Caringrace Inc v Claridge
[2016] NZHC 1704
•26 July 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-351 [2016] NZHC 1704
UNDER the Companies Act 1993 IN THE MATTER OF
an application under Section 174
BETWEEN
CARINGRACE INC Plaintiff
AND
CHRISTOPHER AND CAROL ELIZABETH CLARIDGE
First Defendants
AND
CARRICKMORE LIMITED Second Defendant
AND
JISHENG (JASON) SONG Third Party
Hearing: 18 February 2016 Counsel:
E St John for Plaintiff
J E Bayley for First Defendants
No appearance for Second Defendant
E St John for Third PartyJudgment:
26 July 2016
JUDGMENT OF CLARK J
I direct that the delivery time of this judgment is
3:00pm on 26 July 2016
CARINGRACE INC v CLARIDGE [2016] NZHC 1704 [26 July 2016]
Introduction
[1] This judgment deals with three interlocutory applications. The substantive proceeding concerns a dispute between the first defendants, Mr and Mrs Claridge (Claridge), as 50 per cent shareholders of the second defendant (Carrickmore) and the plaintiff (Caringrace) as the other 50 per cent shareholder. Caringrace is a United States holding company specifically formed to hold the shares in Carrickmore. The third party, Mr Song, is the sole director of Caringrace. Mr Song is, with Mr Claridge, a director of Carrickmore.
The background to the proceeding
[2] Mr and Mrs Claridge established Carrickmore in 2001. In 2012 they sold
50 per cent of their shares to Caringrace.
[3] The parties entered into a shareholders’ agreement in order to regulate the relationship between them once the share transfer had been completed. The business of Carrickmore was the manufacture, distribution and marketing of infant, adult, and specialist milk powders. Each shareholder agreed to use best endeavours to promote the interests, reputation and business of Carrickmore.
[4] Also in January 2012 Carrickmore entered into an agency agreement with a company related to Caringrace known as Natramall. Natramall agreed to exclusively purchase Carrickmore’s products and not to purchase competing products. Mr Song owns shares in Natramall. Natramall is involved in the importation of infant milk formula into China and generally the natural health industry.
[5] By late 2014 difficulties in the parties’ relationship had begun to emerge and in early 2015 lawyers’ letters were exchanged. Mr Song was concerned that there had been several instances where the Chief Executive of Carrickmore (Mr Claridge) had failed to respond to issues which he had raised. Those issues included questions relating to the financial statements of the company; not obtaining shareholder approval for salary adjustments or bonus payments; ignoring rules in respect of related party transactions; ignoring or avoiding implementation of resolutions of the
board; not providing information relating to expenses claimed and not disclosing particulars of processing operations as they affected the company.
[6] For their part Mr and Mrs Claridge were increasingly concerned about the use of Carrickmore’s intellectual property. They believed Caringrace, facilitated by Mr Song, failed to keep intellectual property confidential; used intellectual property for the benefit of another; failed to promote the business of Carrickmore by misusing confidential information and failed to ensure Carrickmore acquired and retained new intellectual property. These were alleged as breaches of the shareholders’ agreement. The same conduct was also said to constitute breaches of Mr Song’s duties as a director because he was engaged in establishing a parallel distribution business and an infant nutrition products company in competition with Carrickmore. Claridge considered there needed to be a separation of interests and sought to achieve that by suggesting agreement to separation or relief under s 174 of the Companies Act 1993.
[7] Suffice to say the relationship became impossibly dysfunctional and proceedings were issued. The litigation itself is fraught and its procedural journey tortuous.
Substantive claim
The plaintiff ’s proceedings
[8] Caringrace issued proceedings in May 2015. It claims the affairs of Carrickmore, under the control of Claridge, have been operated in such a way as to unfairly prejudice Caringrace. Relief is sought under s 174 of the Companies Act:
(a) placing Carrickmore1 in liquidation;
(b)in the alternative, an order that one party purchase the shares of the other for an amount to be determined by the Court.
1 The statement of claim and the subsequently amended prayer for relief both refer to the “first defendant” but this is plainly a typographical error.
[9] Caringrace also filed an interlocutory application for the appointment of an interim liquidator which was dismissed by Associate Judge Smith on 16 July 2015. Those orders are the subject of review under s 26P of the Judicature Act 1908. I address and determine that application in this judgment.
[10] In September 2015 Caringrace applied for leave to bring a derivative action. That application is not addressed in this judgment.
The first defendant’s pleadings
[11] Claridge filed a statement of defence and counterclaim in July 2015.
