Bi v Westcoast Mining Ltd

[2019] NZHC 860

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2019-418-003

[2019] NZHC 860

UNDER

the Companies Act 1993 and Part 18 of the High Court Rules 2016

IN THE MATTER OF

an application for relief under section 174 of the Companies Act 1993

BETWEEN

JIANTAO BI

Plaintiff

AND

WESTCOAST MINING LIMITED

First Defendant

GOLDEN COAST HOLDING LIMITED

Second Defendant

CHAO ZHANG

Third Defendant

MINGHOU ZHANG

Fourth Defendant

Hearing:

16 April 2019

Appearances:

R A Hearn for Plaintiff

J V Ormsby for Third Defendant

Judgment:

17 April 2019

JUDGMENT OF COOKE J

[Interim relief]

[1]    In these proceedings the plaintiff, Jiantao Bi alleges that the fourth defendant, Minghou Zhang and his nephew, Chao Zhang (the third defendant) have engaged in oppressive or unfairly discriminatory/prejudicial conduct in the manner contemplated by s 174 of the Companies Act 1993 (the Act) in relation to the first and second

BI v WESTCOAST MINING LIMITED [2019] NZHC 860 [17 April 2019]

defendants,  in  which  the  plaintiff  and  third  defendant hold shares.    The present application is an application for interim orders pending the substantive fixture.

Background

[2]    The business venture that the parties were engaged in involves gold mining on the West Coast. The plaintiff owned gold mining permits, and he and the third/fourth defendants decided that they should work together to try and build a gold mining enterprise. There is no written agreement between them, but the plaintiff says that he was to have a 20 percent stake with the third/fourth defendant having an 80 percent stake, and that he would be a director and employee. The plaintiff and fourth defendant first met in April 2016 with initial arrangements being established in November 2016 with mining commencing in May 2017.

[3]    The venture has not been successful. The position between the parties has deteriorated. The plaintiff alleges that the defendants decided to close the mine in late September 2018, and that he was removed as a director in October 2018. It is then alleged that the defendants decided to issue further shares. The defendants say this is being done to raise new capital for the business, and the plaintiff says this has the effect of diluting his shareholding, or placing him under financial pressure.

[4]    On 11 February 2019 the plaintiff filed an interlocutory application without notice for interim relief. It was granted in the following terms:

(a)The first and second defendants are restrained from proceeding further with the share issue dated 21 January 2019, or taking steps to commence any other share issue, until further order of this Court.

(b)The first and second defendants, and their subsidiary companies Gold Mining Services Limited, Greid Minning Limited, Arahura Resources Limited and King Solomon Gold Limited, are each restrained from commencing or resuming any mining activities until further order of this Court.

(c)The first and second defendants, and their subsidiary companies Gold Mining Services Limited, Greid Minning Limited, Arahura Resources Limited and King Solomon Gold Limited, are each restrained from disposing or otherwise dealing with their assets until further order of this Court.

[5]    Those orders were granted on an interim basis until 11 March 2019, and on the basis of the proceedings be served forthwith and given a prompt call-over. They were listed for first call on 18 February 2019. The interim orders were varied at that stage so that they were in the following terms:

(a)The first and second defendants, and their subsidiary companies Gold Mining Services Limited, Greid Mining Limited, Arahura Resources Limited and King Solomon Gold Limited, are each restrained from disposing or encumbering any non-current assets including mining permits until further order of this Court.

[6]    The plaintiff now pursues the application for interim orders originally filed by him. He seeks the orders that were originally granted by the Court, subject to the restraints in paragraphs [4](a)–[4](c) above being subject to exceptions allowing he restrained parties to:

(a)pay the arms-length debtors existing as at 11 February 2019;

(b)undertaking any necessary remedial work; and

(c)attending to necessary regulatory obligations to ensure continued currency of the mining permits and land access agreements.

[7]    The third defendant opposes the continuation of interim orders, and this is the matter that I have now heard.

Approach to interim orders

[8]    The application is for interim orders under r 7.53 of the High Court Rules 2016. The test for interim relief is well established, and involves the Court considering

whether there is a serious issue to be tried, and if there is, whether the balance of convenience favours the granting of the interim relief sought. This involves the Court stepping back and assessing where the overall justice of the case lies.1

[9]    The  application  is  supported  by  an  affidavit  from  the  plaintiff  dated    11 February 2019. Two affidavits  have  been  filed  by  the  third  defendant  dated 18 February 2019 and 8 March 2019. An affidavit has also been filed by the fourth defendant dated 9 March 2019. The plaintiff has filed an affidavit in reply dated 21 March 2019. The evidence shows that there are considerable factual disputes. That includes a dispute on the nature of the original arrangement between the parties. The plaintiff says that he was to invest $5 million worth of assets in the form of gold mining permits and other tangible assets, and that the fourth defendant was to invest $20 million. The third and fourth defendants say that the assets contributed by the plaintiff were worth considerably less than $5 million, and that the original arrangement was purely between the plaintiff and the third defendant, who was to contribute only $5 million worth of capital. They say any further investment by the fourth defendant was contingent on the success of the original venture, and that it had a $20 million limit.

