Barber v Green Cabs Limited HC Wellington CIV-2010-485-2221
[2011] NZHC 118
•16 February 2011
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2010-485-2221
BETWEEN STEVEN BARBER AND JULIE BARBER Plaintiffs
ANDGREEN CABS LIMITED Defendant
Hearing: 11 February 2011 (Heard at Wellington)
Counsel: M. Smith - Counsel for Plaintiffs
G. Pearson and C. Milner - Counsel for Defendant
Judgment: 16 February 2011 15:00:00
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment was delivered by Associate Judge Gendall on 16 February 2011 at
3.00 pm under r 11.5 of the High Court Rules.
Solicitors: Michael Smith, Solicitors, PO Box 16002, Wellington
Duncan Cotterill, Solicitors, PO Box 10376, Wellington
S & J BARBER V GREEN CABS LIMITED HC WN CIV-2010-485-2221 16 February 2011
Introduction
[1] On 8 November 2010 the plaintiffs, who are minority shareholders in the defendant company, Green Cabs Limited, brought proceedings seeking an order to place the defendant into liquidation. On 12 November 2010, the defendant applied to strike-out the plaintiffs’ liquidation proceedings or, alternatively, for an order for security for costs. The plaintiffs in their liquidation application claim that the defendant has persistently and seriously failed to comply with the provisions of the Companies Act 1993, and that it is just and equitable that the defendant be placed into liquidation.
[2] This proceeding is the third application for an order for liquidation brought against the defendant since July 2010. The other two applications were either struck out or withdrawn.
[3] The hearing of the present applications before me occurred on 11 February
2011. Following the hearing, I reserved my decision on the defendant’s applications but made an interim order restraining publication of any advertisement of the plaintiffs’ liquidation application, and of any information relating to the statement of claim or any other document in this proceeding.
Background Facts
[4] The defendant company was incorporated on 23 February 2007 and carries on business as a taxi operator. Mr Callum Brown (Mr Brown) is currently its sole director. The plaintiffs are shareholders in the company. They jointly hold 2,500, or
2.17 per cent, of the company’s shares. The plaintiffs were also parties to an independent driver’s contract with the defendant, through their company BFG NZ Limited, but this contract was terminated for alleged misconduct on 21 September
2010.
[5] The plaintiffs allege mismanagement of the defendant company and non- compliance with the Companies Act 1993. Mr Brown acknowledges that there have
been some Companies Act 1993 compliance issues. However, he says that these were caused in large part by Ms Margaret Gerbes (Ms Gerbes), who was the company’s CEO until mid 2010, and that there has been an extensive and ongoing investigation into the company’s affairs since. Apparently, the police are currently investigating complaints against Ms Gerbes in relation to her management of the defendant company.
[6] As an aside, on 3 July 2010, the plaintiffs, together with some other shareholders, appointed a Mr Graham Edward McCready (Mr McCready) to act as their “advocate”. Mr McCready, who was not a shareholder in the defendant company at that time, served liquidation proceedings on the defendant on 6 July
2010. These were struck out on the basis that Mr McCready had no standing to bring the proceedings. Mr McCready then issued another set of proceedings, alleging breaches of s 27 of the New Zealand Bill of Rights Act 1990 and defamation; and Ms Gerbes, who had appeared in support of the first of Mr McCready’s proceedings, filed her own application to liquidate the defendant. Both of these proceedings were eventually dismissed by consent or withdrawn.
[7] The plaintiffs now indicate that they purported to terminate Mr McCready’s authority to act on their behalf on 11 October 2010. They say that they were not involved in, and had no knowledge of, any but the first proceeding brought by Mr McCready against the defendant.
[8] Mr Brown acknowledges that the defendant has experienced some recent difficulties but says now it has support from both creditors and shareholders to put the company back into a sound position. He maintains that the company has a successful business with strong cash flow, and that it is now managed actively and successfully. He says that he has engaged the help of independent professional assistance to resolve outstanding compliance issues. The company’s main creditor, the Inland Revenue Department, has agreed to accept an instalment scheme to enable repayment of arrears. And on 18 January 2011, the plaintiffs’ actions and position in the company were considered and a resolution was passed by over 90 per cent of the defendant’s shareholders asking that the plaintiffs sell their shares and discontinue proceedings against the company.