(a) The statement of defence pleads Claridge offered to purchase Caringrace’s shares in Carrickmore at a fair value but there has been no response nor any grounds suggested as to why such payment would not bring any oppression to an end.
(b)The counterclaim seeks an order that Claridge acquire the shares of Caringrace in Carrickmore at a fair value and a direction that the determination of a fair value should make an allowance for the damage to Carrickmore caused by the breaches which the counterclaim alleges. Further Claridge seeks removal of Mr Song as a director of Carrickmore.
[12] Claridge also issued a third party notice claiming against Mr Song that, together with Caringrace, he has facilitated the establishment of a parallel distribution business and an infant nutrition products company in competition with Carrickmore. Claridge seeks by its third party claim that Mr Song be removed as a director of Carrickmore because he:
(a) has breached his director’s duties to Carrickmore;
(b) refused to provide any explanation for his conduct;
(c) has acted in bad faith and against the interests of Carrickmore by interfering with its supplier and attempting to cause serious loss; and
(d) despite being requested to do so has refused to resign.
[13] A third mechanism by which the Claridges seek removal or restraint of Mr Song is the interlocutory application filed in August 2015 which also is determined by this judgment.
The second defendant’s position
[14] Carrickmore’s statement of defence denies that its affairs, under the control of Claridge, have been operated in such a way as to unfairly prejudice Caringrace. It opposes the orders sought on the basis that they are not in the company’s best interests.
Relevant interlocutory history
Orders of Associate Judge Smith
[15] The plaintiff’s application for the appointment of an interim liquidator came before Associate Judge Smith on 16 July 2015. The course the hearing took is outlined later in this judgment. For the purpose of setting out the background to the interlocutory applications I record that the Associate Judge dismissed the application
and made orders in the following terms (emphasis added):2
(a) The first defendants will indemnify the plaintiff for such sum as this Court might determine at the hearing of the substantive proceeding is just and equitable, limited to the cash held by the second defendant as at 16 July 2015.
(b) Within seven days of today’s date, the first defendants will provide to the Court a bank bond as security for the above indemnity.
(c) The plaintiff’s application for appointment of an interim liquidator is
dismissed, with costs reserved.
(d) The substantive proceeding is adjourned to a case management conference, on a date to be advised by the registrar. Counsel are to
2 Minute of Associate Judge Smith, 16 July 2015 at [4](a)–(f).
confer and provide a joint memorandum not later than three working days before the conference.
(e) Each party is to give standard discovery in accordance with r 8.7, within 21 days of today’s date.
(f) Leave is reserved to the parties to apply by memorandum for any clarification or variation of the foregoing terms which may be necessary.
[16] The day after the hearing before the Associate Judge the first defendants applied under order (f) for a variation of order (a) on the ground of counsel error. The proposed order handed to the Court on 16 July 2015 referred to “the cash”. Counsel said his proposal should have referred to “half the cash”.
[17] Counsel for the second defendant consented to the variation on the grounds that both she and the second defendant recollected that the indemnity was intended to be to the extent of the plaintiff’s half share of the cash held by the second defendant. Counsel said this recollection was confirmed by her handwritten notes of the discussion which proceeded on the basis that the indemnity was in respect of half the cash.
[18] The plaintiff opposed the variation because there had been no common intention that the indemnity should be limited to half the cash held by the second defendant as at 16 July 2015.
[19] The Associate Judge considered the dispute was not appropriately dealt with under the leave provision at (f) of his orders. The alteration sought was more than a clarification and went “beyond anything that might have been contemplated as a reasonable “variation”. The Associate Judge considered the proposed variation to be sufficiently substantial that it would call into question the appropriateness of the orders that he had made. His orders were not made by consent and the Associate Judge considered that the defendants’ concerns would be more appropriately pursued by way of an application to review his orders. He issued a Minute on 29 July 2015 to that effect.
[20] On 14 August 2015 Claridge filed an application:
(a) for an order removing Mr Song, or restraining him from acting, as a director of Carrickmore; and
(b)to review the Associate Judge’s decision of 16 July 2015 and seeking variation of his order [4](a) “so that the indemnity of Mr and Mrs Claridge is limited to ‘half the cash held by the second defendant as at
16 July 2015’”.
Strike-out application
[21] On 2 September 2015 Caringrace filed an application to strike out Claridge’s statement of defence and debar Claridge from further defending the proceeding on the grounds that:
(a) Claridge was in breach of Associate Judge Smith’s order to pay within seven days (i.e. by 23 July 2015) a bank bond as security for the indemnity referred to in his orders; and
(b)Claridge had attempted to take an active part in the proceedings notwithstanding that the orders of the Court had been ignored.