[10]   There are other various disputes disclosed by the affidavits which I do not need to address at this stage. But I consider the question of interim orders against this background. In accordance with the normal approach I first consider whether there is a serious issue to be tried, and then consider the balance of convenience and overall justice.

Serious issue to be tried

[11]   The plaintiff’s claim alleges oppression and unfair prejudice under s 174. The approach to s 174 is well established. It was fully articulated by Richardson J in Thomas v H W Thomas.2 Section 174 concerns oppressive, unfair discriminatory, or unfairly prejudicial conduct towards a member of the company. What is involved is an assessment of the full circumstances giving rise to the issue before the Court in light of the overall scheme and purpose of the relevant provisions of the Act. In

1      Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA).

2      Thomas v H W Thomas [1984] 1 NZLR 686 (CA). See also Latimer Holdings Ltd v SEA Holdings Ltd [2005] 2 NZLR 328 (CA).

essence the section is directed to abuse of power, or a visible departure from the standards of fair dealing. Whether there has been an abuse is considered objectively. The fact that the conduct complained of is within the powers of a defendant does not mean it is permitted if it involves such an abuse.

[12]   In advancing the case for interim relief, Mr Hearn for the plaintiff relies on the fact that the plaintiff is a minority shareholder in the companies, and that the effective control of the companies’ rests with the third and fourth defendant. Against that background he says that the following steps taken by the companies involve oppression, unfair discrimination, or unfair prejudice of the kind contemplated by     s 174:

(a)the plaintiff was removed as a director of the company and its subsidiaries. He says the exercise of power to achieved this was for an improper purpose — namely to give the fourth defendant greater effective control;

(b)the closure of the mine by the defendants, without consultation with the plaintiff, which is said to be unnecessary, causing the company added expense to resume operations; and

(c)the issue of new share capital which is said to put the plaintiff under undue financial pressure, or overwhelm his shareholding. The plaintiff says that any further need for capital should be achieved by calling it up from the defendants in other ways.

[13]   It is not necessary to address each of the elements of the plaintiff’s claim at this stage. I am satisfied that the plaintiff has an arguable case that an order should be made in his favour under s 174 on the basis that the affairs of the companies have been conducted in an oppressive, unfairly discriminatory, or unfairly prejudicial manner towards him. But it also seems to me that the claim available to the plaintiff under that section is of a particular nature, and that its nature impacts on whether any interim orders should be given or continued at this stage.

[14]   As Richardson J emphasised in Thomas, it is important in assessing claims under s 174 to not only understand how the section fits within the overall scheme and purpose of the Act, but to understand the nature and circumstances of the operations of the company that have led the situation giving rise to the application for orders under s 174. That is appropriate not only to ascertain whether the prerequisites to the making of orders arise, but also to identify the orders that are appropriately made by way of relief. This is equally true when it comes to interim orders, the purpose of which must be to preserve the ability of the Court to make effective orders at the conclusion of the substantive case, and to prevent irretrievable prejudice to an applicant that may otherwise arise.

[15]   At the outset the plaintiff and third/fourth defendant formed what can loosely be described as a joint venture. The plaintiff was to contribute the mining licence, mining assets and his mining expertise, and the third/fourth defendants were to contribute the required capital to exploit these assets. The plaintiff would only have a 20 percent shareholding. Otherwise there is plainly a factual dispute between the parties on the nature of the original arrangements. They are not recorded in any written agreement, and reliance is placed on email exchanges and other communications between the parties, which have been translated from Chinese into English in documents before the Court.

[16]   It may be that the nature of the venture between the parties is influenced by what might be described as Chinese business culture. Rather than there being an executed agreement containing precise terms regulating the relationship between them, the venture may be seen as having greater emphasis on personal relationships, and the standing of the participants. As the arrangement progressed the relative standing of the participants could alter. This may be what the third and fourth defendants are alluding to by saying there was to be a second stage of the proposed business venture. To attempt to capture the nature of that relationship in a written agreement may have involved some drafting finesse.