[9] Subsequently, the plaintiffs declined the offer to sell their shares, on the basis that they contended liquidation was the appropriate course for inquiry into the alleged mismanagement of the company. One of the examples of “continued mismanagement” relied upon by the plaintiffs, in addition to the allegations made in their statement of claim, relates to an order of the Disputes Tribunal in Christchurch, dated 28 January 2011, awarding $15,000 against the defendant for wrongful termination of a third party’s driver’s contract. However, the defendant confirms it opposes the claim and has applied for a rehearing of this matter on the basis that it was not aware of the claim against it and thus took no part in the Disputes Tribunal proceeding.
Parties’ Submissions and My Decision
[10] The plaintiffs’ liquidation application is made pursuant to s 241 of the Companies Act 1993. In the application, they allege that the defendant has persistently and seriously failed to comply with the provisions of the Act, in particular ss 47, 107(3), 120, 124, 134-137, 140, 189, 196(2), 208, 209 and 218. The
breaches that are alleged are said to be that:
the defendant issued 25,000 new shares that were sold to shareholders
buying the same number of shares at different prices per share;
the directors failed to enter in the interests register details of transactions
in which they were interested;
the defendant failed to hold an annual general meeting in respect of the
2009 and 2010 financial years within six months after the balance date;
and failed to hold the 2009 annual general meeting within 15 months of the 2008 annual general meeting;
the defendant filed annual returns for the financial years 2008 and 2009 stating that a unanimous resolution not to appoint an auditor was passed, when no such resolution had been put to shareholders in the 2008 meeting and two shareholders had voted to appoint an auditor at the 2009 meeting;
no annual report or general meeting has been notified for the 2010 financial year;
the defendant regularly failed to give ten working days’ notice of
shareholder meetings;
the defendant persistently acts in breach of the shareholders’ agreement
by operating with one director;
the defendant persistently failed to pay its tax obligations, creating a
serious risk of substantial loss to its creditors;
Mr Brown authorised an investment in the defendant at a time when he could not reasonably expect that the obligation would be able to be
performed;
Mr Brown failed to exercise the care, diligence and skill that a reasonable
director would exercise in the circumstances;
the company records are incomplete; and
the defendant has failed to provide copies of documents requested by the plaintiff.
[11] The plaintiffs further submit that it is just and equitable that the company be
placed into liquidation, on the basis that:
the defendant’s board fails to act in the best interests of creditors and
shareholders;
the defendant fails to keep the plaintiffs properly informed about its
activities;
the defendant fails to adhere to the notice and other requirements relating to annual general meetings, record keeping, resolutions and meetings; and
the affairs of the defendant are being conducted in a way prejudicial to
the plaintiffs and the defendant’s shareholders.
[12] Rule 15.1 of the High Court Rules provides that the defendant is entitled to
have a plaintiff’s proceeding dismissed if it:
(a) discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b) is likely to cause prejudice or delay; or
(c) is frivolous or vexatious; or
(d) is otherwise an abuse of the process of the court.
[13] The Court of Appeal summarised the general principles for dealing with an application for strike-out in Attorney-General v Prince and Gardner [1998] 1 NZLR
262:
A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed (R Lucas & Son (Nelson Mail) Ltd v O'Brien [1978] 2 NZLR 289 at pp 294 – 295; Takaro Properties Ltd (in receivership) v Rowling [1978] 2 NZLR 314 at pp 316 – 317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR 37 at p 45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2 NZLR
641); but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude jurisdiction (Gartside v Sheffield, Young
& Ellis).
[14] These principles were endorsed by the Supreme Court in Couch v Attorney- General [2008] NZSC 45, [2008] 3 NZLR 725 at [33], where it was said that it is “inappropriate to strike out a claim summarily unless the court can be certain that it cannot succeed”.