[22] On 8 September 2015 the application to strike out was adjourned for a defended fixture on 19 November 2015 and timetabling directions were made by Associate Judge Matthews. At the same time Associate Judge Matthews refused Caringrace’s request for an unless order observing that, although the Court takes very seriously breaches of its orders, to strike out a defence is a draconian step not to be taken lightly when counsel informs the Court that there are reasons why it has not been possible to comply with the order.
[23] At a telephone conference on 16 November 2015 Associate Judge Matthews vacated the strike-out fixture on the basis that the application concerned essentially
the same issue as arises in relation to the application for review.3 Consequently, both
3 Namely the alleged error in counsel asking the Court to order an indemnity to the extent of “the cash” held by the second defendant when the intent was that the indemnity should have been limited to “half the cash”.
the application to strike out and the application to review the order made on 16 July
2015 were set down for hearing on 18 February 2016.
Application to remove or restrain director
[24] This application had not been allocated a fixture but counsel agreed at a teleconference before me on 11 February 2016 that it was one of the three interlocutory matters to be heard on 18 February 2016.
[25] I turn then to the first matter, the application to review the decision of
Associate Judge Smith.
Review of the Associate Judge
[26] Jurisdiction to review the Associate Judge’s decision is provided by s 26P of
the Judicature Act 1908:
(1) Any party to any proceedings who is affected by any order or decision made by an Associate Judge in chambers may apply to the court to review that order or decision and, where a party so applies in accordance with the High Court Rules, the court—
(a) must review the order or decision in accordance with the
High Court Rules; and
(b) may make such order as may be just.
[27] High Court Rule 2.3 provides for the review of orders or decisions of
Associate Judges:
2.3 Review of decision
…
(4) If the order or decision being reviewed was made following a defended hearing and is supported by documented reasons,—
(a) the review proceeds as a rehearing; and
(b) the Judge may, if he or she thinks it is in the interests of justice, rehear the whole or part of the evidence or receive further evidence.
(5) In all other cases,—
(a) a review proceeds as a full rehearing; and
(b) the Judge may give the order or decision the weight he or she thinks appropriate.
[28] Mr St John contends that the appropriate approach is to apply r 2.3(4) because the Associate Judge’s decision followed a defended hearing and is supported by documented reasons. Mr Bayley resists that contention. Mr Bayley submitted that r 2.3(4) is inapplicable because the Associate Judge’s order was not made following a defended hearing but instead was made during a defended hearing before submissions had been concluded. The order was simply made as a consequence of a proposal put forward by Claridge. No documented reasons were given and no findings of fact or principles of law are set out in the decision. Accordingly, Mr Bayley submitted, r 2.3(5) must apply and the review should proceed as a full rehearing with the Court giving the Associate Judge’s decision the weight the Court considers appropriate.
[29] I take a different view. Notwithstanding the brevity of the hearing and, indeed, the reasons of the Associate Judge, I accept the orders were made following a hearing which, for the purposes of r 2.3(4), was a defended hearing.
[30] Before r 2.3(4) can apply it must be shown that the decision under review: (a) followed a defended hearing; and
(b) supported by documented reasons.
[31] I consider both elements are apparent from the Judge’s Minute.
Did the decision follow a “defended hearing”?
[32] What came before the Associate Judge for hearing was Caringrace’s application for an order appointing an interim liquidator. All three parties filed written submissions in advance. In the course of counsel’s submissions it appeared to the Associate Judge that the defendants might be able to give sufficient assurances to the plaintiff as to the maintenance of the second defendant’s assets such that an
order for the appointment of an interim liquidator pending the substantive hearing under s 174 of the Companies Act would not be necessary.
[33] I infer that it was during the course of Mr St John’s submissions on behalf of the applicant for interim liquidation (Caringrace) that this thought occurred to the Associate Judge. That inference can be taken from the Minute and the Associate Judge’s description of the development “during the course of counsel’s submissions”, i.e. “counsel” singular.
[34] The matter was stood down for counsel to confer. Again, I infer that this was before Mr Bayley had made any submissions on behalf of the defendants in opposition to the application. When called again Mr Bayley put to the Associate Judge a proposal on behalf of the first and second defendants. Mr St John was unable to take instructions on the proposed resolution but, as the Associate Judge recorded in his Minute, Mr St John was not able to point to any basis on which it might be said that the proposal would not serve to maintain the value of Carrickmore’s assets (or any assets managed by it) pending the hearing of the substantive proceeding.
[35] Where it has been said that a “defended hearing” suggests full argument from
opposing parties4 “full argument” should not be confused with extensive argument.
