her interests need to be protected. I understand Ms Mlouk’s concern that the properties will be sold and the cash diverted elsewhere. If there is a serious risk of this happening, there may be other steps that Ms Mlouk can take to protect her interests. They do not include, however lodging notices of claim against properties held by companies.

Result

[57]   I grant Mr Turkmani’s application and order the removal of the notices of claim lodged against the 66 properties listed at Schedule A of Mr Turkmani’s affidavit affirmed on 13 July 2021.

Costs

[58]   Mr Turkmani is entitled to costs on a 2B basis. If counsel are unable to agree costs, they may submit memoranda of no more than four pages.

G J van Bohemen J