[15] The defendant advances two grounds for strike-out of the plaintiffs’ proceeding: first, that the claim as pleaded is untenable; and secondly, that the proceeding is “frivolous and vexatious”. In addressing this latter ground, McGechan on Procedure at HR15.1.05(a) describes it in the following way:
(1) Frivolous
This refers to a proceeding which is not a serious and proper use of the Court process, but trifles with it. True examples are, fortunately, rare but include Fitzherbert v Acheson [1921] NZLR 265. There, Salmond J struck out an action for damages for slander against the president of a Mäori Land Board for things he had allegedly said in the course of a Board hearing. Salmond J, at p 269, described the action as “baseless and frivolous”: whether the words had been used in a judicial or administrative capacity, no action could be maintained against the defendant. He had immunity from suit both at common law and under the relevant legislation.
(2) Vexatious
As with the “prejudice or delay” ground, all pleadings tend to vex the opponent. Again, the key is an element of impropriety. For example, a second attempt, in a fresh proceeding, to obtain summary judgment, while an earlier proceeding dealing with the same transaction remained extant after summary judgment had been declined, was treated as vexatious and was stayed until the first proceeding had been discontinued and costs paid: Registered Securities Ltd (in liq) v Yates (1991) 5 PRNZ 68.
[16] The plaintiffs contend that any dismissal of a proceeding as vexatious or frivolous requires proof of impropriety.
[17] In response, submitting that “the bona fides” of the plaintiffs is in question here, the defendant paints the plaintiffs as “disappointed parties to earlier litigation conducted through their agent, and now disgruntled shareholders of another company that has had its contract terminated”. The defendant submits that the present proceeding accordingly is brought for an ulterior purpose, and that the plaintiffs have involved themselves in a “campaign” against the defendant.
[18] The plaintiffs respond to this allegation by suggesting that the defendant has not provided any cogent and probative evidence of impropriety or prejudice, akin to an abuse of process, and that there is therefore no evidence to dispute the plaintiffs’ claims that they were unaware of all but one of the proceedings brought against the defendant. The plaintiffs also point out that the termination of their contract followed their disgruntlement with the operation of the company’s business. The defendant responds to this by saying that it is the timing of commencement of proceedings that is relevant, and that this occurred after termination of the contract.
[19] In terms of the merit of the plaintiffs’ proceeding, the defendant does acknowledge that there are some Companies Act 1993 compliance issues and that,
for the purposes of this application, the pleadings must be assumed to be correct. However, the defendant further submits that the cause of these compliance issues is highly material, asking the Court to take into account that Ms Gerbes is currently under police investigation and that professionals have been engaged now to put matters in order. Reference is made here to Southern Ocean Trawlers Ltd v Director- General of Agriculture and Fisheries [1993] 2 NZLR 53 (CA) at 62-63, where Cooke J commented:
... there is the familiar question whether the case is so clear that the proceeding should be struck out in limine; and associated with it the question of affidavit evidence. On these questions I am content to say that the factual and legal position must be established with sufficient clarity to justify the strong step of striking out. And that the circumstances in which affidavits may be considered cannot be defined in any exhaustive way. Hitherto this Court has refrained from attempting any exhaustive definition, and it would seem unwise to do so. If the facts can safely be established without an elaborate and probably inefficient exploration on conflicting affidavits, the Court should hold itself free to go beyond the pleadings. It may be important to preserve this possibility when legal proceedings are increasingly used as a vehicle to promote causes, thus giving rise to greater risks of abuse of procedure. (emphasis added)
[20] In Attorney-General v McVeagh [1995] 1 NZLR 558 at 566, the Court of Appeal provided the following summary on the role of affidavit evidence on applications for strike-out:
The Court is entitled to receive affidavit evidence on a striking-out application, and will do so in a proper case. It will not attempt to resolve genuinely disputed issues of fact and therefore will generally limit evidence to that which is undisputed. Normally it will not consider evidence inconsistent with the pleading, for a striking-out application is dealt with on the footing that the pleaded facts can be proved; see Electricity Corp Ltd v Geotherm Energy Ltd [1992] 2 NZLR 641, 645-646; Southern Ocean Trawlers Ltd v Director-General of Agriculture and Fisheries [1993] 2 NZLR
53, 62-63, per Cooke P. But there may be a case where an essential factual allegation is so demonstrably contrary to indisputable fact that the matter ought not to be allowed to proceed further.