[36] In my view the requirement in r 2.3(4) for a defended hearing may be met where the hearing has afforded to all parties with a proper interest in the outcome an opportunity to say all that they reasonably might say. The defendant’s submission was effectively that their proposal should dispose of the application. The Associate Judge agreed.
[37] As Mr St John observed cases frequently turn in the High Court on such outcomes reached during the course of a hearing and without the need for parties to
exhaust themselves through submissions.
4 Andrew Beck and others McGechan on Procedure (online ed, Brookers) at [HR2.3.02(1)].
[38] It is apparent to me that, before the Associate Judge, counsel had the opportunity to represent their respective clients’ interests to the fullest extent, whether through submissions or proposing a settlement in lieu of a formal submission. Accordingly, the requirement for a defended hearing is satisfied.
Is the decision supported by documented reasons?
[39] Mr Bayley submitted that there are no documented reasons as to what the determination of the application for interim liquidation would have been; no findings of fact and no principles of law. Thus there are no “reasons” to appeal against which, Mr Bayley said, is the essence of an appeal. Consequently r 2.3(5) must apply and the review should proceed as a de novo rehearing.
[40] But to the extent the Associate Judge was obliged to give reasons, his reasons were to relate to the outcome reached following the hearing as it proceeded before him. He was not obliged to give reasons for an outcome that might have been reached had the hearing taken a different course.
[41] The conclusion the Associate Judge reached following the hearing was that “the appointment of an interim liquidator is not necessary”.5 And he documented his reasons:
(a) The proposal tendered on behalf of the first and second defendants was aimed at providing assurance to the plaintiff as to the maintenance of Carrickmore’s assets thus making the appointment of an interim liquidator unnecessary pending the substantive hearing under s 174.6
(b)The Associate Judge initially considered the proposal provided that level of assurance.7
5 At [3].
6 At [1].
7 At [2].
(c) Mr St John, on behalf of Caringrace, did not point to any basis upon which it might be said that the proposal would not serve to maintain the value of Carrickmore’s assets (or any assets managed by it) pending the hearing of the substantive proceeding.
(d)The Associate Judge declared himself satisfied that the implementation of the proposal “should serve to maintain the value of the second defendant’s assets pending trial” and that “in those circumstances the appointment of an interim liquidator [was] not necessary”.8 Those circumstances included Carrickmore, within seven days of the hearing, indemnifying Caringrace to the extent of the cash held by Carrickmore as at 16 July 2015.9
(e) The second defendant’s assets so protected pending trial, the
application for appointment of an interim liquidator was dismissed.10
[42] Thus, the Associate Judge determined the application before him and for the reasons documented in his Minute. (I observe that the reasons were primarily those advanced by the defendants although this point bears more on the defendants’ argument that there was no defended hearing.)
Conclusion as to nature of review
[43] Having concluded that the decision under review was reached following a defended hearing and is supported by documented reasons, this review proceeds as a rehearing and essentially proceeds as an appellate review.
[44] The starting point will be the Associate Judge’s decision. The applicant for review must show that the decision is wrong. The appointment of a liquidator being a discretionary power of the Court the appellate standard requires the applicant to
show that the Associate Judge acted on a wrong principle, or failed to take account
8 At [3].
9 Approximately $478,000.00.
10 At [4](c) and [5].
of a relevant matter, or took account of an irrelevant matter or that he was plainly wrong.11
Was the Associate Judge in error?
[45] As Mr Bayley’s position was that the review should proceed by way of a rehearing de novo, it was not necessary for him to identify error and he did not do so. Rather, he submitted the orders were made as a consequence of a proposal which contained an error by counsel.
[46] Mr St John says the Associate Judge made no error. In response to the applicant’s contention that the proposal contained a mistake which was carried forward into the orders made, Mr St John’s submission was that the Associate Judge was not recording a consent position. The Associate Judge made a judgment to dismiss the application for the appointment of a liquidator based on the proposal he had received, and considered, and he declined the subsequent application to vary that order.
Evaluation
[47] There is no basis for doubting Mr Bayley’s explanation as to why the proposal ought to have referred to half the cash held by Carrickmore. Mr Bayley’s account is supported by Ms Maclean, counsel for Carrickmore, who filed a memorandum confirming that it was her recollection that the indemnity was intended to relate to Caringrace’s half-share of the cash at that stage held by Carrickmore. She confirmed this was recorded in her hand-written notes of those discussions which occurred when the Associate Judge stood the matter down.
[48] Mr Bayley’s memorandum to the Associate Judge seeking variation enlarged
the explanation for the error.
(a) If Caringrace succeeded in its application for the appointment of an interim liquidator, then it relevantly had an interest in half the cash held (by Carrickmore).