[17]   The reality is that this venture, whatever its true scope was, has not succeeded. The mining activities that have been engaged in have not yet been successful. The third and fourth defendants blame the plaintiff for this, but wherever the blame lies it is apparent that the venture has been unsuccessful. The third and fourth defendants

says operations have taken place at a considerable loss. The plaintiff is unsure whether this is so, but also indicates that it would not surprise him had it operated at a loss during the start-up period. More importantly the personal relationship between the parties has considerably deteriorated. Both the plaintiff and the third defendant make allegations that the other has been involved in stealing gold from the business operation. The third and fourth defendants also make allegations that the plaintiff mislead them in relation to the original arrangements. Realistically it may not be possible for the parties to continue in business together.

[18]   Even if the nature of the arrangement is as described by the third and fourth defendants the plaintiff seems to have an arguable case for relief under s 174. The third and fourth defendants now appear to be engaged in a further stage of the overall business enterprise in a manner that excludes the plaintiff. They may be seeking to do so in an attempt to preserve their investment. In doing so they have arguably unfairly excluded the plaintiff from the affairs of the companies.

[19]   The various elements that are advanced by the plaintiff to demonstrate circumstances potentially triggering the application of s 174 may be a reflection of the fact that the third and fourth defendants have assumed control. Irrespective of how precisely it came about, the plaintiff is no longer a director or employee. The mining operations have ceased as part of the third and fourth defendants’ intention to stop the existing operation, restructure matters, and then renew the mining operations in a different way. The proposed issuing of new shares is a consequence of further capital injection to establish what is effectively a new mining venture. It is arguably no longer the venture originally contemplated by the plaintiff and the third/fourth defendants.

[20]   There are no clear terms and conditions agreed between the parties that regulate what was to happen if their original joint business plan failed. But the reality is that the original venture may now need to be wound up. A person in the plaintiff’s position could insist on remaining a 20 percent owner of the venture as originally conceived. But realistically the plaintiff has not done that. What the plaintiff accepts in his claim is that the original venture has failed. But he complains that the fourth defendant is establishing a new venture using the original joint venture assets. What he seeks by way of relief is an order that the fourth defendant purchase his shares. That approach is realistic.

[21]   The third/fourth defendants cannot have it both ways. If they are to step in and take over control of the venture, and use its assets to establish a new venture, then the plaintiff needs to be compensated. The plaintiff is a 20 percent shareholder. The venture had value. It holds the mining permits and other assets that the plaintiff brought into the joint enterprise. There is the potential profit-making business associated with the permits and that venture, even though their endeavours thus far may have been unsuccessful.

[22]   In short it may be unfairly prejudicial to the plaintiff for the third and fourth defendants to take the steps they have taken without buying out the plaintiff’s interest. They may need to purchase the plaintiff’s shareholding to legitimately assume control. If they have failed to do that, then the Court may have grounds to require such an order under s 174, for example by requiring the fourth defendant to acquire the plaintiff’s shares.

[23]   The remedy that may be available under s 174 in these circumstances would be financial, and if the action is successful will most likely involve an order requiring the plaintiff’s shares to be acquired. The flexibility involved in the application of s 174 is relevant to the remedial orders that could be granted. In Sturgess v Dunphy the Court of Appeal said:3

[148] Wrong and remedy are closely linked. As Richardson J put it in Thomas, it is the unfairly detrimental effect of the conduct on the complaining member that brings the remedy into play. The remedy responds to that detriment, and the court acts for remedial, not punitive, purposes. The most common remedy is a buyout order, presumably because the cases usually involve tightly held companies or quasi-partnerships in which the members can no longer do business together. When fixing the price the court will adopt a valuation methodology designed to achieve fair market value, which is normally defined as the price that an informed buyer would pay. It assumes no discount for minority status.

[24]   The remedy should accordingly correspond to the detriment. Here the market value of the plaintiff’s shares may be affected by the adverse financial performance of the business so far. The fact that the plaintiff would be only entitled to 20 percent of the shares may not be conclusive as to what is an appropriate award for his effective exclusion from the new venture, and the taking of the old venture’s assets. The point

3      Sturgess v Dunphy [2014] NZCA 266 at [148] (footnotes omitted).

is illustrated by the fact that there be no business at all without the plaintiff’s mining permits and other assets. It is possible that the value of the permits alone is greater than a 20 percent share in the companies. But the plaintiff contributed the permits to the venture. It is arguable that such factors may need to be taken into account in the grant of relief under s 174, and may involve adjustment to the market value of the 20 percent, or alternatively additional compensation under s 174(2)(b) to ensure that the remedy corresponds to the true detriment suffered by the plaintiff. I do not have any view on the strength of such arguments. The factual disputes prevent me from doing so at this point. But the key point is that the relief that can be granted is flexible enough to deal with these eventualities.