[21] The defendant also notes that the plaintiffs make up a tiny minority of shareholders, and that it is not in the interest of creditors or of the other shareholders that the company be liquidated. The defendant submits that as liquidation is an “extreme step”, it is not the correct process for the plaintiffs to deal with their grievances here; and that there are alternative, more appropriate remedies that the plaintiffs could seek to ensure that compliance matters are fully addressed.
[22] The plaintiffs, on the other hand, suggest that the compliance issues are serious, warranting explanation and investigation, and they argue that the present management of the defendant is continuing to act irresponsibly. They endeavour to argue that the defendant’s offer to purchase their shares is an inappropriate response because it does not address the serious matters alleged and the adverse effect that those matters have had on the value of their shares. Overall, the plaintiffs submit that their proceeding raises serious and proper matters for consideration by the Court, and that the objections raised by the defendant will have to be assessed at the substantive hearing once all requisite evidence has been considered.
[23] Section 241 of the Companies Act 1993 provides that a company may be put into liquidation where the Court is satisfied that:
(a) The company is unable to pay its debts; or
(b) The company or the board has persistently or seriously failed to comply with this Act; or
(c) The company does not comply with section 10 of this Act; or
(d) It is just and equitable that the company be put into liquidation.
[24] The plaintiffs rely here on paras (b) and (d). In my view, however, the “just and equitable” ground adds little to the plaintiffs’ case, other than to emphasise the plaintiffs’ position that the company’s affairs are being conducted in a way prejudicial to its shareholders. The main allegation is that the defendant should be placed in liquidation because of non-compliance with the Companies Act 1993, and it is para (b), therefore, that I will focus on largely.
[25] In The Registrar of Companies v Northern Crest Investments Ltd HC Auckland CIV-2009-404-802, 8 June 2009, the Registrar applied for liquidation of the defendant company, mainly on the ground that there had been a persistent and serious failure to comply with s 194 of the Companies Act 1993 concerning its obligation to keep accounting records. Associate Judge Christiansen dismissed the application. He noted that much had changed since the proceeding had been filed, namely that the company was now controlled by persons who appeared “well qualified”, and that any deficiencies in the accounts had been sufficiently remedied
“from a liquidation perspective”. Any remaining issues, he said, were capable of being dealt with by the Registrar by other means. As to the Court’s discretion to refuse an order for liquidation, the Judge said at [40]:
Commonly that is exercised when there is a genuine dispute which cannot be dealt within the Companies Court, or because of the views of other creditors liquidation may be an inappropriate remedy. Usually if a remedy other than liquidation is reasonably available then the Court will normally decline to order liquidation.
[26] In that case, only two of the creditors appeared to support the application.
[27] Based on the affidavit evidence before me, at the very worst it might be said that the defendant’s breaches of the Act could fall within the “persistent and serious” category envisaged by para (b). The defendant certainly did not attempt to have the proceeding struck out on the basis that the alleged non-compliance could not be regarded as persistent and serious.
[28] However, the Court retains a wide discretion as to the remedy of liquidation, and many factors are relevant to this discretion other than that the company (or its board) has persistently or seriously failed to comply with the Act. Having carefully reviewed the information before me, I have come to the conclusion that this is not a case in which the Court could conceivably exercise its discretion to grant the application for liquidation.
[29] There are several reasons for this conclusion. First, the plaintiffs make up only a very small minority of shareholders; over 90 per cent of the company’s shareholders actively oppose the plaintiffs’ application; and there is no support for the liquidation application from creditors. It would be an extreme response, in my view, to liquidate the company in the face of such opposition.