(b)And so, given Claridge wished Carrickmore to continue in business it was just and equitable for Claridge to protect Caringrace for its interest in half the cash held.
(c) During discussions between counsel this explanation was provided.
But it otherwise represented a fair response to the Associate Judge’s
initiative during the hearing.
(d)There could be no logic to the Claridges giving a security for cash to which they have an entitlement.
(e) Nor could there be prejudice to Caringrace because its position would not have been any better had it succeeded in the appointment of an interim liquidator.
[49] Mr and Mrs Claridge’s explanation for the error they seek to rely on is offered, in a sense, to vitiate the Associate Judge’s order on the grounds of mistake. A consent order may be set aside where, for example, the agreement is vitiated by mistake. The relevant principles were discussed by Courtney J in Kiriwai
Consultants Ltd v Holmes which Mr Bayley cited.12 From the authorities which
Courtney J discussed I acknowledge:
(a) the High Court’s inherent jurisdiction to set aside a consent order if the interests of justice require it and if good grounds are established to warrant that course;13
(b) examples of good grounds for setting aside a consent order include:
(i)an order not in fact made with the consent of the party challenging it; or
(ii) an order founded on an agreement vitiated by mistake.14
12 Kiriwai Consultants Ltd v Holmes [2013] NZHC 3290 at [9].
13 Auckland Regional Services Trust v Lark [1994] 2 ERNZ 135 (CA).
14 Butcher v Finnigan [2012] NZCA 250.
[50] The proposal was not consented to by the plaintiff. The Associate Judge recorded that his orders were not made by consent. Considering whether, even so, the interests of justice require this Court to vary the Associate Judge’s order I am not satisfied that there is any proper basis for doing so.
(a) The Associate Judge was aware that Caringrace held only a
50 per cent interest in Carrickmore when he made the order for Caringrace to be indemnified to the full extent of the cash held. Yet he made the order, being satisfied that a bank bond as security for an indemnity limited to the cash held by Carrickmore should serve to maintain the value of Carrickmore’s assets pending trial.
(b)As it has happens, although the purpose of the bond was to “maintain” the company’s assets as at 16 July 2015, the company’s assets have since halved. Evidence before the Court shows that by the time of the hearing on 18 February 2016 the amount held had reduced from approximately $478,000 to $215,425.39. In his sixth affidavit filed for that hearing Mr Claridge explained this by reference to costs which Carrickmore had incurred.
(c) The Court of Appeal has rejected a generalised principle which would entitle a party who claims to have settled a dispute on a wrong factual and legal basis “to get a second bite at the cherry”:15
The Court is not available as a means of enabling parties who say – we wish we had gone about things differently and been more careful and insistent – to get a second bite at the cherry.
The Court of Appeal made this observation in respect of “adult, able” parties who are represented. The principle has even greater relevance where it is counsel him or herself who offers to the Court a proposal presumably reflecting a client’s instructions upon which counsel has presumable advised. It does not behove counsel, particularly in the context of hard-fought litigation, to resile from proposals which the
Court and opposing parties must be able to assume have received the benefit of counsel’s close attention. And, further diminishing any claimed injustice, is the fact that the proposal was assented to by counsel for Carrickmore as well as Carrickmore itself16 — and presumably Mr and Mrs Claridge at the hearing.
(d)The effect of the appointment of an interim liquidator would have been to preserve all of Carrickmore’s assets. The bond which the Associate Judge ordered had this effect.
(e) It was in the totality of all of these circumstances that the Associate
Judge decided appointment of an interim liquidator was not necessary.
[51] Considering the nature of the allegations made against Claridge, which include unauthorised dissipation of assets, it is not convincing to suggest that security for an amount which exceeded the amount to which Caringrace would be entitled on liquidation was a wholly unlikely outcome.
[52] There being no error in the Associate Judge’s decision, and no basis for
variation, the application for review is dismissed.
[53] With the status of Associate Judge Smith’s orders now resolved there must be compliance with them. The orders I make at the end of this judgment are directed to that outcome.
Application to strike out
[54] The plaintiff applies to strike out the first defendants’ statement of defence on
the basis of non-compliance with the Associate Judge’s orders.
16 “It is both Counsel and the Second Defendant’s recollection …”: Memorandum of Counsel for
the Second Defendant, 20 July 2015.
[55] The principles applicable to striking out part of a pleading are settled.17 Of particular relevance to this case is the threshold for strike-out. The strike-out jurisdiction is to be exercised sparingly and only in a clear case.
[56] Mr St John submitted that if the application for review is declined then it follows that the defence must be struck out or, at the least, an unless order must be put in place.