[25]   For those reasons I conclude that there is an arguable case that the plaintiff is entitled to relief under s 174.

Balance of convenience and overall justice

[26]   Although the plaintiff has demonstrated an arguable case, that does not mean that interim orders are appropriate. As Mr Ormsby submitted for the third defendant, the balance of convenience factors, and overall justice, are of significance. As he pointed out, the plaintiff seeks a financial remedy in these proceedings — effectively an award of damages, albeit that the precise remedial order may involve a purchase of the plaintiff’s shares. I do not accept his submission that this means that interim relief preventing the defendant taking particular steps cannot be granted. There may well be circumstances where taking further steps that appear prejudicial to a plaintiff could be appropriately stopped pending a trial, even when only financial relief is sought, simply to preserve the status quo. But it is clearly a relevant consideration.

[27]   In the present case the fact that the plaintiff is ultimately seeking a financial remedy only is largely determinative of the application for such orders in my view. That is certainly the case with respect to the application for an order preventing the defendants from resuming mining activities. Such an order would adversely affect the defendants in a significant way, and it would also affect third parties, such as the contractors who were going to work at the mine. That is so notwithstanding the complex provisos now proposed by Mr Hearn.4 It is also relevant that the plaintiff’s

4 See [6] above.

case is that the defendants acted improperly by ceasing mining activities in the first place. For these reasons such an order should not be made.

[28]   An order preventing the defendants from proceeding with their share issue is more evenly poised. Preventing that step would not realistically prevent the defendants from raising further funds for the new venture. It would just prevent those funds being injected by way of an issue of shares. The issue of shares will dilute the plaintiff’s relative shareholding. He can argue that this should not happen before the resolution of the issue of the acquisition of his shares.

[29]   I asked Mr Hearn what prejudice would arise for the plaintiff if the interim orders were not made and the matter proceeded to trial. He indicated that the plaintiff did not trust the defendants in relation to the activities of the companies in the meantime. But given the plaintiff is not seeking to have a continued involvement in these activities, any such steps can properly be taken into account by the Court when it comes to remedy. Indeed the normal approach would be to assess the value of the plaintiff’s shareholding at the time he was excluded in September or October 2018. There could be flexibility about the date of the valuation to do justice. Mr Ormsby also accepted that the Court exercised flexibility in relation to the buy-out remedy. It would not necessarily be constrained by valuation methodologies employed by accountants. What would be most important would be to do justice in the circumstances.

[30]   Even if the issuing of shares is held to be a further step in conduct that may be regarded as unfairly prejudicial in accordance with s 174, the Court would still be in a position to fashion the remedy to address this. Proceeding with the share issue neither prevents the Court from granting effective relief, nor has a detrimental effect on the plaintiff that in a way cannot later be remedied.

[31]   It is appropriate for the Court to be realistic about the current situation. It is reasonably apparent that the plaintiff seeks interim orders to achieve some negotiation leverage. In effect the third and fourth defendants have exercised powers in a way that has excluded the plaintiff, and left him in an apparently weak negotiation position. This commencement of proceedings, and the application for interim relief are an understandable reaction. But provided that the ultimate remedy the Court grants in

the proceedings takes proper account of the wider circumstances, it is not appropriate to grant interim orders simply to give the plaintiff back some of the negotiation power that has been taken away from him.

Conclusion

[32]   For these reasons I have concluded that interim relief should not be continued. The interim orders presently in place are accordingly discharged, and the plaintiff’s further application for such orders is dismissed.

[33]   It would normally be appropriate to award the third defendant costs on his successful opposition to the interim orders. However, in the particular circumstances of this case I do not do so. The plaintiff is being excluded from the operations of the companies in a way that give rise to an arguable case that s 174 applies. An application to the Court to prevent such conduct continuing was understandable. It seems to me that the Court should consider the question of costs of the interim relief applications when it determines the outcome of the substantive application itself. It is possible after consideration of the overall merits of the case that the Court could conclude that the applications for interim relief should be treated as costs in the cause, or that they should lie where they fall. Much may depend on the outcome of the factual disputes apparent from the affidavits. Accordingly I adjourn the question of costs so that it is determined by the trial Judge.

Cooke J

Solicitors:

Corcoran French, Christchurch for Plaintiff RVG Law, Christchurch for Third Defendant