[30] Secondly, liquidation under para (b) is a remedy of last resort. The plaintiffs have not pursued any alternative remedies. Clause 17 of the Shareholder Agreement sets out a detailed procedure for resolution of disagreements between the shareholders. Although this procedure is optional, it would at least provide a starting point for addressing the plaintiffs’ concerns. The plaintiffs submit that they do not wish to sell their shares because they want the company to be “investigated”. In fact,
they submit that liquidation is the only way to conduct a proper investigation into the company’s affairs. In my view, this submission is misconceived. There are a number of other potential remedies that could be pursued by the plaintiffs to shed light onto the dealings of the defendant and to enforce compliance with the Act (see, generally, ss 169-176 and 178-179).
[31] Thirdly, there is clear evidence that efforts are being made now to put the company’s affairs in order. Mr Paul Ryan, who is a shareholder in the company, has deposed to his involvement in this attempt in an affidavit filed in the proceeding brought by Ms Gerbes; and there is evidence from Mr Brown that, following Ms Gerbes’ departure in mid 2010, the defendant engaged a firm of accountants to determine what needed to be done to ensure Companies Act 1993 compliance. Given the evidential parameters of the defendant’s application, I make no findings as to whether all or even most of the alleged breaches have in fact been remedied. However, the evidence does suggest that this is not a situation in which the company is set on a path of continued non-compliance. This observation, being very much a forward-looking evaluation of the defendant’s willingness to put matters in order, is not inconsistent with the plaintiffs’ pleading. Nor is it inconsistent with the plaintiffs’ evidence, which is largely (though not exclusively) centred on allegations relating to a period prior to July 2010. And, in my view the Disputes Tribunal’s order relied upon by the plaintiffs, disputed as it is by the defendant, seems to me to be irrelevant here.
[32] As I see the position, it would be an extraordinary step to place the defendant company into liquidation, based on the alleged breaches that have been identified, in the circumstances just outlined. Accordingly, I am entirely satisfied that the plaintiff’s application could not possibly succeed and that it must be struck out. To leave alive what I see as an entirely untenable claim to liquidate the defendant and to allow public advertising of that liquidation application is inappropriate here. In saying that, I accept that generally it is difficult to strike out an application under s
241 purely on the basis that the Court would never actually exercise its discretion to liquidate the company, and that this exercise of discretion should ordinarily be left to a substantive hearing, but the present case is a distinct and unusual one where a robust approach is warranted.
[33] As to the defendant’s second ground of strike-out, which is that the application is frivolous and vexatious, I briefly note that as I see it, this also provides support to some extent for the decision to strike out the present proceeding. The plaintiffs’ clear involvement in Mr McCready’s first proceeding in my view does create an impression that the plaintiffs played a part in what could be perceived as a concerted but unsuccessful attempt to place the defendant into liquidation. The plaintiffs as shareholders in the defendant company represent a tiny minority and there are clearly other remedies open to them other than the extreme step of liquidation if they feel they are being oppressed or the company needs to take management or compliance steps. In addition, in my view putting the defendant into liquidation is not the correct process here and is likely to be harmful to all creditors and shareholders including the plaintiffs. Finally, the plaintiffs’ present application in my judgment is a misuse of the Court’s process in that it is difficult to escape the conclusion that it is brought for an ulterior motive simply to put pressure on the company and its current officers, it lacks merit and is effectively a re-litigation of the earlier attempts to liquidate the company.
[34] Given my conclusion that the plaintiffs’ proceeding should be struck out, I do not need to deal with the defendant’s second application which is one seeking security for costs.
Conclusion
[35] The defendant’s application to strike out the plaintiffs’ liquidation
proceeding succeeds. An order is now made striking out this proceeding CIV-2010-
485-2221.
[36] As to costs the defendant has succeeded in this strike-out application and is entitled to an award of costs. Before me counsel for the defendant mentioned that an award of indemnity costs would be sought. There were no other submissions made to me, however, regarding the issue of costs.
[37] Costs are therefore reserved. If counsel are unable to agree on the issue between themselves then they may file memoranda (sequentially) on the question of
costs and, in the absence of either party indicating they wish to be heard on the matter, I will decide the question of costs based upon the material before the Court.
‘Associate Judge D.I. Gendall’
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