[57] I have dismissed the application for review. But I decline to strike out the statement of defence.
(a) While the first defendants should have sought a stay of the Associate Judge’s order, or complied in protest, it would not be in the interests of justice to take the severe step of striking out their statement of defence.
(b)The non-compliance was not a manifestation of mere indifference to the Court’s orders. Claridge applied promptly for clarification and when that was declined pursued, also promptly, an application for review. Mr Bayley characterises the failure to seek a stay of the orders as an “imperfection”. I think the failure to seek a stay was less an imperfection than incautious. Without that formal order Claridge’s position and interests are left “up for grabs”. But while Mr and Mrs Claridge’s failure to seek a stay was a failure to fully protect their interests pending resolution of the application for review that of itself does not provide a basis for striking out the statement of defence.
(c) As well, Claridge was likely to have been encouraged in its stance by the fact that Associate Judge Matthews had refused to order compliance with Associate Judge Smith’s orders under the threat of an unless order. He said: “when counsel informs me that there are reasons why it has not been possible to comply with the order” striking out would be a draconian step not to be taken lightly.
Additionally, the strike-out application was scheduled to be heard on
19 November 2015 but the fixture was vacated a few days beforehand on the basis that the matter should be heard at the same time as the application for review because it was said to raise essentially the same issues.
[58] In the circumstances I do not regard this as a clear case for striking out. The application is accordingly dismissed.
Application to remove Mr Song as a director
Parties’ positions
[59] Claridge applies for an order removing Mr Song as a director of Carrickmore or alternatively restraining him from acting as a director.
[60] Section 164 empowers the Court to grant injunctive relief and s 174 is a remedial provision pursuant to which the Court has a discretion to intervene where there is a visible departure from the standards of fair dealing.18
[61] Claridge seeks removal or restraint from Mr Song on the following grounds:
(a) The plaintiff (Caringrace) and Mr and Mrs Claridge are equal shareholders in Carrickmore.
(b) Mr Song is a director of both Caringrace and Carrickmore.
(c) The business of Carrickmore is the manufacture, distribution and marketing of infant and specialist milk products into China.
(d) Caringrace and Mr Song has facilitated and established a parallel business also distributing rice and milk products into China and in direct competition with Carrickmore.
(e) In so doing:
(i) Mr Song is in breach of his duty as a director to act in good faith and in the best interests of Carrickmore as required by section 131, Companies Act 1993; and,
(ii) Caringrace has breached clause 2.3 of a Shareholders’ Agreement by failing at all times to promote the interests, reputation and business of Carrickmore.
(f) Caringrace refuses to sell its shares for a fair price independently determined.
(g) Caringrace and Mr and Mrs Claridge assert the affairs of
Carrickmore are being conducted in an unfairly prejudicial way.
(h) Mr Song has no interest in the continuation of the business of Carrickmore and has sought the appointment of an interim liquidator.
(i) It is just and equitable for the court to remove Mr Song as a director to ensure proper regulation of the future conduct of the company’s affairs.
(j) Alternatively, Mr Song should be restrained from acting as a director of Carrickmore having evidenced an intention to continue the above breaches.
[62] Citing examples of the High Court relying on s 174 to remove a director19
Mr Bayley submitted that removal of a director is available under s 174. Mr Bayley submitted that interim relief is required because Mr Song’s conduct is contrary to the best interests of Carrickmore. He said there is a serious question to be tried in this case and referred to the five further affidavits which Mr Claridge has filed, since filing the interlocutory application to remove, which set out in extensive detail with supporting documentation, the conduct of Mr Song said not to be in the best interests of Carrickmore. The concerns fall into the following broad categories:
(a) Natramall,20 under the direction and control of Mr Song has claimed to be a distributor of the Carrickmore brand after distribution arrangements ended. Mr Claridge’s evidence is that the distribution agreement was cancelled with effect from 31 March 2015. The allegation is that Carrickmore’s products and promotional material have continued to be displayed after distribution arrangements have ended and business cards containing both Carrickmore logos and a
brand in direct completion to Carrickmore have been prepared; and
19 Hogg v Sheppard HC Auckland CIV-2002-404-1959, 3 September 2003 and Johnson v Sneyd
HC Wellington CIV-2004-435-84, 7 December 2005.
20 Natramall effected distribution of Carrickmore’s products in China pursuant to the Age ncy
Agreement entered into on 14 January 2012 between Carrickmore and Gentech Foods.
Natramall has misrepresented that it is the authorised distributor of
Carrickmore when distribution arrangements were at an end.
(b)Mr Song has caused the company accounts to be frozen and communicated with Fonterra to advise Carrickmore would not be liable for any orders placed thereby resulting in supply to Carrickmore being refused.
(c) There are allegations that Natramall plans to use Carrickmore’s
intellectual property.
[63] On behalf of Mr Song, Mr St John referred to the improvement in Carrickmore’s trading accounts since Mr Song’s acquisition of a 50 per cent share holding in January 2012. Financial statements for Carrickmore for the year ended
31 March 2012 disclosed no trading and no assets or liabilities. For the years ending
2013, 2014 and 2015 respectively Carrickmore had a turnover of $NZ3.7 million,
$NZ6.6 million and $NZ8.6 million. Mr Song attributes this success to his involvement from January 2012 and the distribution structure he was able to establish.
[64] Mr Song had been voicing his concerns about governance issues since 2014 and protesting his inability to discharge his director’s duties because he was denied access to the information and records that he sought which relate to his concerns about governance issues and dissipation of Carrickmore’s assets to Claridge family interests.
Assessment
[65] As Mr Claridge observed in the first of his six affidavits the background to the allegations made by both Mr Claridge and Mr Song is extensive and involves a great number of documents. Hundreds of pages of evidence are before the Court. One of the letters appended to one of the affidavits described the accusations as extensive and virulent. That is not an inaccurate description. Both Mr Song and Mr Claridge claim the other has refused to answer specific issues while both also claim they have provided to the other that which the other seeks.
[66] Mr Song and Mr Claridge have polarised views as to the reasons why Carrickmore is not trading. Mr Song points to Mr Claridge’s “unlawful” appointment of a new distributor and a lack of understanding of the new regulatory environment governing the exportation of infant milk powder into China amongst many other allegations. Mr Claridge strongly contends that Mr Song and Natramall have been acting in direct competition with Carrickmore and that Mr Song has established an alternative supplier of infant formula.
[67] The key disputed facts cannot be resolved in the context of these interlocutory hearings where the evidence has not been tested by cross-examination. At one extreme Mr Song considers Mr Claridge’s actions amount to an orchestrated hijacking of Carrickmore for his own personal advancement. At the other Mr Claridge says Mr Song has manufactured a situation where Carrickmore cannot trade and that his removal is likely to result in suppliers and distributors agreeing to resume trading with Carrickmore. Even if it were established the alleged conduct is oppressive or unfairly prejudicial I am not satisfied an order under s 174 would be
just and equitable.21
[68] In assessing whether or not it is “just and equitable” to make an order under s 174 the Court will engage in a balancing exercise, in which the interests of all parties are weighed:22
The fairness implicit in that expression is not to be assessed in a vacuum or simply from one member’s point of view. There must be a balancing of all the interests involved.
[69] In particular the conduct of an applicant shareholder will be relevant to the
Court’s considerations.23
[70] Since the hearing on 16 July 2015:
(a) Claridge has not complied with the Court’s order even to the extent of
a bank bond for half the cash held by Carrickmore as at 16 July 2015,
21 Section 174 of the Companies Act: “If, … the Court considers it is just and equitable to do so, it may make such orders as it thinks fit…”
22 Vujnovich v Vujnovich [1988] 2 NZLR 129, (1988) 4 NZCLC 64,474.
23 Marryatt v PC Home Hire Ltd (2002) 9 NZCLC 263,003 at [70].
this being what Claridge asserts it intended all along.
(b) The two independent directors resigned on 2 September 2015.
(c) Carrickmore’s cash balance has reduced from $478,000.00 to
$215,425.39.
(d)Albeit temporarily Mr Claridge diverted company funds in satisfaction of his personal obligations. On 23 July 2015, following the hearing before the Associate Judge on 16 July the sum of
$239,154.67 was debited from Carrickmore’s 001 account. The transaction was marked as a ‘bill payment’ and the recipient was
‘Rhodes & Co Trust Account’. The amount was to be payment towards the bond which the first defendants were ordered to pay. The sum was credited back to Carrickmore’s 000 account on 31 July 2015 with the references ‘Rhodes & Co’, ‘Return Funds’ and ‘Bond– Court’. Mr Claridge explained the transaction in his sixth affidavit. The amount paid from Carrickmore to the Rhodes & Co Trust Account represented approximately half of the cash in Carrickmore at the time. Mr Claridge said he thought it possible that this could be separately held as a bond while Carrickmore traded using the other half of the cash. However, once it became apparent to Mr Claridge that the plaintiff would not accept a bond for half the cash the monies were returned at Mr Claridge’s instigation to the Carrickmore account. Even accepting the explanation at face value it was an extraordinary step for Mr Claridge to consider taking. The Associate Judge ordered the first defendants to provide the bank bond. For Mr Claridge to contemplate, however briefly, that as a director of Carrickmore he could use its assets in satisfaction of his personal liabilities is troubling. The reason for the return of the sum is no less troubling. Mr Claridge deposes it was returned because “it became apparent that [the plaintiff] would not accept a bond for half the cash”. What should have governed Mr Claridge’s expectations and actions were the terms of the Court order itself not the plaintiff’s response to
Mr Claridge’s attempts to offer a bond for less than the amount the
Court had ordered.
(e) Mr Claridge has publicly announced that he has shut the company down. A news media report on 20 November 2015 has the headline “Carrickmore drops out of infant formula business”. It reports that Mr Claridge had closed down his business citing the
inordinately hard work of operating in China. Instead, the owner and chief executive of Kapiti-based Carrickmore Nutrition has become the new boss of Potatoes New Zealand.
[71] In summary orders under s 174 are refused. The company is not trading. Mr Claridge publically announced he had shut it down.24 The accounts are frozen. It seems there is little prospective damage to the company to be realistically restrained. On the other hand removal of Mr Song would come at some significant disadvantage to him as a director. He would no longer have the entitlements a director has to access information about the company and, considering the
background which I have recited, I am not satisfied it would be just and equitable to grant an order removing him. That is particularly so in light of the unilateral steps that Mr Claridge has taken.
[72] I turn now to the second ground upon which Claridge relied in its application to remove Mr Song namely, s 164 of the Companies Act which empowers the Court to grant injunctive relief.
[73] The balance of convenience is said to favour interim relief because Mr Song’s removal or restraint would inhibit him from interfering in the operation of Carrickmore and his restraint or removal would result in supplies agreeing to resume trade with Carrickmore. Mr Bayley submitted that if Mr Song is permitted to remain
as a director and stymie the prospect of future trading pending trial there may be
24 Speaking to that media announcement Mr Claridge stated in his sixth affidavit that it was very much a “PR” exercise and that despite the tenor of the article Mr Claridge had never given up on the idea the company can resume trading. The point for present purposes is that in light of that public statement, damage to the brand is not a realistic concern. What may or may not be Mr Claridge’s private intention does not impact on what is in the public domain.
significant and potentially immeasurable damage to Carrickmore and Claridge; the brand is liable to decrease in value the longer the company lies idle.
[74] I am satisfied that even accepting there is a serious question to be tried, neither the balance of convenience nor overall justice favours removal or restraint of Mr Song.
(a) The company’s bank accounts have been frozen. On 3 September
2015, immediately following resignation of two directors, Mr Song required all bank accounts in the name of Carrickmore to be frozen until further notice or by order of the High Court. That step was inevitable, it is said, when first Mr Claridge refused to provide any financial information about the company including monthly management reports and bank statements and secondly did not provide the bank bond as ordered by the Court.
(b)The first defendants’ counterclaim, filed on 7 July 2014, alleges breaches of the shareholder’s agreement in respect of unauthorised usages of Carrickmore’s intellectual property. I am conscious of the fact no injunctive relief was sought at that stage.
(c) The first defendants and Mr Song have a prima facie interest in maintaining the value of Carrickmore each being a 50 per cent shareholder.
(d) Each of the parties is willing to purchase Caringrace at fair value.
(e) As to a possible order restraining Mr Song in respect of the use of Carrickmore’s intellectual property Mr Song deposed in his May 2015 affidavit in support of interim liquidation that he appreciated and understood:
that if the relationship between Natramall and Carrickmore is to be severed Natramall would have to cease using any of Carrickmore’s intellectual property including anything to do with its brand name in any manner or form including its
name on any of the digital applications such as websites, Wechat accounts, social media and the like.
Result
[75] The application for review of the Associate Judge’s order is dismissed. That being the case the Associate Judge’s orders continue to be effective. As the Associate Judge ordered, there must be compliance within seven days of the date of this judgment.
[76] Mr Claridge requires release of some assets to pay an auditor so that the updated financial accounts which Mr Song seeks can be provided. With the bond in place Mr Song will be in a position to authorise the unfreezing of the accounts.
[77] The application to strike out the first defendants’ statement of defence is dismissed.
[78] The application to remove Mr Song as a director of Carrickmore is dismissed.
[79] Both parties have had a measure of success and may consider it appropriate that costs lie where they fall. If any issue as to costs does arise, focussed
memoranda may be submitted.
Karen Clark J
Solicitors:
Rhodes & Co, Christchurch for First Defendants
Alan Jones Law Partnership, Auckland for Plaintiff and Third Party
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